Wherever you go in Australia to visit friends and family, the conversation very soon turns to the scarcity and high cost of rental housing. The topic will then quickly shift to the ever-rising cost of houses and why parents worry about their adult kids taking on seven-figure mortgages. As residential property analyst Michael Matusik recently said, it comes down to the Bank of Mum and Dad.
Few cities or towns have escaped the 20% rise in residential real estate prices (for the year to September) or the inevitable rental hikes that followed. Stories that circulate about landlords taking advantage and tenants deciding they’d be better off sleeping in their cars are not uncommon. Check in with any emergency housing agency and they will tell you things are as tough as they have ever been.
AMP Capital chief economist Shane Oliver says that while housing affordability has always been an issue in Australia, it has moved from a periodic cyclical concern to a chronic problem.
“The 20% rise in prices over the last year has put the spotlight on the issue again. With the surge in house prices since the 1990s has come a surge in debt which brings with it the risk of financial instability should something go wrong in the ability of borrowers to service that debt.”
Oliver said the gains have been driven by record low mortgage rates, buyer incentives, a tight jobs market, a desire for more home space as a result of the pandemic and working from home, numerous government home buyer incentives, the “fear of missing out” and lower than normal listings. This has pushed average prices to record highs and real house prices to 23% above their long-term trend.
Oliver says the average capital city dwelling price rose 200% over the past 20 years, compared to an 82% rise in wages. The disparity has become more telling in the last 10 years with dwelling prices increasing by 58% and wages rising by only 26%.
The popular wisdom, if your parents taught you such things, was to spend no more than a quarter of your gross household income on housing. Over the decades, this figure has risen to 33% and in the major cities has peaked at 50%.
As we are now in pre-election mode, it’s appropriate to mention the Affordable Housing Party, a single-issue party which is on a membership drive to avert the risk of de-registration. Led by Andrew Potts, the party had its first tilt at Federal politics in 2017, fielding a candidate in the Bennelong By-Election.
The party’s policies include phasing out negative gearing, ending the capital gains discount on investment properties, stopping foreign investment in Australian property, taxing investment properties which are left empty and cracking down on full-time AirBnB operators.
Radical? Yes, but the problem needs some radical thinking before we end up with 200,000 people couch surfing and sleeping in their cars.
The AHP’s research on the housing sector focuses on negative gearing, which means the cost of owning an asset exceeds profits, resulting in investors claiming this loss to reduce other taxable income.
As the research suggests, one ought not to expect the Federal Government (or any government), to shut the scheme down. As of April 2017, Federal MPs and Senators owned a total of 289 investment properties.
This could be a good time to bust a few myths about negative gearing, Tax Office statistics from 2017 show that 64% of the 2.2 million people who own investment housing have an annual income of less than $80,000. This seems to scuttle the argument that only the wealthy benefit from investment housing. Less than 10% of Australia’s 2.2 million property investors earn more than $180,000 a year. Likewise, 71% of investors own only one home, with 19% owning two and 10% owning three or more houses.
Labor Leader Anthony Albanese upset some of the affordable housing campaigners in July when he abandoned pledges to impose restrictions on negative gearing. The opposition went to the 2016 and 2019 elections promising to halve the 50% deduction on capital gains and limit negative gearing to new properties only.
National Shelter chief executive Adrian Pisarski said by ditching its commitment to reforming negative gearing, Labor had “abandoned” would-be home-owners and low-income households wanting to buy homes.
“It took 15 years of campaigning by many to get the ALP to find a spine on CGT and negative gearing and commit to helping reduce house price inflation,” Mr Pisarski told the SMH at the time. “This is a sad day for affordable housing.”
In May Mr Albanese launched the Opposition’s $10 billion Housing Australia Future Fund. The fund would build social and affordable housing and create thousands of jobs now and in the long term, he said.
Annual investment returns from the Housing Australia Future Fund will be transferred to the National Housing Finance and Investment Corporation (NHFIC) to pay for social and affordable housing projects.
Over the first five years, the investment returns would allow the building of 20,000 social housing properties, 4,000 of which would be allocated for women and children fleeing domestic and family violence and older women facing homelessness.
Residential property analyst Michael Matusik has a few ideas to fix housing affordability. He says part of the problem is the focus on new builds rather than the existing market.
Matusik-style reforms would include removing negative gearing (a policy set when interest rates were sky high) and charging stamp duties at a flat $2,000 per transaction.
Matusik suggests a 20% tax on all property transactions – including owner stock if sold within, say, three years. This would stop ‘flipping’ (buying a house, renovating it and selling again within a short period of time) which is a major driver of prices. The government should limit foreign buyers to new dwellings and they must also have a 50% Australian business partner who pays 20% tax. These new rules would also include measures to stop developers land-banking.
“If they don’t start building the project within five years, they lose development approval. After 10 years, if there is no action the site is sold underneath them. In short, you cannot buy a home (new or existing) unless you have an Australian passport and pay 20% tax. No Passport no buy.”
As for new housing, Matusik says all housing related incentives should be removed because they distort the housing/building cycle. He also suggests that greenfield developments be required to provide minimum levels of community infrastructure set as targets. No doubt he will extrapolate on these ideas in a future Matusik Missive.
More radical ideas from Gwyn Hooper, writing for a Byron Bay newspaper (the median house price in Byron is $2.8 million (units $1m):
Under Hooper’s affordable development plan, the Federal and State governments would provide finance and free land. Local Government’s role would be to manage the buildings and tenants and waive its usual development fees.
“The tenants would have a secure tenancy, pay an affordable rent (based on income), and would importantly be able to live and bring up their families without financial stress – an issue that can cause family breakdowns that only compound these issues.”
As these examples suggest, this issue needs to be de-politicised and brought out into the sunlight with an ‘open to new ideas’ sign attached.
Written in the comfort of my freehold home, ameliorating some of my baby boomer guilt, I think.
Last week: People who lived in the UK for more than six months between 1980 and 1996 are prohibited from donating blood because of Mad Cow disease.