‘You cannot help men permanently by doing for them what they could and should do for themselves.’

  —Abraham Lincoln

Taking India seriously

Washington as well as Asian capitals such as Tokyo, Jakarta, Singapore, and Hanoi have been busily courting New Delhi with impressive results. But the weakest link in New Delhi’s growing network with centres of influence in the region is with Canberra. If Australia wants to remain an active, relevant and influential ‘middle power’ in Asia, then spending the next half decade improving our bilateral relationship with countries such as India is much more important and a better use of finite time, resources and energy than the nice-sounding but premature idea of an Asian Pacific Community (APC).
India’s economy has been growing at about 7-8% each year since reforms began in 1991. But in important respects, India’s economic prospects appear more favourable. Unlike China whose population is ageing, more than half of India’s current population is under the age of 25 years. If reforms continue, India will reap a massive ‘demographic dividend’ well past the middle of this century. Already, India has a vibrant and thriving middle class of 300 million people compared to around 50 million–100 million in China. This means it has a critical mass of people generating economic resources needed to entrench New Delhi’s status as not just a South Asian colossus but a major centre of power within the entire Asian continent.
But it is not just about economic opportunities. A rising India provides a helpful counter-balance to a rising China. This explains the immense diplomatic efforts undertaken to build better relations with India as well as American and regional strategic interest in courting New Delhi. For example, the Indian Navy already conducts extensive exercises with Washington and Jakarta, and increasingly with Tokyo, Singapore, Kuala Lumpur, Manila, and Hanoi. Some of these joint exercises include anti-submarine manoeuvres, with a clear eye on China’s growing submarine fleet.
Even though Prime Minister Kevin Rudd will visit Manmohan Singh in New Delhi this month, India is still treated as a sizable but strategic afterthought by the current government. Before rushing to build new security multilateral institutions, Canberra needs to do the hard graft of building strong bilateral relationships with centres of power such as New Delhi as the rest of the region is doing. Doing so is the best approach, not just for managing China’s rise but for ensuring that Australia remains relevant, active and influential in Asia well into the future rather than on its sidelines.

Dr John Lee is a foreign policy Research Fellow at The Centre for Independent Studies in Sydney and a Visiting Fellow at the Hudson Institute in Washington, D.C. His report The Importance of India: restoring sight to Australia’s strategic blind spot was released this week.

Australia’s forgotten savers

Whenever the Reserve Bank lifts interest rates, all newspaper editors seem to ask their reporters for the same story: ‘Find me a young family struggling with higher mortgage repayments.’ And they always do: After Tuesday’s 25 basis points rate rise, the business section of The Age introduced its readers to a couple, both 29, who were now planning to cut back on Christmas presents for their nine-month-old son. Their Christmas celebrations were also called off, and if there were more rate rises in the future, ‘we don't know how we will cope,’ one of them complained.
Heart-wrenching stuff? Or maybe just a bit cringe worthy? After all, did anyone really believe that the RBA would keep interest rates at historic lows forever?
Australian newspapers seem to have a big heart for heavily indebted homeowners. Nothing wrong with that. But occasionally they should show an equal amount of compassion for tenants and savers.
Take house prices. Strangely, price increases in any other market are called inflation, but when house prices go up then the market is said to be ‘healthy’ or ‘robust’ or ‘doing well.’ But house price increases are only shifting wealth from owners to non-owners. Rising houses prices never create wealth. In fact, they make tenants wishing to buy property worse off.
With interest rate rises it is the same bias. You will always find someone complaining about higher repayments. But in the past, did you ever hear a saver complaining about falling interest rates? Probably not because savers don’t matter much in our property-obsessed society.
The underlying bias against savers and tenants in favour of homeowners and mortgage-takers translates straight into policy. Taxation is the best example: If you own your home, you enjoy the returns on your capital (i.e. the imputed rent) tax-free. If you are a saver, however, you have to pay income tax on the interest. You even pay tax on that part of the interest which keeps your capital stable in real terms, i.e. the inflation component. Homeowners, on the other hand, can eventually realise most of the capital gains on their property tax free.
Australia’s addiction to the property market needs to stop if we care about housing affordability. And if we care about the level of private debt, then we need to make saving a much more attractive option for young Australians.
And to these pitiful couples that Australian newspapers always find after RBA rate rises, we should finally tell the truth: If you can only afford the repayments on your mortgage at emergency rates, you should have never bought a house in the first place.
Dr Oliver Marc Hartwich is a Research Fellow with the Economics Program at The Centre for Independent Studies.
 

Wrong on house prices, ask him how

University of Western Sydney academic Steve Keen made a name for himself with forecasts of economic doom, predicting a 40% decline in Australian house prices. Keen put his money where his mouth is, selling his unit in Surry Hills in October last year for $526,000. In November last year, Macquarie Bank’s Rory Robertson raised the stakes, proposing the following wager:

'On the maybe 1% chance that he is right, and capital-city home prices do indeed fall by 40% within the next five years—starting from Q2 2008, and as measured by the ABS—I will walk from Canberra to the
to the top of Mt Kosciusko.
If Dr Keen turns out to be less than half right, as I expect, and home prices drop by (much) less than 20%, he will take that long walk. Moreover, the loser must wear a tee-shirt saying: ‘I was hopelessly wrong
on home prices! Ask me how.' 
Following this week’s release of ABS data showing capital city house prices up 6.2% for the year-ended in September, Keen conceded defeat and will be putting on his hiking boots and tee-shirt.
What does Keen say when we ask him how? ‘I didn’t know the government was going to be stupid enough to bring in the first home buyer’s boost.’ The increased first homeowner’s grant has certainly inflated house prices, transferring wealth from taxpayers to incumbent property owners, but it would be a gross exaggeration to say this prevented a decline in house prices of 40%.
So where did Keen go wrong? For a start, he neglected the supply-side of the housing market and the growing shortage of dwelling units that is putting upward pressure on prices. More seriously, Keen made the mistake of assuming that he knew something that everyone else didn’t. The efficient market hypothesis tells us that this is unlikely and we cannot reliably predict future movement in asset prices. Keen inadvertently demonstrated the veracity of the idea that asset prices are informationally efficient. Rory Robertson made the more reasonable assumption that house prices reflect fundamentals and was vindicated.
According to RP Data-Rismark, the median Sydney unit price rose 8.3% in the year-ended September. With a little help from Treasurer Swan, Keen’s bet against the market has so far cost him nearly $44,000 in forgone capital gains on his former unit.
Dr Stephen Kirchner is a Research Fellow with the Economics Program at The Centre for Independent Studies.