The new Turnbull Coalition has the opportunity to rewrite the economic policy, or lack of it, of the previous Abbott-Hockey Government. This greatly exacerbated Australia’s housing problem and was pushing Australia into recession. The Reserve Bank’s Governor Stevens recently explained that repeated interest rate reductions were attempting to stimulate the depressed economy. He suggested the Government could take advantage of record low interest rates to borrow for infrastructure spending to provide the much needed economic stimulus without further interest rate cuts. (Statistics show infrastructure spending had dramatically fallen since the Abbott Government came to Office.) There was no response.
These low interest rates concerned the new Head of Treasury who feared they were setting the stage for a housing bubble. Presumably he had memories of the 2008 US housing collapse following an immense “bubble” funded by irresponsible lending—albeit much worse than Australia’s possible situation. Surprisingly his concern over interest rates dismayed Abbott who expressed his support for rising house prices. Ironically it was Abbott, against all precedents, who appointed the new Treasury Head from outside the public service.
The low interest rates attracted a multitude of housing investors, from both within Australia and overseas, seeking capital gain from purchasing housing primarily in Sydney and Melbourne. The inevitable escalation in housing prices made housing increasingly unaffordable for first home buyers in those cities.
Incongruously, despite the almost continuous increases in productivity and per capita income over the past 70 years, housing in these cities is now less affordable than in the 1950’s! Since 1985 the ratio of median housing price to median income has increased from 3.4 to 11.4; and with virtually static wages and rising house prices this ratio will worsen. Since housing is the largest and most important material component in the living standards of the vast majority of Australians its affordability for first-home buyers should surely be a high priority for Government.
There are three obvious steps to solving the housing problem. Firstly, to reduce housing demand from local and foreign investors seeking capital gain (resulting from the demand-supply discrepancy) and from local investors also seeking to reduce their taxable income. Secondly, to reduce the rate of population increase which at 330,000 last year–of which net migration was 184,000—this was close to adding the population of another Canberra. The third step is to increase the annual addition to housing supply.
Examining these steps
The Government could readily block the sale of housing to overseas residents, now accounting for over 20% of purchases in Sydney and Melbourne, to protect the interests of Australia’s first-home buyers over non-residents seeking capital gain. Hockey’s recent concern with overseas housing investors was confined to their limited purchase of established housing rather than with their much greater investment in new housing.
The Government could also phase-out tax advantages given to local investors through both negative gearing (permitting interest on housing investment as a tax deduction from total taxable income), and discounted tax on capital gains. These tax perks, going primarily to higher income earners, not only increase housing demand and therefore housing prices but substantially cut Commonwealth revenue. The Australia Institute estimates this year’s negative gearing will cost revenue $4.2 billion. This could fund around 17,000 homes for low income earners—enough to house the current estimated 100,000 homeless in six years. Despite Hockey’s past claims that negative gearing increases housing supply, statistics show the great majority of such investment is in established housing.
The previous Government therefore not only permitted, but played a crucial role in the manipulation of a market which made housing increasingly less affordable for first-home buyers and at their time of greatest need.
On the supply side the Australian Government could, at no expense to the budget, establish a National Housing Corporation (NHC) to construct additional housing for sale and rent to overcome the market’s shortage of affordable housing. The National Housing Supply Council, within the Department of Treasury until abolished by the Abbott Government shortly after coming to Office, estimated the shortage of affordable housing was 599,000 in 2010-11. Considering the steep rise in housing prices and the very small increase in average earnings over recent years this figure would now be much larger.
The proposed NHC could borrow at current record low interest rates. Since Government can borrow significantly below the rate to the private sector and because the Corporation could be established as a community service, rather than as a profit-making enterprise, it could sell or rent housing well below current market prices. Moreover, the increased supply would significantly reduce market prices. Because interest and administrative costs could be built into both sale prices and rental charges the NHC could operate without cost to the budget. Of course the Government could use the budget to subsidise a proportion of these houses to assist low income earners and those dependent on social services.
These policies would lead to a considerable reduction in current housing stress– defined as mortgage repayment or rental cost exceeding 30% of gross household income–which has been steadily increasing over recent decades. With unchanged policies this will further increase.
As a major social bonus the NHC could be subject to statutory requirements for quality architecture and town planning. Furthermore, it could be required to take account of location concerning both public transport and employment opportunities usually ignored by private developers. Such policy, perhaps complemented with the establishment of an Urban Development Authority, could eventually help save State Governments many billions of dollars in transport costs for both new roads and expanded public transport designed primarily to move workers from their housing to place of work!
The NHC could make the single largest contribution to reducing poverty since mortgage repayments and rent represent by far the largest item in the vast majority of low to middle income family budgets.
Harold Levien is a freelance writer on political and economic issues. After graduating in economics he founded and edited a monthly review of current affairs, Voice, The Australian Independent Monthly. It lasted five years. After its demise he lectured in economics. He has written many articles on current political and economic issues for a variety of journals. He is now retired.