Category: Property Market

Federal government may cap number of investment properties

From The Real Estate Conversation.

The federal government is considering limiting the number of properties investors can buy, as it struggles with ways it can reign in property prices in booming markets only a few weeks out from the May budget.

According to an article in The Australian Financial Review, the government is looking at ways it can cap the value of tax breaks for property investment as it tackles housing affordability problems, which vary widely around the country.

Since 2012-2013, there has been a 9.2% increase in the number of property investors that own five or more properties, according to The Guardian’s analysis of recent Australia Tax Office data.

The federal government has ruled out getting rid of negative gearing according to Labor’s policy, and has indicated that it will consider more ‘surgical’ measures.

The government appears to have moved away from an earlier idea to allow first-home buyers to access their superannuation funds to accumulate enough money for a deposit.

Malcolm Gunning, president of the Real Estate Institute of Australia, told SCHWARTZWILLIAMS the percentage of investors in the market that own three or more investment properties is only very small, and therefore capping the number of properties those investors can own is only “clipping around the edges”.

Gunning said capping the number of properties investors could own would mainly be “political posturing”, and warned it could decrease the supply of new properties coming onto the market, which in turn could cause rents to rise.

“It’s a balancing act,” said Gunning.

London Housing Market Takes A Bath

At the end of 2016 we reported that the formerly invincible London home market had suffered its biggest crack in years, when home prices plunged the most in six years according to Rightmove via Zero Hedge.

Asking prices in London dropped 4.3% in December with inner London down 6%.  Meanwhile, the most exclusive neighborhoods, like Kensington and Chelsea, recorded even sharper declines at nearly 10% as home buyers migrated to cheaper areas of the city.

While it was unclear what was the catalyst: whether post-Brexit nerves, China’s crackdown on capital outflows, the ongoing depressed commodity market, or reduced migrations by wealthy Russian and Arab oligarchs, what is obvious is that the slump has continued, and according to the Royal Institution of Chartered Surveyors, its price balance for the city fell to the lowest since February 2009 last month, plunging to minus 49, which means that a greater percentage of agents reported drops in March.

Still, as Bloomberg reports, more respondents than not still expect prices in London to rise over the next year, the report showed. they may be disappointed.

Speaking to Bloomberg, Samuel Tombs at Pantheon Macroeconomics said that the London measure tends to represent the prime market rather than the city as a whole. The slump in the gauge tallies with other reports of sellers in central London having to cut prices to close deals.  Nationally, the RICS price index stayed at 22 in March, though the expectations for both values and sales over the next year weakened. New buyer inquiries and sales were stagnant, with the most expensive properties among the worst performers, according to report.

While buyers – especially those relying on mortgages – remain largely locked out of the market because of high prices, nervousness about Brexit and the U.K. outlook, price downside according to realtors may be “limited because of the continued shortage in the supply of property to buy, with estate agents’ listings reportedly at a record low.”

Which is odd because a cursory check reveals not only that there is a glut of high end properties, many of which have been on the market as long as a year, but that despite huge discounts as high as 40%, nothing is moving, and just this one listing service has no less than 124 pages of properties – at 15 properties per page – with price declines in Kensington and Chelsea alone, up from “only” 53 pages when we last looked at the same website back in December.

“High end sale properties in central London remain under pressure, while the wider residential market continues to be underpinned by a lack of stock,” said Simon Rubinsohn, RICS chief economist. “For the time being it is hard to see any major impetus for change in the market, something also being reflected in the flat trend in transaction levels.”

Super for housing a ‘dumb’ policy, says Coalition MP

From The New Daily.

Nationals MP Andrew Broad says capping negative gearing would be a better approach to tackling housing affordability than allowing Australians to dip into their superannuation.

Allowing people to dip into their super would be a “lazy way to address the issue”, the Coalition backbencher told The New Daily.

“Dumb policy is dumb policy, basically,” he said.

“People don’t want us to touch superannuation. I think realistically it has no legs because it would get blocked in the Senate anyway. But more so it has no legs because it is not sound policy.

“[It] won’t work and it has negative consequences on young people’s retirement.”

The Victorian federal MP was backed up by former health minister Sussan Ley, who tweeted that young Australians “need their super for retirement”.

However, plenty of other government MPs, including the Resources Minister Matt Canavan, have urged Treasurer Scott Morrison to embrace the superannuation proposal, which the government’s Expenditure Review Committee is expected to consider this week.

Instead of using super, Mr Broad said he preferred a cap on the number of homes or total dollar figure that can be negatively geared — although he was strongly opposed to Labor’s outright ban on the tax deduction.

“As long as the threshold is fairly high, you could say, once you’ve deducted more than $50,000 from negative gearing, you can’t deduct any more than that,” he said.

“We’ve got to reward people who want to buy one or two investment properties. We don’t need to have a tax regime that allows people to buy 10 or 20 and be in competition with someone who’s trying to purchase their first home and put a roof over their head.”

Meanwhile, other Coalition MPs are publicly lobbying to keep the super proposal alive, with Resources Minister Matt Canavan adding his support on Wednesday.

“This is, I think, a legitimate idea — it’s had support from people like Paul Keating in the past, it’s used in other countries, it’s something we should certainly consider,” he told the ABC.

Liberal backbenchers including John Alexander, Ian Goodenough, Tony Abbott, Tony Pasin and Craig Kelly have stated their support.

Mr Kelly told The New Daily he’d be disappointed if the policy wasn’t in the budget.

“But obviously the budget is not the only time that this change could be made,” he said.

Pointing to Australia’s declining rate of home ownership, he added: “It’s becoming harder and harder for young people to afford to get that deposit.

“I don’t think that is good for the country.”

Assistant Treasurer Michael Sukkar has previously said the super for housing idea could work as part of a broader suite of affordability measures, while Finance Minister Mathias Cormann is on the record as saying it would push up house prices.

Treasurer Scott Morrison is reportedly in favour of allowing Australians to divert their super into a special account, according to the ABC.

If the policy is adopted in the budget, it would still be subject to the whims of the Senate crossbench.

One Nation supports allowing people to access their super, Nick Xenophon and Jacqui Lambie are open to the idea in some form, while the Greens and Senator Derryn Hinch oppose it outright.

Outrage at ‘really dumb’ resurrection of super-for-housing idea

From The NewDaily.

Reports that the government is again considering hacking into superannuation to solve the housing crisis have angered experts and regular Australians alike.

Anonymous sources within the Coalition have leaked to the ABC, The Australian and others that the plan is still in play, despite Treasurer Scott Morrison previously saying the government had no such proposal.

ABC political reporter Andrew Probyn reported Monday night that the proposal was being actively investigated for inclusion in the May budget.

Liberal backbench MP John Alexander, a vocal member of the advisory panel formulating the government’s housing affordability package for the May 9 budget, is known to be fighting for the idea. He is supported by fellow backbenchers Tony Abbott and Craig Kelly.

Assistant Treasurer Michael Sukkar wouldn’t rule it out in an interview with Sky News on Tuesday. He said the government is “pretty keen to examine measures that can bridge [the deposit] gap and allow first home buyers to get into the market as soon as possible otherwise the goal posts keep shifting”.

The super-for-housing idea, as commonly understood, would allow prospective first-time buyers to put their super savings toward a deposit. This would be in keeping with Mr Sukkar’s “keen” focus on removing the first hurdle to home ownership.

Treasurer Morrison told a conference on Monday it now takes eight years to save for a home deposit in Sydney and six years in Melbourne.

However, experts are horrified, as are many Australians, that super savings could be tapped in an attempt to solve this problem.

Economists, academics and even former PM Paul Keating, the godfather of compulsory superannuation, have all warned it would push up prices, expose the savings of Australians to a undiversified asset, erode their income stream in later life, and push up the cost to taxpayers of age pensions.

In fact, Malcolm Turnbull once dismissed it as a “thoroughly bad idea” and Finance Minister Matthias Cormann warned it “will not improve housing affordability” when it was floated during the Abbott years.

On Tuesday, Opposition Leader Bill Shorten described it as a “raid” on super. “Most young Australian’s don’t have much super at all,” he told a press conference.”

This is borne out by a recent report that estimated the average Australian aged 25-29 had only $16,000 in super in 2014.

Mr Shorten also noted, as many experts have done, that the “secret” of superannuation is compound interest. Theoretically, thousands of dollars could be lost in retirement if a worker’s capital is eroded early in their working life.

“If you raid that superannuation when it is in very small amounts at the start of people’s careers, you just won’t have enough super to retiree on,” he said.

“If the government wants to do something about housing affordability, rather than raid superannuation and starve people of income in retirement, you need to reform negative gearing in capital gains tax deduction.”

Affordable housing, finger-pointing politics and possible policy solutions

From The Conversation.

In the first article reviewing The Conversation’s many articles on housing issues, the commentary about fiscal and supply-side issues was consistent. The same is not true for affordable housing due to the diversity of affordability issues.

The issues have to do with the complexity and scale of the affordability problems and possible policies discussed in Conversation articles since January 2016. As it is not possible for one article to cover all the relevant policies, the focus here is on the National Affordable Housing Agreement (NAHA), support for not-for-profit social housing, bond aggregation and inclusionary zoning.

The terms affordable and social housing are sometimes used interchangeably, a potential cause of confusion. Affordable housing is more encompassing – it represents an aspiration for all who cannot enter the market for housing. This includes both ownership and rental.

Social housing is one form of affordable housing. It includes public housing and housing owned and managed by not-for-profit community housing providers. As well as providing housing for those unable to enter the market, community housing providers accommodate, for example, people with disabilities and those escaping domestic violence.

A ‘hot’ political issue

Affordable housing is a “hot” issue. Recently, the new premier of New South Wales, Gladys Berejiklian, listed it as one of her top three priorities.

Federal Treasurer Scott Morrison claims supply-side constraints are pushing up housing prices. He targets state planning regulations as the problem.

Federal politicians favour this explanation as supply-side complaints can be used to blame state and local governments. This serves to divert attention from federal fiscal policies, which effectively subsidise home ownership.

How big is the problem?

Of the need for public and social housing, authors wrote:

We have modelled the income rules determining eligibility for public housing, and estimate that there are 900,000 households satisfying these income eligibility criteria.

… state-owned-and-managed housing still accommodates around 700,000 of our most vulnerable citizens.

… there are as many as 105,000 people who are without a home and 160,000 households on public housing waiting lists. The overall stock of public housing has fallen from 331,000 units in 2007-08 to 317,000 in 2013-14.

Social housing has nearly 200,000 Australians on a waiting list.

In addition to the public housing stock, not-for-profits provide about 100,000 social housing dwellings.

The scale of the affordable housing problem is highly dependent on mortgage stress. This, in turn, is linked most closely to household incomes and employment levels. This mortgage stress is not especially concentrated in the capital cities.

Into this affordability mix one might also add some 2 million Australians who “don’t have the resources to bounce back” from unexpected bills.

Ways to improve social housing supply

The NAHA, which has been referred to as Australia’s housing policy, is a “national partnership agreement” by the Council of Australian Governments (COAG). Its largest component is social housing.

Federal government ministers have described the A$1.3 billion-a-year NAHA as an “abject failure”. This is because it has not increased “the number and availability of public and social housing stock”.

In contrast, The Conversation authors agree that spending on public housing is inadequate and declining.

Australia’s social housing system remains grossly underfunded. Currently available resources are inadequate even to properly maintain the existing portfolio, let alone to underpin the new supply needed to keep pace with the growing need.

… the overall stock has been eaten away, through market sale of public housing, and run down, through skimping on repairs and maintenance.

The history of public housing is that housing was briefly referred to as a “right” after the second world war. Public housing was used to accommodate people from various classes; it was not initially a preserve of the poor. Later, that changed:

[Public] housing’s declining share of the housing stock became more tightly rationed to the lowest-income households. This eroded the system’s rent base. At the same time, its ageing buildings and households with greater support needs increased its costs.

When operating expenses are not covered, maintenance is inadequate. When that happens, the number of habitable units declines.

It is feared that the NAHA might not survive the 2017 budget. Likewise it is feared that:

… [Productivity] commission-inspired “reforms” could involve the forced sale of public housing to vulture capitalists unconstrained by enforceable obligations to provide tenant services or to maintain, upgrade and retain housing stock for its current purpose.

… some residents face eviction through large-scale public housing redevelopment by governments that view their homes as key real estate assets.

The fear of eviction from public housing sites with high land value is certainly warranted:

In March 2014, New South Wales government minister Pru Goward announced that all of the 293 public housing dwellings in Millers Point, Dawes Point and The Rocks, as well as the 79 apartments in the Sirius Building built for public housing in the 1970s, were to be sold. Their tenants would be moved.

One of the potential bipartisan ways forward is to scale up social housing provided by not-for-profits. As federal housing minister, Tanya Plibersek proposed in 2009 that:

… not-for-profit community housing providers would be supported to grow to a scale enabling them both to complement and compete with public housing entities.

Social housing tenants were evicted from the Sirius Apartments so the valuable inner-city site could be sold. Dean Lewins/AAP

Social housing critically serves low-income renters. The high cost and limited availability of rental housing is a defining feature of the affordability problem. It also underscores the inequality between owners and renters due to the fiscal policy benefits for home owners.

Funding is needed to scale not-for-profit social housing. In a context of seeking to cut public spending, Morrison is looking to private sector funding of the sector to increase both the supply of affordable housing and the transfer of public housing to not-for-profits.

He is seeking to secure such funding based on a bond aggregator model. This is best explained by the Australian Housing and Urban Research Institute (AHURI). It has proposed:

… an Affordable Housing Finance Corporation … designed to aggregate and source large amounts of capital from the bond market so as to provide lower-interest, long-term loans to not-for-profit community housing providers developing housing for lower-income households. The intention is that money would be raised efficiently with reduced financing costs rather than in expensive one-off transactions such as when borrowing from a bank.

AHURI cautions that the not-for-profit need for rental income means that households whose only income is welfare assistance cannot access not-for-profit social housing. The need for rental assistance remains.

Another means advocated for increasing the supply of affordable housing is inclusionary zoning. This approach requires a percentage of new housing projects on rezoned and government land to be affordable housing. An additional benefit is that this improves access to jobs for low-paid service workers.

Inclusionary zoning has long been practised in Europe, the US and, more recently, in South Australia. The rationale for inclusionary zoning is:

… that the uplift in land value results from public policy changes that allow for housing development or higher-density housing. It is not unreasonable, then, that landowner windfalls should be limited to achieve the important public policy outcome of housing affordability.

The Property Council opposes inclusionary zoning, claiming that it will increase the cost of housing for others. This is doubtful, for the following reason:

If a fixed percentage of affordable housing becomes a condition of rezoning … this will only affect the size of the landholder’s windfall gain. Developers will offer lower prices for the land, based on the mandated requirements for affordable housing.

The Greater Sydney Commission supports inclusionary zoning, which is sorely lacking in Melbourne. In Sydney, the debate concerns the percentage of dwellings allocated to affordable housing. The commission suggests figures of 5%-10%, whereas The Conversation authors advocate:

… at least 15% of housing in new private developments … [and] on publicly owned land, at least 30% of new housing developments should be affordable.

Fresh approaches and funding needed

If NAHA funding is reduced, or the NAHA is terminated, the affordable housing problem will sharply escalate. Australia’s “housing crisis” will truly deserve that label.

It can be anticipated that social housing provided by not-for-profits can scale, but this will take many years. Government rental assistance will still be needed. Inclusionary zoning is desirable and can serve low-income households, but will never be an alternative to the need for social housing.

The question is what policy alternatives Morrison has in mind and how much he is prepared to spend.

Author: Richard Tomlinson, Professor of Urban Planning, University of Melbourne

Affordable housing in, negative gearing stays, says Treasurer

From The Real Estate Conversation.

Treasurer Scott Morrison has spoken of his commitment to home ownership as an achievable goals for Australians in a speech for the Australian Housing and Urban Research Institute today.

He said the government is looking at new ways to help renters and fund affordable housing, but he said negative gearing will stay.

“Home ownership is a positive for the Australian economy, our society and the nation’s finances,” said Morrison, but he said that recent data shows home ownership is declining in Australia, especially for young people.

The data shows that the proportion of home owners has fallen from 71 per cent of Australians to 67 per cent over the past 20 years. For Australians aged 25 to 34, home ownership is down by almost 10 per cent between 2002 and 2014, and currently sits at around 30 per cent.

Morrison said, “That is more than 160,000 young people that would otherwise be homeowners.”

Laying the foundations for the upcoming 6 May budget, Morrison said Labor’s proposal to change negative gearing tax breaks will not help Australians hoping to buy their first home, because it will increase rents, making it harder to save for a deposit.

Morrison said renters need greater security. He said that over 85 per cent of private renters move within five years, and almost one third of moves are forced, which is three times the rate of other household arrangements.

Morrison said, “This is particularly concerning for families with children.

“These families need housing stability to have consistent, reliable and beneficial access to the services they rely on such as schools, medical assistance and other supports.

“This means access to longer term leases,” he said.

Morrison said the federal government could establish an Affordable Housing Finance Corporation that would use a “bond aggregator” model that has been successful in the UK, and which is aimed at garnering tens of millions of dollars in investment into community and social housing.

Morrison called on state governments to release greater supply of land, to alleviate some of the housing supply shortages.

Glenn Byres, Chief of Housing and Policy for the Property Council of Australia, said the Treasurer’s highlights the complexities in dealing with the housing and rental markets.

“We agree with the Treasurer’s assessment that the rental market is working well, but the housing supply pipeline in our cities is not,” he said.

“Housing supply across Australia is hindered by government property taxes and charges, unnecessary red tape, and planning systems that were built to constrain growth rather than facilitate it,” said Byres.

He said the Government is right to be looking at ways to kick start private investment in Australia’s housing markets, saying “the private sector is ready, willing and able to help.”

“The Federal Government should also be looking at ways to incentive the states and territories to encourage new housing supply using national competition payments,” suggested Byres.

Byres agreed with the Treasurer about the delicate balance between negative gearing and the rental markets.

“‘Negative gearing disruption’ is about making housing investment less attractive which will, in turn, impact the rental market,” he said.

“We believe there is scope, as part of broader tax reform, to reduce the capital gains tax discount to 40 per cent in the May Budget,” said Byres.

Mr Byres said the Treasurer was rightly focused on increasing supply through more investment and addressing supply constraints.

Nicholas Proud, chief executive officer of PowerHousing Australia, the body representing 28 Community Housing Providers, has welcomed Morrison’s commitment to address affordable houing shortages.

Helping new supply, creating more social and affordable housing, supporting first home buyers, and helping seniors to downsize are all step in the right direction, he says.

Adopting the UK’s bond aggregator model will open streams of institutional funds to increase the supply of social and affordable housing, said Proud.

“While public housing has decreased by 24,000 since 2007, community housing in Australia has over the same period grown from 33,526 to 72, 410 dwellings as per the recent Productivity Commission Report on Government Services,” said Proud.

“Providing funds through to the community housing sector will deliver more affordable homes more cost-effectively and assist those on low incomes through to first home ownership with more options,” he said.

To read the Treasurer Scott Morrison’s speech in full click here.

Strong Auction Clearances Continue

From CoreLogic.

Auction activity ramped up across the combined capital cities this week in the lead up to Easter, with 3,424 homes taken to auction this week, recording the highest volume of auctions year-to-date. The preliminary clearance rate remains strong despite the increase in volumes over the week, with 77.6 per cent of auctions reporting as successful. This week’s results are higher than both last week’s 75.9 per cent across 2,657 auctions and the same time last year when 67.1 per cent of the 1,831 auctions were cleared.  However, if we compare to the pre-Easter weekend in March last year, volume’s reached their highest level for 2016, with 3,540 auctions held.

Housing Finance Still Growing

The latest data from the ABS on Housing Finance to February 2017 shows that overall finance continued to grow.

The trend estimate for the total value of dwelling finance commitments excluding alterations and additions rose 0.4%. Investment housing commitments rose 0.7% and owner occupied housing commitments rose 0.2%. [DFA NOTE: They include owner occupied refinance in these numbers]

In seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions fell 2.7%.

But within the moving parts there are interesting observations – as usual we will focus on the trend series, which irons out some of the statistical bumps, though others will rush to comment on the 13% fall in investor loan flows from the previous month.

But looking first at ADI loan stock, overall balances rose 0.44% in the month to $1.57 trillion. Investor loans comprise 35% of the total, just down a little, in original terms.

Turning to the trend lending flows, total flows grew by 0.38% compared with the previous month, up $128 million. Within that, refinance fell to 18.7% of flows, down 0.83% or $50 million, owner occupied loans rose 0.65%, up $89 million and investment loans rose 0.69% or $91 million.

The main rise in the owner occupied sector was the purchase of established dwellings, whilst funding for new purchases and construction both fell a little. All categories of investor lending rose.

The HIA highlights that

the number of loans to owner occupiers constructing or purchasing new homes during February 2017 rose in just two states – South Australia (+6.5 per cent) and Queensland (+3.7 per cent). Compared with a year earlier, the largest reduction in lending volumes affected the Northern Territory (-63.8 per cent), followed by the ACT (-23.4 per cent) and New South Wales (-9.7 per cent). There were also falls in Western Australia (-8.7 per cent), Victoria (-2.0 per cent) and Tasmania (-1.7 per cent).

Looking next a first time buyers, the number of transactions rose in the month, in original terms up 7.5% to 6,596, or 13.3% of all transactions, still below previous peaks and lower than last month.

Our surveys also identified another 4,600 first time buyers going direct to the investment sector, so overall volumes are higher than the official figures suggest.

Looking at the movements, month on month, the number of FTB rose, with an increase of 460 over the previous month. Fixed rate lending compared with all transactions was down.

More On Negative Gearing Distribution – The Wealthy Benefit The Most

Last week we discussed data from our core market model on negative gearing, and using our segmentation demonstrated that some, and more wealthy segments, benefit the most.  There is room to trim the excesses, without necessarily removing gearing overall.

Today we look at another perspective, which supports this argument. We estimate that 61.7% of households with investment property are negatively geared – this has been rising significantly, as investment property penetration as risen.  Around 2.4 million households hold investment property, but not all is mortgaged or geared.

The first chart shows the value of investment property mortgages mapped to the value bands of investment property held. The orange area are households who negatively gear, the blue those who do not. This shows that the larger value portfolios have more gearing, and therefore get the greater tax benefits.  Note also the small, but important peak in portfolio values above $2m. We are seeing the rise in the “professional” investor class, or Portfolio Investors as we call them.

Another way to look at the value distribution is by the number of properties held in the investment portfolio. Again the orange area is property negatively geared, the blue, not geared.  We see a significant spike in gearing above 5 properties, as well an an expected strong distribution in one or two properties. Our modelling shows around 79% of households have one or two properties.

The overall costs of negative gearing and capital gains tax concessions are an estimated $7.7 billion annually, and three-quarters of the capital gains tax concessions are enjoyed by the top 10 per cent of income earners.

So, in our view, the Government should be looking to curtail the gearing available to multiple property holders, and limit the total amount which can be geared. Those two simple measures would take heat out of the market, reduce the tax burden and still allow “mum and dad” investors to benefit.

A categorical “NO” to negative gearing reform is a major mistake. Treasurer, please note! As it stands, as mortgage rates rise, and investment loans will bear the brunt of these rises, actually the poor tax payer pays for this, insulating geared investors from the extra costs. Treasury should be modelling the extra impost this will be on the budget.

 

What housing issues should the budget tackle? This is what our experts say

The Conversation has published many articles by Australia’s foremost academics on policies that affect housing. In the lead-up to expected announcements in the federal budget in May, we review the arguments in the articles since January 2016 – 81 were identified, of which 58 concerned housing policy.

This article focuses on the most frequently mentioned aspects of housing policies and other policies that had unintended effects on housing – fiscal policy, land supply and planning approvals, and affordable housing. A concern with politics and inequality was a consistent theme. Recent articles have discussed a possible housing bubble.

This article considers demand-side market distortion, supply-side blaming, and inequality. The second article will consider housing affordability and prospective policy changes.

Demand-side distortions

The discussion of fiscal issues most often involves the following government responsibilities:

  • negative gearing and capital gains tax exemptions – a federal responsibility;
  • stamp duty (state government); and
  • the need to replace stamp duty with land taxes and to implement value-capture taxes on unearned rises in land value (state and local governments).

The First Home Owner Grant and the use of superannuation savings to buy housing were seldom mentioned. The same is true of the Reserve Bank and the role of the Australian Prudential Regulatory Authority in regulating housing lending.

The macroeconomic implications of fiscal issues were largely not included in the housing debate. The irony is that both major parties support market distortions – the Coalition government somewhat moreso than the Labor opposition.

This is where politics enters the picture. It is recognised that:

70% of voters own their houses … Housing accounts for more than 60% of the value of total assets held by Australians.

Home owners have a vested interest in stable, if not increasing, housing prices. As a result, it was observed:

The default position for politicians is to sound concerned about housing affordability, but to do nothing.

Reading the articles caused me to think the debate should be framed somewhat differently and focused on market distortions. These are a negative when policies:

  • give rise to price distortions;
  • divert capital from more productive investments to less productive ones;
  • divert consumption from other goods and services and associated jobs as a result of inflated housing prices and mortgage payments;
  • create risks: household debt and exposure to interest rate rises, bank mortgage lending, the housing market, the national economy;
  • raise transaction costs;
  • reduce labour market efficiency by discouraging labour mobility; and
  • exacerbate inequality.

Market distortions, when transparent, are positive if they serve social ends like affordable housing and reduced inequality.

With some variation in interpretation, Conversation authors agree that negative market distortions arise from the fiscal policies listed earlier. Negative gearing and capital gains tax are “perverse incentives in the tax system”. Together, they have “simply added fuel to the fire” of increasing housing prices.

Negative gearing is … a subsidy for buyers … The problem is one of too many buyers willing to pay high prices, and negative gearing is designed to create more buyers willing to pay more.

So negative gearing encourages people to invest in property, and it particularly encourages them to invest by borrowing most of the price of the house … This is a very odd kind of housing and investment policy, seemingly designed to encourage people to over-extend and expose themselves to big risks if property prices were to fall.

Capital gains tax is “diverting capital from other productive investments in the expectation of tax-free capital gains”.

Lopsided lending for private housing has diverted finance away from business investment.

The articles also identify distortions to the economy, household debt and Australia’s budget deficit. An example is:

… the unusually generous treatment which the Australian tax system gives to the costs of and returns from debt-funded property investment.

And, referring to a possible housing bubble:

… double-digit increases in house prices, combined with unprecedentedly high household debt (more than 120% of GDP, the third highest in the world) and household debt servicing ratios (also the the third highest in the world), make for a precarious situation.

… the CGT exemption cost the budget A$46 billion in 2015-16. Removing the exemption altogether would wipe out the budget deficit in one swoop.

Another author notes that by:

… making homes default savings accounts essential to our long-term welfare security … we have come to depend on them for much more than housing … A welfare system that relies on home ownership in a globalised era is … critically vulnerable.

The articles on market distortions lead to firm conclusions. Fiscal policies that benefit home owners significantly distort the economy, inflate housing prices, and create risks that permeate from households to the national economy.

Supply-side blaming

It must be noted from the start that:

New supply is a small fraction of the total stock of dwellings (about 2% in Australia). Prices are set by the total housing market …

Discussion of housing prices that singles out supply-side issues is thus poorly grounded. This is contrary to Treasurer Scott Morrison’s view:

The issue here is fundamentally about supply.

He seems to believe that:

… the most important factor behind rising prices has been the long-running impediments to the supply side of the market.

Morrison seeks to push states to remove residential land use planning regulations that are supposedly unnecessary and impeding the supply of housing.

Several articles observed that it is easy for the federal government to express dire concern about affordability and to blame state and local governments for planning and building regulations slowing the supply of land and housing. State governments sometimes repeat this mantra, blaming local governments.

It was observed that home owners are susceptible to scare campaigns by property sector bodies about the claimed impact of possible fiscal reforms It was also observed that Morrison was the Australian Property Council’s national policy and research manager from 1989 to 1995, and is well versed in blame shifting.

Are the supply-side problems dire? It appears not. In Sydney and Melbourne:

… approvals are running at about double the actual dwelling construction levels, so “fixing” the planning systems is unlikely to have much impact on dwelling supply levels.

Growth in the national housing stock has kept pace with population growth for almost a decade.

Developers release land to the market at a rate that sustains prices.

Developers … simply won’t allow supply to get ahead of demand in a way that would put significant downward pressure on prices. Dwelling approvals in Sydney and Melbourne are running way ahead of building starts, but housing projects are released in stages to avoid swamping the market.

As a result:

Record construction rates have co-existed with unprecedented and ongoing property price hikes.

The issue is less the scarcity of land than speculative acquisition of land. The developers benefit from unearned increases in value arising from zoning changes, and then from a managed release of land to the market.

For these reasons, some articles proposed taxes should accompany rezoning. A vacant land tax was also mentioned.

Developers are unlikely to release land at a rate that improves affordability by lowering prices. Dan Peled/AAP

Many articles also worried about where land is being released. The need for planning and the importance of location have long been evident:

In his 1972 election campaign, Gough Whitlam loudly proclaimed that in modern Australia an individual’s health, wellbeing and life chances were shaped more by where they lived than the job they held, their religion, race or ethnicity.

Promoting inequality

In effect, all home ownership in Australia is subsidised. It’s a form of social welfare biased in favour of the wealthy. For example:

… Australian governments have effectively subsidised housing through taxation incentives for home ownership.

For instance, the exemption from capital gains tax:

… results in the payment of income support to those with substantial wealth tied up in their principal residence.

… the current benefits of exempting the main residence from CGT flow mainly to high-income earners, with more than 50% of the benefit flowing to the top 20% of households … [capital gains tax] is a perk for the rich.

… negative gearing is a tax deduction … the higher your marginal tax rate, the more you get. Someone on $200,000 will receive about half their loss back. Someone on $30,000 will only get about a fifth.

… most of the gains go to a small subset of investors with lots of properties and on very high incomes. The “mums and dads” get a relative pittance.

In addition to fiscal measures:

… the lack of well-located affordable housing is an economic productivity concern as well as a social problem.

Intergenerational inequality in home ownership is not included here. While often mentioned, it is “framing the housing affordability question the wrong way”. The divide is determined by class and perpetuated by those with wealth in property and the potential for intergenerational wealth transfer in the housing market.

A specific insight concerns the geography of mortgage stress. Mortgage stress is more a result of household income than the price of the house. Rather than Sydney and Melbourne, where mortgages are highest:

… mortgage stress is highest in Tasmania and South Australia … Households in regional areas are also facing more mortgage stress than their city counterparts.

If attention turns from house prices to mortgage stress, the geography of housing angst turns to regional Australia and to “employment and income statistics”.

Beware simplistic mantras

It is hoped this article leads to some introspection regarding the causes of housing affordability problems. Australia has for too long persisted with the mantra of housing prices being caused by problems of supply.

This is not a political statement. It was Labor that established the National Housing Supply Council. The emphasis on supply is so very misleading. The focus should be on the functioning of the housing sector and on those unable to enter the housing market.

It is hoped as well that this article has caused some concern regarding the macroeconomic distortions and productivity costs associated with housing policies and, more to the point, policies that are not intended to affect housing.

The failure to resolve housing issues, besides being thoroughly unfair, is also a failure to improve the productivity of Australia’s economy.