House prices may have finally peaked, at least in Melbourne and Sydney. But a slight cooling in some overheated cities makes little difference to overall housing affordability in Australia, which has declined significantly over the past two decades.We need a new, nationally coordinated approach to housing policy in order to ensure that the vast majority of Australians have access to the suitable, affordable and secure housing they deserve.
Without a new and innovative approach to housing policy we risk creating a significant social and economic divide between the 60% of home owners who are generally older and wealthier and the remainder who aren’t.
This month the Australian Housing and Urban Research Institute published the final report of a 2 year research project which proposed a holistic, long term framework for tax reforms, which might lead to better housing outcomes. Potential benefits include improving housing affordability for aspiring first home buyers and increasing the supply of secure and suitable rental accommodation for the growing number of Australians who find themselves locked out of the housing market.
Many of the reforms my colleagues and I considered, such as the tax treatment of investment loses (negative gearing), capital gains and replacing stamp duties with a broad based property tax have been widely debated. Our claim to innovation was to propose and model an integrated 10 to 15 year strategy for gradually lowering the capital gains tax (CGT) discount and capping the quantum of rental losses an investor could claim while phasing out stamp duties. Under the clear pathway we have devised, such reforms could be implemented with minimal impact on household or government budgets and would have little immediate impact on housing markets while delivering better outcomes over the longer term.
The report received a positive media reaction, with Jessica Irvine, a senior economics writer with Fairfax Media, describing it as “compulsory reading for all state and federal politicians.”
However, the politics of actually implementing changes to housing policy remain as challenging as ever. What has become clear since the release of our report is that politics of housing taxation is dominated by the competing claims and interests of different groups of home owners and property investors. Meanwhile the more acute needs of the millions of tenants in the private rental market and social and community housing are largely ignored.
To use the language of Danish political economist, Len Seabrooke, Australian housing policy is shaped by the imperatives of ‘residential capitalism’ whereby the interests of homeowners, investors, banks and other property interests dominate the political debate.
Most of our analysis and the subsequent media attention focused on the distributional implications of our reform proposals on various categories of home owners and property investors. However, we also proposed a series of tax reforms designed to increase the supply and affordability of private rental and social and community housing which we believe warrant much closer attention.
It is widely accepted that the tax treatment of residential property investment in Australia is very generous and has, along with other factors, contributed to speculation and increased demand for existing properties in Australia’s major cities. Since 2000 an average of 40% of home lending has been for been for investment properties, mostly to small scale ‘mum and dad’ investors of which there are now more than 2 million. At the same time the supply of affordable social and community housing has declined from almost 15% of all housing completions in the 1980s to less than 5% today.
This matters for two reasons. First, more Australians will find themselves permanently in the increasingly expensive and insecure private rental market. Second, there is growing evidence that our unique model where the vast majority of private rental stock is owned by small scale private investors leads to poor housing outcomes. This is because ‘mum and dad’ investors who own one or two properties through no fault of their own often can’t afford to offer their tenants long term security and struggle to manage the risks associated with renting such a significant asset. A related concern is that small scale property investors lack the capacity to increase the supply of affordable rental housing that meets the needs of lower income Australians.
In short, we need to develop policies and a national framework for encouraging greater large scale and institutional investment in social and community housing as well as a greatly expanded build-to-rent market.
Increasing the supply of affordable rental housing in Australian cities will require a multi-pronged effort including inclusionary zoning at a local level and access to low cost finance through mechanisms such as the Commonwealth’s bond aggregator and the recently established National Housing Finance and Investment Corporation (NHFIC).
While governments have been reluctant to invest in housing in recent years, there is growing recognition that affordable housing is vitally important social and economic infrastructure. With land and property prices in Australian cities at the level they are, governments, both state and federal, will still have to subsidise social and affordable housing.
Our report also identified three tax policy changes that would also contribute to the supply of affordable and secure rental housing.
First, all state governments should end the current system of land tax aggregation whereby large scale investors pay a much higher rate of land tax per property relative to mum and dad investors. Our research suggests that a simpler tax based on the value of individual properties could raise the same amount of revenue while removing a significant barrier to institutional investment in new affordable housing.
Gradually reducing the capital gains discount from 50% to 30% over a period of decade or more would also be a step in the right direction because investors would have to focus more on the long term yield from property investment rather than capital gains, which should improve tenant security. The savings from cutting the CGT discount could be reinvested in social housing.
Finally, and perhaps most controversially, we propose reviewing the very generous treatment of the family home in the pension assets test, given that growing numbers of Australians will be retiring without the security of home ownership. Savings again should be used to provide rent assistance and other financial support for our most vulnerable retirees while also ensuring, through a well-designed deferral scheme, that income poor, asset rich pensioners are no worse off.
The politics of housing in contemporary Australia favours the preservation of the status quo, but as a country we need to do much better. We need to give serious consideration to some of the reforms outlined above as part of a coordinated national approach to ensure that more Australians can access suitable, secure and affordable housing. Our social fabric and economic prosperity depend on it.
Professor Richard Eccleston is Director of the Institute for the Study of Social Change at the University of Tasmania and is the lead author of the Australian Housing and Urban Research Institute’s recently published policy inquiry Pathways for Housing Tax reform.
The executive summary:
Coverage of the report in the Fairfax press