Why The Government Doesn't Care That You Can't Afford A Home
For State Governments, stamp duty in their capital cities are now in most cases 'rivers of gold'.
Well if you are sitting out there wondering when you will be ever able to purchase your own house, don’t think that this issue will be quickly resolved by the actions of our courageous politicians.
Unfortunately, after observing and researching housing markets and housing policy for the past 20 years, my conclusion is that the default position for many modern Australian politicians is to sound deeply concerned about housing affordability pressures but do nothing effective.
Sure, they state how very sympathetic they are about the housing position of people who aren’t home owners. Gladys Berejiklian, the NSW Premier, is a great case study. When first elected as the NSW Premier in 2017 she said improving housing affordability was one of her top priorities. (Back to Ms Berejiklian and her Government later. ) After you have provided your sympathetic statement, you then blame someone else for the problem and pick a strategy that will help boost your own position.
The reasons why federal politicians do this is not hard to fathom. It’s pretty simple election arithmetic. With so many homeowners in Australia cheering the price of housing up in Australia (about two thirds of Australian dwellings are occupied by people who own the dwelling), politicians do not want to deliver bad news to them by putting real downward pressure on house prices.
For State Governments, stamp duty in their capital cities are now in most cases 'rivers of gold'. This is mainly because of bracket creep. Apart from stamp duty rates for foreign buyers, the rates haven’t been changed for many years so the stamp duty rates that applied to a Vaucluse mansion in the 1980s are now applied to your ordinary house in Blacktown. What State Treasurer wants to give that up?
In NSW in 2017, the Government collected almost $9 billion worth of stamp duty. Politicians, however, want to be seen to be doing something -- so we have many enquiries, taskforces, working parties and a lot of blame shifting... but not much action.
Take the current favourite talking point for politicians -- the supply fix -- we need to build more houses! This is a great policy for a federal politician because they don’t control the supply levers to any large extent, the State Governments do.
State Government politicians also like it because they can blame local governments and also communities for resisting development. It also sounds good -- everyone is an economist now and more supply will help bring down prices -- it works in lots of markets so it will work in housing markets.
This is the point in the story where I would like you -- the reader -- to become a researcher. If you are in Sydney, Brisbane or Melbourne have a look around your city and notice the number of residential construction sites. There seems to be a lot of new supply out there but prices are still very expensive. Take Sydney as a case study, supply has been steadily growing since 2011. In the year up to the end of February in Sydney, we completed over 40,000 dwellings. This is the most dwellings we have ever completed in Sydney.
And what about the Reserve Bank?
Instead of putting their hands up and acknowledging the role of record low interest rates pushing up house prices, in a recent discussion paper they claimed that the increase in prices is a result of the Zoning effect constraining the supply of housing (i.e. blame the urban planning system).
They make the fairly weird claim that the planning system is the reason that land for apartment buildings is not free. I sort of figured it’s because the people who own that land are pretty keen to maximize their profits from being a land owner, but maybe I have missed something.
New supply is terribly important and we should build as much new stock as possible, but in a market with very strong demand pressures, supply on its own is not a great strategy. A key difference in the housing market is that new supply is only about 2 percent of the total housing market. It’s like trying to put a bushfire out with a garden hose.
To really make a difference we need to attack the problem at both ends. We need to reduce demand by changing the tax settings (i.e. negative gearing and the capital gains discount) to reduce the level of demand at the same time as we encourage new supply. We also need to make sure that as much as possible of the new stock is affordable.
Going back to the NSW government, their main strategy, like the Victorian Government, has been to provide stamp duty relief for first-home buyers. Whilst this measure, combined with investors finding it more difficult to get finance, has meant that more first-home owners have got into the market, it has also had the effect of pushing up house prices (first-home buyers have got more cash in their pocket and bid for longer at auctions).
And while the Government has been very active in trying to get more supply out the door they have done very little to focus on the more moderate end of the housing market. One obvious strategy here might be to dedicate a certain proportion of housing from development on Government land (say at least 20 percent or above, like many overseas cities).
A real housing strategy would need to address issues for home owners as well as renters. We do need to do something about house prices for first-home buyers but there are many Australians who will never get the opportunity to purchase a home -- long-term renters.
Our current renters have a very precarious existence compared to renters in other countries with very little stability. We have to turn our rental system from one which sees renting as a temporary tenure to one which respects the rights of renters and provides secure tenure and decent maintenance of dwellings.
We also need to divert some of the large windfall profits being gained by landowners as areas are upzoned (e.g. converted from industrial areas to high rise apartments) to cater for the strong demand for housing in our cities and dedicate them to the provision of ongoing secure rental housing. The new Greater Sydney Commission Plans for Sydney ask for 5-10 percent of dwellings in these areas to dedicated to affordable housing. This is a pretty small target compared to many other parts of the world, but it is a start.
So what can you do? I think to break the cycle of inaction we need to call governments out. When politicians say supply will fix the problem ask them how when it hasn’t worked yet. Ask them why Sydney’s housing is so expensive despite the city breaking its long-term housing supply record. And also send them a copy of the graph from Chapter 1 of any first-year economics text book showing that price is the result of the interaction of supply and demand.
If you are a first-home buyer ask your local Federal member why you have to compete with investors that the Government subsidizes heavily through the tax system. You could also ask State governments if they think housing supply is so important why have they stood by and let many traditional rental properties now used as accommodation for tourists through platforms like AirBnB pushing up rents. Hobart is the best/worst example of this in Australia. With the rise of AirBnB the vacancy rates for rental properties is the lowest in the nation and rents are rising at over 10 percent per annum.
The housing outcomes in Australia are not some dreadful accident, they are a result of groups of home owners and investors in State and Federal Government cabinets over Australia constructing a system that is geared towards making housing more expensive. Just try to imagine how different housing supply in Australia might be if we had a cabinet full of renters. The housing market is a classic case of what John Hewson recently called inter-generational theft.
If we want to fix it, we need to get on it.