McKell half right on housing policy

By Leith van Onselen

Labor-aligned think tank, the McKell Institute, has launched a new report entitled Choosing Opportunity: A Policy Blueprint for a Fairer Australia, which argues that “housing affordability is the central economic issue facing future generations of working and middle class Australians” and calls for reforms to property tax settings in a bid to improve affordability.

Below are some of the key extracts pertaining to housing affordability:

…housing affordability is indeed a national issue, with a generation of inadequate policy foresight responsible for fostering an era of unaffordable accommodation nationwide, and particularly in Australia’s capital cities. Ensuring housing affordability is central to strengthening the middle class…

By reducing the disparity between housing prices and median incomes, working and middle class Australians will be able to contribute more to the economy overall…

Not only does the increasing expense of housing constrain individuals’ ability to afford non essential goods and services, the disruptive nature of the continued search for affordable housing has a significant impact on a family’s ability to settle into its environment, and increased housing mobility has a direct link with poorer education outcomes. Research has demonstrated that children in families forced to move because of unstable housing situations tend to have poorer educational outcomes…

Housing is becoming extremely unattainable for new home buyers. Existing arrangements are fundamentally inequitable – supply is not meeting demand, the younger generation are being increasingly entrenched in the rental market with no credible path to home ownership, and existing tax arrangements such as negative gearing are oriented towards existing home owners or property investors in higher income brackets. Reform to the housing market is therefore a key component of reorienting Australia’s economy towards a more equitable space…

While the reality is that poor public policy choices over the last several decades have led to the unsustainable state of housing affordability, fortunately, through the right public policy choices moving forward, the growth in house prices can be slower and affordable housing can once again be within reach of future generations.

The McKell Institute has made two substantial policy recommendations aimed at reducing the burden on Australian families associated with buying a new house: reforming negative gearing, and reforming stamp duty…

Reforming negative gearing policy is central to fostering greater housing affordability in the long term. Currently, negative gearing arrangements enable investors to claim losses on properties through the tax system, encouraging investment in existing housing stock over the investment in new properties. While negative gearing certainly has a place in the Australian economy, it has been poorly oriented in favour of property investors as opposed to new home buyers, or families who want to move home…

Stamp duty is a widely derided taxation on the purchase of property that makes up a substantial portion of state government revenues across Australia. The costs, however, are significant, and prohibit many new home buyers from being able to enter the housing market…

Accordingly, it is sensible to suggest that stamp duty must be reformed to enable new home buyers the chance to enter the market, while simultaneously providing ongoing, stable revenue for state governments…

While a complete stamp duty/land tax switch would be favourable for most home buyers, other options could be implemented that give consumers the choice between paying up front stamp duty or a longer term land tax. This report recommends further study into the option of a preferential home ownership taxation system, where home owners can opt in to either an up front payment of stamp duty, or agree to a longer term taxation on the value of their land to a comparable value. Such a measure would create a more equitable housing market for new home buyers in particular, and provide the same ongoing revenue predictability that state governments rely upon to deliver essential services.

These two key recommendations – reforming negative gearing, and reforming stamp duty across Australia – are essential reforms if housing affordability is to be seriously addressed in Australia. Not only will this benefit younger home buyers, it would also improve the budget bottom line for both state and federal governments and strengthen Australia’s economic standing overall…

Not a bad priority list. Although it does not go nearly far enough.

The biggest problem I see when it comes to housing policy is the separation of responsibilities and vertical fiscal imbalances between the Commonwealth and States.

The Commonwealth controls broad tax settings and immigration policy, whereas the states control land supply, planning and actual service delivery.

Accordingly, we have a dysfunctional situation at present whereby the Commonwealth has juiced housing demand by: 1) maintaining perverse tax rules (e.g. negative gearing and the CGT discount) that encourages excessive investor speculation into existing dwellings; and 2) maintaining very high levels of immigration.

Meanwhile, the cash-strapped states, who receive only a small share of the total tax take, have locked-up land supply, tightened planning, and under-invested in infrastructure partly because they cannot afford to fund the growth thrust upon them by the Commonwealth.

Accordingly, too few new housing lots are being produced at ever-rising prices:

The end result is a housing system that is failing because of too much demand pushing-up against supply-side barriers, leading to escalating housing costs (both prices and rents).

In addition to the taxation reforms highlighted by McKell, the federal government needs to take the lead on the supply-side, to ensure that the states are both willing and able to cope with the population expansion thrust upon them by the Commonwealth, so that they can deliver affordable housing supply connected by good infrastructure.

There are many ways to skin the housing cat.

The federal government could offer incentive payments to the states to free-up land supply, relax planning, and build housing-related infrastructure.

Again, it is the federal government that has decided to run a high immigration program, so the least it should do is provide the states – the ones primarily responsible for service delivery and infrastructure – with the means to cope with this growth.

Ultimately, the best way to overcome the states’ reluctance to boost supply is to ‘show them the money’ and offer them incentive payments in return for genuine supply-side reforms.

One option is for the federal government to pay the servicing and development costs of bringing urban land to market and then recover part or all of the cost from rates or taxes on the land over the next 20, 30, 40 or 50 years (explained here and here).

The commonwealth could fund it directly via a Commonwealth Land Tax (which existed between 1910 until 1953) or have the state government collect it as rates and remit the required amount back to the federal government (or bond holder).

Alternatively, if the federal government remains reluctant to fund such vital infrastructure, it could instead set up a Municipal Utility bond model (explained here and here), like the one operating in Houston Texas, and then let the growing self-managed superannuation fund (SMSF) sector do the funding. The returns will be secure if the rates/taxes are a first charge on the property, and the SMSF industry is begging for simple secure long term investments that generate a steady return. In any event, the model certainly beats the current one whereby SMSFs are having a punt with retirement savings on the housing bubble through bank stocks and the like.

These are just two possible solutions out of many. The important thing is that the federal government stops ignoring the whole supply-side issue and takes a genuine leadership role, as well as providing the states with funding for growth.

The bottom line is that Australia desperately needs genuine leadership from the federal government to drive supply-side reform and improve housing affordability for the growing population. The feds control the lions share of the country’s revenue base and population (immigration) policy. Therefore, they simply cannot continue to bury their head in the sand and blame the states.

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