Expensive housing is entirely counter-productive. Nobody celebrates when petrol goes up, or when electricity prices rise. So why celebrate when house prices rise so much, that your children have to pay relatively 3 times as much of their income for their first house, as you did for yours?
Unaffordable housing creates a social divide between classes, and between the old and the young. House prices have risen massively since 1985, and right now we have the mother of all housing affordability problems in Australia, and quite possibly one of the world’s few remaining housing bubbles (along with Hong Kong and possibly Canada).
Much of this problem originates with government distortions of free markets, which have made housing a particularly attractive form of investment for borrowed money, which in turn has driven up prices.
Tonight is Australia’s federal budget night, so today seems like an appropriate day on which to talk about those government taxes & incentives & rules.
I would like to see 5 changes made by government in relation to housing, and the rules and taxes governing it, to remove these distortions and get Australian housing closer towards being a free and efficient market, with affordable and sustainable prices:
Eliminate the First Home Owners Grant. This would save the taxpayer in the region of $700 million per year, whilst also removing a market distortion that has achieved the exact opposite its stated aim (by making homes demonstrably less affordable to new buyers).
End the negative gearing tax subsidy. Currently this subsidy costs the Australian taxpayer $4.8 billion per year. “Very few other ”advanced” economies are as generous in their tax treatment of geared investments as Australia is. In the United States, investors can only deduct interest incurred on borrowings undertaken to purchase property or shares up to the amount of income (dividends or rent) earned in any given financial year; any excess of interest expense over income (as in a ”negatively geared” investment) must be ”carried forward” as a deduction against the capital gains tax payable when the asset is eventually sold. In Australia, by contrast, that excess can be deducted against a taxpayer’s other income (such as wages and salaries) thereby reducing the amount of tax otherwise payable on that other income.”
A dollar’s income should be taxed the same, whether it is earned from wages, from interest, from dividends, or from asset price rises. The current tax system penalises productive work far more than passive speculation, as the highest rates are imposed on wages and income from savings; lower rates are imposed on income from investments. In a fair tax system, the 50 % CGT reduction should be eliminated, and CGT would apply to all assets equally, including the family home. All forms of income should be taxed at the individual’s marginal rate. Removing the 50% CGT reduction alone would save the Australian taxpayer close to $10 billion per year.
The “price guides” given by real estate agents for auctions in almost all cases are significantly under the final sale price, and almost always under the reserve, wasting buyer’s time and money. Also known as “under-quoting”, and it is “the difference between the guide given to buyers, and an agent’s sale estimate as written on the sale authority contract. It’s hard for buyers to prove under-quoting because they don’t have access to the contract.” A far more transparent process for sale by auction would be for the reserve price to have to be disclosed 1 or 2 weeks prior to auction. This would still leave the market to determine prices, but would let buyers know what the seller’s lower bound was, prior to having to spend money on building inspections and solicitors, only to then find out that the property was never in their price range. Agents who do not publish the reserve in time or who do not call the property on the market at the reserve price would have their real estate licenses revoked.
The money saved from the above (over $15 billion per year) spent on improving public infrastructure and transport, and reducing or eliminating stamp duty.
Stamp duty on housing is a significant additional transfer cost, and as such it mildly discourages people from changing housing, such as when their current housing is no longer appropriate. It encourages people to buy housing they think they will need in a 5 or 10 or 15 years time, rather than the housing they actually need now. This is a large part of why couples without kids want to buy 3 or 4 bedroom houses, in anticipation of the 2.3 children they plan to have, rather than buying the housing they actually need now, such as a 2 bedroom apartment close to work.
The terrible state of public transport and infrastructure, especially in outer suburbs in cities like Sydney both discourages people from living further out from the city, and encourages transport by car rather than public transport. The result is higher prices for homes close to the city and congestion on the roads as people shun public transport for a more reliable and convenient form of private transport. To make our cities better places to live, and to reduce pollution, we need more public transport routes, higher frequency, more interconnection points, better timing of connections, and a single city-wide electronic ticketing system that covers every type of public transport.
In a perfect world, some or all of these reforms would be addressed in tonight’s budget. However our current politicians, from both major parties, are weak-willed poll-driven career-politicians, who are afraid of offending current home-owners. So instead of doing what’s in the economy’s and future home-owner’s best long-term interests, I fully expect more of the same. The longer the current incentives are left in place, the worse the problem will be for Australia when it inevitably corrects.
A comment on abolishing negative gearing. In Oct 1987 Paul Keating abolished NG. Immediately the housing market took a downward spiral. Investors ran away. The news was full of young mum’s with babies in prams qued up at caravan parks trying to find accommodation. 18 mths later it was reintroduced and the Hawke govt. took a huge hit. If NG is abolished the govt. will have to fill the gap and provide public housing for those not in a position to buy their own. I think this would easily eat up the tax breaks NG provides. Think of the ongoing cost of maintenance to the public purse. Based on the Building Education revolution BER debacle and not to mention the insulation catastrophe NG may be the lesser of two evils.
Essentially there is no clear causation or correlation between NG removal and rising national rents in that period. What did happen was rising rents in Sydney, which already had an unusually low and falling vacancy rate anyway, even prior to NG removal – see this graph: http://1.bp.blogspot.com/-gnBmeG5piVU/TgeyZJ58onI/AAAAAAAABS4/tRmS-woQ4hY/s1600/hp4.bmp (wish I could find one that went back a few more years). Combine this with ferocious spin by the real estate industry at the time (in the worst traditions of the mining industry against the resources rent tax), the media keen for a good story, and you get the resulting perception that NG is necessary for rental properties – yet what happened in Sydney was going to happen anyway, irrelevant of NG. The stats simply don’t back up the claim that without NG rents will rise.
Look, if there is any argument at all for NG, it’s that it should apply to new housing only. It’s pointless applying it to existing housing, since all it does is change the balance between numbers of renters and numbers of owners, but it by definition it doesn’t and cannot create any new housing when considering only existing housing. More people buying instead of renting, means less renters, means less competition for a smaller pool of rental properties. The only case where it could help is in the creation of new housing stock. That’s why I favor either quarantining NG for all properties, or making NG deductible against other income for new properties only, say for a fixed period of time after they are built.
And of course it’d make it easier both politically and for people when planning their finances, to phase NG out on existing properties gradually and with several years notice, so that people know exactly what’s coming and can plan accordingly.