When John Howard lost his seat of Bennelong at the 2007 general election, free market advocates lost the contest to liberalise industrial relations. When Kevin Rudd was removed as Labor Party leader in 2010, attempts to tax resources more efficiently ended. Scott Morrison’s defeat in 2022 killed a plan to allow some superannuation balances to be invested in property, a change that would have loosened funds’ stranglehold over retirement savings.

Each event was a substantial setback for economic reform, with one substantial caveat. Morrison’s superannuation policy was not responsible for the Coalition’s election loss. The plan’s brief existence – it was the official policy of the Australian Government for a week – was perceived within the Coalition as electorally popular. Some senior Liberal politicians have argued deploying it so late in the campaign was a timing mistake. Revealed earlier, it might have reduced the size of the Coalition’s loss, they said. Others were concerned any longer exposure would have given time for a scare campaign by the superannuation industry to generate momentum. 

Either way, the victory by an opposition that had promised little, if any, challenging policy changes sent a definitive message. Tax reform is dead. Industrial relations is lost. Energy markets are unlikely, for decades, to be freed. Government expansion looks inexorable, for now. The media has little interest in serious policy reform. The federal parliament is captured by interventionists. Even Coalition Treasury spokesman Angus Taylor, an economic conservative, doesn’t advocate shrinking government. Two decades into the new century, the cause of economic freedom in Australia has been lost. A prosperous but fearful nation has abandoned ambition. 

So how should believers in the primacy of individual rights begin what will likely be a tortuous fight back? To make Australia a richer and more promising country for future generations? To convince Australians to trust themselves, rather than their governments? What’s the tactical play?

Housing – the primary priority of almost every adult Australian – could provide economic liberals with a path back to relevance. Housing and property policy has been regarded by many experts as a reform sideshow. 

After 20 years of failed attempts to improve the tax system, focusing on the mix of income, business and consumption taxes, a new approach is needed. Housing policy could be the starting point for a new generation of political leaders to advance economic reform.

The problem is obvious. The fix, although deeply difficult, is not unachievable. Success could invigorate liberalism. Housing is a route to fixing aged care, which is held back by the concentration of family wealth in housing. Solving the aged care problem could generate the political capital and policy credibility needed to expand and increase the GST, a pre-condition to cutting extravagant retirement welfare, which makes it impossible to lower personal income tax rates. 

If personal taxes can become less punitive on the working classes – by which I mean anyone who relies on wages rather than capital or welfare to survive – business taxes could be cut. Significantly reducing corporate taxes as the culmination of a comprehensive free-market policy agenda could provide the greatest economic benefit to Australia since the great coal, gas and iron ore export boom at the start of this century. It could help unleash Australia’s physical, intellectual and geographical potential, transforming the country into a place with the entrepreneurial drive of Silicon Valley, the wealth of Wall Street and the living standards of Singapore.

Economic, social and political reasons make housing a logical new starting point for the free-market project. Housing has become too expensive for many young individuals and families, even outside inner-city Sydney or Melbourne. At the start of the millennium, the average ratio of household debt to annual income was 67 times. By September 2022, it had reached 146 times. From Hobart to Broome, finding a pleasant dwelling that isn’t expensive is hard.

Because of their family backgrounds, some Australians will never get the opportunity to enter the last remaining tax-favoured investment, property. Rising property prices make society richer, and more unequal. Expensive houses and apartments, relative to incomes, force non-wealthy people to live further away from jobs, make people poorer and exacerbate financial inequality. People with inheritances, which are untaxed, outbid the non-privileged, who rely on taxed income. The less fortunate are forced to the geographical fringes of society, or rental accommodation, or into debt that is harder for them to service. 

That right-wing political parties should favour property owners’ interests has long been a fixed position in Australia. Property-driven affluence was assumed to make voters more fiscally conservative. This assumption was challenged by the election of a Labor Government in 2022, and the success of non-Liberal independent candidates in previously safe Liberal seats at that election and in 2019. The rise of ‘teal’ independents, who won eight seats in 2022 in what were previously Liberal electorates, has convinced many Liberal MPs and activists that the correlation between wealth and right-wing voting is fading. 

Homeownership may be a more important voting determinant than class or heading that way. The Australian Electoral Study, an in-depth survey of every election for the past 35 years, found that 55% of people who voted for the Labor Party or Greens in 2022 were renters. 38% of homeowners voted for the Coalition. The Coalition-Labor spread is narrower when it comes to class. In the 2022 federal election, there were less than 10 percentage points between working-class support for Labor and the Coalition, down from a gap of more than 30 points in 1987. A federal Liberal politician, Keith Wolahan, found the correlation between homeownership and Coalition voting stronger in his electorate of Menzies, one of only three Melbourne seats won by the Liberal Party. When two-party preferred swings were compared with 2021 census data showing home ownership, the correlation was clear and uniform. Areas with higher concentrations of renters were more likely to swing to the left. Looking beyond his electorate, he found that new apartment complexes the Victorian Government had approved next to train stations had high numbers of renters who were shifting some previously safe Liberal seats marginal.

The logical extension of Wolahan’s analysis is that, as renting becomes even more popular, the electorate will permanently, if gradually, shift further left. This would be the continuation of a 50-year ownership trend. In 1971, 64% of 30 to 34-year-olds owned property. By 2021 the level was 50%, according to the Australian Institute of Health and Welfare. For those aged 25 to 29, the rate fell from 50% to 36% over the same period. Among 50 to 54-year-olds age, the proportion fell from 80% to 72%.

To build new constituencies for his party, Wolahan suggested adopting policies that would help young, non or semi-professional couples buy into existing housing stock – to tip the scales their way when competing with investors. One of his suggestions was for the Liberal Party to review its support for unlimited negative gearing, which allows mortgage interest payments to be used as tax deductions. Wolahan said he understood the politics of the 2019 federal election, where the aspirations of teachers and tradies with one investment property featured in campaign rhetoric. But the tax rule, he said, favoured the “anesthetist with ten investment properties” who would more often than not outbid young couples looking to buy property for the first time. Wolahan said that a younger population of propertyless Australians meant the political benefit exploited in 2019, when the Labor Party unsuccessfully proposed phasing out negative gearing, was now outweighed by a political cost.

Some economists have argued that negative gearing has little effect on housing prices. Peter Tulip, the Centre for Independent Studies’ chief economist, has written that state and municipal-enforced housing restrictions, including tight zoning and minimum-size rules, are much bigger contributors to housing costs. 

Tulip calculated the average apartment in Sydney costs $500,000 to build, a figure that includes the builder’s profit, land and financing costs. Limits on the availability of land and other rules raise the cost by $350,000 to $850,000. The 70% difference between the construction cost and the sale price is usually captured by the owner of the land, or the developer, if the landowner doesn’t appreciate the value of their asset, according to Tulip. 

The analysis, which was taken up by Jason Falinski, a former Liberal Member for Mackellar in Sydney who chaired a parliamentary inquiry into house prices, pointed to two main conclusions. Regulation was the biggest cause of the cost of apartments, and it was enforced at the state and council levels. Falinski’s committee’s report recommended state governments abolish stamp duty, a tax on property sales, which essentially shifted responsibility for the problem to lower levels of government. 

Falinski’s report analysed the problem rationally, not politically. There is a counterargument. Even if abolishing or restricting negative gearing has little effect on property prices, as a signature tax break, ending it would provide a potent signal of intent to aspiring home buyers.

Affluent municipalities appear more likely to oppose property development, including supermarkets that cater for middle and lower incomes. Some politicians, including Liberals, have exploited resistance to these developments for electoral purposes. Ironically, though, most of the opposition to the construction of new housing, which could ameliorate economic inequality, has come from the left.

In Sydney’s Leichhardt suburb the mayor, Jamie Parker, led the opposition in 2010 to the construction of 1250 apartments that would replace a disused trotting track. Parker predicted the development would trigger a fall in nearby property prices and a large increase in traffic.

Known as Forrest Lodge, the district was transformed. Between the censuses of 2011 and 2016 the share of high-rise apartments in the area rose from 10% of dwellings to 46%. It was one of the largest shifts of its type seen in Sydney. Prices in the adjoining suburbs of Annadale, Camperdown and Glebe kept rising, increasing the wealth of already-prosperous residents. Parker, a Member of the Greens party, was elected to the New South Wales Parliament in 2011. He continued to oppose new housing in the area, including on the site of a disused power plant known as White Bay, until his retirement in 2023. 

The Forrest Lodge example demonstrates two important dynamics of the housing policy debate: playing to residents’ prejudices can be an effective tactic for individual politicians; the arguments employed are often selfish and dishonest.

The central problem with making housing more affordable is that it may be difficult to achieve without hurting the financial interests of existing owners, who comprise more than half the population. Tulip has advocated for the construction of 1 million new dwellings, which he estimates would lower property prices and rents by 25%. A shift of this magnitude would reduce Australians’ collective wealth by approximately $250 billion. 

In this store of wealth lies the political and economic challenge of making housing cheaper. Retirees and pensioners – the greatest beneficiaries of long-term property price rises - are an important and powerful constituency for right-wing political parties. With plenty of time to worry about their finances, retirees are a politically engaged group.

About 70% of those over-65 receive welfare. As Australia ages - about 25% of us will be over 65 by 2047 - it is only fair on younger generations that the elderly cover most of the cost of their retirements. Which in many cases would mean cashing in their homes, a step the Morrison Government tentatively encouraged in its 2021 budget by expanding a little-used reverse-mortgage scheme.

The taxation system encourages couples to remain in large homes long after their children have left home. Their property is shielded from capital gains tax and the wealth cut-off for the age pension. Good-quality apartments located near their houses and social networks would provide an incentive for retirees to switch to apartments. Their former houses could be sold to young families with children or converted into apartments. 

Eventually, it should become seen as selfish for retired couples and singles to live in multi-bedroom houses. Society should come to regard these houses as precious resources that should be available to families. Such a shift in attitude would make it politically easier to end or reduce the incentives provided by the taxation system for couples or individuals to live in large houses.

As for the young, potential beneficiaries, they need to be convinced that free-market policies can help them achieve the financial security offered by home ownership. Young Australians don’t trust the right. After the 2022 election, federal Liberal Party director Andrew Hirst told Liberal MPs that his research had found 67% of voters believed the party “had fallen behind the views of modern Australia”.

The Liberal Party’s inability to attract young Australians could pose a long-term threat to its existence. Young Australians perceive themselves as more committed to social tolerance than their parents. Questions of personal identity have become more important. Just as the threat of nuclear war overshadowed the lives of young people growing up in the 1980s, global warming is of deep and genuine concern for young people today. They regard sexual identity as more fluid than older generations. They see institutional racial bias where older people don’t. These perception shifts pose a profound threat to the future of the Liberal Party.

The Liberal Party is losing the centre. It is conceivable that the centrist independents will morph into a party that represents the affluent middle classes. If the Liberal Party abandoned or lost hope in wealthy inner suburbs, and retreated to the more conservative outer suburbs, it would likely be taken over by the Queensland Liberal National Party and conservative elements in other states. A new, populist party could emerge similar to France’s National Rally, Israel’s Lukid or Northern Ireland’s Democratic Unionist Party. These parties, led by dominant individual leaders for most of their existence, have limited internal contests over ideology. They are not parties of broad coalitions.

The consequence of an ideologically narrower Liberal Party would likely be semi-permanent minority status in the federal parliament. Periods in government would come from ad hoc coalitions with the Nationals, which might split into conservative and non-conservative rural-based parties, and independents or smaller parties.

There is a natural tendency, at any moment, to expect the future will repeat the past. Particularly in political parties with long histories of power, there is a belief in a cycle that makes returns to government inevitable. This confidence is mistaken. There is no guarantee that parties like the Liberals will be able to keep up with the changes happening in Australia or preserve the internal coalition of conservative and liberal wings crucial to the success of any broad-based party. Believers in free markets, to influence government, need to build a constituency for liberalism. Power will not be handed to them. Nor should it.

Aaron Patrick is a senior correspondent at the Australia Financial Review.