Tag: The Conversation

First results from the 2016 Census

From The Conversation.

In a country as diverse as Australia, it is impossible to identify a set of characteristics that defines us. However, with today’s release of data from the 2016 Census, it is possible to identify some of the common characteristics, how they vary across states and territories, and how they are changing over time.

Australia undertakes a compulsory long-form census – where detailed information across several areas is required of every individual respondent – every five years.

So, what did we learn from the first set of results? According to the Australian Bureau of Statistics (ABS):

The 2016 Census has revealed the ‘typical’ Australian is a 38-year-old female who was born in Australia, and is of English ancestry. She is married and lives in a couple family with two children and has completed Year 12. She lives in a house with three bedrooms and two motor vehicles.

Australia is getting a bit older; the typical Australian in 2011 was aged 37.

How do today’s results vary across Australia?

First, age varies by state and territory.

With variables like age, we often find the “typical” value by taking the median. In essence, we (statistically) line everyone up from youngest to oldest, and find the person who is older than half the population but younger than the other half.

In Tasmania, the median age among 2016 Census respondents was 42. But in the Northern Territory, it was 34. Those in Australian Capital Territory were also quite young (median age 35), whereas those in South Australia were relatively old (40).

The NT population’s relatively young age is influenced by the very high proportion that identify as Aboriginal and Torres Strait Islander.

While we don’t have updated estimates for that proportion (either for the NT or nationally), the data released today show that the Aboriginal and Torres Strait Islander population is quite young. The median age nationally is 23. New South Wales and Queensland have the youngest Indigenous population, with a median age of 22.

This release also tells us something about the different migrant profiles across Australia. Nationally, the most common country of birth for migrants is England. And the median age of migrants is much older than for the Australian-born population (44 compared to 38).

The most common country of birth for migrants living in Queensland was New Zealand; in Victoria it was India; in NSW it was China. There may not be too many more censuses until the most common migrant nationally was not born in England.

Ahead of the forthcoming federal budget, there has been a lot of media and policy attention on housing affordability. Today’s release of census data points to some subtle differences across Australia that may influence policy responses.

Nationally, the most common tenure type is owning a three-bedroom home with a mortgage. In Queensland, however, renters make up a roughly equal share of the population. But, in Tasmania and NSW, more people own their own home outright. And in the NT, renting is the most common tenure type.

In a finding that won’t surprise many, the typical female does a bit more unpaid work around the house than the typical male. The most common category for males is less than five hours a week. The most common for females is five to 14 hours.

We won’t know how this compares to paid work for a while yet – or whether these differences vary depending on age.

What future releases will tell us

The profiles released today offer us limited information. But the census remains one of Australia’s most important datasets.

When detailed data are released in June and then progressively throughout the rest of 2017, we will be able to dig deeper into small geographic areas or specific population groups.

We will be able to ask if there are pockets of Australia with significant socioeconomic disadvantage, and if it is worsening. We will be able to hold governments accountable for the progress we have made on the education, employment and health outcomes of the Indigenous population.

And we will be able to test whether the languages we speak, the houses we are living in, and the jobs that we are doing, are changing.

But those questions rely on a high-quality census.

The attention on the 2016 Census until now has been mostly negative. There was increased concern related to data privacy, the failure of the online data entry system on census night, and staff cuts at the ABS.

In October 2016, the ABS estimated the response rate to the 2016 Census was more than 96%, and that 58% of the household forms received were submitted online. But what matters more than how many people filled in the census and how they did it is whether the responses given were accurate. We therefore need to see a lot more interrogation of the data before taking the results at face value, but we can remain cautiously optimistic.

The ABS will be hoping that now some data is released, attention will shift to what the results tell us about Australian society. It is to be hoped the data will be robust, the insights will be newsworthy, and policy and practice will shift accordingly.

We won’t know this for sure until the first major data release of data June 27 – the data released today were just a sneak peak.

Author: Nicholas Biddle, Associate Professor, ANU College of Arts and Social Sciences, Australian National University

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

Shadow banking and where it came from

From The Conversation.

The term “shadow banking” often has connotations of dodgy lending and borrowing practices, out of reach of regulators. And while its use may contribute to risk, in reality shadow banking does serve a purpose in our economy, one that is increasingly connected to our day-to-day lives.

Shadow banking affects not only the property market, but also superannuation, central banking policy and, increasingly, fiscal and social policy. It refers to the non-bank financial intermediaries that supply services similar to commercial banks.

This system provides funding for credit, by converting risky and long-term assets that can’t be sold quickly or easily (like mortgages) into a money-like, short-term debt (like mortgage-backed securities).

Shadow banking is not a bank in the sense that we know it but more a strategy or accounting technique. A range of institutions deploy these strategies including superannuation funds, insurance companies and local governments. Asset managers, like Macquarie Group in Australia and BlackRock in the United States, also employ these techniques.

In short, shadow banking provides institutions the means to create accounting entities to isolate risks, transfer profits, avoid regulation and increase the range of money-like financial products available for investment.

Where shadow banking came from

There are both supply and demand reasons for the emergence of the shadow banking system. Shadow banking has emerged as a means for financial firms to bypass regulation (for example by using tax havens) and increase opportunities for financial innovation and speculative activity.

Banks have an incentive to lower the number of risky assets on their balance sheets, in order to reduce the amount of capital they need to hold to cover these risks. Because of this the banks create off-balance sheet entities (assets that use shadow banking).

Shadow banking also offers a means for investors to access different forms of money across the financial system. Institutional investors trade in volume, and cannot physically “handle billions in cash in the form of currency”.

This type of finance is normally best met by Treasury bills and government bonds (which presently offer low returns) and repurchase agreements – a form of short-term borrowing in these sorts of bonds. The shadow banking system then fills the gap in the absence of availability of other secure assets.

However these supply and demand explanations only tell part of the story.

The global environment is characterised by a small population) of individuals and institutions with large pools of money seeking safe returns; and, cash-poor individuals with stagnant incomes and a need for credit. One example of this is the growing investment class of securities based on private debt, for example credit cards, mortgage debt and small business loans.

Low inflation across the globe and governments not spending or encouraging investment in assets that offer good returns, means investors are limited in the ways they can currently make money.

The problems with and solutions for shadow banking

Shadow banking has made the task of governments more difficult. However it would be mistaken to assume that governments do not have some control over shadow banking. All levels of government are already linked to aspects of shadow banking whether they like it or not.

Local governments were stung by exposure to shadow banking practices in the lead up to the global financial crisis. Councils were persuaded to invest in a structured financial product that offered unrealistic, and deceptive returns.

The NSW government is currently following shadow banking trends by borrowing and partnering with asset managers to build long-term infrastructure like Westconnex and the Sydney Light Rail.

At the national level, the Rudd-Gillard Government followed trends that originated in shadow banking by developing institutions like the Clean Energy Finance Corporation and the National Broadband Network. Both policies tried to diversify the investment base in Australia, but have been held up by the Abbott-Turnbull governments.

Australia can’t do much to remedy global uncertainty. However, policies it pursues do link into shadow banking practices in multiple ways.

Policies that erode the standard employment relation and cut pay rates increase consumer demand for short-term credit products. This increases private debt for consumers, but feeds its attractiveness into an asset class for institutional investors.

Reserve Bank of Australia Governor, Phillip Lowe, was surprisingly strident in his critique of the cut to corporate tax rates and negative gearing last week. Reading between the lines you can sense frustration with the lack of attention on how Australia stands to benefit or lose from current global investment trends.

Institutional investors don’t need more piles of cash (via company tax cuts), they need ways to invest it. If you think about Australia from the perspective of institutional investors, it lacks a diverse range of assets (besides property!).

Australia only registers 17 specialised goods industries compared with 35 for New Zealand and 44 for Canada. Consequently, real estate and infrastructure debt are some of the only things available to sop up the pile of cash currently sloshing around the global economy.

This leads to claims that self-managed super funds (those run by institutional investors) are potentially exacerbating Sydney and Melbourne’s already expensive property market.

There are three growing areas of shadow banking: catastrophe bonds, which bet on the risk of natural disasters; renewable energy infrastructure banks, and build-to-rent investments. These examples offer the two sides of shadow banking.

Catastrophe bonds are parasitic in the way they provide finance – betting on the destruction from disasters. Renewable energy and build-to-rent show the potential for using finance for potentially progressive outcomes, to provide sustainable energy and housing. Australia could harness this progressive side of finance to create a more diverse economy.

Author: Huon Curtis, Senior Research Analyst, University of Technology Sydney

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.

Morrison rejects pressure for negative gearing to be examined

From The Conversation.

Treasurer Scott Morrison will renew his warnings against tampering with negative gearing, in a Monday speech urging more institutional investment in both rental residential real estate and affordable housing for low-income earners.

As the government prepares its housing package for the May budget, Morrison will also seek to keep expectations realistic, saying one budget cannot turn around the various affordability issues in isolation.

“There are no single or easy solutions and the payback is achieved in some cases over a generation – not an electoral or budget cycles,” Morrison says in the speech, a copy of which was released ahead of delivery.

The policy response on housing “must be careful and calibrated, lest we spark a negative housing shock that would undermine our economic confidence, negatively impact household consumption and retard economic growth,” he says.

“The more than two-thirds of Australians who live in owner-occupied homes would agree that dramatically reducing the value of their home is not a good plan, and it is not the government’s plan.”

The escalating prices in Sydney and Melbourne in particular have led to widespread calls for the government to soften its opposition to changing negative gearing but it has dug in. There is, however, internal debate in government circles about whether to change the capital gains discount.

Morrison says the response on housing must be comprehensive – because there is no silver bullet – and involve all levels of government, with co-ordinated action. It must first remove the range of obstacles restricting supply.

“We don’t claim instantly affordable housing,” he says. “Anyone making such claims would soon be found out and rightly punished for it.”

He says the rental sector has not escaped affordability challenges even though rent increases have not mirrored those of housing prices.

About 47% of low-income rental households in the capital cities spend more than 30% of their household income on housing costs.

Higher house prices are making it harder for potential buyers to move into ownership, he says, and this means they are staying in the rental market longer. That puts pressure on rents and availability and even more pressure on lower income households, increasing the need for affordable housing for them.

More housing is needed not just for homeowners but for renters – “for key workers such as nurses, teachers and police officers who can’t afford to rent or buy in the communities they serve and for those on low incomes, the disabled and the disadvantaged.”

Morrison once again will attack the performance of the National Affordable Housing Agreement, as not adequately delivering.

Rental yields for investors are 2.1% in Melbourne and 1.8% in Sydney, and less for affordable and social housing stock.

Despite low yields, 27% of Australian housing stock is owned by investors. This compares with 18% in the United Kingdom. Unlike Australia, there is greater institutional ownership of residential real estate in the UK and even more in Europe and the US, Morrison points out.

“Here, our private rental stock is owned by mums and dads.”

“Figures to be released later this week show two million taxpayers in Australia have an interest in a residential investment property. 72% own just one property and 90% own no more than two. Just over 1.3 million of these taxpayers negatively gear their investments, including 58,000 teachers and one in five police officers. Two thirds of those taxpayers who negatively gear their investments have a taxable income of $80,000 or less.”

In the UK, where there is no negative gearing, rent as a percentage of income is on average 25% higher than in Australia, Morrison says.

“Australian residential property investment is more geared to capital gain than yield.

“If mum and dad investors were not part of our private rental market, there would be fewer rental properties available, meaning higher rents, further crowding out of those on lower incomes and even greater pressure on already over-stressed community and social housing resources.

“Regardless of one’s opinions of the merits or otherwise of negative gearing, it is an established and structural component of Australia’s housing markets. Disrupting negative gearing would not come without a cost, especially to renters, let alone the wider economic impacts. Proponents of disruptive negative gearing changes have ignored this fact,” he says.

“This would not be good for the 30% of Australian households who rent.”

But Morrison says attention needs to be paid to how there could be more institutional involvement in rental residential real estate. “This would diversify the basis of ownership and inoculate risk, while potentially delivering greater stability and certainty as well as greater innovation in product offerings.”

It would need to be fundamentally driven by the private sector.

A variety of reforms is also required to increase the supply of affordable rental housing for key workers and those on low incomes, he says. A housing bond aggregator is one being examined. This model aggregates and sources capital from the bond market for lower interest, long-term loans to providers.

Morrison says he hopes an appetite can be cultivated among Australian super funds for investment in affordable housing. “What could be more in the interest of nurses, teachers or police pension fund members than investing in affordable housing for nurses, teachers and police officers?”

“As with residential real estate, this will require the same prerequisites to establish a new institutional investment class. However, more specifically for affordable housing, it will require de-risking the income stream and mitigating tenant risk.

“There are a series of options available for government to provide greater certainty in this area,” he says.

Britain’s housing market is in poor health, but it’s not just a shortage – here’s why

From The UK Conversation.

The UK’s housing market is in critical condition. The symptoms are stark: demand in several regions far outstrips supply, prices relative to earnings in many major cities are beyond the reach of most people, home ownership is increasingly unobtainable, the homeless population is growing and low-income households are too often having to settle for substandard homes.

Yet so far, an exact diagnosis has proved elusive and, as a result, effective treatment has not been administered. The problem is that the housing sector is often described in shorthand – the housing market, “affordable” housing, the neighbourhood, or council housing, to name just four such ways of talking about housing. Each is quite different and even just looking at any one masks more than it illuminates – there is considerable variation in the quality and attractiveness of council housing, for instance.

Housing is a complex, interdependent system, with many components of different types and scales. Its function isn’t isolated from its environment – the operation of the housing system is closely connected to the land market and planning mechanismsas well as the construction and development industries. And housing exists across a range of jurisdictions and tenures, each accompanied by different laws, rights and obligations.

Living history

The mind behind Right to Buy. Nationaal Archief/Wikimedia Commons, CC BY

The housing system has also been moulded by history. For one thing, much of the UK’s housing stock is with us as part of a long-established and enduring built environment. It has also been shaped by extensive and overlapping sets of more or less effective government interventions over time: from the garden city movement, to post-war slum clearance, Margaret Thatcher’s Right to Buy and many others. These policies are situated amid shifts and changes in cultural beliefs about housing, aspirations and material constraints.

Housing systems are affected by economic change and income growth at local and regional levels – as well as interest rates, regulation of mortgage lending, housing taxes and other policies that privilege one set of housing arrangements over another. Demography – encompassing trends in migration, household size and ageing – also contributes to the shape and size of housing demand.

Yet these relationships run both ways. Housing is such a critical consideration for political and economic decisions that the state of the sector directly affects the economy and demography of the UK, as well as being affected by them. In a housing bust, for instance, falling incomes can reduce demand and house prices. But if house prices continue to fall, this can also reduce consumption and spending, as people feel worse off.

Unpicking the threads

When you think about housing as a system, it becomes clear that the “housing crisis” is actually a collection of symptoms from several chronic, overlapping problems. The UK housing market has experienced decades of privileged taxation treatment. Consecutive governments have been obsessed with boosting rates of home ownership. Meanwhile, the development industry’s business model is based on lifting land value, with planning permission from local authorities, which results in the construction of more expensive properties. And there has been long-term under-investment in social and affordable housing, combined with an over-reliance on welfare benefits to offset rising rents.

We know that the housing system is dominated by the existing stock, so it stands to reason that it will take a long time to untangle and address these issues, which have built up over the decades. That is, assuming that political consensus is strong enough to allow coherent long-term policy to move forward in step. This is a fair definition of a “wicked” problem.

To build consensus and tackle these issues, housing policy and practice need to be based on evidence, which is grounded in this systemic point of view. The evidence will need to be nuanced, according to the great variety in the sector across the UK: after all, housing is largely devolved, and significant differences between the situations and approaches in Scotland, Northern Ireland, England and Wales are already apparent. For instance, there is no Right to Buy in Scotland – instead, a new private tenancy law will produce longer-term tenancies that may yet encourage more families into the rented sector.

To this end, the University of Glasgow, together with eight other UK universities and four non-academic partners, is embarking on an ambitious programme: the UK Collaborative Centre for Housing Evidence (CaCHE). Our aim is to put evidence and analysis back at the heart of this complex social and economic problem. This research will provide the ammunition to influence and transform housing policy and practice through better problem diagnosis, policy evaluation and appraisal of new opportunities, in order to generate improved housing outcomes for all.

Governments are trapped in a vicious cycle of housing policies and prices

From The Conversation.

Whether house prices have been inflated by limited supply, or because of transfers to investors and homeowners, government policy is now trapped in a vicious cycle. The wealth accumulated in our houses has become a central part of the retirement system, and the government itself can’t afford for prices to fall.

Generous tax subsidies and asset test concessions on the family home have incentivised the accumulation of wealth in property and fuelled demand pressures in the housing market for decades.

Government assistance to home buyers and owners is provided in the form of the First Home Owners Grants, stamp duty concessions, and the family home’s exemption from capital gains tax, land tax, as well as the pension and other assets tests. These subsidies and concessions combine to make wealth accumulation in the family home more attractive than other assets.

In many real estate markets, land supply constraints and planning controls can limit urban sprawl while housing demand pressures continue to intensify. Hence, cities such as Sydney have become “pressure cookers” where the subsidies result in rising house prices in the face of land supply constraints.

The policy-price cycle

The family home has become a cornerstone of the Australian retirement system. Sustained house price increases have allowed government income support to be set at historically low levels in Australia compared to other countries with lower home ownership rates such as Sweden and the Netherlands. This is based on the assumption that the low-income elderly will be housing asset-rich, and can therefore can get by on smaller pensions.

Indeed, in an era of ageing populations, governments have been encouraging older Australians to tap into their store of housing wealth to fund their own retirement and ease intergenerational fiscal tensions. For instance, the Productivity Commission’s aged care equity release scheme recommends elderly home owners draw down against their housing equity to meet aged care costs.

Of course, this only works if house prices continue to rise.

If house prices fall, the cycle gets broken and the family home may no longer be an adequate base for supporting the retirement needs of the wider population. In the event of a long-term decline in house prices, individuals would require greater income support from governments as their personal asset base weakens. This would in turn perpetuate a rise in government social security expenditure.

Over the long term

But even if house prices weren’t to decline, there is a paradox at play in this system. In order to maintain a healthy housing asset base for retirees, house prices must remain high. So the policy-price cycle is aimed at sustaining home ownership as a key pillar of the welfare system. However, it has also resulted in housing wealth becoming increasingly concentrated in the hands of smaller subgroups. Notably, housing equity is getting concentrated in the hands of older generations.

Author’s own calculations from the Australian Bureau of Statistics Surveys of Income and Housing. Author provided

As these charts show, the intergenerational housing wealth gap has widened in the last two decades. In 2011, the median housing equity of home owners aged 45-64 years was nearly double the value held by the 25-44 year olds. The share of the population’s housing equity held by those aged 45-64 years has widened between 1990 and 2011 at the expense of those aged 25-44 years.

This means the system could potentially unravel in the long term. If large numbers of young people continue to face price barriers to home ownership, the home ownership pillar within the welfare system will be weakened as the future population of home owners shrinks.

In the short-term a significant group of millennials will miss out on the benefits of home ownership. But in the long term, unless governments address some fundamental structural problems currently entrenched within our tax-transfer system, there is a significant weakness in our social welfare system built on housing.

 

Author: Rachel Ong, Deputy Director, Bankwest Curtin Economics Centre, Curtin University

The government’s company tax cut win a triumph of politics over economics

From The Conversation.

Now that the first stage of a cut to the corporate tax rate has been passed by the Senate it’s clear the benefits are more political than economic. The cut may signal to the world that Australia wants to be competitive on corporate tax, but it won’t make much of a difference to our largest businesses and multinationals.

Company tax cuts have been on the government’s agenda since the 2016 budget, when the cuts were announced. Ultimately, the plan was to reduce the corporate tax rate from 30% to 25% by the 2026-27 financial year for all companies.

The government has secured a cut to businesses with a turnover of under A$50 million, with companies with a turnover of less than A$10 million receiving a reduction in their tax rate (to 27.5%) this financial year. But the second stage of the tax cut is still to be passed, that would give a cut to businesses with a turnover of A$100 million in 2019-20.

The impact is all in Australia’s image

Arms of multinational companies often pay a much lower effective tax rate when compared to their parent company. Until politicians across the globe can agree how to ensure companies pay tax on local earnings, which appears unlikely in the near future, tax rates will remain a signal to multinationals on where to base their business.

The tax cuts have been strongly supported by big companies and even more so by the Business Council of Australia. A major reason put forward by the business community is the need to stay competitive in a global environment.

Our major trading partners such as the United Kingdom and United States are planning to drastically reduce their corporate tax rates and countries such as Ireland (12.5% on corporate trading profit) and Singapore (by 2018 20% capped at $20,000) already have very low corporate tax rates in place. Multinational corporations have the ability to profit shift to lower taxing jurisdictions.

For instance, a multinational can employ tax accountants to structure ownership of intellectual property in a low taxing jurisdiction and reduce gross income by license fees, or via debt loading to a parent company. Tax avoidance is often siphoned through a non-reporting subsidiary, so these accounting tricks occur without the glare of public scrutiny. In other instances multinationals have been able to completely bypass Australian tax by booking revenues overseas.

How it will affect accounting for Australian companies

When you look at what a tax cut might mean to Australian companies, it’s not hard to envisage how a tax cut tied to a specific revenue level creates incentives for accountants and lawyers to exploit new thresholds.

Accounting research from the United States shows companies do take into account tax when considering how to report their profits. For example, a typical strategy is to delay recognising an expense that belongs in the current year, until the next year.

This is usually to make it seem like the company has increased its profits, making it appear better to shareholders. However there have been no studies specifically relating to how companies might do this in relation to revenue (what the Australian government is considering for the tax cut).

At any rate, the net rate of tax on Australian company profits is considerably lower than the current 30% (or the new 27.5%) company tax rate. According to our calculations it should be around 11.3%. This is lower than the company tax rate in other similar economies.

There’s also something unique to Australia which means private companies pay less tax and that’s dividend imputation. This is designed to eliminate the double taxation of dividends in the hands of Australian shareholders.

Since it’s introduction in 1987, dividend imputation has provided strong incentives for firms to pay the full statutory tax rate on all reported profits. The tax paid on dividends flowing to Australian shareholders of Australian companies is reduced by an amount equal to the tax already paid by the corporation, this is known as imputation credits. A shareholder’s marginal tax rate, and the tax rate for the company issuing the dividend, both affect how much tax an individual shareholder owes on what is called a fully franked dividend.

Companies that pay fully franked dividends in Australia, pay on average over 10% additional tax on the same level of earnings than companies not paying franked dividends. Approximately 62.3% of imputation credits are utilised by resident shareholders.

The average effective tax rate of Australia’s largest private companies are much lower than that of the largest public companies (most of which pay fully franked dividends). You can see this in the table below which shows the effective tax rates calculated by two separate studies.

One of the studies by the union United Voice looked at the ASX200 companies and the otherby lobby group GetUp examined the largest private companies operated by foreign multinationals.

The corporate tax rate does figure in investment decisions of Australian companies and foreign companies wanting to do business in Australia. However, the rate of corporate tax is at best a second order effect in influencing the decisions of foreign companies. Therefore, the gains from the government win in the Senate appear to be more political than economic.

At best the tax cut may somewhat reduce the burden on smaller Australian companies, albeit at a significant cost to the budget, without impacting the largest Australian and foreign multinationals. Although prospects for further tax cuts for the big end of town (which has a greater impact on the economy) are unlikely in the next five to 10 years without Senate crossbencher support.

Authors: Brett Govendir, Lecturer, University of Technology Sydney; Roman Lanis, Associate Professor, Accounting, University of Technology Sydney

What economics has to say about housing bubbles

From The Conversation.

The b-word is doing the rounds, barely a decade after the United States house price bubble burst spectacularly, setting in motion a global financial crisis. As Australian real estate prices continue to break records, many wonder whether this is sustainable.

Economists disagree on how to define a bubble, or even whether bubbles exist. Intuitively, a bubble (and this applies to any asset, not just real estate) exists when the price of an asset is over-inflated relative to some benchmark. And here’s the rub: no one can agree on what that benchmark should be.

The benchmark could be an estimate of the asset’s value based on a collection of variables that plausibly affect its supply, demand and price, so-called fundamentals. For houses, these fundamentals include population growth, tax policy, household size, household income, and many others.

But economists cannot agree on what fundamentals determine an asset price, or how important each fundamental is. As well, the value of these fundamentals can only be estimated, not observed. It’s subjective to the point that someone will always be able to concoct a story based on fundamentals to rationalise why house prices are at the level they are.

Some economists propose alternative benchmarks to measure a bubble, such as historical long-run averages or an estimate of the underlying value of a trend. If asset prices are greater than these averages or the trend, then we have a bubble. However, this definition is too simplistic because the economy is dynamic, ever evolving, and both long-run averages, as well as trends, do change.

Price hikes and bubbles

It’s only when asset prices reach outrageous heights that a majority of people, economists included, agree that it is overpriced and due for a major correction (a bubble burst). Even then some economists will deny the existence of a bubble.

One of the earliest examples of an asset price bubble was the frenzy in the market for Dutch tulip bulbs in the seventeenth century — the so-called “Tulipmania”. Although the data is patchy and many historians have not exercised great care in retelling the story, there’s little else to explain how prices for Witte Croonen bulbs rose 26-fold in January 1637 and fell to one-twentieth of their peak value in the first week of February.

Yet, well-respected scholar Peter Garber argued that:

The wonderful tales from the tulipmania are catnip irresistible to those with a taste for crying bubble, even when the stories are so obviously untrue. So perfect are they for didactic use that financial moralizers will always find a ready market for them in a world filled with investors ever fearful of financial Armageddon.

Soldiers destroy tulips to reduce supply and stabilise prices following the sudden collapse of tulip prices in seventeenth century Holland. The Tulip Folly (1882) by Jean-Léon Gérôme. Jean-Léon Gérôme/Wikimedia Commons, CC BY-SA

Assuming bubbles are a significant gap between the observed asset price and some appropriate benchmark value, the mere existence of this gap begs the question of how it came about. The answers mostly rely on psychology, which is why many economists (looking to represent the world in a mathematical model) struggle with the concept.

Bubble frenzy

Bubbles are ultimately a confidence game, in which the vendor sells the asset to a buyer at a profit, with the latter hoping to do the same in the future. This game relies on a powerful narrative that captures people’s imagination and persuades them their turn will be different.

As George Soros, the famous US-Hungarian multi-billionaire hedge fund manager once remarked:

[…] Bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.

This misconception is the consequence of human behaviour and traits that depart from the fully rational paradigm so often assumed in formal economics. Instead, as behavioural economists argue, people exhibit a number of biases.

These include, for example, the desire to find information that agrees with their existing beliefs (called confirmation bias) or the tendency to form decisions based on the most readily available information (called availability bias). People experience and seek to resolve their discomfort when they have two or more contradictory beliefs, ideas, or values and they also employ simple abstractions in thinking about complex problems and events (framing).

People are poor intuitive statisticians and care more about avoiding losses than about experiencing gains (called loss aversion). The list of flaws in human behaviour goes on. Moreover, humans, social animals that we are, compete with and emulate our peers, herd like sheep and act on rumours.

Occasionally, all these traits and biases re-enforce each other and send the prices of houses, or shares or whatever, into the stratosphere.

Who’s afraid of a bubble?

The bubble itself is rarely a major cause for concern, although young Australian households looking to purchase their first home will disagree. The problem, of course, is that every bubble eventually pops and this correction is typically violent and painful, for two reasons.

First, asset prices often fall faster than they rise, so the downward correction can destroy value in a very short space of time. And second, most bubbles are fuelled by debt, because the only way a bubble can expand in the later stages is if the demand for the asset is bolstered by debt.

This combination – high debt and falling asset prices – generates a vicious cycle in which distressed debtors scramble to repair their balance sheets and sell their asset. This in turn pushes the price of that asset even lower, causing further distress to similar owners of the asset, and so on.

The pain associated with a bursting bubble varies considerably. Sometimes economies rebound rather quickly from a burst bubble, as was the case after the breath-taking collapse of the dotcom bubble.

However, housing bubbles are in a league of their own. Historically, they have always led to severe recessions, and there is no reason to believe this should change. The next time is not different.

The answers on how to deal with a bubble range from “nothing” to “whatever it takes”. The problem is that no-one (policy makers included) can reliably identify a bubble.

If there is such a thing as a bubble, we will only know for sure when the bubble is already popping. Acting early to prevent a bubble expanding further is risky and unpopular. It’s a brave central banker who raises interest rates in anticipation of an increase in asset prices when the rest of the economy is humming along just fine, or even showing signs of weakness.

So, is Australia in the midst of a housing bubble? I will go out on a limb and answer in the affirmative. There are plenty of arguments why current house prices are exactly where they should be, based on the fundamentals.

But in my opinion these explanations do not pass the smell test: 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 third highest in the world), make for a precarious situation. All it takes is a modest change in investor sentiment, a few interest rate hikes, or a noticeable increase in unemployment, and the whole scheme unravels. I hope I’m wrong, but history is on my side.

Author: Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National University

Why spatial inequality in Australia is no joke

From The Conversation.

As in many other countries, income inequality in Australia has grown over the past two decades. At the same time, Australia is one of the most urbanised countries in the world, with more than 60% of the population concentrated in just six major cities. Incomes in these cities are very spatially segregated, with high and low earners concentrated in different suburbs.

In new research, I used census data to examine these patterns. Focusing on the incomes of men aged 25-54 in our six largest cities, I found that income inequality among men has grown substantially since 1991 – particularly during the 1990s.

This has been associated with increases in the relative income gaps between different areas within the cities. The share of inequality associated with location has also increased over time – an indicator of increasing segregation.

To the extent to which people draw on the resources of the people who live in their local area, this spatial segregation has potential implications for social cohesion and intergenerational inequality. There are also substantial differences across cities. Sydney was substantially more unequal than other cities over the whole period.

The census tells us the gap has widened

These results are based on detailed tabulations from the five censuses from 1991 to 2011. The focus on men aged 25-54 is partly for data availability reasons, but also permits a simpler focus on those income trends associated with wage growth and workforce-age income support payments.

The research examines how incomes vary across the local areas in our six largest cities. These areas are defined using the Australian Bureau of Statistics “statistical local areas” (SLAs) designation.

In Sydney and Melbourne, SLAs correspond closely to local government areas, while they are generally smaller areas in the other states. The income measure is the single census question on the person’s total income (before deducting taxes) – answered in categories.

Statistical interpolation techniques are used to generate a smooth income distribution and to compensate for a change in the payments of income support between 1991 and 1996. More details can be found here.

The graph below shows trends in city-wide inequality since 1991.

Figure 1: City-wide inequality. Author’s calculations from ABS Census data

In each city, male income inequality grew substantially during the 1990s. It flattened out after 2001 (generally increasing slightly up to 2006, then falling back a little after the global financial crisis). In all years, incomes were substantially more unequal in Sydney than the other cities, with this gap widening over the period.

In part, this reflects the larger size of Sydney. However, Sydney is now only slightly larger than Melbourne. Most of the gap is likely due to the high wages in parts of the financial services industry centred in Sydney.

Within the sub-regions of each city, inequality also increased, following a similar pattern. However, the growth in income inequality within local areas was less than the overall growth in inequality. Corresponding to this, the gap between the average incomes in each region also increased.

This is indicated in the graph below, which shows a measure of between-region inequality – the extent to which the average incomes in each area differ. Using the “GE(1)” measure of inequality, this more than doubled between 1991 and 2001. It then increased slightly up to 2006 and fell back slightly after the GFC.

Figure 2: Between-SLA inequality. Author’s calculations from ABS Census data

The overall combination of these trends is that the share of city-level inequality associated with location has grown over the period. For the GE(1) measure, this share increased from about 15% to 18%. That is, spatial segregation between rich and poor has increased over time.

Are we segregating ourselves?

One simpler way of describing the spatial concentration of incomes is to consider the situation of the top 10% of Sydney men – those with annual pre-tax incomes of $141,000 or more in 2011.

What fraction of these rich men lived in the low-income areas of Sydney? If we define low-income areas as the SLAs with the lowest average incomes and containing 20% of the male working-age population, then we find that only 5% of rich men lived in these areas in 2011.

So while it is true that some rich men live in the areas that have low average incomes (and maybe they might meet poor men), they are four times less likely to do so than the average man (5% vs 20%). And this segregation has increased over time. Back in 1991, 6.2% (rather than 5%) of rich men lived in these poor regions.

The other cities are also segregated, though not quite as much as Sydney. Looking at the top 10% of earners in each city in 2011, the percentage of these who were in poor local areas was 5.6% in Melbourne and Brisbane, 5.9% in Adelaide, and around 9% in Canberra and Perth.

Dark shades of inequality

This data also allows us to consider which areas are more segregated or mixed. This is mapped below for Sydney and Melbourne.

Figure 3a: Within-SLA inequality in Sydney. Author’s calculations from ABS Census data
Figure 3b: Within-SLA inequality in Melbourne. Author’s calculations from ABS Census data

The darker shades indicate local areas with more within-area inequality – though for small regions such as this, it is more appropriate to use a word with more positive connotations such as “heterogenous” or just “mixed”. The more mixed areas are generally those with higher average incomes (plus some areas with high ethnic heterogeneity).

This is driven by the fact that most regions include at least some men with low incomes, but high-income men are unlikely to live in the more homogeneous outer suburbs.

The concentration of high-paying employment and the poor transport linkages of Australia’s major cities undoubtedly play a large part in driving this.

Author: Bruce Bradbury, Associate Professor, Social Policy Research Centre, UNSW