The Politics of Housing: Locking us out of Affordable Solutions
The Politics of Housing: Locking us out of Affordable Solutions; Individual investment in housing wealth causing serious problems for non home owners and future generations
If I read (or have to write) another report that starts off with the words 'safe secure affordable housing is essential for good health, employment, education and overall wellbeing' I'm going to tear my hair out.
Not because it's not true, but because it's so self-evidently true that we shouldn't have to keep saying it over and over again. We should just be getting on with fixing our housing problems. So why aren't we?
Well, the trouble with housing policy is that housing politics is just so damn hard. What might seem like self-evident solutions to housing experts and academics will affect the wellbeing (perceived or otherwise) of over eight million Australian households - the vast majority of whom are home owners and have, on average, nearly half of their household wealth invested in their home.
When we talk about improving housing affordability, we're talking about slowing down house price growth and, with it, the growth of investments and wealth for almost seven out of every 10 households. That's a hard sell.
The problem is this individual investment in housing wealth is causing pretty serious problems for non home owners, and future generations.
Because the housing market is interlinked, the astronomical growth in house prices is locking future generations out of home ownership, driving up rents and linking households financial security (investment) to their physical security (housing), an inherently risky strategy if one takes a quick look at the United States.
The bigger picture is that while an individual home owner might gain in wealth, this craving for investing in housing actually reduces our overall economic prosperity.
We need to change some attitudes towards home ownership and renting, and to understand that housing is first and foremost shelter, something everyone needs.
Attitudes to the rental market also drive this national obsession with housing and home ownership. Nearly everyone has rented at some stage in their life and so many see it as a transitional tenure, something to be done until you settle in to a 'real' life of home ownership.
But tenure in Australia is changing, people are renting for longer and later into life, rates of home ownership are declining, and we may soon find ourselves with a growing proportion of lifelong renters, stuck in sub-standard conditions without security or certainty.
Another major obstacle is our current tax and transfer system, which favours home ownership and encourages over-investment in housing. By and large households receive more in tax breaks the older and wealthier they are and the more expensive their house is.
Investors in particular get perverse tax incentives that encourage them to borrow more than they can afford, deduct any losses they make from their income and then be taxed half on the profit they make from the sale of a property.
Over generous capital gains and negative gearing tax breaks mean that investors can outbid first home buyers who must rely on their income, and not the tax man, to service their mortgage. Unfortunately with 1.6 million investors claiming a tax deduction each year compared to 110,000 people buying their first home, their sheer numbers give them 95 per cent more voting power.
So rather than addressing these tax incentives and levelling the playing field, successive governments have bought off first home buyers with a $7,000 grant. This grant is universal and widely liked, but it doesn't actually help first home buyers to compete with the negatively geared investor, nor manage a mortgage six times their annual income. What it does is bid up the price of housing. When two first home buyers bid against each other they simply send the extra $7,000 straight into vendor's pockets.
While these incentives affect the way the housing market functions, there's a large section of the community who the housing market simply fails. This is because providing low cost rental housing isn't particularly profitable, and those 'market innovations' which make it profitable, like rooming houses, have social consequences that we should not accept. This is why government involvement in the low cost end of the housing market, through affordable housing programs is critical.
But it's expensive. It's expensive to build and run social housing, and policy settings around targeting tenancies and historical underfunding have made it more so. Currently the government is giving social housing providers (and State Housing Authorities) around the same amount of money that it was in 1995 and asking them to build exactly the same amount of housing.
The one off injection of $5.6 billion to build social housing in the Nation Building Stimulus package has certainly helped to address that decline. But a single shot of adrenaline is not enough to fix an obese patient after a heart attack. You need a plan for post-operative care, and the social housing system doesn't have one.
Sadly the national conversation around housing is dominated by investment speak and industry analysts, people whose interest is making money from housing, and that's the opposite of making housing affordable.
What is ultimately needed is for structural reforms to be made easier within the framework of a real funding plan, and a commitment to an affordable housing sector in the long term.
By viewing social investment in housing as non-negotiable as health and education spending we can begin to shift the politics of housing, so that governments invest in a housing system that works for everyone.
Sarah Toohey is Campaign Director of Australians for Affordable Housing.
Low-income Australians are being priced out of the private rental market in capital cities and mining boom towns, a welfare group says.
Anglicare Australia on Monday released a Rental Affordability Snapshot which examined rental rates on 65,000 properties advertised during a weekend in mid April.
The snapshot tested the affordability of rents for people - most Australians spend 30 per cent of their income on accommodation - on government payments or the minium wage.
Executive director Kasy Chambers told reporters in Canberra housing stress was a national crisis.
"In Perth, there is absolutely nothing available for anyone on a single income, and these results are largely replicated across all our capital cities," she said.
She said an assessment of 20,000 Sydney and Melbourne properties found only 40 that were suitable for low-income earners.
Anglicare wants housing stress to be put on the national agenda.
Ms Chambers said the federal government needs to consider reshaping negative gearing and tax treatment of the family home.
"We need to find the capital, by investing some of the trillions of dollars we have in superannuation into affordable housing, as is done in other parts of the world," she said.
Ms Chambers said Commonwealth rental assistance was not nimble enough to work across areas with high rents and demand.
She said mining towns were also feeling the pinch.
Families are going without doctors visits, dental treatment and car insurance and, in some cases, are cutting back on groceries to pay for rent, Ms Chambers said.
The writers are correct that housing is a thorny political issue and hard to solve. In the end everyone needs a house, and housing is easily the largest investment class. They are also correct that in Australia we aspire to own our own homes rather than rent. It's such a shame they seem to turn their brains and/or their honesty off once they get past that point.
The first questions that come up are:
1. Is Australia suffering a home ownership crisis? Is it true that home ownership in Australia is in some terminal decline? That should be an easy one to answer. And it is. 35 seconds of googling came up with a 2010 report from the ABS, the graph from which is below.
The most up-to-date number I could find from a non-spruiker source was actually the OECD which had Australia's rate of home ownership in 2011 at 69.5%. Another ABS site had the 2010 figure as 68%.
So over the past 40 years has the rate of home ownership in Australia has been remarkably stable, varying between 67% and 71%. 2011 was firmly in the middle of this range, even though you might expect that the rate would be dropping off a little, simply because people are marrying/forming permanent partnerships and starting families later in life. But it's not the case. Over the past 40 years and even over the last 10 years there is no real trend visible.
The fact that the rate of first-home-buyers in the total mortgage mix always seems to revert to the mean of about 20%, jogged around somewhat by government policy and interest rates at times is in broad agreement with this.
2. Is Australia really all that unusual in its rate of home ownership? ------------------------------------------------------------------------------------
Also pulled from the ABS website:
Gee. actually, there is no "normal" rate, although if there were a normal rate, Australia would be right in the middle of it.
3. Is Australia's Taxation system wrt Investment Property really out of whack with the rest of the world? ------------------------------------------------------------------------------------------------------------------------------------
The best summary I could find was below, sourced from an RBA discussion paper: rdp2006-12
Whoa! There is lots of variation here. Let's split into four main sections:
a) Tax deduction for home mortgage. This is allowed in very few countries. Personally, I think it is a poor policy, since it essentially allowing a tax deduction for consumption. Also, I suggest it would encourage people to overextend themselves in home purchase, and of course if you lose your job, your tax deduction goes out the window just when you need it most. CGT exemption for principle residence and perhaps other breaks not positively tied to your level of personal indebtedness would seem more prudent. It may be no coincidence that two of the worst property crashes in the world are going on right now in the US and the Netherlands.
b) Negative gearing. (Being able to offset a cashflow deficit from property against your other income.) Allowed in most places, but limited in some: i) The UK where it is verboten. End of story. ii) The US where you can do negative gearing only if renting places out is your primary way of making money. (Professional property investor). iii) France - allowed, but interest expense may not exceed gross rent. Actually, that sounds like prudent investing to me. Effectively limits tax-advantaged leverage ratio. iv) Switzerland and Netherlands - I didn't delve into these.
c) Capital Gains Tax -------------------------
This is an area with huge variation. The places that allow mortgage interst deduction on principal residence often seem to claw some of it back in CGT when you sell. Switzerland seems to have a tax regime that is tough on housing, regardless of purpose or ownership structure. CGT is levied on investment housing in the following countries: i) Australia and Canada - taxed at full marginal income tax rate, but only on 1/2 the capital gain (but no CPI adjustment on cost base is allowed.) ii) US. Taxed at 15% now, going up to 18% next year for properties held more than 5 years. iii) UK, where it is taxed at 28%. Used to allow some CPI depreciation on cost base, but not any longer. iv) Switzerland where you take it in the shorts, as with everything else.
d) Depreciation -------------------- Most places allow this. Canada does not allow it to push income for a property below zero. Actually, not sure about other places, but in Australia it is only "half" allowed, because any depreciation you claim is deducted from your cost base, meaning you pay more CGT down the road if you claim depreciation. In some cases you are actually better off not to claim depreciation.
My Summary (you are welcome to your own conclusions) ----------------------------------------------------------------------- In general, which of the places is most tax-friendly would depend on your circumstances. Germany and France are much more tax-friendly on housing, both have lower rates of hoe ownership than Australia, Germany much lower. The UK and Switzerland are probably least friendly to the investor. The UK has a somewhat higher rate of home ownership than Australia, but before 2008 the UK was arguably friendlier than Australia to the investor because of much lower CGT.
At any rate, Australia's CGT has gotten steadily higher over the years (nothing up to 1985, removed averaging and CPI cost basis adjustment while giving a 50% discount in 2001, making for a nett increase in CGT in 2001.)
The negative gearing debate -------------------------------------
In my opinion, in the long term, negative gearing makes little difference. In the short-term, disallowing it would temporarily drive down prices but not affect the long-term rate of growth of home prices. In the medium term it will have some rent-increasing effect as yields adjust. The fact that saving into an investment property no longer gets a short-term tax advantage will move some people to other asset classes and depress construction activity until rental yields replace the cashflow tax break. But it will never happen, because I think abolishing negative gearing will have little or no impact on the overall tax take, at the cost of lots of near-term pain and eventual disadvantage for the most vulnerable. In the end negative gearing works out as a rent subsidy.
Why do I think it will have little long term impact on the tax take? First let's look at the CGT effect.
CGT is levied on ((sales price) - (cost base))/2 at the full marginal rate. There is an established rules about whether an expense to do with an investment property (or any other business investment for that matter) affects the cost base or current income.
1. Purchase price - added to cost base and cannot be deducted from current year.
2. All purchase expenses like stamp duty, loan establishment fees, lawyer's fees EXCEPT interest expense. Added to cost base and no deductible.
3. Interest expense - deductible but not added to the cost base.
4. Repairs - deductible
5. Taxes other than stamp duty - deductible
6. Current expenses like body corp, insurance, etc. - deductible
7. Improvements. Added to cost base, not deductible.
8. Depreciation - this is not a cash flow, so it is a funny one. It is counted as an expense - so Deductible, but then SUBTRACTED from cost base.
Logically, if you do not allow interest to be deducted as a current expense, it would get added to the cost base and lower (probably wipe out) the eventual CGT. As a property investor, I could adjust to that.
If you said that for individual property investors interest expense was neither deductible nor able to be added to the cost base, then I would form a company and run the property as a separate business with the property as an asset.
If you disallowed interest as a deduction for companies, then all investment in the country would cease, except for investments that don't need finance to make them fly.
If you disallowed interest on residential properties for companies but not other interest, then I would structure the company as an entity that had initial paid-up capital and the property as assets, a zero-coupon loan with a huge balloon payment collateralised against the residence as a liability and wind up the company on sale.
If you think any change to the tax regime could stop interest expenses being claimed on tax by sophisticated investors without seriously impacting overall investment in the country you're nuts. What you could achieve is to drive the small investor out and make a lucrative business for big companies. I have lived in Germany, where home ownership is very low and investment properties for individuals are rare because rent controls and other tenant-friendly laws have driven the individuals out. There, the typical owner of investment properties has thousands of apartments and is known as a rent shark. In most cities it is *really* hard to get an apartment. While I was living in munich it was common for hundreds of people to apply for every apartment that came up for rent. Every year, you rent would go up by the maximum allowable amount regardless of CPI, but typically what would happen would be the rent would gradually fall behind the market over the years, and new renters would have to pay well above the market to get into a place. Of course landlords would spend *nothing* on the apartment while you were in it, so renters would do their own renovations at their own expense and most long-term tenants I knew had some form of litigation going against their landlord to try to force them to do essential repairs.
So I tend to like the Australian system which keeps the big companies out of the rental housing market. I also like it because it makes a class of asset which until now, and almost certainly in the future, which (a) encourages long-term saving and (b) has good risk-adjusted returns available to the little guy. It does mean that lots of Australians are over-invested in housing and underinvested in other asset classes which is probably not a good thing, but is a hell of a lot better than having it the other way around.
Back to those idiots -------------------------
At best the people who made the press releases are intellectualy lazy. A few minutes on Google amounts to more research than they have done. At worst, they are just plain dishonest.
The suggestion that negative only be made available what the housing has a low-income person in it is laughable. I can just see the conversation with a prospective tenant now.
"Show me your certificate of low-income-ness, or the rent will be $15/week higher." "Here You Go" "I think you might get behind on the rent, so application denied. NEEEEEXT!"
If you want to give people rent subsidies, then do it through Centrelink.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
The writers are correct that housing is a thorny political issue and hard to solve. In the end everyone needs a house, and housing is easily the largest investment class. They are also correct that in Australia we aspire to own our own homes rather than rent. It's such a shame they seem to turn their brains and/or their honesty off once they get past that point.
All land subdivisions have "developer contribution" costs in them. Every block of land is sold new with GST in it, when the house is built then every stick of timber and brick has a GST content.
He also pays substantial stamp duty on the transfer.
Therefore when a house is sold new, a buyer is looking at paying an extra 20% plus in total (rough estimate)
Fast forward 12 months, and the owner of that house decides to sell, and he wants all of his money back in the sale, so effectively the new owner pays all of those taxes, and a house built pre GST across the road then competes with pricing that includes GST and in some cases developer contributions that didn't exist when that land was subdivided. Those extra costs in the pricing have dragged up the values of all homes, not just the ones that actually contain those costs.
When we have an asset that is so heavily taxed as our homes, it can never be sold in the market at the same level as homes in other parts of the world that don't contain those tax levels. At the moment it is possible to buy almost new homes below replacement cost, but eventually the demand from an increasing population must put pressure on those prices, and force them back up again. For a while though some costs will be saved via lower cost building materials, trademans wages, and costs per lot in the greenfields buy price, but that can't last forever.
It's that simple. But google developer contributions, they vary in every state, as does stamp duty.
If we advertised a house as $250,000 plus taxes of $50,000 then we would have a better reference point when we compare our home prices with those overseas, but it isn't listed like that.
Of the 10,385 properties advertised for rent in the Sydney region on a weekend this month, only 25 were affordable and suitable for people on the age or disability pension or parenting payment.
Only one property was within the financial reach of a single person on the Newstart Allowance.
And, for a single parent with one child, not one flat or townhouse was affordable and appropriate even if they were prepared to move to Gosford, the Blue Mountains or Campbelltown.
The second annual survey by Anglicare Sydney of affordable rental properties in the greater Sydney region and Illawarra on April 13-14 reveals the extent of the rental crisis facing those on government benefits.
Even areas once considered good value for renters, such as Campbelltown, Macquarie Fields and Minto, had no affordable properties.
There was a single property - in Villawood - within 20 kilometres of the Sydney CBD that was affordable.
Grant Millard, chief executive officer of Anglicare Sydney, said the situation was appalling. ''But on top of that, the level of competition for those properties would be intense,'' he said.
''It's not just families on income support who would be trying to get them; typically these families would be less attractive tenants to a landlord."
For some reliant on social security benefits the best bet was the central coast, where nearly half the affordable properties were located.
But even here there was nothing for a single aged or disability pensioner, a single person on the Newstart Allowance, or a single parent with one child.
Anglicare defines affordable as a property which takes up less than 30 per cent of a household's income. Paying more is considered to put a household in "housing stress".
The writers are correct that housing is a thorny political issue and hard to solve. In the end everyone needs a house, and housing is easily the largest investment class. They are also correct that in Australia we aspire to own our own homes rather than rent. It's such a shame they seem to turn their brains and/or their honesty off once they get past that point.
Great post miw !
I put trolls and time wasters on my ignore list so if I don't respond to you, you are probably on it ....
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