Open Letter to Glenn Stevens, Advisor to NSW Premier on Housing Affordability
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:
https://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, let’s help Mr Stevens and make a few suggestions for the issues on his ‘review’ list.
Housing Affordability: a message to Glenn Stevens, Advisor to Premier Berejiklian
Dear Glenn,
Here are 5 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 Federal Minister for Housing Affordability should be given powers on issues relating to land release and housing development. To end the Federal-State blame game, 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 inter-generational 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, an annual Housing Affordability Summit is required; 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. First Rung will support this event.
Here’s the link to the website. You can register now.
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: Australia's Future Tax System
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 in the media, and then ignored.
The Steven’s Review may meet the same fate.
Good Luck to you Glenn.
If you have suggestions for Glenn Stevens, please make a considered comment below…
References:
The Economist https://www.economist.com/news/leaders/21688856-worlds-young-are-oppressed-minority-unleash-them-young-gifted-and-held-back
OECD https://www.oecd.org/social/affordable-housing-database.htm
NSW State Revenue: https://www.treasury.nsw.gov.au/__data/assets/pdf_file/0013/11515/bp2_4.pdf
Federal & State Revenues: https://theconversation.com/factcheck-how-much-of-australias-tax-is-collected-by-states-and-territories-50457
Federal Government report on a ‘better tax system’: https://bettertax.gov.au/publications/discussion-paper/
RBA and CPI: https://www.macrobusiness.com.au/2011/09/how-the-cpi-hid-the-housing-bubble-2/
Founder/Organiser @ FinTech & Banking Awards/Summit & Podcaster
3 年March 2021: as the average home passes NZ$1m, and growing at 19% over the past 12 months, NZ PM tasks NZ Central Bank to track house price inflation: https://www.afr.com/policy/economy/by-targeting-house-prices-new-zealand-shows-the-way-20210315-p57ard
Joint MD Armillary Ltd - Chair of NZ’s Largest Truck Brand 2021;2022, & 2023
7 年But this ignores the value of intergenerational wealth. Most of the millenials parents and grandparents own 3,4,5 properties, according to this narrative. Surely, they will inherit these assets. If you tank property values now - surely that will just create the type of multi-generational crash that Australia borrowed and spent its way through during the GFC? Shouldn't we just accept that property was systemically undervalued in the lucky country for two or three generations? Perhaps the overvalued sentiment is just a point on cycle that's been playing out for decades? I agree that artificially incentivising speculation on a particular asset class with low yields is poor public policy, and that the supply side issues are real, but surely the real focus should be on the productive economy, not asset construction?
Good article Glen, but you left out one factor on the demand side of things - immigration. Over the past few decades the Federal Government has maintained an immigration intake level of 350 - 400,000 people every year. These are mostly skilled migrants - not refugees who make up less than 10 percent of that total - who settle in the large cities on the eastern seaboard. The upshot of this influx is that a new Canberra-sized city is needed every 2.5 to 3 years to house them all and almost the entire burden is on state governments.
There's nothing wrong with the current government distortions? https://www.domain.com.au/news/meet-daniel-walsh-the-26yearold-train-driver-with-3-million-worth-of-property-20170301-guluch/ https://www.domain.com.au/news/how-a-28yearold-investor-used-uber-to-help-him-buy-eight-properties-20161129-gsvd4b/
Investment | Business Transactions
7 年William