Why builders should split from the HIA

ScreenHunter_01 Mar. 03 22.48

By Gavin R Putland, Research Officer at Prosper Australia

Eight days after SBS reported that Treasury and the Parliamentary Budget Office are working on limiting negative gearing to new homes (while grandfathering past acquisitions), and two days after Louis Christopher of SQM Research backed the story, the Housing [sic] Industry Association has released a “research note” under the title First Home Buyers: The Big Picture. The front page says in part:

Low FHB shares have also been attributed to changes in FHB grant regimes in many states, which have seen the grant for the purchase of existing homes being reduced or eliminated entirely…

If this diagnosis is correct, the obvious remedy is to do precisely what Treasury is contemplating: disallow negative gearing on future purchases of established homes, so that FHBs who don’t get grants don’t have to compete with negative gearers. Curiously, the HIA prefers a battery of alternative explanations, starting with:

A substantial amount of FHB demand was dragged forward due to improved grant incentives and concessions during and following the GFC;

and going on to blame the variation in the fraction of the population in the FHB age group (too slow to explain anything), labour market conditions (a mixed bag), first homes bought as investments (without mentioning negative gearing as a motive!), a rising incidence of parental help and inheritances supporting mortgage-free FHB purchases (honestly — I couldn’t make this up), and the conservatism of FHBs relative to non-FHBs and investors (as if nobody had been sucked in by the First Home Owners’ Boost).

If the reforms that confined grants to new homes were not implicated, there should not be any correlation between the timing of the reforms and the timing of the declines in FHB shares. But there is. The following graph from MacroBusiness shows the FHB share of housing financing commitments (excluding refinancing) in the five mainland states.

Graph

The two states without precipitous declines — WA and SA — were slow or half-hearted in reducing the grant for established homes: WA reduced it to $3000 from 25 September 2013, and SA reduced it to $5000 from 22 November 2012 to 30 June 2014 (when it is due to cease). In contrast, NSW terminated the grant for established homes from 1 October 2012, Qld from 11 October 2012, and Victoria from 1 July 2013 — with a correspondingly later decline in the FHB share.

Limiting grants to new homes caused the decline, and limiting negative gearing to new homes will fix it.

Among the HIA’s conclusions is this gem:

FHB confidence will grow as the housing market recovery becomes more consolidated…

And how do the geniuses at the HIA explain how higher prices will make the allegedly cautious FHBs more willing to buy? Two dot-points later comes the answer:

Strong price growth will lead to the accumulation of home equity — allowing increased parental support for home purchase by FHBs.

I kid you not. That’s what they said. We must not have cheaper homes enabling FHBs to get into the market without the help of property-owning parents. We must have more expensive homes so that property-owning parents can give their offspring a bigger unearned head-start over the offspring of their non-property-owning inferiors.

The penultimate paragraph warns:

The most likely impact of imposing penalties on investors is that fewer homes will be built.

Not if the penalty is limited to investment in established homes, so that investors need to build new homes in order to avoid the penalty!

The final paragraph is similarly elliptical:

Accordingly, the real challenge will be for policymakers to ensure… a strong supply of affordable housing… it is vital that policy allows for the provision of an adequate dwelling stock… Policy measures with respect to FHBs, however well intentioned, must ultimately be judged on their ability to support stronger flows of new dwelling supply…

All the more reason to tell property investors that future investments will not qualify for negative gearing unless they add to the supply of housing.

The HIA’s studied silence on this obvious remedy appears calculated to maximize demand-side pressure on prices and minimize infill construction, in order to drive up the values of big developers’ land banks — to the detriment not only of first home buyers, but also of those HIA members whose core business is the actual supply of housing. Smaller builders and developers — who cannot afford to land-bank and must therefore get on with building and developing — together with contractors, designers, kitchen and bathroom makers, and suppliers of materials and components, should be asking exactly what they get for their HIA membership and whether they would be better off breaking away.

 

Comments

    • “so that FHBs who don’t get grants don’t have to compete with negative gearers.”

      Oh but yes FHB’S will have to compete with NG’s because they will be both wanting the same block of land for their new shiny house, the only way this would work is to ramp up the release of land at the same time. The competing of land by the FHB and the NG would also (probably) have a knock on effect on established housing.

      • My words (quoted) refer to the market for established homes, not new homes.

        The comment seems to forget that:

        (i) Any restriction of negative gearing is an overall reduction in effective demand;

        (ii) To the extent that the proposed restriction, by default, shifts demand, it shifts demand towards that segment of the market which permits a supply-side response (construction); and

        (iii) Not all of that segment is tied up in the formal land-release process; consider vacant lots in established suburbs, and old properties that are ripe for redevelopment given the right incentives.

        Pleased to be reposted on MB.

  1. “studied silence” indeed.

    The HIA are asked for comment by the MSM every other day.

    Not once have they been asked why they oppose NG for new-builds only.

    Not once.

  2. In 1959 in the USA, as Levittown type developers were smashing the established land bankers, the National Association of Home Builders put out a propaganda documentary against “sprawl”:

    http://www.newgeography.com/content/001723-year-1959

    It’s called “institutional capture by vested interests”.

    And yes, builders should quit and set up a new organisation that DOES represent their interests, when stuff like this starts to happen.

    • PhilBest … Many thanks indeed for drawing that important article and National Association of Home Builders “Community Planning” propaganda to our attention. I comment on the article thread.

      Sadly … the HIA in Australia is playing the same game … the big losers being its general membership and the wider public. The HIA has been unfortunately the major industry association holding back progress on housing issues, as I explained years ago with “The Need For Clarity” …

      http://www.demographia.com/p-hia.pdf

      It is well past time the general membership of the HIA woke up.

  3. Isn’t there already a Master Builders Association that represents builder’s interests?

    What are there submissions/position on negative gearing for new builds only?

  4. I believe the MBA may have a different policy?
    Can anyone here provide any info or statements put out recently on MBA’s position on limiting NG to new builds only. This could encourage any HIA members on this site to change their allegiance. Let’s get it happening.

  5. Totally agree. I have a number of friends who are eco-builders and they understand that the problem is land cost. After the purchase of the land no one has any money left to produce quality buildings, or employ anything that might be more expensive in the short term for long term gains. Affordable land makes for better housing, expensive land makes for short cuts and badly designed and produced buildings.

    • +1 FF.

      If Australia had inexpensive land we could have more genuine choices, including building quality or providing cheap shelter so people can get on with their lives.

      Reforming property taxes is just the ticket. Remove the taxes on building and transactions (Stamp Duty) and put it on the land.

      It is called State Land Tax. It already exists and just has to be flattened and have the manifold exemptions removed. Probably possible entirely by regulation, so no pesky law changes.

      How about it, Premiers? You want solid building activity and good housing. You want the freedom and independence homeownership provides to the citizens you represent.

      Before you snort and turn to the key question – How do I get reelected, cos the people will hate it? – there is a genuine moral and economic high ground here. Our bad taxes impose significant deadweight costs on the economy. You can sell this.

  6. Hill Billy 55MEMBER

    On 4 Corners last night Mr Hockey was keen to lambast the car industry for their $1.1 Bil subsidy from the taxpayers, which was summarily withdrawn.

    As the Uncommercial loss provisions of the Tax Act restricts losses to be offset against future profits from such ventures, surely the Tax Deductibility of Negative Gearing is similarly a subsidy of Property Investors and should be removed so that any deductibility is only allowed against future profits, including any Capital Gains. Problem solved of too much wasted investment in uneconomic property ponzis.

  7. Thanks Gavin for a great article. I am an HIA member (I’m sorry to say) and had read the recent HIA article with much anger, and have been thinking of how to respond to it. Thanks to this site I have only in the last year become aware of the HIA’s deceit of it’s members and the general public, and have been forwarding articles from MB on to other Builders I know. I think there may be a bit of corruption creeping into the HIA in recent years?
    If we can make more HIA members and the general public more aware of what the HIA are doing this could be a pivotal point on the land cost issue.
    220,000 Australians accessed specialist homeless centres last year. This is a shocking figure that could be cut drastically if land was much cheaper. The homelessness issue is something that the politicians talk about year after year but do little about. The facts are that there are lots of builders out there, myself included, who could build cheap houses for the homeless if we could access cheap land.

  8. I agree that the HIA are a bunch of Morons.

    But, if you limit negative gearing to new homes only, thereby making 2nd hand homes unattractive to purchase(for investors), eventually property investors will work out that it doesn’t make sense to buy new properties as their resale value will decrease significantly as soon as they buy them. So eventually no investors will buy new properties either(believe it or not but property investors invest mostly for the prospect of capital gains, not for negative gearing benefits).

    I think a better option would be to remove the special building allowance (depreciation on the build value of the house) & limit the deductibility of the investment loans to 80% of the purchase price of the property for all properties.

    • What you talk about is not a problem, it is a beat-up. All the negative-gearers who chase capital gains can bugger off. They are not investors, they are speculators.

      They can be replaced by people who buy (build) houses to live in. Or real investors, who get housing built and then hold *for yield*.

  9. arescarti42MEMBER

    Anyone want to link this article to the HIA twitter page, or however it is done?