How Can Australia Address the Housing Affordability Crisis? 6

Monday, March 14th, 2016
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Wind back 20 years and the average full-time worker in Australia could pick themselves up a weighted median priced house in a capital city for around four times his or her yearly earnings before tax.

Fast forward to today and that same multiple has risen to 8.6, home ownership rates have dropped and many of those fortunate enough not to be locked out of the market altogether are being forced further out toward the urban fringe and thus further away from the best opportunities for employment and social activity.

Between 1996 and 2011, for example, home ownership rates dropped from 71.2 per cent to 66.9 per cent overall and from 52.2 per cent to just 42 per cent amongst 25-to-34-year-olds, according to ABS census data. In Melbourne, whereas more than 45 per cent of dwellings across almost every suburb bar a few in the inner east were affordable to low and middle income earners in 1981, Grattan Institute data suggests that by 2006, that could have been said of hardly any suburbs within 30 kilometres of the CBD.

What can be done? First, what would not work, according to Associate Professor Steven Rowley, Director Australian Housing and Urban Research Institute – Curtin Research Centre, would be to simply release more land. Instead, Rowley says affordability will only improve when there is a significant rebalancing of supply and demand and incomes grow faster than direct housing costs.

“We hear a lot about solving the housing affordability crisis by simply releasing lots of new land and making it easier for developers to deliver housing,” he said.

“The reality is more complex and you can have all the land you want, but unless development is profitable for a developer on a particular site, then no housing will result. Additionally, developers do not want to flood the market with land and housing because the result will be downward pressure on prices and this will impact on profitability.”

Beyond that, one thing many commentators suggest is that stamp duty should be replaced with better ways of raising revenue, such as land tax. As a transaction-based tax, RMIT Centre for Urban Research head professor Jago Dodson says stamp duty – the cost of which on a $500,000 home could amount to anything from $8,750 in Queensland to more than $20,000 in both Victoria and South Australia (subject to concessions) – acts as a barrier to those who seek alternative housing solutions as circumstances in their lives change (such as through switching jobs) and falls disproportionately as a burden upon those who relocate on a regular basis.

A better way, University of Auckland researchers Nicholas Ross Smith and Zbigniew Dumieński argued in an article on The Conversation last year, would be through taxes levied on the unimproved value of land. Such taxes exist everywhere in Australia except for the Northern Territory, but principal places of residences are generally exempt and rates charged are generally modest.

Inexpensive to administer and difficult to evade (as land cannot be moved to tax havens), Smith and Dumieński argue that such a tax would not only avoid punishing land owners for building on their land but would also encourage holders of vacant or inefficiently used land to either make use of that land or sell to others who will make use of the land.

Meanwhile, interesting issues surround negative gearing and capital gains tax. Industry lobby groups argue that the ability of investors to take advantage of negative gearing concessions encourages greater levels of new housing supply while enabling middle income professionals to get ahead financially. They add that previous attempts to remove the negative gearing tax concession in the 1980s led to a landlord strike which drove up rents.

A number of academics and economists, however, say this is nonsense. Pointing to ABS data which indicates that 93 per cent of all loans made to investors within the residential property market relate to the purchase of established rather than new housing, economists such as Saul Eslake and Grattan Institute researchers John Daly and Danielle Wood say that investor activity within the housing market adds very little to new housing supply in reality.

As for the apparent surge in rents during the mid-80s, this was concentrated in two markets (Sydney and Perth) and was not caused by the abolition of negative gearing but rather by strong population growth and insufficient levels of new construction in those cities. Elsewhere, rents actually fell during that period in Brisbane and Adelaide, and remained stable in Melbourne.

At any rate, even if less generous tax concessions did prompt some investors to sell, their properties would be purchased by current renters (who would no longer need to rent), meaning that any reduction in rental properties available would be equally matched as there would also be fewer renters to compete for these properties, Eslake, Daly and Wood say.

Dodson and Rowley both agree. Dodson refers to negative gearing as ‘essentially a subsidy for households on very high incomes to become landlords’ and outbid less wealthy households. Rowley, meanwhile, says Labor’s proposal to restrict the availability of negative gearing to newly constructed housing is sensible and may encourage potential investors to invest in new builds rather than compete with first home buyers for established dwellings.

Rowley also supports the removal or reduction of the 50 per cent capital gains tax discount on investment properties, and suggests this also be restricted to new housing in order to further encourage new supply.

Beyond tax, a number of commentators say more needs to be done to create mechanisms through which private capital is encouraged to invest in affordable housing.

In 2014, for example, the Australian Housing and Urban Research Institute called for the creation of a new type of instrument referred to as a housing bond. Under this arrangement, a new government body would raise large volumes of money from long-term low yield bonds issued by banks to institutional investors and would allocate these to community housing organisations (CHO), who would in turn use the money to purchase property which was either rented under subsidised rates or sold to low income families under a shared equity model. To make the bonds attractive to investors, the government would guarantee repayment in the event of CHO default. Such a mechanism, AHURI argues, would help to finance the development of affordable housing targeted at low income families in an environment whereby levels of public sector investment in social housing have dropped back in recent decades.

Beyond taxation and finance, there is planning and zoning, and the question of whether or not constraints within the planning system are having a material impact upon housing affordability. While property sector lobby groups insist that this is indeed the case, academics are not so sure.

Speaking particularly of the situation in Sydney and New South Wales in an article on The Conversation last year, for example, Sydney University professors Peter Phibbs and Nicole Gurran acknowledged that there was room for improvement in this area but added that reforms over the past 10 years meant the system in that state was now more flexible and responsive to greater levels of housing demand. Dodson says evidence on this topic is ‘somewhat mixed’ and stresses that notwithstanding the potential for further efficiency gains in this area, this must be balanced against the need to avoid poor quality developments.

That said, a number of commentators suggest there are specific strategies with regard to planning which could make a difference. In his City Limits book published last year, for example, former Grattan Institute researcher on housing and cities and now assistant director of intergovernmental strategy of the Department of Premier and Cabinet (Victoria) Paul Donnegan argued that the simplification of convoluted planning zones and rules along with greater emphasis on housing diversity and choice within decision making could help unlock the potential of middle suburbs for greater levels of medium density development.

Others, such as Eslake and Melbourne-based Metropolitan Planning Authority CEO Peter Seamer argue that more should be done to improve transport links to outer suburbs so that housing within these areas can offer suitable living options without residents being forced to endure long and costly commutes to places of employment.

A further concept which has broad support among academics, meanwhile, revolves around inclusionary zoning – the reservation of a proportion of dwellings (usually 10 to 20 per cent) to be made affordable to low and moderate income earners as a condition of new development approval. Such an approach is being looked at in Victoria, for example, where the state government is drafting a pilot project which is expected to start on government land which is being readied for sale.

Phibbs, Dodson and Rowley all support this concept, with Dobson seeing ‘huge scope’ to do this within Australian cities. It may, however, be more difficult in fringe areas where margins may be tight. Rowley suggested such an approach could deliver significant quantities of affordable housing, though he cautioned that such a policy took years to bed down in the United Kingdom.

Finally, Dodson says Australian governments in general lack a holistic understanding of the interplay between the housing system, market and housing policy. At a federal level, for example, he says the Minister for Housing is primarily concerned about the social and welfare aspects of housing policy as opposed to the broader economic considerations. The Treasury, meanwhile, has a good understanding of the housing market, but is under-resourced in terms of its appreciation about how the system, markets and policy interact with each other.

Dodson says more courage is needed in this area.

“I think what we need to see is bolder strategic thinking,” he said. “If you look at the Senate Inquiry which came out last year, virtually all recommendations were rejected by the government.

“There is a real disinterest in this policy area at the federal level. State governments with their limited resources are not especially adventurous in this area either.”

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  1. Steve

    It's really becoming an outrageous joke. Housing affordability is becoming a huge social problem, Turnbull and Morrison both recognized this before they were in their current positions as PM and treasurer. Since then the affordability has only become considerably worse, but now that they are actually in a position to do something about it they've done a complete 180 on the issue. I was open-minded to this new Turnbull government, I gave them the benefit of the doubt that the change would actually be good for the nation, but it's the same ignorant, apathetic, greedy bulls**t.

  2. Peter

    The reason why politicians don't want to bring housing affordability to the table is because around one third of the cost to purchase the land & construct a new home is tax. Makes the first home owners grant look rather insignificant when you look at it like that!
    I've been blowing my trumpet since the introduction of the GST. Stamp duty needs to be looked at. There are some great ideas on the table for it, but I fear they are going to stay as ideas in the short term.
    C'mon Malcolm, time you put that business brain of yours to work in this area.

    • Charles Litho

      I believe the total tax on a new house and land package is 43%.
      One of my clients just bought an investment property. The person selling my client the property had a small mortgage he is going to pay out and he is going to use the rest of the money to build a new house for himself as an owner builder on another site he owns. When an investor pays money for an existing house the other person is then free to build another one. The capital is not stashed under a mattress or taken overseas and gambled away. Even if money is just put in the bank its is then used to finance more building. The main aim is to have economic activity in Australia. A young friend with capital has been so scared of the talk that investors in Australia are criminals that need to be chased away has gone to London and bought a property already leased at a good price, which she feels was a bargain. Keep telling people who work hard save money and offer their capital to be used by others as criminals and we will lose half the population. I find that the only people who complain about Australia's economy are those that are work shy. People who have youth and health may need to work hard for a few years can do anything. One young man who was complaining about the cost of housing to me did not think he should work for longer than 37 hours a week and not work on the weekends or during his month long holidays for the next few years. Australians please count your blessings and praise what ever God you are aligned to.
      No war No disasters and a welfare system when we do trip up and people have a reason to complain.
      The poorest class of Australians today would have been regarded as well to do fifty years ago.

  3. David Chandler

    The conversation on Australian Housing has become so detached from reality many of the issues being discussed such as negative gearing, social housing, stamp duty, land supply, capital gains taxes and the like seem to have lost sight of the questions needing to be asked. Those who lobby governments generally have a narrow cast platform which advocates the interests of their constituency. You can predict what every advocacy group will say. And government has allowed the the policy and Ministerial organisation of housing to line up with the key advocates. Politicians have been elected to grasp the issues and lead. They should be able to rely on a robust public service to help shape modern responses and their implementation. Australian housing issues today differ from those that defined them in the post war years. One size does not fit all these days. Some of the advocates are reluctant to accept that the 'housing question' needs to be re-imagined. Then the policy levers that may respond could be fathomed. For example housing for those with little or no income through to those on incomes of up to $120,000 pa who spend more than 30 – 40% of their after tax income on housing are the core group in need of fresh policy attention. How to enable as many people on housing assistance to access the private rental market is a question that has no answer. How to enable a private rental housing choice for all renters where tenure certainty was an option would seem paramount. How to address Australia's housing stock size miss-match must be next in line. How to make it more viable for owners of existing stock to re-build on their own sites and not suffer the value destruction occurring in the private developer market is next, etc.

  4. Grant

    I think we need a better understanding of today verse 20 years ago. 20 years ago we were more content with modest 3 bedroom homes without pool, ensuit, ariconditioning,etc.etc. Differences include todays interest rates are 4.5% verse 13.5% plus, 20 years ago. This equates to a 200 -300% improved affordability in todays dollars. Double incomes have had a major impact which has driven house prices up, so there is a direct correlation between income and house prices. A couple who both earn a modest $65,000 per year have a total family income of $130,000 which means a mulitiplier of 4 equates to a house price of $520,000. The reality is I bought my first house in 1985. I didn't spend money on mobile phones, internet, dinning out each week, overseas holidays, flash new cars, latest fashion must haves, etc. Yes we all want the nice things and image is a big thing today. Facebook tells me I must be out all the time having a great time otherwise my life is boring and I am not worthy. Thats' all false rubbish. Housing is still affordable, financial discipline, employment discipine, matrimonial discipline are some of the keys to success. What we don't need is pathetic "woe is me it's all too hard" media sympathy, but get on and make a fist of it. You can't buy your first house without making sacrifices and hard work. Past generations did it with lower income and higher interest rates. If the average Aussie doesn't wake up that hard work is needed to succeed, then step aside for the othere nationalities which are hungry for success. We have a great country. It is safe, our government is not corrupt, we have a great quality of life and on the open global market today, that is very attractive to overseas investors.

  5. Bruce Christopher

    This old chest nut! It seems so much analysis, data and selective statistics on this issue are being carried out by academics, that a momentum of group-thinking has stifled wider analysis. Having bought and sold properties in Sydney (including entry level) and Brisbane while following pricing, dwelling expectations, interest rates and salaries, I have found housing net affordability (monthly expense against income) fairly steady over the past 3 decades. This includes units and houses for first home buyers.

    In 1996 median prices were closer to 5 (Brisbane) to 8 (Sydney) times average yearly earnings and now that is about 8 to 15 times. In the meantime interest rates have halved so the monthly burden is constant. Also in that time there has been a significant shift upwards in the expectations of what a home and its contents should provide.

    I'd suggest that some other contributing factors to the lower take up for purchasing homes in the 25-34 year bracket would be more mobile career plans and choices to prioritise other things rather than begin the focus and saving discipline early as required to be in a position to purchase. Commentators tend to be locked in to a small range of factors rather than widening to include social preferences and the complete picture of affordability.

    I think the only role for Government is to have policies which review and encourage the supply of a portion of low cost housing options, assure proper broader planning and then leave the rest to market forces. Agreed, stamp duty should be abolished as promised with GST introduction. 'Negative gearing' was a term introduced as a concept following the introduction of being able to claim expenses against any type of investment, not a policy itself.