MB Radio: Housing affordability and politics

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With Australia in the midst of a phoney war before an election campaign Leith van Onselen and Catherine Cashmore discuss with Gunnamatta the silence of Australia’s political process (and both sides of politics) on the subject of affordable housing.

The discussion ranges over the factors which have created Australia’s extraordinary real estate prices, and the political dynamics and policies which have buttressed the situation, as well as the extreme reluctance of both sides of Australian politics to address the issue, or even encourage awareness of it.

It also explores different measures of housing affordability and the factors which will shape it moving forward, as well as the lengths the real estate industry goes to, to cultivate the public focus on rising real estate prices.

Ritualised Forms
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Comments

  1. Stop NG on newly bought and sold homes. Similar to Cap Gains tax post 1985.

    Fixed.

    Doesn’t hurt any existing owners.

    Is part 3 there?

    • I hurts existing owners if they want to sell ie: The ‘new’ buyer can’t assume the tax off-set that is currently allowable on the same property, so the re-sale price will be lower to reflect that. Only when interest rates are so low that NG becomes obsolete of its own accord can it be ‘unhurtfully’ removed. At that stage it should be removed from all properties, regardless.

    • Nah there wasnt a part 3

      It was just the way it ended and was edited which made it sound sort of like there may be.

      • The Patrician

        Well done Gunna. Good job.

        Lets hope Hockey or Bowen were listening.

        Maybe someone should tweet them a link.

        Ed Husic seems to be a rising star in the current govt, not afraid to take on the vested interests, does tweet and has an interest in tackling affordable housing in Western Sydney.

        With all the effort currently being applied to looking for revenue savings, I find it mind-boggling that NG is not on the table.

        What’s Ken Henry doing?

      • “What’s Ken Henry doing?”

        I think Dr. Henry has done a great job. I support the recommendations detailed in his tax review. Abolishing the negative gearing is not one of them, and there is a good reason for that. In my view, abolishment of negative gearing requires total overhaul of the taxation system (which will need to go much further than the recommendations in the Henry tax review), as I had detailed elsewhere.

        Other than this reason based on principles, I think there are practical implications to consider.

        I raised this point before on the MB site, but somehow did not receive much adequate response. So I reiterate it here; it is far from clear, at least to me, that the ATO will raise more revenue, not less, by abolishing the negative gearing.

        To illustrate my point, let’s say there is an individual whose marginal tax rate is 15%. Suppose this individual has exactly “zero negative gearing” position (investment costs exactly match investment incomes) with, e.g., ANZ. Now suppose ANZ decides to boost its profit margin by hiking the rate so that this individual now needs to make $1 extra payment to ANZ ($1 negatively geared).

        Now what will happen?

        This individual deducts the $1 from his income statement. The ATO will then collect 15c less tax from this individual. But wait! The ATO will collect 30c more tax from ANZ because ANZ made an extra profit of $1. The net result; the ATO is better off by 15c.

        You can play out a bunch of scenarios between the depositors, the borrowers, and the banks. If the income distribution of the depositors is the same as that of the borrowers, and if the profit margin of the banks does not change, then the ATO will not make or lose any revenue by varying the total amount of negatively geared loans. If the income distribution of the depositors is higher than that of the borrowers, which is likely, then the ATO will raise more revenue as the size of the negatively geared loans increases (for a given profit margin of banks).

        The situation gets a bit more complex once offshore funding is involved. But, then again, does not the ATO collect taxes from foreign depositors at the highest marginal tax rate? In which case, the ATO would make a killing by increasing the size of the negatively geared loans.

        Disclaimer; as a taxpayer, I have a vested interest in boosting the ATO’s revenue without increasing my own tax payment, and so do you. The point I raised should be adequately addressed in any rational discussion concerning the negative gearing. As usual, the burden of proof should fall onto those who advocate changes, not onto those who prefer status-quo.

      • Agree Dumpling,

        Negative gearing is largely a symptom of the problem rather than the cause. It is standard practice to allow people and companies to deduct expenses from their income.

        Certainly we could introduce fiddly rules limiting the circumstances in which expenses related to property can be deducted from income but it is missing the point.

        Negative gearing in property has only worked over an extended period because other demented policies relating to property and credit have made speculating on excessive capital gains in property a sure thing.

        Fix those policies and the rationale for the majority of current negative gearing will be gone. Trying to stop negative gearing while those policies remain in place will be political poison and a distraction from the real issues of improving supply and the under pricing of credit by the RBA.

        That will leave us with those investors who are investing for yield but go through a relatively short period of negative gearing while they are paying down the initial size of the loan to get to the point where the investment is positively geared.

      • Thanks, Pfh.

        I just want to know in advance what I am getting into if we were to make a change – any change – and so should everyone. It looks to me that the ATO will see its tax receipts plunge with abolishment of NG (see my posts below), and I will be affected by this as a taxpayer in a negative way, because the ATO will surely look to fill the shortfall in the tax receipts by taxing the wise – i.e., who had not “contributed” to the ATO’s bottom line via NG.

        I might add that the technique I used in the above and below examples (i.e., trying to see if tax receipts will rise or fall with the change in every dollar of a negatively geared loan, or if tax receipts will rise or fall with the change in the tax law) is essentially a variance of what they call the principle of virtual work in Physics. It is a very useful technique in thermodynamics when I try to guess which way a complex system will move with the change of one variable (I am a full time chemical engineer). I do not see why I cannot apply this wonderful technique for economics, which is a tiny subset of the whole universe, and this technique is supposed to work for the whole universe.

        By the way, I am also finding that statistical mechanics I routinely use in chemical engineering is useful in economics, too. For example, wealth distributions of a free economy in which currencies can be freely exchanged between individuals should look like the Boltzmann distribution (a system in which energy can be freely exchanged between entities). The colder the temperature the more skewed the distribution. As the system temperature increases, the distribution gets less skewed, and eventually approaches the Gaussian shape.

        The inference becomes interesting by relating the energy to money and the system temperature to the total wealth in an economy; the poorer an economy (i.e., less total wealth) the income distribution is more skewed (vast majority have tiny wealth and a large proportion of the total wealth is concentrated to lucky few). As the total wealth of the country increases, the distribution gets less skewed (and the entire distribution shifts to higher wealth).With unlimited amount of wealth the distribution approaches the Gaussian.

        Guess what, that is what we see in the real economies! We are governed by the laws of Physics after all. Therefore, in my view, it is philosophically wrong to assume that the unequal wealth distributions we see in the real world are consequences of a poor policy and/or unfair taxation system and/or tyranny and/or global conspiracy. YOU DO NOT NEED ANY OF THIS to achieve “unequal wealth distributions”; random distribution of the world wealth will do. The inferred solution is also obvious; the best way to redress the skewed distributions is to increase the amount of total wealth.

      • Coming from a country that ( like most of the world) does not have negative gearing it took me a while to get my head round property prices vs returns here.

        I have certainly known people who paid more for property than they would have without negative gearing, and therefore can only conclude that it contributes to higher prices, even if irrationally.

      • @dam The Gaussian argument only holds in an unrestricted environment. As soon as you have external forces, your distribution is governed by these forces.

        Also if your argument about greater wealth -> greater wealth equality is true than the USA should have greater equality than AUS. This is obviously not true.

      • Yes, you are right that my above description is for a closed system in thermal equilibrium (canonical).

        If you introduce a temperature gradient in the system by an external heat source (the external force in the economic analogy) then obviously the distributions will change. It still holds that the “natural” distribution is the Boltzmann distribution and the reason that there is less wealth inequality in Australia than in the US is NOT because the US has a bad regulation or a bad policy, but rather because there are more regulations in Australia.

        Clearly it requires continual input of energy for the external heat source to maintain the “temperature gradient” and force a system move away from an equilibrium and maintain it there. The greater the deviation from the equilibrium the greater amount of energy will be lost (dissipated) by the external heat source. Is not this analogous to the correlation between the size of the government and its efficiency

        Food for thought.

  2. High land price is a major factor that cripples the competitiveness of local businesses because the high cost is obviously passed onto the pricing of the final product.

    Trying to address the productivity issues without addressing the high land prices is just like trying to cure lung cancer without quit smoking. You can try whatever fancy cutting edge treatments but the benefits are limited by constant exposure to smoke and tar.

    Or maybe their mental make-up is; “I would rather die if I cannot smoke anymore”?

    Having said that, those who advocate abolishing negative gearing should at least first make sure that the ATO will raise more revenue, not less, by doing so.

    • Dumpling,

      You may be wrong….
      I’ll use the same line of reasoning but no negative gearing allowed in this instance.

      Now suppose ANZ decides to boost its profit margin by hiking the rate so that this individual now needs to make $1 extra payment to ANZ

      Now what will happen?

      This individual cannot deduct the $1 from his income statement. The ATO will then collect the same tax from this individual. But wait! The ATO will collect 30c more tax from ANZ because ANZ made an extra profit of $1. The net result; the ATO is better off by 30c.

      Even with the NG you are conveniently closing the cycle at ANZ to support your theory. How do you know ANZ is not offsetting this dollar against some loss elsewhere. Banks are quite good at finding ways to minimize tax. Is all OK if the losses are real but we all know that a can of paint can easily be claimed as used on a NG property. Is just a matter of having a receipt from Bunnings isn’t it? So if investor can so easily rort the system I think banks have devised a even better procedure long ago.

      • I can only compare whether the ATO is better off or not on the “everything else being equal” basis.

        If NG is banned, then the total amount of loans will plunge and the tax receipts will surely plunge, too. To estimate whether the ATO is better off or not will be a lot more complex numerical exercise.

        The rorting schemes you referred to can be carried out with positive gearing in exactly the same way, so I do not see how it adds to the argument of abolishing NG.

      • Forget about the rorting. I was just clouding the issue with that.
        On a “everything else being equal” basis the ATO is better off with no NG by 15c more than in the case with NG.

        In your example the individual gets to pay 15c less tax and the ANZ pays 30c. (+15c for ATO)

        If there is no NG the individual doesn’t get to pay 15c less tax but the ANZ still pays the 30c. (+30c for ATO)

      • Another way to look at this is; In Year Zero NG was banned. In Year One, NG is introduced. Will the tax receipts rise or fall? It looks to me that the ATO will increase its revenue with every new (negatively geared) dollar loaned, as my post above suggests.

        Now I am not convinced that the tax receipts increase with the introduction of NG AND reversing the rule back to Year Zero will also increase the tax receipts. If this were the case, then the ATO could keep boosting its tax receipts by simply changing the same rule back and forth every financial year!

        Anyways, the whole point of my post is that I have not seen any study or evidence which convinces me that abolishing NG will increase the ATO’s tax receipts, not decrease them. Perhaps you can try to convince me whether there is an error in the first or the second premise. I am an independent thinker and open minded.

    • Dumpling

      I think the issue with negative gearing is that the ATO effectively provides cash inflow (less tax outflow) with NG.

      This allows the NGer (or ATO) to support higher house/land prices that would not not otherwise have occurred.

      Ie. NGer buys a higher priced house or can pay more for the same house than a non-NGer. An unfair advantage for what is essentially shelter.

      It’s but one factor in creating an easier way to own a home. As well as lower IR, direct grants etc etc.

      Its government policy that “gooses” prices.

      That’s the source of the cancer, not to mention our willingness to follow return vs reward….

      • We keep arguing about NG but no one rise the question on the real issue of depreciation on the property. Most benefits from NG came from depreciation, not interest expenses.
        One thing I never understand is that a ip owner claim depreciation every year, and at the end of the ownership, the property sell at higher price. What is the logic? I know it’s the land component but doesn’t sound right.

      • Jojo.

        Its basic business principals at work.

        Things deteriorate. The house is worth less with time. While the land appreciates as you know.

        The investor gets (from memory) 2.5% depreciation on the house construction. Ie it’s said to last 40 years. Probably less so with the new builds. 😉

        However the investor will pay more capital gains tax on sale by having a higher capital gain since the capital cost is reduced by the depreciation already claimed.

        Policy making it easier to afford or push house prices higher.

        I guess policy needs to differentiate between residential housing and commercial (hotel) housing. The Later – a business with all tax concessions available like any other business.

        The former is more a social good. No unfair tax and cash flow benefits to those that don’t need it.

        Or alternatively everyone gets to deduct interest. Not just investors….

        Correction to earlier post: “return vs effort”

      • I know full well the negative effects of NG. I also think that it takes a lot more than Dr. Henry’s recommendations to abolish NG in an orderly manner (in a manner that is coherent with the rest of the taxation system).

        As I had posted numerous times on the MB site several months ago (sorry I am too lazy to find the link to my old posts; perhaps you can do the search?), I am in favour of the recommendations spelt out in the Henry tax review. I already posted my position, more than once, on broad based land tax and on congestion tax (“they already do this in Singapore and it works well”). The only point to which I differ is on individual income tax.

        Dr. Henry recommends offering of 40% discount to investment incomes which will be added to one’s wages in an individual’s tax return. My proposal, detailed elsewhere, is to totally decouple investment incomes from wages, in which wages are taxed as they are now (indexed) and the investment incomes are taxed at a flat rate that matches the corporate tax rate (currently 30%). In other words, each individual would be required to file two tax returns, one for wages and the other for passive incomes.

        There are a few clear advantages to my proposal over the Henry’s recommendation, although back of the envelope calculation shows that the end results are remarkably similar (e.g., if one is in the top marginal tax rate of 45%, one will pay 27c on a dollar under Dr. Henry’s recommendation while 30c on a dollar under my proposal).

        My proposal is simpler, fairer and more equitable. Under my proposal, there would be no point for one to subdivide one’s income into multiple entities or open an account in the names of one’s kids or relatives. Also, as a matter of principle, I see no reason for tax on investment (non- labour) incomes to be indexed; it should be taxed at a flat rate regardless of the size of one’s wages. The underlying reason for this is that, unless you inherit large sums, the monies you invest must have come from your wages, which are already progressively taxed once. In fact, it is telling that the Henry tax review itself had stated “In conjunction with introducing the discount further consideration should be given to how the boundaries between discounted and non-discounted amounts are best drawn to achieve certainty, reduce compliance costs, and prevent labour and other income being converted into discounted income.”

        In my view, Dr. Henry could go a bit farther and totally decouple wages (labour incomes) from investment (non-labour) incomes, once and for all. This would abolish negative gearing by default (which still remains in the Henry tax review).

        Granted, Dr. Henry’s recommendations in the review are not a final goal but rather an ongoing “process” toward a better system (read, e.g., his comments on inheritance tax). My sense is that the taxation system of future needs to progressively shift to more “stock-based” from the current overwhelmingly “flow-based” version as the population ages. But then again, I am afraid that I am too ahead of my time.

  3. BubbleyMEMBER

    And the bug up my butt, self managed super buying investment property.

    That’s going to be a financial claymore which will blow up and take a lot of retirement funds with it.

    I’d say at least 50% of investment property sales in Darwin are smsf. I’d also say the majority of all sales in Darwin are to investors.

  4. New Zealand’s stupidity continues “The opposition Labour Party is adopting a policy of restricting foreign ownership of existing houses…..the rule would not apply to Australian buyers because if New Zealand stopped Australians buying homes “we would risk the possibility they would shut us out as well”.
    Tell me how you stop anyone buying anything in a Global World if they as so inclined? The less rules there are, the harder they are to avoid……

    • Janet, easy. You ask for evidence of passport or permanent residency before allowing a sale to proceed. There is always the chance of people using family as proxy etc, but this will certainly reduce foreign speculation.

      • So if Chodley Wontok & Assoictaes, a company run by permanent Australian resident Mr. Wontok, buys 1,000 second hand houses in Auckland and ‘borrows’ the money from his non-resident affiliate companies (say,Wontok & Co, Hong Kong)/individuals off-shore; allocates the true ownership in a little black book he holds at his holiday home in Victoria Peak, that isn’t a sale to a non-resident? Maybe not in words, but certainly in deed…..Investment Banking is an industry designed to look for loopholes in any regulation. Property is already awash with such loopholes. More of them, isn’t the answer……

      • Janet, not saying Aussies should be able to either.and I’m not saying you can completely stop johnny foreigner polluting our market, but you can certainly make it harder and make sure we are not the lowest hanging fruit. In Aus there was a noticeable difference when the Rudd relaxed foreign home buyer rules, and a notable reduction in demand when they were rightly tightened.

        It’s not the only solution, the real evil is massive immigration, but this is a start.

    • Agree about the stupidity of the Labour party in NZ, Janet. Also the Xenophobia aspect.

      If central planners were enabling an oligopoly racket in bread and milk, would banning immigrants from buying bread and milk solve the problem?

      If the needed supply of houses was being built, overseas buyers of them would just stimulate the economy same as overseas buyers of anything “made locally”.

      Housing is a basic necessity, so central planners should not be allowed to enable an oligopoly racket in it.

  5. Auction results: 81% clearance in Sydney

    http://www.homepriceguide.com.au/saturday_auction_results/sydney_domain.pdf

    The RBA will be stroking the long haired white cat on its lap today as its cheap money policies take effect in the market for existing houses.

    But still new housing construction is sluggish because the product is just too expensive.

    Will they continue to try to goose the latter while the former starts to overheat?

    We will find out in August but I reckon they may just sit tight.

    Would be nice if they actually used their famous jawbone on the housing supply issue once in a while and get Gov Glenn to deliver a serious speech on the subject

    “Why yanking the interest lever is not enough to fix the housing affordability issue”

    With both parties sticking their head in the sands on the issue now is the time for the RBA to make a real contribution to the debate.

  6. Thanks to all for a very interesting podcast.
    Over this last month we have had 2 houses sell in our street , usual 4 bedroom with pool on say 780sq block about 25 year old (2154)
    One went for 823k and the other was sold privately to an estate agent for over 1 million….couldn’t believe it.
    There must be a lot of inheritance money now being passed down from oldies passing on as when I look at my new neighbours in their mid thirties with 3 children under 10 year old and 2 new cars I cannot understand how they are doing it.
    Cheers

  7. BTW the journo Joe Hildebrand who has a show on ABC on a Tuesday night called Shitsville Express is turning his attention to Australian housing affordability on this weeks show.
    I think it is on ABC 2 at 9.30 pm this Tuesday night.

    Leith n Gunna it would be great if you could lobby Q&A to get the debate on housing policy on the show…I reckon it will happen and one of you guys need to be on the panel….so who do you know in ABC land to bring this debate forward?

    • Not a bad show, but I have almost no doubt they’ll dance around the issue, and deliberately omit key reasons for housing unaffordability like cheap credit and mass immigration.

      The conclusion will most likely be “meh, ok we’ll just have to pay $600k for a dogbox”.

    • Q&A has been very wimpy on the topic of housing affordability ever since they let Tanya Plibersek – then housing minister – get caught with a difficult question on the subject a few years ago. Must have been very embarrassing for them, with the ‘star’ getting hammered by a sharp young fellow in the audience (how did he get in?). On her subsequent visits to the show, tony seemed to made sure she didn’t get a single question on housing, quite a feat when she had the housing portfolio.

      • I remember it well….If anything the host Tony Jones shielded Plibersek and others from any awkward moments arising from the direct questioning…….. It was after that episode that I lost any respect I had for the show or its host, never watched it since.

        The day they grow a set and discuss some real issues is the day hell freezes over!

        Useless!

  8. Great, great podcast, thank you. Reasoned and refreshing discussion, however as with most discussions of property in Australia it has left me profoundly depressed. I’m a first home buyer but just cannot see a way into this Sydney market. I’m not an elite by any stretch but I do work in the CBD (formerly with a bank) and the vested interest in residential property is absurd. There is no chance government will do anything. So what do I do? Stay at home forever, rent, or just jump on the bandwagon and take on stupid debt and risk?

    • Guess what, I am also a would be (or perhaps the term “discretionary” may suit better) first home buyer! I am not depressed though. Maybe there is something wrong with my psyche, but I do not mind as long as I am happy! Why do you wish to get into the housing market now? I am happy to wait as long as it takes – I do not feel any rental stress or anything like that while waiting.

      Hang in there, mate. Meanwhile, study history and you can learn a lot about human nature. I do not believe that human nature will change easily so the effort you put in will not be wasted. I guess once you get a good grasp of mass dynamics it will be a lot easier to hold a long term view…..

    • Same situation as you guys but in Melbourne. Partner and I have good jobs (for now anyway lol) and a decent deposit. Family members inquire about why we don’t buy. I try and explain, some get it, some don’t.

      Agree with dumpling re mass dynamics. One thing to note is that our property system relies a great deal on upgrading and thus the only way for it to come unhinged without government action is for FHB to stay out of the market.

      • On FHBs, that’s why I think it can’t actually continue indefinitely.

        What sort of FHB wants to take out a mega mortgage, in an economy liable to be exposed for its uncompetitiveness, with income growth getting kneed in the nuts, while demographics starts to flow against real estate?

        ……and on top of that be reliant on yet more FHBs being brought in without asking questions?

      • It’s a feature of all pyramid type schemes right? Always need new participants at the bottom. Unfortunately many got roped into the great Australian dream because of not thinking for themselves. Mind you many have done quite well assuming they get out in time.

        Also if the economy trends down, highly leveraged investors may start feeling the pinch as well.

        The one thing that can kinda keep this going is increased immigration but if the economy trends down, it may not be viable. On the professional front, Oz wages may not be competitive against cost of living to Europe and US.

  9. Blah blah blah, the only party that will do anything for housing affordability is the Stable Population Party.

  10. RobertoMEMBER

    The boomer generation around the world and in Australia was relatively much larger than any before and as they moved into peak earning years caused strong GDP growth and even stronger asset price growth. Add in reflexivity (Soros’s positive feedback of buying begetting buying in a crowd/ group think frenzy) and that is basically why houses are so expensive. The favourable political climate that they gave themselves ie: NG and CGT concessions was a form of reflexivity also. All about to reverse for the same reasons as they retire. There are plenty of academic papers supporting the demography linkage in Leith’s old posts.

    • Roberto

      I think i understand the demographics issue.

      But i will inherit over $500k…. Hopefully not any time soon.

      So will my other two siblings.

      That will represent a rather large deposit for a house should i think that’s a good investment.

      Do the reports you speak of talk about inheritance.

      Sorry for the ignorance.

  11. This was quite interesting – particularly to someone not particularly into housing investment – Leith I think you covered the issues well and realistically. Although there is a demographic out there that would like to see the end of NG there is a larger one it seems that would not – I’m not sure Cashmore fully explored that view but Leith appears clearly aware.

    Re SMSF property investments – there are a plethora of warnings of risk online and hopefully most acquaint themselves with the info available prior to decision making. These investors are not exactly kids!

  12. Great work. Its good to see the discussion starting to focus on mechanisms to unwind the neg gearing mess before it blows up. There are actually some easy wins here – just set the quarantine level high and let the market catch up, introduce staged debt equity etc.

    It is easy (and fun) to be cynical, but really, the reason these easy things are not being done can only be because the major parties are captured by the vested interests.

    Listening to the process of the property income stream model – it does sound eerily similar to the old financial planning model of just get em in anything and get a cut. Tell em to borrow if you have to but get that money under management.

    The lesson for the GFC/Great recession really has to be that private debt becomes public debt. It is very dangerous to be a prudent saver within the established financial system when all the debt issues blow.