Tony Abbott might be still fatigued from his weekend ironman, however it appears that his position on housing prices is little better than that of property boosting Prime Minister Kevin Rudd. Two days after Reserve Bank chief Glenn Stevens warned Sunrise viewers that property prices were “getting quite high”, Abbott defended the influx of foreign buyers of Australian property and Australia’s high property prices.

Abbott told ABC radio that “if you are effectively saying to some people ‘look, you’re not allowed in the market’, you are inevitably going to reduce the maximum price that people might get for their property”. Abbott added, “I understand that what we don’t want is a system where houses are being bought by people who just don’t live in them, but nevertheless it’s not something that I would like to commit to just here and now.”

The problem with Abbott’s comments is not necessarily the effect of foreign buyers, but rather, his explicit support for high property prices. (Foreign buyers are certainly a factor, especially in certain suburbs such as Melbourne’s Box Hill or Balwyn, but the primary reason for the housing boom is not foreign buyers, but rather record low interest rates coupled with overly permissive bank lending and historically low unemployment). But while high property prices appear to be a vote-winning populous opinion, it is another case of political expediency gazumping economic common sense.

That common sense case was well explained by Dr Oliver Hartwich in Business Spectator today. Comparing the recent British housing boom (and subsequent downturn) to the Australian housing landscape, Hartwich noted:

High levels of personal debt are a severe, but not the only, negative consequence of Britain’s home ownership cult. It also severely reduces labour mobility within the UK. Economists like Andrew Oswald of Warwick University have long argued that high rates of home ownership make it less likely for people to accept job offers requiring relocation.

Hartwich continued:

Perhaps the biggest disadvantage of high ownership rates is cultural. The phenomenon has created the notion that rising house prices are a good thing. It is quite ironic that in every other walk of life, rising prices are called inflation. Not so in housing: an inflating property market is thought to be “doing well”, “getting stronger” or “gaining momentum”.

Such language is revealing. It shows how many commentators have lost sight of what a house is, namely a place for people to live in. Instead, it has reduced housing to just an asset class.

Hartwich’s points are apt — the benefits of high property prices accrue to a relatively small proportion of the population (and can often result in practical detriments to the economy).

Then there are the many losers from high property prices.

For those who do not own property, high prices create an often insurmountable barrier to climbing the “property ladder”. However, even for those who do already own a residence, should they wish to sell their home, they will often be buying and selling into the same inflated market (unless they are able to sell property in a suburb that has appreciated more than the median). Aside from that, higher prices also lead to higher transaction costs (largely stamp duty and agent selling costs, which are based on the property price). Therefore, high prices will in many cases actually result in a lower standard of living. (Then there is the other side effect of home owners using apparent equity in their homes for consumption, which, if the United States is any guide, can end up in calamity when that alleged equity vanishes).

The main beneficiaries of high property prices are the wealthy, specifically those who are able to earn a passive income by investing in a tax effective asset that contributes little to the nation’s productive capacity. (An example of this is shrewd Melbourne rag trader Solly Lew, who recently sold a Melbourne city property for $30 million, after having originally purchased the undeveloped block in 1982 for only $810,000. Lew’s compounding 20% return was tax free. The purchaser of the property announced plans to construct apartments to be sold largely to overseas interests. Lew did nothing to improve the site during his 28 years of ownership).

Whatever the reason for Australia’s housing boom, be it due to over-zealous lending, overly restrictive council planning policies or the less likely “foreign buyer” factor, it is up to politicians to take the courageous step of popping the bubble (through policies changes such as removing capital gains concessions, negative gearing and home owner grants), rather than encouraging it through politically popular but economically myopic policy.

But sadly, it appears both sides of politics preferring blowing up bubbles to popping them.