housing affordability – Page 6 – Digital Finance Analytics (DFA) Blog

Budget 2017: Prepare to be disappointed on housing

Despite all its huff and puff on housing, a senior economist has warned voters the government will disappoint on the one reform almost everyone wants.

Professor Richard Holden said it would be a “real shame but no surprise” if Tuesday’s federal budget failed to curb tax perks for property investors.

“There is now consensus that there should be a move away from negative gearing and to prune back the capital gains discount. I think everyone agrees except the government and maybe the Property Council,” he told The New Daily.

“It’s very hard to find anybody else. You’ve got Jeff Kennett, John Hewson, Malcolm Turnbull before he became Prime Minister. Everyone seems to agree it’s a bizarre system that’s driving up prices.”

What’s in the housing package? Click to find out

After haemorrhaging support to Labor by doing nothing to help first home buyers in his pre-election 2016 budget, Treasurer Scott Morrison spent the end of last year swearing he’d focus on housing affordability this time around.

He’s been forced to walk back some of that rhetoric, as policy options evaporated under pressure from Labor, interest groups and the Abbott faction.

What hasn’t changed is Mr Morrison’s pledge not to touch negative gearing. But he’s been less emphatic on the capital gains tax discount, which allows landlords to pay tax at their marginal rate on only 50 per cent of the capital gains they realise when they sell a property.

A wide array of experts, including Richard Holden, agree these tax perks favour wealthy investors, and contribute to the difficulty of young Australians entering the property market, at least in Sydney and Melbourne.

A new survey by CoreLogic, a property data firm, found that 87 per cent of non-home owners are concerned about affordability; 30 per cent are looking to inheritance or parents to help them buy; and 62 per cent living with parents say they can’t afford to move out. It surveyed 2010 people aged 18 to 64.

By CoreLogic’s estimate, houses cost 7.2 times the yearly income of an Australian household, up from 4.2 times income 15 years ago. And a 20 per cent deposit costs 1.5 years of household income, up from 0.8 years.

Professor Holden was more enthusiastic about incentives for older Australians to downsize to smaller homes, especially if that involves a stamp duty discount.

“Stamp duty is like the worst tax in the history of the world and everyone with a minute’s economic education thinks it should be replaced with a land tax, so anything that pushes in that direction is a good idea.”

However, if the incentive allowed wealthy individuals to exceed the superannuation balance cap, that “would be a concern, depending on how it’s structured”.

Professor Holden also praised the government’s push to invest more in affordable rental housing: “The idea that housing affordability bites at the very lowest end is a really big deal.”

But he rubbished the government’s proposal to offer subsidised savings account to help first home buyers save a mortgage deposit.

“We saw the government float the idea of accessing super. Now, myself and Saul Eslake and others all came out vociferously and angrily against that. I don’t know if it was causal, but they backed down,” Professor Holden said.

“But now they’re talking about tax-preferred savings accounts for first home buyers, and for the life of me I can’t understand why they can’t seem to get through their heads that anything of that nature is just boosting demand.”

Daniel Cohen, co-founder of lobby group First Home Buyers Australia, said he disagreed with the view that subsidised savings accounts would only push up prices.

“As a standalone policy, they are correct, which is why we want to see policies that are also decreasing demand from investors, and we want to see affordable supply also increase,” Mr Cohen told The New Daily.

“What economists are not considering, I feel, is that first home buyers still have a deposit hurdle, and with the current costs of living, average wages and stamp duty, that is a really big hurdle.”

He said the accounts would act as “financial literacy” to encourage young Australians who might not have considered it to save for a home.

For Mr Cohen, the biggest budget disappointment would be no reform on negative gearing and capital gains.

Why older Australians don’t downsize and the limits to what the government can do about it

From The Conversation.

Encouraging senior Australians to downsize their homes is one of the more popular ideas to make housing more affordable. The trouble is, incentives for downsizing would hit the budget, but make little difference to housing affordability.

It sounds good: new incentives would encourage seniors to move to housing that better suits their needs, while freeing up equity for their retirement and larger homes for younger families.

But the reality is different. Research shows most seniors are emotionally attached to their home and neighbourhood and don’t want to downsize.

When people do downsize, financial incentives are generally not the big things on their minds. And so most of the budget’s financial incentives will go to those who were going to downsize anyway.

Financial barriers to downsizing

There are three financial hurdles to downsizing. Downsizers risk losing some or all of their Age Pension, because the family home is exempt from the pension assets test, but any home equity unlocked by downsizing is not.

Downsizers also have to stump up the stamp duty on any new home they buy. For a senior purchasing the median-priced home in Sydney that’s now A$32,000. Finally earnings from the cash released are taxed, whereas capital gains on the home are not.

The Turnbull government has flagged the possibility of financial incentives in next week’s federal budget for superannuants and pensioners to downsize their home.

One proposal would exempt downsizers from the A$1.6 million cap on super balances eligible for tax-free earnings in retirement, or from the A$100,000 annual cap on post-tax contributions. But this would benefit only the very wealthiest retirees – just 60,000 retirees have super fund balances exceeding A$1.6 million.

More seniors would benefit from a proposal to exempt them from stamp duty when purchasing a smaller home. And many would benefit from a Property Council proposal to quarantine some portion of the proceeds from the pension assets test for up to a decade.

The trouble with all these proposals is that they would hit the budget – because everyone who downsized would get the benefits – but they would not encourage many more seniors to downsize.

Staying – or downsizing – is seldom about the money

Research shows that for two-thirds of older Australians, the desire to “age in place” is the most important reason for not selling the family home. Often they stay put because they can’t find suitable housing in the same local area.

In established suburbs where many seniors live, there are relatively few smaller dwellings because planning laws restrict subdivision. And even if the new house is next door, there’s an emotional cost to leaving a long-standing home, and to packing and moving.

And so, few older Australians downsize their home. According to the Productivity Commission, about 20% aged 60 or over have sold their home and purchased a less expensive one since turning 50. Another 15% have “strong intentions” to do so in the future.

When older Australians do downsize, their decision is dominated by non-financial considerations, such as a preference for a different style of house and living, a concern that it is getting too hard to maintain the house and garden, or the loss of a partner.

These emotional factors typically dwarf financial considerations. According to surveys, no more than 15% of downsizers are motivated by financial gain. Stamp duty costs were a barrier for only about 5% of those thinking of downsizing. Only 1% of seniors listed the impact on their pension as their main reason for not downsizing.

There are better and cheaper ways to encourage seniors to downsize

If governments do want to use financial incentives to encourage downsizing, budget sticks would be cheaper and fairer than budget carrots. Even if they have little effect on downsizing rates, at least they would contribute to much-needed budget repair and economic growth.

The federal government should include the value of the family home above some threshold – such as A$500,000 – in the Age Pension assets test. This would encourage a few more seniors to downsize. More importantly, it would make pension arrangements fairer, and contribute up to A$7 billion a year to the budget.

Asset-rich, income-poor retirees could continue to receive a full pension by borrowing against the value of the home until the house is sold. The federal government would then recover the cost from the proceeds of the sale. If well designed, this scheme would have almost no effect on retirees – instead it would primarily reduce inheritances.

State governments should abolish stamp duties on property, and replace them with a general property tax, as the ACT Government is doing. This would encourage downsizing, although only at the margins.

But the real policy justification is that it would help working age households to take a better job that’s only accessible by moving house, and so improve economic growth. It’s a big prize: a national shift from stamp duties to broad-based property taxes could add up to A$9 billion a year to the economy.

In short, the downsizing debate is a prime example of how governments prefer politically easy options with cosmetic appeal, but little real effect, on housing affordability. If they’re serious about making it easier for young Australians to buy a home, they will have to make tougher policy choices.

Authors: Brendan Coates, Fellow, Grattan Institute; John Daley, Chief Executive Officer, Grattan Institute

Housing Affordability, One Brick At A Time

ABC Lateline carried a segment featuring BrickX, which can either be seen as an innovative way to facilitate housing affordability, or the ultimate in the financialisation of property. You decide!

Affordable housing is not just about the purchase price

From The Conversation.

Solving the affordable housing crisis is a high priority for state governments around Australia.

This is understandable given the hyper-inflated property markets in many Australian capital cities. Rising concerns that interest rates will increase over coming years also fuel the unaffordability fires.

Proposed solutions to this crisis often focus on opening up new greenfield areas of land in the outer suburbs to develop lower-cost housing. Hence the solution to the affordable housing process is often thought to lie in creating housing with a low purchase price. This approach incentivises developers and housing suppliers to keep the price of new housing stock as low as possible.

This leads to houses that are more costly to own and maintain. Construction savings on features such as insulation, passive solar design, and heating and cooling systems mean such houses have high energy demands. That, in turn, means ongoing living costs such as the cost of air conditioning remain high for the life of the house.

Such houses are also constructed to the minimum standards dictated by the building codes. Poorer design and lower-quality materials can lead to large deferred maintenance costs and lower resilience to natural hazards.

In addition, housing in the outer suburbs has poorer prospects for capital growth, effectively trapping poorer households on the fringes of our cities. The residents of these suburbs also generally face higher transport costs to get to work and services.

Exposed to future risks

We are, in effect, encouraging new home owners to take on larger future risks and costs just so they can buy a house. This keeps government happy by increasing the number of new home owners – a proxy for affordable housing.

But this approach ignores the issue that home owners increasingly cannot afford to continue to own a home, not just buy one.

Increasingly, the first cost-saving action for struggling home owners is to be uninsured or underinsured. About 14% per cent of people have no home or contents insurance whatsoever.

Of those who are insured, many know they are not adequately covered. Back in 2012 it was identified that around one-quarter of home owners and renters had no insurance cover for house contents. Other estimates suggest that nearly one-third of households in Australia remain uninsured. Other studies more recently concluded that 41% of tenants do not have contents insurance.

Events like the recent Cyclone Debbie remind us just how exposed many families are to natural hazards, including physical damage to assets and the associated emotional hardship.

In many cases, families have been financially wiped out as a result of their lack of insurance coverage. These families then go back onto the long waiting list for affordable social housing.

Therefore, by defining affordable housing in terms of only purchase price of housing and number of new home owners, we are dramatically understating the problem of housing affordability.

By facilitating families to invest in houses that require high energy demands to be liveable, and which are located in areas increasingly exposed to natural hazards while households are uninsured or underinsured, we are simply mismanaging the affordable housing challenge.

Reframing affordability

A key action that can be taken is to frame housing affordability in terms of whole-of-ownership-life costs. This means we move away from defining affordable housing in terms of the initial capital cost and instead consider the total cost of owning a house over the term of ownership.

This approach explicitly encapsulates the risks of under-insurance and higher interest rates.

This is the approach used when funding infrastructure and major utilities assets. When planning major infrastructure, cost-benefit analyses must now consider the whole-of-life costs. This is to account for enthusiastic infrastructure advocates deferring costs through to increased maintenance obligations so the capital costs remains low, and hence the project becomes more attractive.

It’s the same for housing development. Therefore, the same approach needs to be adopted for home ownership.

ABC 7:30 Does Good and Bad Debt

So the latest pivot from the Government is a focus on the “good and bad debt” as an apparent key to growth, with housing affordability now becoming more of a side show as the realisation dawns that they cannot solve that equation. This segment discusses the issue, and includes a contribution from DFA.

Housing affordability is worsening, warns ratings agency

From Mortgage Professional Australia.

Moody’s report shows regulatory crackdowns and low-interest rates will not protect affordability, putting pressure on Government to take action in the Budget

Housing affordability is deteriorating in Australia despite the impact of regulatory crackdowns and low interest rates, a report by international ratings agency Moody investors Service has found.

Affordability worsened in the year to March 2017, with interest repayments requiring for 27.9% of household income on average, compared with 27.6% in March 2016. Affordability declined steeply in Sydney, Melbourne and Adelaide, according to the report, although it improved in Brisbane and Perth, which is currently the most affordable city in Australia, with the proportion of income going to repayments at 19.9%.

Moody’s expect that housing affordability will continue to deteriorate, blaming “rising housing prices, which outstripped the positive effects of lower interest rates and moderate income growth”. Whilst APRA’s restrictions on interest-only mortgage lending could dampen demand for apartments they could also reduce affordability, Moody’s claims: “the new regulatory measures have prompted some lenders to raise interest rates on interest-only and housing investment loans, which will make such loans less affordable.”

Proportion of joint-income required to meet interest repayments, March 2016:

Sydney 37.5%

Melbourne 30.3%

Brisbane 23.9%

Adelaide 23%

Perth 19.9%

Australia: 27.9%

Coming just weeks ahead of the 2017-18 Federal Budget, Moody’s report indicates the Government cannot rely on regulators and the RBA if it wants to improve affordability. In March Treasurer Scott Morrison said repayment affordability would play a major part in the Budget and was a bigger issue then the difficulty of first home buyers, whilst ruling out any changes to negative gearing.

In a series of sensitivity tests, Moody’s demonstrated the risks faced by Australian homeowners. Looking at the effect of house prices continuing to rise, income decreasing and interest rates increasing, Moody’s found Sydney homeowners were particularly vulnerable. A 10% rise in property values – far from unknown in the harbour city – meant an extra 3.8% of income needed to meet mortgage repayments.

Moody’s report did find that affordability was unchanged for apartments. Apartment owners spent an average of 24.5% of their income on repayments, compared to 29.3% for house owners. This is a national average: affordability of apartments did decline in Sydney and Melbourne.

Inflation number misses the housing crisis

From The New Daily.

Almost nothing is to be seen of Australia’s housing crisis in the latest inflation figures.

Wednesday’s Consumer Price Index (CPI) from the Australian Bureau of Statistics showed just a 0.5 per cent increase in inflation this quarter, up 2.1 per cent over the past 12 months.

Over the same period, house prices grew 1.4 per cent, and by 75 per cent over the past five years.

The biggest increases in the CPI were in fuel, healthcare, power and, yes, housing.

However, as pointed out recently by Commonwealth Bank senior economist Gareth Aird, this ‘housing’ figure, which accounts for 22 per cent of the CPI calculation, does not truly reflect the struggle of many Australians to get onto the property ladder.

“The CPI is a poor barometer of changes in the cost of living for people who don’t own a dwelling and aspire to purchase one,” Mr Aird wrote.

That’s because the CPI measure of ‘housing’ only counts rents, utilities and the cost of building a new dwelling. It doesn’t include the cost of the land the dwelling sits on. And it doesn’t include the interest costs of repaying a mortgage.

If the full cost of housing was factored in, Mr Aird estimated it would add roughly 55 percentage points to headline inflation.

As mentioned above, the CPI ‘housing’ measure also doesn’t include interest charges. It used to, but they were removed in 1998 after lobbying from the Reserve Bank, which argued that rising mortgage interest rates would push up inflation, thereby requiring official cash rate rises, which would then push mortgage rates even higher, in a vicious loop.

The RBA said then that “excluding interest charges would in no way distort the outcome over the long run”.

Australia Institute senior research fellow David Richardson said if the CPI were to include land prices, the inflation rate would be pulled too hard by almost out of control house prices.

“Imagine if things went up 15 per cent a year in price,” Mr Richardson told The New Daily.

“Lots of contracts in Australia are indexed against the CPI. If they’re sort of fiddled then you’re talking billions and billions in consequences.”

Marcel van Kints, program manager with the Prices Branch of the ABS Macroeconomic Statistics Division, told The New Daily: “The ABS CPI aligns with international standards, an international respected measure of inflation.”

The ABS also published a FAQ with Wednesday’s release in which they pointed to their reasoning behind the exclusion of land from the CPI.

They said that housing is included in the Selected Living Cost Indexes, which are “particularly suited to assessing whether or not the disposable incomes of households have kept pace with price changes”.

Inflation outpaces wages

All of this is seeing many Australians left behind as both housing and the prices of popular consumer goods rise while wages stagnate.

Over the past 12 months, the CPI rose 2.1 per cent while wages grew by only 1.9 per cent, according to the latest ABS data.

The Australia Institute’s David Richardson said this is leaving many Australians worse off.

“I suspect that as professionals and skilled white collar workers, we’re all in the same boat,” he said.

“What we’re seeing now is a symptom of structural change that’s been creeping up on us for a long time.”

The Answer to our Housing Affordability Challenge is Housing Supply – HIA

The HIA makes some good points about the need for a credible land planning body to provide national monitoring and forecasting of future land release and housing requirements to address housing affordability; but ignores the important point that supply is actually NOT the key issue, because average number of people per property has remained the same as the mortgage loan growth and house prices have risen. Other factors are at work.

Australia needs supply not demand focused solutions to address our national affordability challenges, said the Housing Industry Association.

“Attempts to remove demand for new housing will reduce supply, affordability and jobs,” said HIA’s Deputy Managing Director, Graham Wolfe.

“While several measures announced today by Labor to address Australia’s housing affordability challenges provide a sensible approach to increasing supply of new homes, others targeting demand will have an adverse impact on affordability now and into the future,” said Mr Wolfe.

“We can’t address housing affordability nationally with both eyes solely on Sydney and Melbourne,” said Mr Wolfe. “Sydney house price increases have been driven by many factors, including significant population growth, a ten-year supply recession, low interest rates and the impact of extremely high stamp duty costs on sales in the established housing market.”
“The dynamics in Perth, Adelaide, Northern Queensland and Darwin are very different. Foreign investors and self-managed superannuation fund investors cannot be blamed for the recent fall in house prices in Perth and Darwin, or the slower level of new housing activity in Adelaide. Inflicting demand side measures on these capital cities ignores the significant negative impact on housing supply, jobs and economic growth in these economies.

“Right now, if foreign capital investment in Australia helped bring significant residential development projects to commencement in Perth, creating jobs and production, the Western Australian economy would be much better for it.
“Australia needs a credible land planning body to provide national monitoring and forecasting of future land release and housing requirements. The body would help to inform government policy on financing, infrastructure and demographics.

“Other policies to address housing affordability must include a reduction in the imbedded taxation on new housing, government funding to support infrastructure and reforms to address unnecessary planning delays in bringing new residential developments to market.

“Our national housing affordability challenge is complex, and necessitates a national ‘cost of housing’ inquiry to identify impediments to the supply of new housing. Such an inquiry would bring together the overlapping impact of regulations, taxes and barriers imposed by all three levels of government, and importantly, inform governments in developing cohesive, integrated and responsible housing reforms, measures and programs,” concluded Mr Wolfe.

Super funds targeted in Shorten’s housing affordability package

From The Conversation.

Labor will promise to ban direct borrowing by self-managed superannuation funds, as part of a housing affordability policy released on Friday to pre-empt the government’s package in next month’s budget.

This “limited recourse borrowing” – where a creditor has limited claims on the loan if there is a default – has increased from about A$2.5 billion in 2012 to more than $24 billion. Almost all of it is in residential or commercial property.

The Murray Financial System Inquiry in 2014 recommended restoring the prohibition that had been lifted in 2007. It warned that “further growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system”.

Among other measures, a Shorten government would double the screening fees on foreign investment and financial penalties that apply to foreign investment in residential real estate. Foreign investment purchases nearly tripled over the three years to 2014-15. The ALP says the higher fees and penalties would “help level the playing field between first home buyers and property speculators”.

The centrepiece of the ALP housing policy remains the changes to negative gearing and the capital gains tax discount that Labor took to the election, but the latest package surrounds those with several other initiatives.

The opposition announcement comes as the government’s expenditure review committee struggles to stitch together a credible package, and after a much-publicised split among ministers over whether first home buyers should be able to use their superannuation for housing. Malcolm Turnbull last week apparently ruled that option out.

Labor says its package would see the construction of more than 55,000 new homes over three years and increase employment by 25,000 new jobs a year.

The ALP would establish a Council of Australian Governments process to achieve a more efficient and uniform vacant property tax across the main cities.

It would provide $88 million over two years for a new Safe Housing Fund for transitional accommodation for victims of domestic violence, vulnerable young people and older women at risk of homelessness. This would restore cuts made by the Coalition in the 2014 budget.

It would also work with state governments to get better outcomes in the National Affordable Housing Agreement. And it would establish a bond aggregator to increase investment in affordable housing – something the government is moving towards.

Labor would also re-establish the national Housing Supply Council and re-instate a minister for housing, the policy says.

It says that “any housing affordability package that doesn’t involve reforms to negative gearing and the capital gains tax discount is a sham”.

“Demand for housing is being turbo-charged by unfair, unsustainable and distortionary tax concessions for investors.” The ALP’s long standing policy is to limit future negative gearing to new housing and reduce the capital gains tax discount from 50% to 25%.

Labor says the super funds’ ban “will prevent the unnecessary buildup of risk in Australia’s superannuation system, reduce future calls on the aged pension as a result of a less diversified superannuation system and make the financial system more resilient in the face of potential economic shocks”.

It says that although foreign purchases in residential real estate account for a relatively small amount of overall annual purchases, the amount has grown by 275% in the three years to 2014-15.

Under the Labor policy, from July 1 2019 the foreign investment application fee would go from $5000 to $10,000 for a property up to $1 million; from $10,100 to $20,200 for one between $1 million and $2 million, and from $20,300 to $40,600 for one between $2 million and $3 million.

For foreign buyers who acquired dwellings without approval, the criminal penalty would be increased to $270,000, and $1.35 million for a company.

Author: Michelle Grattan, Professorial Fellow, University of Canberra