Public hearings for the Senate Inquiry into housing affordability got underway in Canberra today. The Inquiry is due to report by June 16. The first day of hearings included evidence from people such as the newly expanded Housing section in the Department of Families, the Master Builders’ Association, the Planning Institute, the Urban Development Institute, Housing Industry Association, NATSEM, and Treasury. Submissions and the transcripts of hearings can be read by following this link.
The housing affordability crisis is serious and long-standing. There’s no doubt it is seriously biting many people. It was reported that “housing affordability and health were the topics most asked about” when Kevin Rudd held a community cabinet meeting in Narangba, which is in the middle of a major growth area on Brisbane’s northern outskirts.
Many people – including me – have their favoured one or two key actions they feel will make a big difference, but in reality, the solution will have to be multi-faceted to be effective. It’s not just going to be a choice between reducing fees such as stamp duty, releasing more land or trying to reduce interest rates. Last night’s 4 Corners program about dodgy lending practices by financial institutions adds another contemporary element to be considered, but there are many components of the problem which have long been ignored.
As this article in The Age a month ago reminded us, “the average Australian family can no longer afford the average home mortgage, according to new figures that paint a devastating picture of how unaffordable housing has become in capital cities like Melbourne.”
A recent piece by Professors Kath Hulse and Terry Burke from the Institute of Social Research pointed out that “recent research by Associate Professor Judith Yates and Dr Vivienne Milligan for the Australian Housing and Research Institute suggests we do not have a short-term cyclical problem — we have a more fundamental structural problem that began about 1970.”
Yates and Milligan show that the “deposit gap” for full-time workers on average earnings buying a median-priced house has been trending upwards for almost four decades, notwithstanding cyclical changes in real estate prices.
If we have a long-term problem and not a cyclical one, what sort of solutions should we be looking at? How can we go beyond some of the measures offered by Canberra, such as release of government land, funding for infrastructure to encourage new supply, and a scheme to attract institutional investment in affordable rental housing?
Let’s start with tax. Many people have made sizeable capital gains on their homes which they did nothing to earn, apart from being in the right place at the right time, and it is untaxed. If introducing at least part taxation of capital gains from home ownership is taboo, let’s think about turning stamp duty into something more sensible. Stamp duty at current levels is not really a tax on a real estate purchase transaction anyway. Why not levy it on sale when it could operate as a de facto capital gains tax and work out a sensible graduated rate.
Then let’s have a look at negative gearing, which is essentially applied to turnover of existing housing and arguably has added to competition among house buyers and helped inflate prices. This could be restructured to send signals about additions to supply with preferential rates for those prepared to invest in new housing.
Negative gearing seems to be the great untouchable as far as politicians are concerned, but I will be interested to see what the Senate Inquiry uncovers in regards to evidence about the positive value that this expensive tax break has on housing availability and affordability.
Writing on his blog, Canberra Times economist Peter Martin has called negative gearing, when combined with the 1999 changes which halved capital gains tax, as “a rort crying out for reform.”
Why bother earning money by producing something when you could borrow to the hilt to buy a rental property, make sure that your repayments exceeded your income from rent, cut the tax you paid on your other income along the way, and then sell the property for a very-lightly-taxed capital gain?