Nelson the Future Eater -Dining on the base vote A La Carte

This was me in Crikey earlier today.

After every change of government, dismal polls become a staple for the political misery that is Opposition. But there are dismal polls – essentially temporary bouts of opprobrium and uncertainty unleashed by the electorate on the recently vanquished, and then there are polls so dismal that one must start to question whether they represent some underlying shift afoot in the size and structure of a party’s base vote.

We’ve seen the latter in action before, particularly at the State level, with leaders like Peter Beattie applying some WD40 to rusted on Coalition voters and forever changing the political landscape as a consequence.

But what is happening to the Coalition and Brendan Nelson is unprecedented.

The problem here of course is trying to estimate what the Coalitions base vote actually is, or rather was. With a number of State Labor governments of late carving out pretty extraordinary majorities, it appears that the proportion of the electorate that that will only ever vote for the Coalition over Labor at any level of government has been shrinking for a while. If we look at State and Federal elections over the last decade and for each State take the lowest primary and two party preferred vote that the Coalition has received in an election – we’ll get a fairly good idea of just how big, in practice, that group of the electorate is that will always vote for the Coalition over Labor under any circumstance.

So for NSW, the lowest primary vote achieved by the Coalition was 33.7% in 1999 – however there was a large One Nation effect running through that election which distorts the picture – so if we look at the 2003 State election, we find the Coalition received a 35% primary vote with a TPP of 43.8%. So we’ll use this as our NSW Coalition base vote figure. If we do the same for all the States and use Federal results for Tasmania (because of their Hare-Clark system) while paying particular attention to avoiding any One Nation distortionary effects around 1998, we end up with the following lowest primary and two party preferred results received by the Coalition recently in major elections.

	NSW	Vic	Qld	WA	SA	Tas
Primary	35	38.2	35.5	34.4	36.1	37
TPP	43.8	42.2	44.5	47.3	43.2	42.7

We can then use state electoral population weights to get a national average of 36% for the Coalition primary vote base and 43.8% for the Coalition two-party preferred vote base - which represents the lowest possible level of Coalition support based on the actual putting of pen to ballot paper by the electorate. Our base vote estimate isn’t meant to compare State and Federal politics; it is simply an estimate of the proportion of the electorate that has never voted Labor over the Coalition in major elections – the truly rusted on Coalition vote.

If we run these two base vote lines against a seven year history of the federal Coalition primary and two party preferred vote estimates (using monthly Newspoll averages to knock out some of the size of the poll to poll noise), something extraordinary happens:

Now remember folks, this base vote is calculated on the sheer thumpings that the Coalition has received in the States of late, so it is probably a little undercooked in real life and would in reality probably be up to a couple of points higher than the red lines given here. Effectively, this is the Coalitions best base vote scenario.

Brendan Nelson is leading a party that is receiving a national vote share lower than all of the State Opposition annihilations of late put together. It makes the polling bleakness of early 2001, and that of March/April 2007 look like a golden age of popularity by comparison.

If that’s not bad enough, if we look at the way those State annihilations of the Opposition played out in practice, a sort of electoral hysteresis was operating. State ALP governments eroded the State Coalition vote to the point where the Coalition base started contracting, leading to an almost natural, lower long-term level of Coalition electoral support as a result - a level of support from which the State Oppositions have found it almost impossible to recover from, consigning themselves to a generation of political failure.

If you lose your base, you lose your political viability.

The Nelson Opposition is losing their base vote in an unprecedented fashion.

UPDATE:

Amber wanted to know what these base lines look like when projected over a longer period of Newspoll - just be aware that the base vote of the Coalition in the past was different to what it is now.

State of the Polls – Old School

It’s been an awfully long time since we last had a good look at the broad state of the political polling like primary votes, satisfaction ratings and their trends rather than the simple headline TPP and Brendan Nelson’s limbo with preferred PM ratings.

So to start off, some music to listen to as we go through the poll roll - the Halo Friendlies doing “Sellout”… quite apt for the poor old Nightwatchman of late.

Looking first at the primary votes of the two majors, we’ll plot how Newspoll, Morgan Phone Poll, Morgan Face-to-Face and the Phone Poll Average have been going since the election. The time scale at the bottom of all these graphs is “Week in Term” meaning week one was the first week after the election, week 2 the 2^nd week and so on and so forth. To help convert the weeks in term into dates, this little table might come in handy:

Week Ending	Week into term
22 December 2007	4
29 December 2007	5
5 January 2008	6
12 January 2008	7
19 January 2008	8
26 January 2008	9
2 February 2008	10
9 February 2008	11
16 February 2008	12
23 February 2008	13
1 March 2008	14
8 March 2008	15
15 March 2008	16
22 March 2008	17
29 March 2008	18
5 April 2008	19
12 April 2008	20
19 April 2008	21
26 April 2008	22
3 May 2008	23
10 May 2008	24
17 May 2008	25
24 May 2008	26
31 May 2008	27
7 June 2008	28
14 June 2008	29
21 June 2008	30

For the ALP we get:

The Morgan face to face poll went wandering out to the fringes of plausibility here for a bit but has lately started coming back to earth - essentially repeating what it did last year. What’s worth noting here is that the two phone polls have pretty much been moving in sync, with the old pattern of Morgan usually being a few points higher for the ALP than Newspoll coming through just like it did last year. Since the end of February there appears to have been a slight growth in the primary vote for Labor which, as we’ll see a little later on, is consistent with the way the uncommitted voters are splitting over other metrics like satisfaction and preferred PM ratings.

Next up, the Coalition primary vote:

Again, the Morgan Face-to-Face poll is the odd one out, being a fair bit more volatile than the phone polls, but also lately showing the highest primary vote for the Coalition. The minor party vote in Morgan’s face to face seems to be a good chunk less than the phone polls are measuring - one would think it’s a bit of a methodological issue going on there.

Using the phone poll average as the comparison between the two parties we end up with:

We can see some slow, consistent movement to the ALP in primaries over time, but only partially at the expense of the Coalition vote - with the rest coming from a decreasing minors vote.

Moving on to the TPP vote estimates - we’ll again compare the pollsters for the two majors.

Apologies for that dogs breakfast - blame the pollsters!

Worth a giggle is the Morgan face to face poll showing an ALP TPP of 65%. Were an election held where that result came about, the ALP would have 139 of the 150 seats in Parliament

The ALP TPP vote seems to have been slightly growing over the last few months yet without being able to say so with any level of statistical significance.

So now we’ve done the primaries and the TPPs we can have a squiz at the Votegap - which is the difference between the vote levels of each party.

This must be more than just a little bit disturbing for the Coalition. As time goes by, the difference between the vote levels of the ALP and the Coalition in both primary votes and TPP share is increasing. That suggests that ALP support is not only coming from minor parties, but directly from the Coalition as well. The ALP seems to be incrementally grinding away into the Coalition base vote - which is exactly what happened in QLD state politics. If a party starts losing its base they are in deep shit.

One blessing for the Coalition is that there aren’t yet enough observations in the data to be able to say this with any real level of statistical certainty - but if it keeps happening like it is at the moment, by the time we get enough observations it will probably be too late for the Opposition to be able to recover before the next election which will put them in a dire position for the election following that - especially in terms of resources.

We’ll keep an eye on the Votegap measures over the next year and see if that longer term trend to the ALP continues - however slowly. If it does, Australian federal politics will change fundamentally.

Moving on to the more qualitative metrics, we’ll start off having a squiz at Nelsons limbo dance with the preferred PM ratings:

This has just about been done to death in the MSM so we’ll leave it pretty much alone except to say that as the uncommitteds have started to crystalise out and get an opinion, they’ve clearly decided that they don’t much think Nelson is up to the job.

That uncommitted pattern is also something worth looking at in the satisfaction ratings:

As Rudds uncommitteds have been crystallising out, they’ve been roughly breaking even since February, moving in equal proportions to satisfied and dissatisfied with his performance. Nelson on the other hand had a big chunk of uncommitteds move in February straight into the dissatisfied column that has remained at a pretty consistent level since March. Since the end of March, the uncommitteds that are crystallising out have actually been moving to the “satisfied with Nelsons performance” column which is pretty interesting considering the beating he’s been getting of late.

The size of Nelsons uncommitted number is also large at over 1 in 4 voters.

So that’s where we are all currently at in the polling. Anyone have any theories or insights over how the data is playing out with the politics?

Many thanks, some cake and a hidden gem

A great many thanks from not only myself, but from the new Mrs Possum to all the well wishers and givers of magnificent advice over what to do and where to go in Tassie - especially the restaurants and little hidden secrets!

As a token of our appreciation, the best we can do is offer you a bit of virtual wedding cake

It was actually hard bringing ourselves to put a knife through such a wonderful piece of artwork (the brides bra and undies sitting on the side of the spa brought much mirth to all).

If anyone is planning to get married on the mid-north coast of NSW anytime soon and is after something a little different as a wedding cake design, drop me a line and I’ll get you in touch with the lovely lady who made ours. She’s good fun and will make just about anything you can imagine.

Tasmania was simply fantastic, with only a single bad experience had (at a hotel that should know better and in a few days time most certainly will) - but what was really surprising is that the bit of Tassie we found the most breathtaking was also a place that is barely advertised - the small little micro settlement of Strathgordon that sits on the shore of Lake Pedder and is a good 70km of winding mountain road to the nearest piece of civilisation.

There’s a hotel of sorts right on the shore line - but what sets it apart is the unusual nature of it, the wonderful staff and what is directly outside the back door. The Hotel actually serves as the bar and restaurant for the literally handful of Hydro Tasmania workers that are up there servicing the Gordon Dam at any given time, so the whole thing seems to be subsidised by Tasmania Hydro to begin with - including the fuel bowsers out the front which have the cheapest petrol in Tasmania. It’s also the only building of any note in the town at all apart from a dozen or so units used to house the staff of the hotel and the Dam workers themselves.

But what makes it magnificent is when you look out the windows of the bar and dining rooms of the hotel and see this:

It’s incredible the way the weather changes every 5 minutes, from rain to fog to bright sunshine - often all trying to happen at the same time. As a result you end up with some of the most spectacular lighting of some really amazing geography.

Again, all taken from the Hotel.

It’s a 15 minute drive up the road to witness the powerful but mixed feelings of walking across the Gordon Dam, there are walking tracks into the National Park all around the place and apparently the trout fishing is brilliant.

And for the pollyjunkies that are reading - the hotel doesn’t make the mistake that so many others do by confusing “getting away from it all” with “complete and utter isolation from the outside world“, so you still have free access to a blistering satellite net connection in the hotel and Austar with Sky Nooz. So after your day of getting away from it all in the lakes and mountain wilderness of Tassie, you can curl up next to the fire with a pint of Wizard Smith ale, watching Sky News and surfing the net while waiting for your marinated wallaby on a char grilled vegetable stack to arrive from the kitchen.

Of all the places we saw in Tassie - this is the one we’ll go back to regularly.

So again, a big thanks to all for the advice and hints and here’s one back for all those that didn’t know about it.

I’ve got a bit of political catching up to do over the next day or so - but can someone please tell me what that idiot Buswell was doing sniffing that chair?

Possums Getting Married

My childhood sweetheart of 15 years has decided that the time is right for her to sign my ownership papers even though I keep telling her that a semi-vintage model like myself doesn’t come with much of a warranty these days - too old to be considered fashionable, but not old enough to be considered vintage chic. Yet despite my many flaws - some rough paint work, zero fashion sense and a predilection for inappropriate metaphors to name but a few of the kinder ones, she’s still keen, god bless her.

So this weekend, vows will be said, rings exchanged, embarrassing family anecdotes inevitably retold and exaggerated, and much merriment will be had by all - and from this grand ritual, apparently I will metamorphosise into an honest marsupial. Well, not too honest… some things are probably well beyond the reach of any ritual.

As you would imagine, weddings bring a special type of holiday that generally takes ones attention away from the world around them and as a result, the Pollytics site will be going a little slower for the next 3 or 4 weeks. However, I’m fairly certain that our honeymoon won’t be as long as, say, a certain political leader’s, and I will be back before that mythical slayer of honeymoons everywhere - The Budget - gets delivered.

We are actually heading to Tasmania for our honeymoon - avoiding the usual tourist traps and spending a few weeks leisurely roaming around the State hunting down the best food and wine that the Apple Isle locally produces.

So maybe some of you folks could answer a question if you’d be kind enough - know any well hidden Tasmanian food and wine secrets?

Is he Australia’s most useless Editor?

This was me in Crikey earlier today.

Image via Crikey.

It’s the question that has been asked over the weekend, or at least asked far more often than the question The Daily Telegraph posed on Saturday. David Penberthy, the Editor of the rag responsible for publishing the most outrageous piece of trash printed in an Australian newspaper for the last decade, now seems to be flailing around like some silly child caught throwing rocks at houses - desperately reaching for any excuse, however implausible, however pathetic, that could remotely justify the disgraceful behaviour of The Telegraph on Saturday.

After getting deservedly slapped around all weekend for one of the larger acts of stupidity undertaken by a major daily in recent history, one would think the Tele would have cut its losses, basked in its sensationalism and enjoyed the few extra eyeballs the exercise generated for their advertisers - but the collective slapping by the deep end of the economic and political gene pool apparently stung a little more than was expected, bringing the Telegraph not only the eyeballs it was after, but a large hit on the credibility of the paper itself - and that definitely wasn’t in the plan.

This morning’s sordid attempt by Penberthy to vindicate the odious cocktail of personal attack and economic fantasy that was thrown at the Governor of the RBA would be laughable if it weren’t so serious. Putting on his “everymans” face - the writing style that’s supposed to relate to the “common man” as if it somehow exonerates the piffle that will inevitably follow, Penberthy argues:

“Stevens’ public relations problems started on March 27.

Channelling the unlamented Malcolm Fraser, he decided to give mortgagees a bit of tough love, mounting what has served as a defence of the (many) banks which have opted to (significantly) overshoot the bank’s current official cash rate of 7.25 per cent.

“The presumption that their lending rates should only move with the official rate isn’t really realistic in this period, and we’ve indeed seen bank lending rates moving independently of the cash rate,” he said.

“I think that’s just life in this environment.”

Maybe it is. But it was about as helpful as saying - shit happens.“

Good grief - “shit happens”? We certainly know where. When the Governor of the RBA answers to the House of Representatives Standing Committee on Economics, his role is to answer any questions posed honestly, in his capacity as the head of the most powerful economic institution in the country. It’s one of, if not the most important presentations the Governor makes. To demand, as Penberthy seemingly does, that the Governor should put his answers to this Committee through a public relations meat grinder shows either a profound ignorance of the underlying importance of the Governors appearances before this Committee, or the depths of desperation that Penberthy is willing plumb to try and recover some of the major losses in credibility that this outburst has inflicted on the paper.

Just when we thought that these miserable excuses couldn’t get anymore obnoxious, Penberthy then has the audacity to start arguing that there’s serious policy consequences that legitimise the papers grubby attacks - he states:

“More important is its effect in policy terms. That is, will it have the innocent effect of giving a context to the banks’ decision to raise rates above the official cash rate? Or will it have the much more alarming effect of giving the big banks a collective sense of legitimacy, where they can hide behind the skirts of the bank and hold up ANY additional rates increase as defensible in light of events overseas?

There is no doubt as to what the readers of The Daily Telegraph believe.”

Well there’s probably not much doubt now after the Telegraph went out of its way to pile this rubbish four foot deep through the minds of their readership on Saturday. And what great evidence does Penberthy produce to back this spurious nonsense up? Well, he continues;

“…Whether he likes it or not, Stevens’ comments have clearly given the banks that sense of legitimacy. Within three hours of his appearance at the House of Representatives committee last Friday, where he amplified his defence of over-the-odds increases, the Commonwealth Bank jacked up its rates again, by 0.12 per cent, adding another $25 a month to the average mortgage.”

Penberthy would have us believe that the Commonwealth Bank, out of the blue and purely as a result of what Stevens said in the Committee, jacked up their rates faster than the Tele would splash a snatch shot of Lara Bingle across their front page should they ever get their hands on one?

Fair dinkum, what a load of dogs cobblers. The idea of the Commonwealth Bank being able to do anything within three hours is amusing in itself - initiating the not insubstantial process involved to raise their own rates in that time frame?

Pull the other one - it plays serious journalism.

The Telegraph goes in hard over “personal responsibility”, it’s a staple of their tabloid diet - parents should be responsible for their tearaway rugrats, criminals should be responsible for their crimes, politicians should be responsible for their policies.

David Penberthy needs to shoulder some responsibility of his own for the outrageous rubbish that the Telegraph engaged in - by taking a very long walk off a short plank and resigning.

—–

Also: Mark over at LP covers the bases and does a bit of poison dwarf tossing to boot.

Stephen Kirchner over at IE lays the boot into Milne.

And that’s possibly the first and only time in history you’ll ever see those two sites linked near each other, anywhere

If anyone knows who wrote the piece in the Saturday version of the Tele, could they let me know? The online version was conveniently missing a byline.

A Brief History of Morgan

Fridays Morgan Poll, a phone poll of 2,231 respondents taken over the weekends of March 26/27 and April 2/3 has just been released showing the ALP leading on primaries 51/34 for a TPP lead of 60.5/39.5

UPDATE: I better add that the minimum MoE on this beast is about 2%.

Getting back to our old habit of charting these little buggers now that we are starting to get enough of them to warrant it, this is what all Morgan polls taken since the last election look like.

If we split them up into their respective Face-To-Face and Phone Poll segments, we get:

That’s all pretty stable business.

Over at the Roy Morgan site, these polls always come released with a little “Gary Says” wisdom - it’s cute and always worth a squiz, but this time I think they made a typo.

Gary Morgan says:

“Although the Coalition continues to trail the ALP by more than 20% on a two-party preferred basis, the result of this Morgan Poll is its best result since late January.”

“Prime Minister Kevin Rudd’s current overseas journeys hasn’t helped Labor support, particularly as the media has been focused on the current economic and financial problems in Australia and the US.”

“Liberal leader Brendan Nelson and his colleagues will be hoping they can continue this momentum in the lead up to the release of Labor’s first Federal Budget in more than a decade.“

I think that last bit should have read “Liberal Leader in waiting Malcolm Turnbull and his aligned colleagues will be hoping they can continue this momentum in the lead up to the release of Labor’s first Federal Budget in more than a decade.”

Call me strange, but I reckon the Coalition having their polling wandering around between 35 and 40% TPP probably isn’t the kind of momentum they’d be after at the moment.

A quick addition to housing affordability

Continuing on from our last round of debate, Anthony Richards, the Head of the Economic Analysis Department at the RBA has just conveniently published a spiel on housing affordability that he gave to the Melbourne Institutes 2008 Economic and Social Outlook Conference.

Some Observations on the Cost of Housing in Australia

It not only addresses a lot of the issues we’ve looked at here, but conveniently provides a fair whack of data that people have been asking about. For anyone really interested in the policy side of this, have a close squiz at the footnotes and the References where there’s a good list of further reading.

UPDATE:

For those of you that either dont know or, like me, dont particularly care, the Senate Select Committee on Housing Affordability in Australia has started going through the motions. I’ve never had much faith from the outset in this particular committee doing anything remotely usefull about housing affordability - but it wasnt until this morning that I actually came across its terms of reference via Tug Boat Potemkin via Club Troppos daily missing link.

The terms of reference for this exercise in intellectual horsepower are:
1. That a select committee, to be known as the Select Committee on Housing Affordability in Australia be established to inquire into and report upon:
The barriers to home ownership in Australia, including:

a. the taxes and levies imposed by state and territory governments;
b. the rate of release of new land by state and territory governments;
c. proposed assistance for first home owners by state, territory and the Commonwealth governments and their effectiveness in the absence of increased supply;
d. the role of all levels of government in facilitating affordable home ownership;
e. the effect on the market of government intervention in the housing sector including planning and industrial relations laws;
f. the role of financial institutions in home lending; and
g. the contribution of home ownership to retirement incomes.

Is there anyone else that reads this drivel and goes WTF?

The only tax regime mentioned is that of “States and Territories” - Oh how very convenient. I’m sure the usual special interest pleaders will have a field day with this one.

Garbage in - garbage out.

Political Advice By The Column Inch

This was me earlier today in Crikey.

In a headline that rivals “Strange Man on Public Transport!” for its sheer obviousness, Opposition is a Tough Business. With new governments come new oppositions which generally struggle to cope with the large decrease in relevance associated with the opposition benches. But after eighteen weeks, most Federal oppositions have at least developed some veneer of political strategy, some understanding of the job required in opposition which the polling starts to reflect. The day to day demand of having a 5 second grab on the great suite of topics that make up the news cycle starts getting complimented with more strategic approaches to the long term business of opposition.

What seems to separate the current opposition from their forebears is that the political strategy in its entirety appears to have been outsourced by the column inch to a set of News Limited journos that give Hawker Britton a run for their money in terms of pure spin. We’ve had the carers payment “crisis” which was little more than journalistic speculation gone feral, we’ve had the Aurukun/Macklin nonsense, we’ve currently got the Australia/Japan relationship “crisis” where the list goes on and on and on. The problem is that these stories sit somewhere between manufactured outrage and mocumentraries on the quality spectrum, allowing the government to easily adapt to whatever crisis they’re apparently facing this week by throwing some small bone to kill the story - an early budget clarification on the one hand, organise a quick Japan meet and greet on the other.

While it’s to be expected that oppositions follow the news cycle, and its to be expected that this type of sensationalist tabloid journalism that drives eyeballs to advertisers will make up a large part of that news cycle, regardless of the size of the paper the stories are printed on - the problem for the opposition is that it’s mostly vacuous fluff that that the public either sees through, doesn’t care about, or worse - they do believe it was an issue and then watch as that nice man Mr Rudd far from caving in to pressure, simply does what’s right and ends up looking in touch with the voters.

If we create a rolling two pollster average using Newspoll and Morgan and compare the first eighteen weeks of the Rudd and Howard governments, something stands out:

By this time in the term of the Howard government, the Beazley opposition had started to move on from the easy pickings of the news cycle and began to compliment that by applying greater strategic pressure about the new government’s policy program, which resulted in Howard’s polling honeymoon being slowly eroded. Yet the current opposition with its scatter gun style and lazy strategic approach is, if anything, falling further behind the ALP as time goes on.

If we want to place it in an even starker context, we can compare the vote gap that existed between the government and opposition of the day in 1996 and 2008 - again using this rolling two pollster average.

Whether this is the result of Rudd being a better political manager than Howard, Beazley being a better opposition leader than Nelson, the nature of political circumstance at the time or some mix of any and all of these things - what is inescapable is that Nelson is failing and that’s not good for the quality of governance.

What might be worth a shot is for the opposition to spend a little more time focusing on real policy issues that the public actually gives a hoot about and a little less time following the droning choir of News Ltd spruikers that are taking tabloid politics to whole new shallows of gravitas.

Unless of course the Libs really like turning the previously unheard of 20 point vote gap into a regular theme of federal politics. They should look north and see how that’s played out in Qld to disabuse themselves of any notion that such a thing would be impossible.

—————-

In other news - Steve Dickson, one of the 8 State Parliamentary members of the Qld Liberal party has threatened to quit over the proposed party merger not being taken to the vote in the party membership. The good news is that such a move would break the 4 all deadlock over the regular Lib leadership tussles, avoiding the need for future coin tossing to solve this most difficult of issues.

Still on Qld matters, Lawrence Springborg has threatened to take his pineapple and go home if the Libs and the Nats continue to refuse to take his proposed new party seriously. Meanwhile Mal Brough has decided to storm the barricades of the Liberal organisation in QLD and put a sword to the evil forces of Count Santo Santoro and his dark army of mediocrity.

Not to be out done in the loony-tunes stakes, NSW Liberal State MP Ray Williams has been accused of getting all hairy chested and challenging a branch president (as well as anyone said president could muster for help) to an old fashioned round of fisticuffs. And just in case you thought that this outbreak of the sillyseason was limited to State politics, the NSW Libs at the local council level have started recruiting One Nation hacks to help them run their local government campaign in the Baulkham Hills area.

Meanwhile, away from Tory central and over at the comrades in Victoria, Andrew Landeryou has uncovered some nuttery going on in Higgins at the local ALP branch level that pretty much explains why most people couldn’t be buggered to join political parties.

And finally, Andrew Bolt plays an April fools day prank on his readership, demonstrating via the comments section what most of us have known about his particular audience for a long time.

On something completely different - this is why they made Youtube.

Ooops - sorry. That was just Nightwatchman threatening to get “in and out of everyday Australians”. If you’re heading to a servo or shopping center over the next week or two, try not to get violated.

This is why they made Youtube!

Roosting Chickens and Murray Plans.

“This exciting new broad agenda replaces words with actions” says the COAG communiqué. Yes, well - they all say that. What gives it a bit more giggle power here is that it’s specifically referring to the red tape reduction strategies associated with the business deregulation program.

If you listen carefully, you can here the Big Kev chants of “I’m excited!” emanating from living rooms and workplaces around the country.

Yet the red tape reduction strategy is far from being a broad new agenda. It’s simply a continuation of a previous ongoing COAG program - in this case going all the way back to the Banks Report, where the only thing new about it is the dozen extra pieces of regulation that have been added to the 27 already in the program. Oh - and the packaging, that’s new! It now says the ALP leading the way in Commonwealth/State relations rather than the Coalition.

When you read across the entire COAG document, most of the heralded achievements are either like the regulation reform program in that they are simply a continuation of existing programs - especially the Murray plan, or they are really low hanging political fruit that makes a loud media bang, and which merely kicks the real detail work down the track for later.

It’s a clever piece of politics that must be making the Coalition choke - the Murray Plan particularly.

This $10 billion back of the envelope Murray plan, which many of us might remember passed the “common sense pub test” - apparently the benchmark standard of good governance in those dying days of the last regime - was not only Howard and Turnbull’s creation, but it warped into a political weapon that has now ironically exploded in the face of its creators.

The Murray plan was mostly politically driven to begin with - it gave the Coalition something to present to the electorate as an example of how they were still a government capable of solving problems and taking on new challenges. The expedience of its creation spoke volumes about its true purpose.

But after the plan kind of flopped in terms of winning back public support, it conveniently segued into the new political strategy that the Liberals developed of attacking the Labor States. This new strategy that popped up mid 2007 was essentially an exercise in trying to diminish the Labor brand and get to Rudd via the backdoor, since brand Rudd was proving to be impenetrable to piffle like Brian Burke, stripper gate and the other fluff the Coalition and their stooges threw at him.

We knew this strategy was in place because we saw it in the notorious Oztrack33 Crosby Textor document and at the time you couldn’t find a Coalition politician that wasn’t dragging the theme of failing Labor State governments into their media appearances.

By June 2006 the Murray plan looked like it was a done deal among all the players, with even Victoria reaching in-principle agreement after dialogue between Turnbull and Bracks. The Coalition could have sown up the agreement then and there if they really wanted to - all it would have taken is for Howard to cave in on some of the States fringe demands with a bit of money. But that would hardly fit with the Libs new political strategy at the time. It would be hard for Howard to demonise the incompetence of the State Labor governments on the one hand, while basking in the inevitable media praise of reaching an agreement with those same incompetent States over the Murray on the other hand. Likewise it would have been a silly mixed political message for Howard to be warning the public that Rudd couldn’t stand up to the State governments, while simultaneously caving in to those same State governments himself to get the Murray plan finalised. It all looks a bit silly to bag the States and attack the Labor brand if the States start delivering the goods.

Strangely, as the Coalition political campaign against Labor State governments ramped up through July, the negotiations over the Murray started breaking down - but not for anything the States had necessarily done, but because the Howard government started reneging on parts of the original in-principle agreement. NSW got hammered by Howard changing the responsibility of residual liability issues, Victoria became more convinced that what was agreed to in-principle was no longer going to be delivered. It was also in July that Howard started getting bellicose in the media with threats to use the Commonwealths constitutional powers to seize control over the basin (although just how the mechanics of that was supposed to work was conveniently left out).

What initially started out as a $10 billion Coalition policy designed with helping the government look relevant with fresh ideas, quickly descended into a $10 billion Howard bluff that became a political weapon in the fight against Labor. Howard hoped that essentially giving the finger to the Murray would help him get the electorate to give the finger to Rudd.

Looking back, it was really quite disgraceful what happened and was typical of the way Howard has always played his politics.

Fast forward to yesterday - and now we have this Coalition conceived plan of fixing the Murray again becoming a political weapon, yet this time it’s Labor’s to wield. The Murray plan is being described as a Labor achievement, that Howard stood in the way of making it happen, that Rudds leadership delivered the goods and that it is the perfect example of the new cooperative Federalism that Rudd stands for and which Howard despised and could not deliver.

Not only are the Labor governments claiming credit for many things at COAG that were already well in the pipeline and mostly of the Coalitions doing like regulation reform, not only are Labor claiming success on issues like health and education which are really little more than low hanging fruit that was easy to achieve and took virtually nothing to do so, but they are now claiming success for delivering the policy of the Murray plan - a plan which was originally conceived for political purposes by the Coalition but which later changed into a weapon of political strategy for the re-election of the Liberal party.

The Coalition, but Turnbull in particular must be choking over this since the Murray plan could have been delivered by Howard and Turnbull last year if Howard had not decided to play silly buggers with it instead. Now the Labor party get to bask in all the credit and glory for the plan, they’ll get to write the history of the policy and will no doubt thoroughly enjoy belting the Coalition around the head with it.

Now Listen Up Kev – What about this housing bizzo? Part 2 - Policy bits.

Continuing on from Part 1 where we had a quick look at the nature of the data, we’ll head into a potential policy solution for increasing affordability, but certainly by no means the only one. This is a rather long article (5000 odd words) that might not be everyone’s cup of tea, but if we’re going to do this type of thing, we may as well do it properly.

George Megalogenis hit the nail on the head in his article about housing affordability when he said:

“If the Labor Government is serious about getting more people into the property market, while also making those with existing mortgages feel less stressed, it has to find a way to get wages rising faster than house prices over the next few years.”

I’d add that it’s real wages that have to rise faster than real house prices for any increase in affordability to occur - you can see that easily by looking at the graphs from Part 1.

But from a policy perspective this is more problematic. The only real impact that the government can have on real wage growth is through enhancing productivity growth via broader economic reform - and while there is always scope for that, it’s generally a slow hard grind that takes years to deliver. A decade of reform starting in the 80’s took until the early to mid 90’s for the benefits to really show up in the metrics. While the economy today is much more reactive and adaptive to changes than it was 25 years ago, meaning that a new round of reform would probably start delivering observable benefits much earlier - it’s still a relatively laggy process.

Yet it’s the other side of the equation, the “real” house price side of the coin where the political problem becomes front and centre. Any policy that deliberately sets out to reduce nominal house prices would be political poison and realistically would not be countenanced by any government. Political parties are many things, but deliberately suicidal is rarely one of them.

This gets us onto something that really needs to be kept in mind here. When it comes to debating policy change, not enough attention gets paid by independent policy pundits (professional and amateur alike) to the political realities that surround any change in policy. It’s all good and well spruiking some grand policy proposal that could well be economic perfection on a stick over the longer term if, over the shorter term, it would kill the government that implemented it. Even the Hawke government, the most reformist of governments, didn’t introduce many policy programs that were pushed onto its radar (like indirect taxation reform - a GST) because it would have been a political step too far. That’s not to say that purity doesn’t have its place - it most certainly does, but realistically we all need to be mindful of the clichés of politics being the art of the politically doable.

Nowhere is this more acute than when dealing with the largest asset class in the country that forms the backbone of around 60% of the population’s net worth over their lifetime. Deflating housing values for some notion of the greater economic and social good is one thing, but widespread negative equity would be a dead chook hanging around the neck of any government majority.

However, house prices can be reduced in real terms while avoiding the electoral retribution of obvious negative equity and falling house price values if the NOMINAL price of housing is kept flat to small growth and inflation is allowed to erode its real value over time.

“The value of my house hasn’t changed for years” incites much less public indigestion than “OMFG! The value of my house is dropping!” - especially when the understanding of “value” that most people hold is one based on ‘nominal’ value (the cost of a house in simple dollar terms when it was purchased compared to its simple dollar value today), rather than real, inflation adjusted value. In many respects, the combination of inflation and time is (and certainly has been in the past on many occasions) a powerful and handy policy tool, even at relatively low levels of 2 and 3%.

The quantitative difference between the publics focus on nominal value and any policy goal’s focus on real value, provides a window for politically sustainable policy activity to deliver between 1 and 3% deflation in the housing market every year (assuming nominal growth in the median house price of between 0 to 1%). It might not sound a great deal, but throw in 10 years worth of time and the compounding effect of inflation slowly eroding the real value of the housing market would deliver a 20-40% reduction in the real value of housing from inflation alone.

Add in real wages growth of 1 to 1.5% per year and we’re talking about a reduction in real house prices in proportion to real wages getting close to halved over that decade period, while avoiding the electoral hysterics associated with falling nominal values of the housing stock.

Once you break it down this way - the problem looks far less insurmountable, and also suggests that drastic action isn’t required, but that slow, thoughtful policy responses can deliver the goods without pissing too many people off or creating any great deal of economic and political dislocation.

But the real beauty here is that it allows for public policy programs to deliver outcomes in the way that public policy works best - incremental behavioural change. Policy is like a good Irish stew; the slower it’s cooked, the better it delivers. A couple of percent change here, a couple of percent change there - add ten years to the mix and we’re quickly talking about serious adjustment.

So if we keep in our thought orbit the idea of maintaining the nominal value of the median house price somewhere around flat to small growth as an overarching policy target for the house price side of the equation, it gives us a foundation to work off in terms of the magnitude of behavioural change that needs to be delivered to ultimately achieve the objective of increasing housing affordability.

POLICY

In the supply/demand nexus that justifiably dominates any discussion on housing affordability (and a great many other things like, say, taxation generally), the debate always seems to become demand centric. Arguments like “Policy X increased the demand for housing” , or “We need to implement Policy Y to reduce demand” seem to take up the bulk of brainspace in these debates - but it’s supply that needs to be focused upon here, and more particularly the how demand affects supply and the spatial distribution of supply. If we want to increase housing affordability, we simply need to increase the number of houses, but ideally we also want large parts of that increase to be, if not geographically where people wish to live, at least in large part where they would be reasonably willing to live. Yet as I argued in Part 1, the starting position for the Australian housing market is one where the supply of reasonably desirable land surrounding large metropolitan centres is simply swamped by demand because we have too few cities. Because each city has a small fixed amount of desirable residential geography - the fewer the number of cities we have, the smaller is the total amount of desirable residential land.

While we can’t just go out and build new cities (as exciting as it may sound for those with a capital works fetish - littering the national landscape with huge white elephants is probably a tad unnecessary), we do have plenty of scope to enhance the growth of larger regional centres organically, by both changing the destination of demand and more importantly the destination of supply, not only through tax and regulatory treatment of housing itself and its consequent price signals, but by assisting regional centres to emulate those economic qualities, but more importantly the origins of those qualities, that drive people to live in metropolitan areas to begin with.

But first up, how do we change the tax treatment of housing to better increase supply?

The current negative gearing regime that has run in conjunction with the two Capital Gains Tax regimes over the last 20 odd years has failed to increase the supply of the housing stock to match the increase in demand. But what is important to acknowledge here are the differing types of demand involved. We’ve had organic demand increasing simply as a function of not only population growth, but also the trend towards smaller household size - that sort of demand is simply a function of life.

But we’ve also had the situation whereby the tax structure applied to housing, in conjunction with the cheap capital costs associated with lowish interest rates in recent years, has increase the investor demand for mostly established housing. The increased competition in the housing market between the organic demand and the investor demand stimulated by tax treatment, has bid up prices across the board. But what it hasn’t done is spurred an increase in supply to match this demand. In a very real sense, we have half of our market not working effectively - and it’s not hard to see why. Investors chasing capital gains growth would maximise that growth by purchasing established housing stock closer to desirable locations (where capital gains are historically greater) rather than invest in new stock which, with our limited number of cities, is now mostly confined to areas far away from those desirable locations (where capital gains are historically much lower). The new supply of housing is essentially doing little more than meeting organic demand that has been pushed out of the established house market by the influx of policy stimulated investor demand.

So why don’t we utilise the tax treatment of housing to directly stimulate new housing rather than established housing?

This can be done without creating a great deal of grief or economic dislocation (i.e. making voters think they’re worse off) - and due to the time it takes to bring new housing stock to the market, we can slowly increase supply to be consistent with the overall objective of maintaining current nominal house price values.

Firstly, keep the CGT regime as it currently exists and grandfather out the existing negative gearing regime to current investors for their currently held properties. This way a government would minimise any backlash from existing investors by avoiding any change to the long term financial plans of existing investors. Those who already have it, keep it until they dispose of the property.

Secondly, keep the current regime for negative gearing whereby losses can be offset against all income sources, but only for properties where the investor is the original purchaser. This isolates loss offsetting against total income to new housing stock only.

Thirdly, for the established housing market, quarantine negative gearing losses to income derived from rent.

This way, the complexities of dramatically changing the CGT regime where someone always ends up worse off is avoided, current policy remains for existing investors until they dispose of currently held properties meaning political grief from that mob is mostly avoided, investment in established housing is still a reasonably viable option for those that are really keen, and negative gearing would finally be structured to actually increase supply by the tax system providing the greatest incentives for investment in new housing stock.

So saying, there will always be those on the fringe that will organise and reorganise their affairs in complex ways to cash in on such targeted incentives when they ordinarily wouldn’t qualify for them - that’s to be expected. But what’s more important is the way incentives change the behaviour of the bulk of the targeted group.

So how would this play out over time in terms of effects?

Increased demand for new housing should spur supply of new housing -but because it quarantines existing investors out of the new regime, there would be no mad rush to adapt (which is important), instead one would expect there to be just a slow, gradual increase in the demand for new housing stock at rates above organic demand levels, providing plenty of forewarning and opportunity for developers to bring new housing stock to the market.

Another consequence would be to reduce demand for established houses, easing pressure on any price growth in the second hand housing market. Even though there would be additional demand for new housing, possibly even to a level where it may start to slightly push up the price of new housing over the very short term, any price rises that occur from this increase in demand would have an effective price ceiling placed on it by the larger established housing market which would now be experiencing softer prices levels because of the way demand has shifted away from established housing into new housing.

A further interesting consequence would be budget savings. Since negative gearing losses claimed by investors would, over time, move from older established housing to brand new housing, there would be far less opportunities available for investors to claim losses via capital expenses and maintenance because the house in question is brand new. One of the biggest rorts of negative gearing are the things that can be claimed as expenses - which in reality are little more than loopholes for subsidising renovations for many. With new houses, gone (over the short to medium term at least) is the capability to redo the kitchen or the bathroom because they are falling apart, or renovate the aesthetics of the outside of the house under the guise of failing guttering and water damaged eaves.

New is new - meaning less scope to claim expenses, meaning less revenue forgone by the tax department (currently it’s about $2 billion a year on negative gearing).

Hopefully it would kill dead the growth in lost treasury revenue that negative gearing has delivered over the last few years. As the proportion of negatively geared new properties grows at the expense of negatively geared established properties, so too would the revenue savings be expected to grow.

One juicy potential of this budget saving is for it to be used to compensate State governments in return for reductions in their fees and charges applied to new land and housing developments.

If the costs of new housing could fall slightly by reducing government fees and charges, that would certainly assist the target of zero to small growth in the nominal value of the median house price - if it could be done in a way that is essentially budget neutral - well that’s the political cherry on top.

The other benefit from using the tax treatment of investor demand to slowly deflate housing prices by simultaneously reducing demand for established homes on the one hand while stimulating the supply of new housing on the other, is that it leaves open the opportunity to change the CGT regime in the future if, after a couple of years, it’s shown that nominal prices are falling or alternatively, rising too fast - giving the government a bit of fine tuning capability to manage the zero to small nominal house price growth target if needed in the future.

Finally, it’s probably worth mentioning the important role that expectations seem to play in the housing investment market. While discussion on the profit expectations of small property investors tends to be dominated by perceptions of capital gains growth (many people expect property will nearly always rise in price despite any empirical evidence to the contrary - you know the type: “You can’t lose with housing, mate”), there’s certainly more complicated dynamics at play. In terms of the risk assessment between property and other investment alternatives that small time property investors make, it’s not only the potential of the growth upside that plays out in the decisions on whether to invest in housing, but equally important are the perceptions of the possible downside of house price falls.

I had a squiz around the place for recent research on estimates of the absolute risk aversion coefficients of small time housing investors in Australia, but unfortunately came up with virtually nothing (if anyone knows of any research in this regard - please let me know!). But anecdotally the downside component of risk aversion for small time property investors seems to be a belief that any house price losses would be relatively small in proportion to the total value of the investment, and would recover over a relatively short time frame. This seems to be verified, anecdotally at least, by a relatively large number of otherwise conservative investors that go into property - including people that believe the share market is too risky a destination for their direct investment (where the downside risks are considered greater than that of property).

So while a policy target of flat to slow growth in the nominal median house price would expect to have consequences of reducing total investor demand as the realisation of small capital gains growth flows through the system, because of the nature of the risk aversion that drives at least some part of the housing investment market, the size of any reduction in total small time property investment one would ordinarily expect to occur through a decade of flattish nominal prices would seem to have a fair chance of being ameliorated to some extent by investors with conservative risk aversion coefficients that aren’t in property only for the capital gains upside, but also because of the minimal risk downside compared to alternative investments.

Add to this that property investment isn’t always singularly about capital gains, but also includes the future capability (after the asset is fully purchased) to provide an income stream in retirement, is perceived as a “safe” asset class that’s relatively liquid and also provides future leverage capabilities - I don’t think the housing investment volumes from small time property investors would necessarily shrink as much as we would ordinarily expect them too in an environment of flat to small nominal median house price growth. I’d be particularly interested in your thoughts on this?

Another thing I’d be really interested to hear your thoughts on regarding the change of housing market expectations is whether it would be likely to have an effect on the overall size of owner/occupier mortgages?

If the reality of flat to small house price growth starts to become institutionalised into the markets expectations, or at least into the market for mortgage owners - would that expectation of small to zero price growth reduce the incentives for borrowers to take out loans larger than they ordinarily would, simply to buy more expensive homes which could then be turned into larger capital gains upon later sale? If perceptions of the capital gains benefit involved with having larger owner/occupied mortgage debt started to erode, what sized impact would that have on the established housing market in terms of reducing the capital gains driven, debt funded price bidding war for established housing stock?

REGIONAL DEVELOPMENT.

While changes to the negative gearing regime alone would be expected to increase housing affordability over time, it’s really tinkering around the edges because it doesn’t address the biggest underlying problem that the country experiences - too few cities providing too small an amount of desirable land, leading to a large supply constraint on desirable urban geography as the starting point for the national housing market.

To maintain longer term housing affordability, this really needs to be addressed otherwise we’ll start running into other problems like our capital cities becoming vast urban basins with enormous redevelopment costs; meaning bloated infrastructure budgets needed just to run large transport networks through existing developments simply to allow the cities to continue growing beyond their current fringes while, still, at least pretending to function adequately.

The big question here becomes one of “If we can’t build new cities, can we do anything that can attempt to emulate in regional centres those qualities that drive people to want to live in our capital cities in the first place?“

The most important quality here, and one which has an extraordinary bearing on many of the other qualities that drive people to live in our capital cities, qualities like the provision of services and economic opportunities, is simply the income ceiling of regional centres.

People, particularly young talented people that grew up outside of the capital cities gravitate towards the big metro centres because they can earn more money and have better career prospects.

High income households have enormous consequences on the economic geography surrounding where they live. High income households not only spend more, increasing localised demand and increasing employment to service that demand as a result, but they also purchase goods, but more particularly services that are themselves provided by other higher income earners, which in turn increases the volume of opportunities for localised high paying jobs, or at the very least increases local career paths towards those types of jobs.

Essentially it’s a twist on the old upstairs/downstairs economy playing out, with high income earners (the upstairs economy) not only increasing the demand for goods and services provided by lower income earners (the downstairs economy), but also providing demand for more sophisticated goods and services from the upstairs economy itself. It’s a perfect example of the cliché of “the ladder of opportunity” playing out in the real world.

If you want examples of this, you only have to go to areas at the centre of the resources boom in North Qld to see it happening, where the increase in high income earners has boosted the demand for more sophisticated local services from top quality accountants, lawyers, health professionals and financial advisers, through to more sophisticated and expensive recreation, through to the retail provision of more expensive goods like cars, boats and home entertainment products, which has, in turn, provided a larger number of better paying jobs for the entire local economy.

When I looked at the data for income ceilings and collated it up, I was actually a little surprised by the enormity of the income ceiling that exists outside of our metropolitan areas. To show its full graphic horror - if we accept as our baseline households earning $1999 per week as our income ceiling, we can then use the 2006 census data to show the proportion of families in each of the 150 electorates across the country that earn $2000 per week or more. That proportion of each electorate can be read from the left and right hand sides of the graph, each individual bar is an electorate, and the electorates themselves have been separated into three categories; all metropolitan electorates (the electorates classified by the Australian Electoral Commission as either inner or outer metro), provincial (an AEC classification for electorates surrounding large non-capital city centres that include places like the Gold Coast, Newcastle, Ballarat, Bendigo etc) and rural electorates.

The electorates have also been sorted within their geographic classification from highest to lowest on the proportion of families earning $2000 or more per week.

There are two big results here. Firstly, 57 out of the top 60 electorates in terms of the proportion of families earning $2000 or more per week are metropolitan electorates. Secondly, the median proportion for all metro electorates is higher than all but 3 non-metro electorates. Three!… and they are mining boom electorates.

So if we want to solve the great underlying supply problem Australia has, we need to figure out some way of increasing the income ceiling in areas outside of the ca