HAROLD LEVIEN. Solving our Housing Problem.

Housing investors have largely crowded out first-home-buyers from the Sydney and Melbourne housing markets. The Coalition Government has not simply failed to address this problem; its policies have been the principal cause.  

Despite continuing productivity and per capita income increases over the past 70 years, housing in Sydney and Melbourne is far less affordable than in the 1950’s. Since 1985 median house prices have increased from three times median income to well over 12 times in Sydney and to over 10 times in Melbourne. In some middle class suburbs this ratio has risen to 30 times median income according to a recent ABC Four Corners program. Given current minimal wage growth current government policies are likely to exacerbate these ratios.

Since housing is the largest component in the living standards of the vast majority of families its declining affordability for first-home buyers and renters greatly reduces their living standards. 

Five government policies have created this problem. First, in the absence of significant fiscal stimulus to arrest growing unemployment, which will increase as vehicle manufacturing ceases over coming months, the Reserve Bank has attempted to stimulate the economy through repeated interest rate cuts. This has attracted very many housing investors seeking capital gain from rising house prices which housing investment induces.

Last year retired Reserve Bank Governor, Glenn Stevens, expressed concern over the effect of interest rate cuts and argued this was an ideal time for government borrowing for infrastructure spending. He realised that, as in Europe and the US, lowering interest rates has limited success in restoring economic growth since private sector expansion primarily depends on growth in aggregate demand.

There’s currently an overwhelming case for government borrowing to fund urgently needed infrastructure for public schools, universities, hospitals, and pre-schools and for restoring huge cuts in TAFE, expanding urban public transport and scientific research to cite a few critical areas. But such borrowing is against government policy.

Unless the Government rethinks this ideological objection to borrowing slow economic growth with rising unemployment is likely to continue. And low interest rates will perpetuate the housing crisis. In past years governments normally funded capital spending through borrowing. It’s certainly central to corporate capital spending. Yet the Federal Government is Australia’s largest “corporation”.

Second and third, the Government could phase-out tax advantages for housing investors through both negative gearing—which allows interest on borrowing to buy houses to be deducted from taxable income–and discounted tax on capital-gains when these houses are sold. These inducements predominantly accrue to higher income earners with many wealthy individuals paying little or no income tax through purchasing several houses while accumulating substantial capital gain.

These tax concessions both increase housing demand (and thus prices) and substantially cut government revenue. The Grattan Institute estimates the current annual cost to revenue from negative gearing is $5 billion and from capital gains tax discount on housing sales is $7 billion. This $12 billion is three times the annual expenditure cuts from the Turnbull Government abandoning the bulk of the Gonski schools’ funding program. Alternatively this revenue loss could annually build around 36,000 houses for low income-earners or rapidly house the estimated 100,000 homeless.

Despite claims negative gearing increases housing supply, statistics reveal the great majority of such housing investment has been in established housing. Labor’s current policy restricts future negative gearing to new housing.

Fourth, the Government could readily block the sale of housing to overseas residents accounting for over 20% of purchases in Sydney and Melbourne. This would help protect the interests of Australia’s first-home buyers over those of foreign investors.

Fifth, the Government could reduce the current rapid rate of population increase and display greater concern for local housing needs, town planning and the environment. Last year Australia’s population increased around 330,000 —including 180,000 net migration — which is almost equal to adding another Canberra.

Since Federation our governments have attempted to provide basic facilities where the market has failed the community. Thus governments provided basic and later improving educational and hospital facilities. In the current incomparably richer society with the failed housing markets in Sydney and Melbourne dominated by government-assisted housing investors, our national government has made it more difficult than ever for young families to purchase or rent the basic facility of housing. It has reversed its traditional role through supporting well-off housing investors rather than struggling first-home buyers and renters.

A National Housing Corporation

The Government could absolutely ensure the interests of first-home buyers and renters through establishing a National Housing Corporation (NHC) to construct affordable housing. As a statutory corporation it would operate in a similar way to the government corporations running Qantas and the Commonwealth Bank, before privatisation, which were completely independent of the budget. It would be essential to prevent sales to housing investors.

While the increased supply would likely reduce market prices the NHC could sell and rent housing well below current market prices both because it could borrow at lower interest rates to the private sector, because it could be established as a community service rather than as a profit-making enterprise and, very importantly, because its very operations would greatly reduce the attraction of housing investors. At a time when interest rates have rarely or never been lower borrowing costs to the NHC would be minimal.

Interest and administrative costs could be built into both sale prices and rental charges. The Government could, of course, use the budget to subsidise a proportion of these houses to further assist low income earners.

These policies would greatly reduce current housing stress– defined as mortgage repayment or rental cost exceeding 30% of gross household income –which has been steadily increasing. Our first Rental Affordability Index showed Australia is currently experiencing a rental affordability crisis with many low income families paying around 65% of income in rent in Sydney and Melbourne and up to 50% in other capital cities.

The NHC could be subject to statutory requirements for quality architecture and town planning. These factors are absent from much private development. It could also be required to consider location relating to public transport and employment opportunities. If complemented through establishing an Urban Development Authority this could eventually save State Governments billions of dollars in costs of new roads and expanded public transport designed primarily to move workers from their housing to workplace!

Since mortgage repayments and rent represent by far the largest item in low to middle income family budgets the NHC could make the single greatest contribution to reducing poverty.

Harold Levien is a freelance writer on political and economic issues. After graduating in economics he founded and edited an influential monthly review of current affairs, Voice, The Australian Independent Monthly. It was published for five years. He later taught economics. Since retirement he has written many articles on current political and economic issues for journals and websites.


John Laurence Menadue is the publisher of Pearls & Irritations. He has had a distinguished career both in the private sector and in the Public Service.

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2 Responses to HAROLD LEVIEN. Solving our Housing Problem.

  1. Avatar Peter Lynch says:

    A large part of the housing affordability problem is confined to the capital cities, especially the eastern ones. This is because the capital cities are growing rapidly. This, in turn, is because the cities are where nearly all migrants settle and also because of a drift of young work-seekers to the cities from failing country towns. Economic activity is greatest in the cities, including a burgeoning building industry and, consequently, that is where the jobs are. There is a feedback here that progressively widens the wealth gap between the big cities and the rest and which concentrates the housing affodability problem in those cities. Elsewhere, house prices have not risen greatly. This problem is not helped by the fact that our cities have only one CBD and have a geographical spread that is reaching the limit beyond which daily commuting to the centre ceases to be feasible. This is a vicious circle that must be broken and the only way it can be done is to spend big money to promote regional centres. Our governments have concentrated their infrastructure expenditure on city roads and rail. The need now is to provide faster and better links between the cities and the regional towns. This is the perfect time to build a very-fast train linking Melbourne to Sydney and on to Brisbane and including stops at a number of regionally important townships in between. It could be possible to live in Canberra or Albury/Wodonga and commute to work Sydney or Melbourne. We should also make a concerted effort to turn some existing suburbs located on ring roads into new alternative CBDs by enticing businesses to move there. If these reforms were implemented, we could make it a condition of residency that all new migrants, except those who arrive with definite employment promises, to spend a number of years, say five, living in a regional centre where they would be provided with a government subsidized job. The time has come to return to the de-centralisation policies of yesteryear.

  2. Avatar derrida derider says:

    “Since 1985 median house prices have increased from three times median income to well over 12 times in Sydney …”

    Wrong metric. Interest rates in 1985 were about triple what they are now – what matters for affordability is the repayments on a mortgage, not just the size of it. To the extent that the price rises are the product of low interest rates rather than other factors they are wholly benign from the point of view of affordability.

    And while getting rid of negative gearing will initially bring down the price of houses it won’t make them more affordable in the longer run – on the contrary, by limiting the financing of new housing it will contract housing supply. Certainly there is a case for limiting negative gearing precisely to encourage investors to invest in other things – but the whole point of that is to have fewer, not more, houses being built.

    Taking the truly stupid money being paid in the glitzier suburbs of Sydney and Melbourne as representative of Australian housing is a mistake anyway. As the real cost of construction has fallen quite a lot since the 1950s and land is not scarce in other parts of the country we can fairly safely say the real cost of housing has fallen in most of Australia since the 1950s, at least on a quality-adjusted basis. The Sydney /Melbourne apartment boom and bust in particular will burn old investors and their banks (both often foreign), not young workers.

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