With only a month to go to the federal budget, the news that Sydney’s median dwelling prices rose by 18.9% in the 12 months to March is sobering. It is surely enough to jolt the Turnbull government into finally adopting bold measures to curb speculative demand in the housing market. Calls to reform negative gearing and/or the overly generous 50% CGT discount are coming thick and fast. David Murray is the latest heavyweight to add to these calls. The Coalition ignores them at its political peril.
Just released CoreLogic data reveals that in the 12 months to 31 March 2017 the median price of Sydney’s and Melbourne’s dwellings rose by a staggering 18.9% and 15.9% respectively. Canberra and Hobart also saw double digit growth at 12.8% and 10.2%. Brisbane and Adelaide saw modest rises of less than 4%. The rise for all capital cities combined was 12.9%. Only Perth and Darwin fell over the period.
Houses versus apartments
Prices for houses rose on average more than apartments, particularly in markets where there has been strong growth in the supply of new apartments – with associated fears of an oversupply.
Melbourne is the prime example of this trend, with 17.2% growth in houses prices against 5.2% for apartments. Writing in the AFR, HSBC economist Paul Bloxham argues that Melbourne’s experience proves it is supply that makes the difference. However, Sydney has also seen a boom in the supply of new apartments, yet Sydney’s differential in growth between houses and apartments (19.7% versus 15.3%) is not nearly as stark as Melbourne’s.
In any event, some commentators have questioned whether the apartment boom is supplying the right type of product in the right places to satisfy the range of demographic needs in cities like Sydney and Melbourne, not to mention whether apartments are affordable in absolute terms.
The lack of synchronicity in Australia’s different housing markets is not surprising. It is a stark reminder that interest rates are a blunt tool when it is necessary to cool one geographic market but not another, or one sector of the economy and not others. The RBA dare not raise rates while inflation and labor market conditions remain subdued.
Alarming levels of household debt
Historically low mortgage interest rates, coupled with speculation inducing tax concessions such as negative gearing and the 50% CGT discount, continue to fuel our addiction to debt – or more specifically mortgage debt.
At some 120% of GDP, aggregate Australian household debt tops almost all other developed countries. Alarmed by the risk that this mountain of household debt poses to our financial system, as and when the bubble is pricked and the music stops, the RBA and APRA are turning to macroprudential controls. Their latest initiative is to rein in the volume of interest only loans to investors.
At the same time, corporate watchdog ASIC is scrutinizing the care with which lenders and mortgage brokers assess their borrowers’ capacity to service their loans, allowing a buffer for some inevitable upward future movement in interest rates.
With monetary policy largely on hold, and macroprudential controls only a modest hurdle for determined property speculators, the Federal government must use the May budget to do more to dampen speculative demand in the housing market.
Bipartisan fiscal reform
Reform of negative gearing and/or the overly generous CGT discount is an obvious tool at the government’s disposal. Not only would it cool speculation and thereby house price growth, it would also make a significant contribution to budget repair. And all this without adversely affecting the federal government’s ability to deliver mainstream services such as health, education and welfare.
The fact that Labor supports reform of negative gearing is not a good reason for the Coalition to reject it. This is a great opportunity for some sensible bipartisanship where both major parties put the interests of the nation before political point scoring. This could be an easy win for the beleaguered Turnbull government.
[P&I is currently pulling together a series of blogs focused on different aspects of the housing affordability crisis, including those described above. These blogs, by a range of well-known and highly respected experts in the field, are due to be published on and from 1 May. P&I has in recent months already featured many blog posts on housing affordability.]
Oliver Frankel is a former corporate finance and M&A lawyer, who has spent the second half of his career in finance, investment and management. Most recently, he has taken a strong interest in how to address the affordable housing crisis.