Australian housing policy favours the wealthy

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By Leith van Onselen

The Grattan Institute has released a new report entitled Renovating Housing Policy, which argues that Australian housing policy wrongly favours the wealthy over the poor and is in bad need of reform. Below are some key extracts:

Housing policy in Australia is overdue for a major renovation.

Government tax and welfare policies, by favouring home owners and property investors over people who rent, are worsening the divide between Australians who own housing and those who do not. The divide is income-based and it is generational. While overall home ownership rates are stable or declining slightly, declines are much sharper among those with low-incomes or aged under 45…

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Government subsidy of home ownership and property investment is skewed in favour of high-income households. They gain far more than others from tax concessions such as the land tax exemption on the family home, negative gearing and the capital gains tax discount. Much more government assistance is provided to buy investment properties than to buy a first home.

Current policies are not producing more home owners. Because supply has been constrained, first home buyer assistance has not only failed to increase ownership levels but may have pushed up prices, benefitting sellers and making it harder for many households to own their first home. Policies that favour investors, such as negative gearing, increase demand for property and push up prices while doing little to increase supply.

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Combined with rules that restrict development in established suburbs, higher prices force many households to buy on the city fringes, with poorer access to transport and jobs. This reduces opportunities for individuals and makes it harder for businesses to access skilled workers. It’s a rising form of inequality that damages productivity and the fair go…

Tax changes have also increased housing demand by making investment property more attractive. The combination of capital gains tax rule changes in 1999 and negative gearing has strongly increased the demand for investment properties. Investors compete directly with potential homebuyers, particularly for established houses. This makes it harder for first home buyers to secure a property…

Meanwhile, more people – one in four households – are renting, and renting for longer periods of time. The lack of encouragement for longer leases in Australian residential tenancy rules undermines stability for renters, many of whom have to move much more frequently than they would like…

At present, home owners profit from government outlays worth about $36 billion a year. Yet home ownership brings such benefits people would do it anyway…

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As Figure 4.3 shows, the capital gains tax and land tax exemptions on the family home as well as the non-taxation of net imputed rent delivers $8,000 per year to households in the top income quintile, compared to only $2,800 per year to those in the bottom quintile.

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Tax concessions for residential property investors are worth $9,200 per year for households in the highest income quintile compared to $3,600 per week for the lowest income quintile.

Favourable treatment of owner occupied housing under the pension assets test does not follow this trend. Fewer higher wealth households receive full or part pensions since these households are more likely to exceed the financial assets test, even with their family home exempted. However.., around 40 per cent of expenditure on the age pension goes to households with more than $500,000 in net wealth…

Households that rent privately benefit least from the policies we costed… Those who do not own their home are excluded from the tax concessions and benefits provided to owners and investors. Unlike owner-occupiers, renters cannot access a highly tax effective vehicle for wealth creation – the owner-occupied family home.

Perhaps the greatest disadvantage renters face comes from the pension asset test. Take, for example, two retired couples that seek the age pension. The first owns their home, which is valued at $800,000. They have $50,000 cash in the bank and no other assets or income stream. This couple is eligible for the full pension – currently $1,133 per fortnight. The second couple rents, preferring the flexibility. They have $800,000 saved in an investment portfolio and $50,000 cash in the bank. Despite having an asset portfolio of exactly the same value as the first couple, the second couple is ineligible for the full or part age pension…

What does it all add up to? Expenditure on housing policy most benefits households that already own a home, followed by households that invest in residential property. Within both groups, higher income households receive the greatest subsidies…

It is also clear that housing policies increase the benefits of owning a home compared to renting, since renters cannot access any of the subsidies available to home owners. In addition, policies benefitting those who already own have, at the same time, made home ownership less attainable…

Winding back negative gearing and the capital gains discount would stop the artificial inflation of demand for investment properties and enable more people to buy their first home. Repealing stamp duty in favour of an annual property tax would greatly lower the cost of moving, making it easier to relocate for job opportunities, or to a more suitable home. It would also encourage the more productive use of land in our cities…

Reform won’t – and shouldn’t – happen overnight. But we need to start the debate now…

Overall, the Grattan Institute report nicely summarises many of the policy distortions afflicting Australian housing, and closely follows Saul Eslake’s 50 Years of Housing Policy Failure presentation in September.

My main issue with both presentations is that, while they correctly identify housing supply restrictions in established areas, they ignore policy restrictions that have been implemented on the fringe, such as urban growth boundaries, up-front infrastructure charges, slow planning approval processes, etc.

As shown by the below charts, fringe lot values have skyrocketed in price despite shrinking in size, which has acted to inflate housing values both in outer suburban locations, as well as across the various urban areas:

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As noted earlier today and previously, supply restrictions on the fringe tend to have particularly pernicious impacts on lower socio-economic groups. As such, it is surprising that the Grattan Institute report has ignored these policies altogether.

In my view, the most important solution to Australia’s housing woes is to deregulate the supply system, so that it can more easily adjust to changes in demand, rather than expecting taxation changes to do the heavy lifting.

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Comments

  1. Do they say much about the position of people who bought (and who are yet to buy) their first home at a new peak price after 2007, compared to those who bought prior to 2000?

  2. “….My main issue with both presentations is that, while they correctly identify housing supply restrictions in established areas, they ignore policy restrictions that have been implemented on the fringe, such as urban growth boundaries, up-front infrastructure charges, slow planning approval processes, etc…..”

    Spot on, Leith.

    It is fringe growth containment and the inflation of “planning gain” there that is mostly responsible for all the subsequent problems.

    There is no market in the world where fringe growth is contained, and “intensification” has restored affordability. All that happens when intensification is expedited in growth-contained cities (eg fast track permissions, abolition of NIMBY rights) is that the property owners and developers make more profit.

    “Price” is determined by “supply and demand”. The nuts and bolts of the process of redevelopment merely decides who gets what share of the price.

    The difference between land prices in a growth contained market and a free market, is that the former has zero-sum economic rent extracted from local incomes, but the latter has none – it has genuine “consumer surplus” in land prices, just like there is consumer surplus in most goods in a free market economy.

  3. When are we going to start seeing grounded structural “nuts and bolts” research, comparing the detailed costs of new fringe starter development here in Australia and New Zealand with Houston Texas ?

    THE REAL DEAL

    http://2.bp.blogspot.com/-Wvy3jZaQ3rs/UTEmx-GDJ-I/AAAAAAAAAXE/mA3sBLWlMho/s1600/the_real_deal.JPG

    Focus on restoring housing affordability

    http://www.scoop.co.nz/stories/PO1305/S00325/focus-on-restoring-housing-affordability.htm

    Houston: We have a housing affordability problem

    http://www.interest.co.nz/news/49029/opinion-houston-we-have-housing-affordability-problem

    Haven’t we had more than enough of the loser confuser bureaucratic / academic so called research on these issues ?

    All we want is the reverent structural “nuts and bolts” research.

    These numbers will tell us exactly what the problems and solutions are … i.e … to sort out land supply and infrastructure financing.

    Hugh Pavletich
    http://www.PerformanceUrbanPlanning.org

  4. New Zealand Prime Minister John Key telling it like it is …

    Where are the Australian Federal and State politicians doing the same ?

    ACTION ON HOUSING AFFORDABILITY – JOHN KEY – YOUTUBE VIDEO

    http://www.youtube.com/watch?v=1dJ20Uqv7eA&feature=youtu.be&desktop_uri=%2Fwatch%3Fv%3D1dJ20Uqv7eA%26feature%3Dyoutu.be&app=desktop

    TEXT …

    18 October 2013
    Action on affordable housing

    “A lot’s been said about housing affordability, and now it’s time for action.

    The Housing Minister, Nick Smith, and Auckland’s Mayor Len Brown recently announced the first batch of 11 Special Housing Areas that will see 6000 new homes being built in Auckland.

    This is a significant step towards our target of consenting 39,000 new homes in Auckland over three years – which is far more than the current average of fewer than 4000 a year.

    And that’s just the beginning.

    We all know that our housing market is not working as well as it could be. Too many families are having to spend too much of their income on housing.

    House prices doubled in six years under the last Labour government, while floating interest rates increased to nearly 11 per cent.

    What did Labour do about that?

    Nothing.

    I am proud that under this National Government mortgage interest rates have been at 50-year lows.

    National values home ownership and we want to help more Kiwis into their own home.

    One of the biggest contributors to the housing affordability problem is actually very basic. There isn’t enough land being supplied for housing.

    That’s why we’re working with local councils to free up land.

    We passed a new law which will see councils enter into Housing Accords with the Government. They’ll be able to create Special Housing Areas, like the ones just agreed in Auckland.

    Developments in these areas will be fast-tracked, so new homes can be consented and built faster.

    It’s one part of our wide-ranging package of measures to improve affordability.

    We’re seeing the start of some real momentum.

    I feel encouraged that National is helping more people to achieve the Kiwi dream of owning their own home.”

    • I liked John Key profile when he was first elected as NZ’s PM few years ago and I predicted that he would be a much better politician and leader than all the morons we have had ever since in Canberra. I hate to be right on this prediction but so far that’s happening. The Kiwis have John Key and we’re left behind with Abbott, Hockey, and Gillard and Swan before…

      • JOon Key started with all the right motives and the right naive ideas. But over the last 5 years or so he’s been ‘got at’. The John Key that famously stated on American television that ‘You can’t get out of debt by borrowing more money’ has been sidelined. If you want a good illustration of that, look at where Auckland house prices have been allowed to go over the last 5 years. It’s a disgrace. Is he doing something about that now? Maybe…but not in a hurry and not in time. Politicians? There’s the same, wherever you go!

      • As opposed to “its not there” “problem? what problem?”. “I’m sorry dave I can’t do that”.

        Perhaps your cynicism need to be tempered with the fact that AU is nowhere near that point. there are no politicians in Australia committing to treble the rate of construction in sydney…. or even acknowledging there is a problem. In all seriousness we are becoming a penal settlement once again this time rather than the commonwealth as our arbiters it is the market and the banks.

    • Have they, Hugh? Tell me whether the median house price in New Zealand is at a record high today or not. There’s your answer. If you choose to think “things will be different now” for whatever reason, that’s your prerogative. But I’d suggest you will still be writing the same thing, in a years time, that you have been for the last +5. Nothing is about to change. “More supply is coming on”, you say. That will do nothing to ameliorate the property disaster that is New Zealand. Nothing. Whilst there are restrictions of any sort on land development, (as you yourself write) things will remain the same.

      • Janet … Thank you for your comments.

        In my considered view, there is now sufficient momentum and pressure for major change in New Zealand. The material I have posted above needs to be read closely.

        I don’t make this statement lightly.

        Hugh Pavletich

      • The 4th September 2010 encapsulates everything you need to know about the property market in New Zealand, Hugh. It presented a generational chance to reconfigure the property market. At a time when hundreds of thousands of citizens were traumatised, and tens of thousand of homeowners saw their lifetimes work damaged or destroyed, the Government of New Zealand did what? Made replacement costs affordable for those unfortunate enough to be in the wrong place at the wrong time; freed up land for immediate development? No. They made land MORE expensive; replacement costs higher, kept the covenants in place. And why? Because vested interested would have suffered the collateral damage; banks would have seen property prices fall. You know what the answers are, Hugh. We have read them a hundred times. And if what you see about you today mirrors your writings and thoughts, then I have sadly misunderstood them.

      • (PS: Westpac Banking Corp senior economic Felix Delbruck said in a note “These (immigration) numbers are big enough to matter for the housing market over the short to medium term – and are one reason why we are expecting house prices to keep rising over the year ahead , despite the headwinds of lending restrictions and recent rises in fixed-term mortgage rates,” he said.
        Vested interests, Hugh, vested interests……

      • i understand your attitude Janet and it remains to be seen whether National are succesful in producing affordabel property or even whether they are serious about that. That said, it is miles better than Aus for a number of reasons:
        1) NZ did not stimulate their market during the GFC. Prices dropped 5 to 15% from 2007 to 2010. A slow melt was allowed to occur. By comparison Aus did the complete opposite resulting in 30% rises in some cities. So in general Aus prices are a lot worse than in NZ (Auckland excepted)

        2) at least it is an issue that all parties must now acknowledge and at least pretend to do something about. Thats 10 years ahead of Aus where the govt/rba etc all think rising prices are a great thing.

    • @ Hugh

      Do you mean that the removing of FHB by the RBNZ in favor of Investors is a good thing ? Prices are still sky high for what I see, not much changes

      • Dam … you mean imposing the LVR restrictions by the RBNZ.

        Do read carefully what RBNZ Governor Wheeler and his Deputy Spencer have been saying. These will be reviewed as and when the Government deals effectively with supply constraints.

        In comparison, the statements by RBA Governor Stevens and his people, can only be described as pathetic.

        Check out this years Demographia Survey ( http://www.demographia.com ) to see where Australia is at. Noting too, the Survey Introduction by NZ Deputy Prime Minister Bill English.

  5. I am not quite sure what is meant by up front charges for infrastructure being a problem. These charges are normally for local infrastructure at subdivision level. Major infrastructure is paid for in other ways.

    The reason I say this is that if the local infrastructure is not paid for up front, then it needs to be paid for through the on-going charges. So, either it is up-front, or on-going (and presumably at interest rates that could then be set quite nicely to make a windfall for the States). If it were paid for on an ongoing basis, then surely the cost of servicing that would balance out the up front cost? Yes, it is a different way of paying, but does it not amount to the same thing as far as affordability is concerned? And with the added possibility that governments can fiddle with the charge.

    Up front infrastructure charges are NOT applied to the major infrastructure items such as dams, treatment plants, major trunk mains, generating stations, major zone substations and transmission mains. These are collected via on-going charges.

    Given the almighty fuss there has been over the past few years about the costs of keeping those assets up, how practical do you think it is going to be to roughly double it for up front local infrastructure?

    • I have the same question, emess. Leith has mentioned in the past his support for the Texan model where a local quango organises the infrastructure and then recovers the cost through annual charges to homeowners.

      Financially, this is really no different to paying for it as a lump sum upfront and then having higher mortgage repayments, ie higher annual mortgage payments = annual Texan infrastructure charge (all other things being equal).

      The Texan model may result in a better/cheaper delivery of infrastructure but that case hasn’t really been argued or made. Leith, any comment?

      • Sure, the total financial cost of a new home buyer paying for infrastructure upfront vs paying an ongoing infrastructure tax would be much the same, but I daresay that many potential buyers would give the ongoing infrastructure cost much less consideration than the upfront cost.

        So upfront infrastructure costs end up being capitalised directly into new land prices, which then pushes up the price of existing land. Ongoing costs probably wouldn’t be capitalised at the same rate, and so would have a smaller effect on the price of existing land.

    • It has been public opinion which has driven both major political parties … National and Labour … to face up to the housing affordability problem. It is the No 1 public policy issue in New Zealand.

      Here is the TV One Colmar Brunton Poll from last December …

      http://tvnz.co.nz/national-news/govt-should-act-lower-house-prices-poll-5257810

      I doubt the public views in Australia are much different. Likely, just a less diligent and active media.

      Hugh Pavletich

      • I doubt the public views in Australia are much different. Likely, just a less diligent and active media.

        I am not so sure. I’ve read the link and felt a bit more favorable towards the Kiwis…at least, the majority of them bravely enough to sacrifice their own interests to give a fair-go to the young generation.

        People in Australia ? I’m not so sure and many in this blog will feel the same me think. Residential property and its related industries have become the biggest and fastest growing religion in the society. The local residents love it, the migrants worship it, the politicians support it, the rich (bankers) can’t live without it, the poor wants it, the bulls adore it, hell… even the bears have surrendered and can’t help seeing it in awe. So what if the young generation can’t have good life because of expensive housing… they’re to be sacrificed because they’re lazy and can’t save money 😉

      • Deo … that’s a wonderful response !

        In my view, as these bubble prices have run on, even the boomers are getting hammered as the kids hit them for financial assistance to get in to first homes. In addition, as the boomers trade up, they are taking on board excessive bubble mortgages as well.

        Retirement savings are therefore getting hammered.

        I covered this years ago within “Getting Performance Urban Planning In Place” … specifically the Section “The Good … The Bad … The Ugly” Basically how it is only a Bankers Welfare Scheme transacting in bubble markets.

        The Bankers are really the major ones (with Governments) making money. Bubble wealth is illusory wealth for the sucker property owners …

        http://www.performanceurbanplanning.org/performanceurbanplanning.html

        More and more Kiwis and their families have woken up to this “con”. I suspect good numbers of Australians will be becoming increasingly aware of it as well.

        What about the recent ACOSS research ?

        Hugh Pavletich

      • Hugh, I think Deo’s right. I commend the NZ govt who is at least listening to the people.

        Our govt doesn’t even regard housing as an issue – certainly not one to be discussed in public. Any any time anyone asks a politician a question about the housing bubble they come up with some stock-standard stupid response. Witness Joe Hockey’s nonsensical interview last week – it’s obvious they hold the public in contempt.

        But do you know what else? I don’t even think half the people in Australia are even aware that we have a housing bubble. I am amazed when I tell people about it, and have to explain everything from the beginning. Of course, by the time I’m finished, their eyes are usually glazing over….

        Edit…. I just read the article you highlighted, and it seems to me that although prices are just below those in Australia, I think NZ wages tend to be considerably lower, which is the reason Kiwis are moving to Australia in droves. I don’t know what the price to income ratio is in NZ, but I suspect it is higher than ours?

        Also I don’t know when Australians are going “to wake up to the con.” All they know is that their own properties are growing in value, and that’s a good thing, and boy, how clever or lucky they were to buy when they did. They also have only ever known prices to go up. The worst part is that our government is determined to make sure prices do only go up.

      • Also I don’t know when Australians are going “to wake up to the con.” All they know is that their own properties are growing in value, and that’s a good thing, and boy, how clever or lucky they were to buy when they did. They also have only ever known prices to go up. The worst part is that our government is determined to make sure prices do only go up.

      • I put a response there, and then edited it, and it disappeared! I hate it when that happens.

        Anyway, what I was saying, Hugh, was that Deo is right about Australia. I commend the NZ govt for at least listening to the people. Our govt is still a long way off from that, pretending, at least in public, that there is no housing issue.

        Also, in the media over the past few weeks, almost every day an article has appeared claiming that we are not in any danger of a bubble. I mean, house prices in Sydney set to reach over $800K soon, but no chance of a bubble!

        My guess is that half of the Australian public aren’t even aware of the housing bubble. I am surprised at the ignorance of people when I talk with them about it – I find I have to explain everything from the beginning. And then their eyes start to glaze over….

  6. Is there anyone brave enough to sum the data and analyze all economic facts and policies during the last couple of decades and to come up with a TRUE picture of today global economy and its social structure and prospects?

    I am sure that this task needs a very brave person.

  7. I think they stretch the cloth to fit the suit a little too much.

    Consider they include exemption of family home for capital gains $14b; pension asset test $7b; and non taxation of net imputed rent $9.6b into a broad umbrella of benefits to the ‘wealthy’.

    • It is because it is something that someone who does not own a house cannot claim against their tax.

    • Tassie TomMEMBER

      Finally, (at this time), the last comment on the blog, and somebody points out that the “cloth has been stretched to fit the suit”. Well done!

      While I agree with the principles of the argument, there are some deficiencies in methodology which detract from its respectability. I will go through them in turn.

      Firstly, – CGT exemption, pension assets test exemption, and negative gearing – absolute rorts, no argument there.

      On the murky side of the argument however:

      1) Land tax exemption. True, but at the moment the only people who pay land tax are investors in residential, commercial, or industrial property. (I’m not sure if owner-occupiers of commercial and industrial land pay it or not). Residential owner-occupiers and agricultural land are exempt, so the majority of land value is not taxed anyway. Citing “land tax exemption” is, in a way, citing a tax that doesn’t exist. I guess their argument is that it is built into the tenants’ rents. I wonder what rate they are using? It is different for each landlord.

      2) Net imputed rent exemption. Yes, a farm owned in a company structure has recently had to pay tax on imputed rent on unoccupied but habitable buildings. However, it is a very long bow to draw that owner-occupiers are being propped up by the government because they don’t have to pay tax on income that they might have received if they were not living there.

      3) Stamp duty – no offset has been allowed for the owner-occupiers or investors that they have already paid tens of thousands of dollars that the renters haven’t paid. Council rates are also a tax.

      4) Rent is easier to deduct – 16% of your rented house is an office, 16% of your rent is tax-deducted. 16% of your owner-occupied house is an office – you can deduct 16% of your ongoing costs, but not interest (unless you want a CGT problem one day), and not the “imputed interest” or “opportunity cost” of your capital if you have little or no debt.

      It annoys me, because I totally agree with the principle of the argument, but they have “cooked the books” to make it all look better, and it loses its legitimacy in the process.