The Turnbull Government continues to give mixed messages about housing affordability, in the process showcasing why it does not understand the issue and has no genuine solutions to fix the problem.
Let’s begin with with the Coalition’s only real champion for housing affordability, John Alexander, who noted the following about negative gearing on ABC Television yesterday:
“If you get rid of negative gearing, you take away one of the foundations that creates the value of real estate, so you will crash the market”…
“Whatever you take away from the investor to cool the investor, you have to give to the home-buyer to empower the home-buyer and maintain stability in the market”…
Crash the market, hey? Wouldn’t that make housing more affordable?
And doesn’t this comment directly contradict those made by Scott Morrison in late January:
“In the absence of negative gearing here in the UK, guess what? They have the same housing affordability problem in London we have in Sydney.
“So [for Labor] to say [housing affordability problems are] the product of negative gearing is absurd when you have a non-negative gearing market here in London and a negatively geared market in Sydney facing the same issues…
So what is it? Would scrapping negative gearing have minimal affect on prices, or would it “crash the market”? The Coalition cannot have it both ways.
In any event, John Alexander went on to again spruik the following policy solutions:
With this in mind [Alexander] is keen to empower APRA to “calibrate” the market based on lending rules…
He has also revived the idea of allowing first-home-buyers to access their superannuation to purchase property, saying safeguard mechanisms could be included in any policy.
“The most important thing if you’re going to use super is to understand that the property bought with super remains the property of your superannuation,” he said. “If you sell it, the money goes straight back into your super.”
As I noted yesterday, APRA has failed miserably at implementing meaningful macro-prudential curbs on property investors. Its 10% investor loans ‘speed limit’ is quite frankly a joke, and APRA has shown zero willingness or inclination to tighten it, despite strong evidence that investor mortgage growth remains out of control, especially in the bubble epicentres of Sydney and Melbourne. So what makes Alexander believe APRA would act responsibly under his proposal?
Meanwhile, allowing first home buyers (FHBs) to access their superannuation to purchase property would be inflationary, and therefore self-defeating from a housing affordability viewpoint. This is because it would increase FHBs ability and willingness to pay, therefore would soon be capitalised into higher housing values. The Budget and people’s retirement savings would also be placed under increased strain for no apparent gain (other than to existing property owners, who benefit from higher values). Indeed, analysis in 2015 by PwC estimated that allowing home buyers to raid their superannuation to purchase their first homes could blow a $31 billion hole in the Federal Budget by 2049-50!
Funnily enough, Treasurer Scott Morrison admitted yesterday that demand-side measures aimed at stimulating FHB demand are self-defeating, thus effectively contradicting Alexander, noting the following with regards to the Victorian Government’s FHB stamp duty cuts:
“On the issue of stamp duty, I welcome it but at the end of the day if that just means that people just bid up more at the auction because they can borrow more because they don’t have to pay stamp duty, obviously that will just take prices in one direction.
He said the first homeowners grant, a $7000 grant introduced by the Howard government as part of the original GST compensation package, had had the same effect.
Instead, Morrison persisted with the claim that boosting supply is the only genuine solution to improve housing affordability:
“…the supply issues at end of day… is what drives up prices. If you only work on the demand side well that doesn’t actually change anything, you’ve got to get more houses built”…
Do-Nothing Malcolm agreed with his real estate treasurer:
“[Housing affordability] is a very big issue. Especially, even bigger issue in Sydney where I come from than it is here in Melbourne where it is a big issue as well. The most important thing that we need is more housing”…
“I know there are issues about tax and obviously stamp duty is a barrier to investment in housing but the tax and stamp duty and other issues are very relevant but, the biggest issue is supply. My city’s policy, our approach to planning, the way that we are working with governments, state governments, and conditioning federal government investment into cities in return for appropriate planning measures, that will deliver over time greater supply of housing.”
Actually idiots, basic economics tells us there are two sides to the housing equation: a demand-side and a supply-side.
If you implement a policy that raises (lowers) demand, it will raise (lower) prices and reduce (improve) affordability [other things equal].
And if you implement a policy that raises (lowers) supply, it will lower (raise) prices and increase (reduce) affordability [other things equal].
Therefore, choosing to maintain distortionary taxation policies that encourages speculative investment into established dwellings, such as negative gearing and the capital gains tax discount, will necessarily keep demand (house prices) higher than would otherwise be the case, thereby reducing housing affordability. But if you remove these distortions, affordability will necessarily improve.
Similarly, maintaining an immigration intake that is so far above historical norms (see next chart) will also keep demand (house prices) higher than would otherwise be the case, reducing housing affordability. But if you lower immigration to sensible and sustainable levels, then housing demand will necessarily decrease and affordability will improve.
This is why housing policy solutions are to be found on both the demand and supply sides, and should include things like:
- Slashing immigration to sensible and sustainable levels [reduces demand];
- Undertaking tax reforms like unwinding negative gearing and the CGT discount [reduces speculative demand];
- Tightening rules and enforcement on foreign ownership [reduces foreign demand];
- Extending anti-money laundering rules to real estate gatekeepers [reduces foreign demand]; and
- Providing the states with incentive payments to:
- undertake land-use and planning reforms [boosts supply];
- swap stamp duties for land taxes [boosts effective supply]; and
- reform rental tenancy laws to give greater security of tenure [reduces demand for home ownership].
The Turnbull Government’s motherhood statements on the need to boost supply, while maintaining the throttle on immigration and leaving the other demand-side levers wide open, adds nothing of substance to the housing affordability debate and is a recipe for failure.
