Firstly it doesn't account for the formation of preferences. Individual preferences are usually constructed as part of the social system - they aren't just individual preferences. They are also shaped by experiences, which explains the "endowment effect"- we value losing something we have more than we value gaining it in the first place.
Secondly the obsession with mathematics. Not because using maths is wrong, but because the assumptions made are made with a view to keeping the maths tractable rather than the model accurate. The worst case of this is the use of structural forms of equations for econometric studies that bear no relationship to any established theory.
But bear with me because I'm going to talk about the "housing market" for a moment as if it really was a theoretical market.
Today the Master Builders Association said "The latest housing finance highlights the urgent need for a national housing affordability agenda to increase the housing supply and ensure first home buyers are not locked out of the market,”
I'm fine up to the word "agenda". Let's just question whether "supply" is the issue everyone claims it is. If supply is constrained below a notional equilibrium level that means the price of houses is higher than it needs to be to reflect the cost of construction. That means in new housing someone is really cleaning up...and that can only be the suppliers of construction or the suppliers of land.
Why then does the Master Builders Association want to increase the supply? Wouldn't it result in a loss of margin and hence return on investment?
There is one perfectly good explanation - and that is that the MBA doesn't want us to look at the real problems. The first of these is the geographic question - our housing market is highly distorted by the huge increase in prices for property close to where the jobs are as recently detailed in an RBA paper.
The second is the presence in the market of speculators rather than investors. The former expects to get their return from the increase in the asset value rather than the income stream from the asset. You don't invest in residential real estate for the rental income.
Unless, of course, you are part of the third limb of the problem - an uneven playing field when it comes to the cost of investing. An owner/occupier pays their mortgage out of post tax income - an investor pays it out of pre-tax income, often arranging negative gearing. Sure the investor pays capital gains tax - but only at half the rate they should. Either the CGT discount has to go, the possibility of negative gearing, or both, to take this cheap money out of the housing market.
What we don't need to do is pour petrol on the flames of the roaring house prices - which is what diverting super funds would do.
The answer to housing unaffordability is to change the geography of our cities - spread the jobs and change the transport infrastructure, end negative gearing and end the CGT discount.
Maybe once those priorities are addressed we can address adding supply - without them adding supply only continues to provide super profits to developers and builders.
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