Why Australia urgently needs a housing debate

It’s always refreshing to read an intelligent report, so when the Centre for Independent Studies released Eight Housing Affordability Myths by Dr Stephen Kirchner, we finally got to see why Australia’s housing debate is long overdue.

The only problem that comes from such a precise paper is that it will require government intervention which, as most would agree, is where the problems start. They just don’t get it – if they did, we would not have the glaring problems that we see today. Some of the interesting points raised are:

• Housing consumption and investment are both taxed and subsidised by all levels of government. The net effect of these taxes and subsidies on housing affordability is difficult to determine as it depends on the benchmarks used to assess what is taxed and what is subsidised.
• Housing affordability is a relative rather than an absolute concept and there is no unique way of measuring housing affordability.
• Much commentary on housing markets focuses on dramatic, ‘short-term’ changes in house prices, failing to put these changes into ‘long-term’ context.
• The supply of new land for housing has declined over the last decade, with the average number of lots produced in the five largest capital cities declining by 21%.
• The long-run increase in the price of new land for housing is indicative of the failure of state governments to increase land supply to accommodate rising demand for new housing.
• A fundamental principle of economics is that if you tax something more heavily you will get less of it. This principle is well understood in relation to markets in goods and services, but it is often forgotten in relation to housing.

Some will argue that today, we are seeing two very clear markets; namely the principal place of residence and the investment market which in Melbourne and Sydney has gone berserk.

More confusing, is that we keep reading reports that consumer confidence is in a downward spiral even though investors are in an absolute feeding frenzy for off the plan properties and to such an extent, that they will pay over and above the asking prices.

Now let’s bring out those conspiracy theories. It is clear that since the global financial crisis (GFC) that the mum and dad investors have stayed well clear of the share market and will continue to do so simply because they don’t trust it. This massive investor shift is now driving property values upwards and creating an unprecedented financial burden on the federal government in terms of negative gearing subsidies and Australia is just one of a few developed countries that allows negative gearing.

Today, 1.2 million negatively gear with the Australian Tax Office statistics revealing that property investors claimed $13.2 billion in losses in 2010/11 which was up from $10.1 billion the year before.

Given the huge run on investment property over the last few years it will be frightening to see what the negative gearing figures are for 2012/13 and 2013/14. Why negative gearing is Australia’s biggest policy failure – “It is difficult to find a government policy that has been less successful at meeting its objectives than negative gearing on residential property. But unfortunately that is the nature of housing policy in Australia, where sound policies are ignored in favour of policies that encourage speculation, reduce home ownership and redistribute wealth towards the already affluent.”

Negative gearing by property investors reduced personal income tax revenue in Australia by $600 million in the 2001-02 tax year, $3.9 billion in 2004-05 and $13.2 billion in 2010-11 – so this itself leaves a pretty good clue as to how popular it has become. Negative gearing was introduced back in July 1985 and many argue that today, it is no longer relevant. Investors have taken the first home buyers out of the market and they can’t compete as it is not a level playing field.

Then you have the foreign investors where an inquiry is currently underway, although the only way to really see what is happening is to extrapolate the relevant stamp duty records and cross pollinate this data – every sale in Australia pays stamp duty although for some strange reason this point has been missed by the inquiry. This data is readily available – although I doubt it will ever see the light of day.

So the debate should be “what benefit is negative gearing to the Australian economy when nearly all the other advanced economies don’t permit it”. Australian property markets would be decimated if it was abolished and would take the banks with them given the significant borrowings on each investment property which are crucial to maximise the negative gearing subsidies.

When the government brought in the GST in July 2000, this immediately brought about the decline of property developers as they had to pay the 10% GST on the construction costs. Maybe a possible answer is to remove the GST on construction, to see more construction which will increase employment and off-set this by scaling back negative gearing subsidies. In the long-term, this would lower property prices more particularly in the property investment sector. Or, do you place a limit on the number of investment properties allowed that can qualify for negative gearing subsidies?

Now we need to see a politician brave to start this conversation. Better still the Abbott government might even decide that they now need a Housing Minister.