Can a correction fix Australia’s housing market?

0:00What are you up to on June 20th? Well, if you're in New York City, the FT is hosting its weekend festival. See big names like John Lithgow and a live taping of the FT's unhedged podcast with Katie Martin and Rob Armstrong. If this sounds like a good time, take a peek at our show notes. We'll have a link there where you can register.

0:21Good morning from the Financial Times. Today is Thursday, June 11th, and this is your FT News Briefing. The EU's foreign service might look pretty different soon. And rising inflation is pressuring the White House to strike a deal with Iran. Plus, we'll take a look at Australia's unorthodox plan to fix its housing crisis. I'm Mark Filippino, and here's the news you need to start your day.

0:51France and Germany are talking about a radical overhaul of the EU's foreign service. That's according to five senior officials briefed on the discussion. It would involve taking powers away from the bloc's chief diplomat, Kaya Callis, and her agency. And as a result, the European Commission and member states would have more control over the bloc's diplomacy. The EU has faced a ton of diplomatic challenges in the past few years, from the conflicts in Ukraine and Iran to U.S. President Donald Trump's trade war. And some have questioned whether the EU's diplomatic agency is up to the task. The officials said several countries have argued that there is too much overlap, plus a lack of coordination between the agency, individual countries' foreign ministries, and the European Commission.

1:40The U.S. and Iran have been exchanging fire for the past couple of days. This is happening as the two countries try to extend a ceasefire and reopen the Strait of Hormuz. U.S. President Donald Trump warned that Iran will have to, quote, pay the price for taking too long to negotiate. On top of the shaky ceasefire, Trump is also facing domestic political pressure to get a deal done. Government data out yesterday showed inflation jumped to 4.2 % last month. So what does this all tell us about the state of negotiations? The FT's Washington bureau chief, James Politi, is here to answer that. Hi, James.

2:14Hi, Mark. Okay, so we've seen what looks like heightened tensions between Washington and Tehran. We've heard conflicting messages from Trump about being close to a deal, but also that Iran is taking too long to agree to one. James, why is Trump resorting to this diplomatic escalation? Well, I mean, he's clearly getting more frustrated with the lack of a sufficient Iranian response to his plea for negotiations. One can argue to what extent this is actually an escalation. The U.S. military is saying that the recent strikes on Iran in response to the downing of an Apache helicopter were done in self-defense, and they do not mean to break the ceasefire.

2:57So it looks like they're trying to ramp up the pressure on the Iranians to strike a deal. But new skirmishes really raise questions about how strong the ceasefire really is. James, I mentioned the inflation report. Tell us how big of an impact that has on getting a deal done. Well, I think it's absolutely critical because the rise in inflation is creating a huge political problem for President Trump. And every Republican who's on the ballot in the midterm elections in early November, which are really coming up quite shortly, just in a few months, petrol prices are up, the cost of living is rising.

3:36And this is not what American voters reelected Trump to do. In that context, Trump and a lot of Republicans feel the need to get a deal. And he seems to be growing increasingly angry about the state of play. How is this all playing out with the Iranians? Well, the Iranians are holding firm in some respects. Even in response to the U.S. strikes, they continue to launch attacks against key allies of the U.S. In the Gulf, the chances of a deal do not seem extremely high. It's still possible there could be an agreement. But it does not appear that the Iranians are willing to make some of the concessions on both their nuclear capabilities and on the Strait of Hormuz that the U.S.

4:28is looking for. So it makes for a very complicated picture. Yeah, I mean, how do you see this playing out? Could we get a ceasefire extension soon? Well, I think we're sort of stuck in this limbo of what I would call, and many others have called, a dirty ceasefire. It's a ceasefire that has frequent violations, frequent skirmishes, and in which there has been no breakthrough on the key issue of what happens to the Strait of Hormuz. it would require either a deal or I think Hawks and Washington would say a more aggressive military action from President Trump against Iran to try to change the dynamic.

5:12But of course, that would come with potentially even greater political costs and economic costs for the White House, which Trump may not be willing to bear. And he certainly hasn't been willing to go that far in the last few weeks. A further escalation would significantly raise the stakes. It would, you know, potentially inflame other parts of the Middle East even more than they are now. It could raise energy prices even more than they are. And so I think the push for a deal would still be the most palatable scenario, but certainly it's possible that we remain in limbo for weeks, if not months.

5:52That's the FT's Washington Bureau Chief, James Spoliti. Thanks, James. Thanks, Mark.

6:02Australia, like a lot of other places around the world, is desperately trying to fix its housing crisis. Prime Minister Anthony Albanese wants to make owning a home more affordable for young buyers. And to do that, his government is looking to undo decades of tax incentives. But is it going to work? I'm joined by Nick Fylds in Sydney to discuss this. Hi, Nick. Hi there. G'day, Mark. So, Nick, how bad is the housing situation for young people in Australia? It's probably not recognised everywhere, but Australia has one of the most expensive housing markets in the world. We are ranked just behind Hong Kong, and places like Sydney are in terms of the expense of buying and renting houses.

6:40That's partly a reflection of high levels of migration, so more people coming here and needing a place to live, struggles in keeping up with demand in terms of building new houses, and the house price spike, which has sent, you know, in a place like Sydney, median house prices over a million dollars and has meant that many, many people, professionals even into their mid to late 30s are still in share houses. They simply can't afford to spend what it takes to compete for a house. So Nick, what is the government doing to bring down prices? So the government of Athenialbanese, which is a Labor government, last month in the budget decided to reverse some tax incentives that were introduced in 1999 under a conservative government, which has led to this sort of house price boom.

7:26The figures they're citing are that since that time, house prices have increased about 400 % compared to about a doubling of income growth. And they say that means the housing market is decoupled from wage growth and something has to be done about that. And how is the government hoping to implement its solution to that, Nick? So the measures proposed are to abolish negative gearing, where people who own multiple properties can offset rental losses or mortgage losses against other taxes, but to limit that to existing stocks. So you can still benefit from that on new development. They've also introduced another suite of tax reforms, including capital gains and how family trusts are taxed as well.

8:10And they've done that in the name of generational inequality and making the housing market more affordable. Do we have a sense of what the market reaction has been to these policy changes? The immediate impact has been that the housing market has effectively grown to a standstill in many places, including Sydney. We have some forecasts out there that perhaps a market correction of about 10 % might happen. So that's the worst housing market correction in Australia in 40 years. Others think that it might be more modest than that. Now you can interpret that as either a disaster if you already own a house and you bought at the top of the market, or that we're really just going to slow the rate of growth to sort of correct this issue.

8:50What are the risks here, Nick? So this is a political risk for Albanese and the Labor government. It's gone down quite badly in some sections of Australian society, not only from the boomers. Start-up companies have criticised the capital gains issues. And also some young people have said, well, how is this fair? My parents may have benefited from the system and created a huge amount of wealth for their retirement. I'm not allowed to do that anymore. There's also a risk that it doesn't work. New Zealand abolished negative gearing a few years ago under Jacinda Ardern and reversed that because one of the potential side effects is a spike in the rental markets.

9:27And that's what happened in New Zealand. The other issue that potentially could come up is the supply issue. If it's a huge asset class and a lot of money's in it, more houses will be built. So how that winds its way through the system over the next decade and whether the government has to step in and provide more funds to make sure there isn't a shortfall as private investment exits the market, it remains to be seen. Nick Files is the FT's Australia and Pacific correspondent. Thanks so much, Nick. Thank you very much. You can read more on all these stories for free when you click the links in our show notes.

10:00This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

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