Housing Affordability: change IS possible, here’s the plan

Glen Frost
Jul 10, 2017 · 7 min read

A spectre is haunting our nation — the spectre of declining home ownership and rising rents due to housing affordability.

Australia is now the ninth most unaffordable country for housing in the OECD– that’s up from number 39 — according to OECD figures published in December 2016. In Sydney and Melbourne the numbers are even worse! Sydney ranks second to Hong Kong, and Melbourne ranks sixth according to international housing affordability think tank, Demographia.

An article in The Australian Financial Review, the nation’s premier business publication (9/2/2017, subscription required) narrowed in on the tax incentives in Australia: “An OECD working paper accompanying the figures makes the point that coherent policies are needed to rein in the lack of affordability that threatens to become an economic and social problem. In particular, the paper says tax breaks for home owners — such as negative gearing — push prices higher as they encourage investment in that asset class by higher-income groups, to the detriment of first home buyers and lower income earners.

An article in The Economist (23rd January 2016) stated the key issue: “Rents and home prices … have far outpaced incomes.”

What is the outcome of two decades of house price inflation?

Australia now has a Property Class System. Here are the OECD home ownership figures:

Australia — share of households; data from OECD 2014

Own outright 32.2 %

Own with mortgage 31 %

Rent at market price on private rental market 31.3 %

Rent at reduced/subsidised price —

Other 5.8 %

You can review the Affordable Housing Database published by the OECD and European Union:

http://www.oecd.org/social/affordable-housing-database.htm

What are the causes of Australia’s Property Class System?

We all see the problem. But why is the debate over the solution so confusing?

Let’s take a moment to look at house prices — price is an outcome– it is a function of supply and demand — basic economics — the challenge is to look at what makes up supply and the demand. Supply side housing issues are mostly the responsibility of the States and Local Government (land release, housing approvals, taxes on property sales), and the ‘demand side’ for housing is mostly under Federal control (income tax, capital controls, APRA regulation, tax deductions for investment properties). An additional and powerful ‘demand side’ factor influencing house prices is interest rates, which are not controlled by Federal Government anymore; these are set via an independent central bank, The Reserve Bank of Australia — more on this below. The Feds blame the States, the States blame the Feds, and on and on it goes.

This ‘blame game’ on housing affordability has gone on for two decades. House prices are now so unaffordable, and the call for action is getting louder and louder, we’re close to a ‘tipping point’ — the point when something has to change. Our politicians are worried. The Premier of NSW recently appointed former Governor of the Reserve Bank of Australia, Glenn Stevens, to head a review into housing affordability. So, what can be done to make housing affordable?

Housing Affordability: what can be done?

Here are 5 immediate suggestions for what’s got to change to make housing more affordable:

First: Official statistics need to change: the RBA needs to include house price changes in the inflation statistics

You’ve heard of ‘Lies, damned Lies and Statistics’ — well here’s the big problem: house price inflation is NOT included in the official RBA inflation index … the RBA says inflation is between 2–3% — this is rubbish. We know the cost of housing has been increasing by 10–20% per year, and if house prices were included in the RBA inflation index, then inflation would be well above the 2–3% target range — and that would force the RBA to act on rising house prices to bring inflation down.

Why is this important? Well it’s not like having somewhere to live is optional, right? If we look at Maslow’s hierarchy of needs — the cost of food, water and shelter are all basic needs of every human being and therefore should be included in the definition of the cost of living, and thus the definition of “real” inflation; ie how these costs change over time.

The only effective tool the RBA has to influence the economy is interest rates. Now do you see why the NSW Premier appointed the former Governor of the RBA, Glenn Stevens, to review housing affordability?

You may recall that the two key issues leading to the Global Financial Crisis of 2007/8 was both the amount of debt being lent to people who couldn’t afford to repay it, and the ratings agencies who didn’t rate this toxic debt properly. Bad ratings led to bad decisions — people invested in the debt thinking it was ‘investment grade’ but later found out it was sub-prime junk. Watch the film ‘The Big Short’ if you’re not sure how bad and false statistics impact financial decision making https://en.wikipedia.org/wiki/The_Big_Short_(film)

Bad statistics lead to bad decisions. Make sure the statistics reflect reality.

Think of the RBA (and their inflation index) as the “ratings agency of the economy”

Second: We need a Minister for Housing Affordability at State and Federal Levels

Housing is a significant part of the Australian economy and one that impacts the lives of all Australians, yet there is no dedicated position in government that is responsible and accountable. Although there have been many working groups, committees and white papers written on this subject over the past decade very little, if any, real change has occurred.

A Minister for Housing Affordability should be given powers on issues relating to land release and housing development. We need to ensure supply side certainty, and supply side liquidity for the housing market if we are going to resolve these complex issues and deal with the intergenerational disparity that exists today.

Third: People with empty houses should be encouraged to sell them

The same OECD report states 10% of urban dwellings in Australia are vacant (and it’s 20% in regional Australia) — importantly for Australia, 90% of total dwellings are in urban areas — that’s far too high and takes housing stock from the market, reducing supply — Government should act on this ASAP. At the moment there is an incentive for the wealthy to leave properties empty as they can claim a larger tax deduction, which is ridiculous. If there is no intention to rent out an investment property then this incentive should be reduced or removed to encourage behaviour that benefits society by increasing supply.

Fourth: We need an annual debate on housing affordability

To ensure a fair and open debate on how Australia can transition to an affordable housing market, I created an annual Housing Affordability Summit; we need to get the issues that impact house prices on the agenda, and review progress every year. The summit should of course cover supply side and demand side issues in the housing sector, the role of the RBA in setting interest rates, and the roles of the public and private sectors in finding solutions.

Here’s the link to the website: http://thehousingaffordabilitysummit.com/

Fifth: The tax system has to change

Why not use the tax system to help make it easier for people to own their first home, rather than having a tax system that benefits people who own multiple investment properties? There could be a limit placed on the amount of properties any one individual can claim against their income tax for example.

This is important as Income tax for Individuals makes up 40% of Federal Government tax revenue. Federal Government collects 80% of the tax in Australia, with State and Local Government collecting 20% — the Feds then give cash to the States for services the States provide (education, healthcare, transport etc).

State taxes for conveyance duty on the transfer of property are approx $16–20 billion, or approx 4% of the total tax take — however, transfer duty can vary significantly from year to year, as it is affected by fluctuations in the volume of property transfers and variations in house prices — meaning a housing boom massively boosts this revenue for the States — ironically making State Governments very happy with booming house prices. According to the NSW Treasury Report: “Annual changes in transfer duty have ranged from minus 30 per cent to plus 97 per cent in the last 20 years”

The tax system in Australia is too complex, it needs to be simplified and more importantly it needs to be fairer; taxation is the subject of previous reports, such as ‘The Henry Review’ — summary here: https://taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/publications/papers/Final_Report_Part_1/executive_summary.htm -

The challenge is that reports such as The Henry Review are very well researched and very well written, they contain excellent policy suggestions; they are released and immediately fought over by our politicians and lobbyists, creating an intense short term debate, and then ignored.

If lobbyists and politicians are the problem, we must change the politicians — because we can change that part. There will always be (well funded) lobbyists.

References:

The Economist http://www.economist.com/news/leaders/21688856-worlds-young-are-oppressed-minority-unleash-them-young-gifted-and-held-back

OECD http://www.oecd.org/social/affordable-housing-database.htm

NSW State Revenue: http://www.treasury.nsw.gov.au/__data/assets/pdf_file/0013/11515/bp2_4.pdf

Federal & State Revenues: http://theconversation.com/factcheck-how-much-of-australias-tax-is-collected-by-states-and-territories-50457

AFR article housing affordability: http://www.afr.com/real-estate/affordability-concerns-australian-housing-costs-surge-in-oecd-ranking-20170209-gu91rk?et_cid=29065089&et_rid=1925780572&Channel=Email&EmailTypeCode=&LinkName=http%3a%2f%2fwww.afr.com%2freal-estate%2faffordability-concerns-australian-housing-costs-surge-in-oecd-ranking-20170209-gu91rk&Email_name=MW502-09&Day_Sent=09022017#ixzz4YR4TJbrC

Federal Government report on a ‘better tax system’: http://bettertax.gov.au/publications/discussion-paper/

RBA and CPI: http://www.macrobusiness.com.au/2011/09/how-the-cpi-hid-the-housing-bubble-2/

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade