KPMG has released a brief report “Housing Affordability: What can be done about the Great Australian Dream? They exhibit greater joined up thinking than recent Government outings, because they include tax reform, supply of affordable housing and shared equity options as part of a reform package. It also shows how complex the issues are. They say it should be a focus of public policy.
The missing piece of the puzzle though for me is property price sentiment. In a rising market, expectations of future price rises drive prices higher, and when two thirds of voters have direct interests in property and the wealth effect these price rises create, it would be a courageous politician who rocks the “magic pudding” boat! Rather they will tinker ineffectively at the margins.
There is no doubt that Australia is experiencing a worsening problem regarding housing affordability, a fact highlighted this week (24 October 2016) by the Federal Treasurer in a speech to the Urban Development Institute of Australia.
The driver of reduced affordability has clearly been the rapid increase in the price of housing, relative to a more benign adjustment in household incomes.
Many of the drivers of house price increases and affordability pressures on some households are occurring globally, are largely macroeconomic and are the product of a complex interaction of demand and supply side factors, and no single policy intervention will address the entire issue.
About a decade ago KPMG Economics completed a detailed review into housing affordability in Australia. At the time we found that the change in median house prices were mostly influenced by the underlying strength of the economy, the performance of the share market, and the proportion of housing being purchased by investors relative to owner occupiers.
We have just re-investigated the relationship of median housing prices in Australia to the key drivers identified a decade ago and found GDP and investor activity remain key influences, but the share market no longer had such an influential role. However, wages, interest rates and housing supply are factors whose influence on house prices have strengthened over the past decade.
Average access to intergenerational equity – being the average amount of time a generation has access to potential wealth via inheritance from the immediately preceding generation – is anticipated to be greatest for ‘Baby Boomers’, and least for ‘Generation X’.
We are now seeing a change in behavior by current generations regarding home purchasing which is new compared to previous generations. That is, some young people are now collaborating to buy, some are assisted by parents, while others are simply choosing not to buy because they don’t want to be committed to a location for 30 years of a mortgage.
Low income households are only able to afford housing stock that is located on the fringe of cities, and even then this has become more difficult. However, this outwards push of the urban fringe also creates broader issues for society around provision of infrastructure into these ‘greenfield locations’, and the false economies associated with cheaper housing but more expensive private and public transport.
KPMG recognises the challenges associated with resolving the problem of housing affordability are complex and they involve a range of both supply and demand side factors. We have offered a number of solutions that provide a way forward for housing affordability to be improved on a permanent basis.
These include:
1. CGT reduction: reducing the capital gains tax discount from 50% to 25%, thereby making property investment marginally less attractive
2. Aggregate property tax: abolish stamp duty on the transfer of residential property and conflate rates, land tax, insurance taxes and emergency service levies into a new Property Services Tax
3. Systemic reforms aimed at maintaining the supply and diversity of land and housing in established and growth areas, through:
a) Set targets: a stronger role for target setting for “net additions to stock” to drive Local and State Government planning schemes;
b) Affordable product: target setting would also focus on encouraging greater diversity of housing stock and deliberately encouraging smaller, well designed affordable products;
c) Streamline planning: making further improvements to the planning system to capitalise on the Government’s planned use of structure plans as a means of reducing the holding costs associated with planning delays – and providing developers in both the private and public sector with greater capacity and incentives to bolster supply at times when the market is under substantial demand pressure;
d) Empower public supply: supporting a stronger role for government land authorities to focus on housing affordability for middle income households within the context of a broader sustainability agenda.
4. Targeted Reforms aimed at improving access to those groups who are the most excluded from affordable home ownership. This package would focus on:
a) More low cost housing: the production of a greater volume of more sustainable, well-designed, lower cost house and land packages;
b) Improve assistance: better targeting of existing State first home owner assistance to increase the overall value and impact of that assistance;
c) Promote shared equity: the introduction of a shared equity program with a percentage of that equity exempt from rental interest charges for the life of the loan or a part of it to be provided by Government and/or the private sector.KPMG also believes that the solution for Australia must involve all levels of Government working together, given the factors driving the problems are not under the remit of any one level of government. It should be a priority area of public policy.
