Negative gearing is unethical

Negative gearing is unethical

By Catherine Cashmore
Tuesday, 24 April 2012

I love reading reports that predict real estate movements.  You’ll hear it trotted out frequently that we’re at “such and such” stage of the “property clock” or property cycle.  Accordingly, over the past few days I’ve read that Brisbane is at five o’clock, unless you own a unit that is, in which case you’re at four o’clock . Adelaide is also at five o’clock, but Sydney on the other hand is languishing somewhere between ‘3.30 and 5.30’ (depending on your “time zone”, no doubt,) and on it goes.

I’m not averse to predicting property movements.  I’ve done it myself on numerous occasions.  There’s almost an irresistible urge in all of us to “foresee” the future like some modern day-prophet and to be fair, there are fundamental historical patterns that give good hints to the basic principles of timing a market.

There’s a quirky joke that goes along the lines ‘If you want to tell God a joke, tell him your plans,’ and whether you’re a believer or not it makes the point aptly.

Just take a look at the tumultuous waters over the previous few years that led the majority of economists not only to miss the GFC and the pace of international recovery, but to follow this with continuous misinterpretations on either a rise or fall in the basic cash rate and subsequent strength of the housing market.

As we’re continually told, on paper Australia has a strong economy, unemployment is low, we’re on the brink of a recourses boom, inflation is “under control”, there’s a shortage of homes, and the population’s growing.  On the surface, it’s the perfect formula for price rises.  However, it didn’t inspire purchasers to get out their wallets in 2011, as record low turnover in overall sales for a decade proved.  Like a snowball effect, as soon as something drops out of sync with a widely accepted formula, a fall in confidence hits the market and impacts predictions even further.

Second-guessing the RBA rate movement has become a popular sport on Twitter and various other media outlets.  Daily I have reports flying into my inbox regarding the most recent RBA rate call. Most are opinions, however a large number have already made predictions assuming a drop in rates for the next meeting.  It’s not based on anything specific, just an interpretation of “hints” contained in the latest minutes as if the decision has already been made – which clearly it hasn’t.

Furthermore, as far as the home buying market is concerned, it now incurs little relevance – the banks call their own tune regardless of the RBA.  Therefore the auctioneers in Melbourne these past couple of weekends who shouted out in their auction preambles that we’ll soon experience a fall in rates to take us into an upward trajectory of the property cycle are either living in a box or under the impression that the buying market is.

As for other predictions, it’s true Australia has a shortage of well-located homes where our rising population want and need to live, and it’s true the Australian market is fragmented, with some areas performing better than others as we move through various stages of the property cycle.  However, it’s also true that successive governments have played their part in creating a model of ownership designed to favour the investor and contribute to the shortage of affordable property for home buyers in the areas where most want to settle.

It’s called “negative gearing”, and it’s the proportion of seasoned investors who take advantage of this tax strategy who eagerly watch the property clock I cited above.  Investors make up roughly 35% of the buying market and many have climbed the equity ladder to own a substantial portfolio of property acquisitions.  Figures from the Australian Taxation Office suggest around 2 million Australians claim deductions for net rent, and figures from the RBA show around one-quarter of all household credit is there for the purpose of holding an investment property.  According to the ABS, the level of household debt over the last 18 years grew twice as fast as the value of household assets.  The ratio of household debt over this period has doubled from 9% to 19%.

On top of this we now have a growing numbers taking advantage of changes in policy that allow investment property to be purchased as part of a self-managed super fund.  So attractive is this proposition that for those with the funds built up to support the strategy, purchasing an established residential property with a long-term trajectory in areas where – under current conditions – an increase in value is inevitable is – for all intense and purposes – a no brainer.

Real estate industry professionals love investors.  The sales process is generally smoother with less emotional content involved, and the real estate agency often benefit from the rental management of the property, thereby creating a lasting relationship with their client’ and an ongoing income stream.  The majority therefore readily accept the policy.

I can cite all sorts of facts and figures to you regarding negative gearing and arguments for and against the strategy.  It was arguably introduced to increase the supply of housing for those unable or unwilling to buy.  Due to our changing lifestyles and the way we now live and move, most have need for a transitional period in rental accommodation at various points in their lives. Therefore investors make up an important part of the home-buying fabric.  It’s also argued that it reduces demand on public housing.  However, as I pointed out last week, due to rising prices sandwiching many out the market, demand for public housing is hardly reducing!

Then there are those who take you back to the Hawke/Keeting era during which negative gearing was to some extent “quarantined”.  The result was marginal at best, there was a dampening of investor enthusiasm and a small increase in rental yields in two states.  The changes didn’t stay around long enough to take us through this transitional period and enable effective judgment of the results. Stringent lobbying by the voting real estate fraternity and property investors ensured at first opportunity the policy was re-introduced.

At the time, there was overall fear that the market would crash, which obviously didn’t occur.  However, I have no doubt if the policy were removed, or even scaled down, there would be less demand for established stock and a subsequent dampening in prices.  No vendor enjoys the thought of their property falling in value, however isn’t this precisely what we need if we’re to allow new home buyers to gain a foothold?

Some argue that if housing were to fall in value, home buyers would be discouraged from purchasing fearing a loss on investment.  So embedded is this obsession with watching property prices rise and fall, we seem to have missed the point of why we need it in the first place. Although there’s no doubt, if prices were to stagnate for an extended period of time, or even deflate in value, some would delay a purchase hoping for further drops.  However, it would be a short-term transition.  It’s a natural human desire to own property once you reach a period of life where there’s a need to settle rather than sojourn. The desire for safety and security runs to the very roots of us all.

In countries where property prices are suffering under the consequences of the GFC, residents would still rather own than rent if given the choice. However currently in the US and parts of Europe, many aren’t able to qualify for a home loan under present conditions and therefore don’t have the choice. Regardless of this, if the current model of negative gearing were scaled down, we’d still be a long way from having a surplus of homes, making it extremely unlikely we’d see a crash as some have presumed.

Eight years ago, the RBA cited negative gearing as one reason for growing un-affordability in the market place.  However, those advantaging from the policy have argued that this is somehow OK because we’re not the only country to employ negative gearing as a tax strategy.  As Saul Eslake (of the Grattan Institute) has pointed out on many an occasion – we may not be the only one, however our policy is at the front of the queue in terms of generosity.

The fact that a few other countries also employ similar incentives provides no realistic platform to argue in favour of the policy.  The real estate market in each country, and within the localities of each country, differs in terms of supply, demand, and affordability.  It’s impossible to compare one against another with a sweeping statement to justify a policy affecting the intrinsic needs of Australia’s buying market.  Australia is one of the least densely populated countries in the world in terms of head of population per square metre.  Much of our land is currently un-liveable, and yet we have a rate of population growth that beats even that of Saudi Arabia!  To top it off, we’re reportedly set to have a housing shortage of 35 million by 2050.  With fewer and fewer able to afford their own place of residence, the future looks anything but sunny for new home buyers.

The call from successive governments to first home buyers looking to get a foothold to go to the periphery of our cities, where housing is marginally cheaper simply because facilities are scarce and public transport is all but non-existent, is hopeless.  The primary reason new estates don’t turn over a reasonable proportion of sales outside of inflationary stimulus packages such as the first-home owners’ grant., isn’t because home buyers don’t like new homes.  It’s because the new areas give no promise of essential community facilities and are hampered with expensive development overlays intended to fund the “ever-promised” schools and public transport systems that seem to take some 20 years to implement. If you want buyers to move there, you’ve got to do more than just build an excess of roof space.

Furthermore, the level of high-rise developments intended to increase the supply of affordable accommodation in our cities are often poorly designed, provide a low-quality living space, and fall out the reach of most first home buyers due to stringent lending restrictions from banks, who see the purchase of this type of oversupplied accommodation a high risk acquisition.  Coupled with this, due to the high number of investors who buy into the new developments looking for a good yield, they don’t offer affordable rental accommodation (hence why so many sit vacant).

The reason why first-home buyers are buffeted out to the outer suburbs is because our models of investment – whether it be negative gearing, land banking, or borrowing to purchase in a self-managed super fund – are solely reliant on capital growth.  You don’t need a master’s degree to understand that the levels of capital growth we’ve been used to seeing in Australia are principally caused by decades of poor planning, which has ensured everyone is squashed around our capital cities for employment and reasonable access to good schools and other essentials such as a local GP and public transport.  For this reason, 93% of investor house and apartment purchases are in the highly sort after inner-suburban locations where most people need to live if they don’t want to face a life stuck in paddock land.

Let’s be realistic about this, it’s essential we encourage personal investment as a plan to support retirement.  Furthermore, there will always be a need for property investors to provide accommodation for those unable to purchase.   However to put policies in place to encourage this in the highly sought-after home buyer suburbs, at the expense of a growing number of people who have no hope of ever owning their own place of residence, does nothing to promote a fair and prosperous democratic nation for all.  It simply splits the population down the centre between those who have and those who have not.

Joe Hockey may want to reduce the country’s expenditure on welfare; however under the current system of ownership, which tips the market in favour of the investor and out of reach of the first home buyer, there is little hope of doing so.

The reason we need a policy change isn’t just about reducing affordability in the inner suburbs, it is essential we start creating models of ownership to encourage investment in the outer suburban thresholds where new supply is dearly needed and communities need to grow. At the moment, if forced to locate into an outer suburban zone, until facilities are provided, most would rather rent than buy, at least until the level of population warrants substantial government and private investment to build the facilities to attract “settlers” not “sojourners”. Therefore investment in these areas is sorely needed – investment that does not rely on capital growth to prosper.

Back in 2007 an article was posted on Smart Company predicting “within the next two years legislation will reduce the scope of negative gearing as a taxation benefit.”  Last year the Gillard government reportedly sounded out unions opinions on scaling down the system.  It was also a key recommendation in the Henry Tax Review.  However to date, nothing has been done.

I can’t help thinking back to a talk I attended where a Victorian state minister was lecturing on the state of our economy (I won’t mention names).  During the course of his speech, he revealed he had ownership of nine investment properties – the majority of which are negatively geared.  He’s no fool – he understands under the current system of investor ownership, property prices in the inner- and middle-ring suburbs prices will continue to inflate over the long term.  Therefore, debating with him – or others like him – for a change in policy will obviously inspire opposition.

Considering we have growing numbers of investors (and voters) employing negative gearing above other investment strategies, there’s no security – should a change in policy be introduced – that it would last the course of the current or even subsequent governments.  However ethically speaking, for the sake of Australia’s growth, a change in policy (through either “quarantining” current rules or scrapping the system in stages) is a much-needed requirement.

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition. 

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Unless we address affordability, Australia’s property market will hit an iceberg: Catherine Cashmore

Unless we address affordability, Australia’s property market will hit an iceberg: Catherine Cashmore

By Catherine Cashmore
Tuesday, 17 April 2012

There’s an old Jewish proverb, which – as a rough translation – says: “People come to poverty in two ways: accumulating debts and paying them off.” Perhaps our politicians should take note, because it’s clear we’re becoming a society split down the center of “those who have” and “those who have not”. You don’t need the brain of a statistician to work out why the polls are so low.  It’s not just about lowering hospital waiting lists and reducing ever rising electricity bills, which are always on the agenda for any state or federal government in power. Neither is it about handouts to “appease” changes in policy such as the carbon tax, or other “nanny” initiatives.  No – it’s as simple as an effective policy to provide shelter for those unable to commit 50% or more of their wages to accommodate for their needs – let alone that of a growing family.

I admit to being a bit of an ABC junkie, always tuned into one of the various news stations.  I listen to MPs’ voices coming over the airwaves daily, reminding me of Australia’s “sunny” outlook in the light of Europe’s economic woes. I hear our Prime Minister remind me that by 2013 we’ll have a surplus and I read reports of the flood of “economic” migrants flocking to our shores to take advantage of our low unemployment status.  This is all fair enough and on the face of it, not untrue.  However, while there’s no shortage of “those who can” in the divide of the “wealthy” and the “struggling” – there’s an increasing shortage of “those who can’t”.

Most recently I read of an English northerner, a hard-working former paper-mill operator by trade, who refused to go on the dole in the UK to provide for the needs of his family of dependents (all 13 of them).  Frustrated with the lack of opportunity in the UK, he’s taken to the seas and like a pioneer – determined to make a new life for his family – has moved to Queensland.  Staying with relatives, he believes our “positive portfolio” will provide opportunity here, which he’d be unable to furnish elsewhere – and he’s probably right.  However, what he may not have factored in is the cost of housing.  With 12 children among his dependents, finding a house to comfortably accommodate his needs won’t be easy – or cheap. Especially if he wants to be within cooee of transport, schools, and shopping facilities.

But it’s not just about purchasing; the rental market in every capital city is stressed to the max. You may pull me up here and emphasise certain media reports quoting figures “indicating” that Melbourne’s vacancy rate has “softened” under the boom of construction.  If so, it’s worth remembering most of this new construction is in the form of high-rise accommodation, which offers neither affordable rent nor (for those on an average wage) a quality lifestyle.  Investors, looking for good yields, have purchased most of the smaller apartments and you’d be hard pressed to get a studio flat with no parking facilities for less than $300 per week – hardly affordable for those on an average wage.

While writing this, I have just paused to have a conversation with a young girl about to vacate from her current accommodation due to the current owners wanting to move in.  We spoke briefly about an established two-bedroom apartment that has just been let.  Such was the demand for this relatively small unit, numerous applications had been fielded, offering some $50 per week above the advertised yield (which isn’t by any means an unusual occurrence for apartments in boutique blocks of this type).  It doesn’t just happen in affluent locations, it happens in the poorer areas also. Suburbs in the outer-western Melbourne regions where the market’s arguably more affordable also fall under high demand for an increasing number unable to save for their own homes.

During the conversation we touched on the subject of the current “abundance” of high-rise apartments currently sitting vacant in the CBD (SQM has the vacancy rate sitting at 4.6%); however her comments were along the lines of “small, expensive and anything but appealing”.

I was then told how she always offers three months rental in advance (not including the bond, which would be an additional cost).  However, even this is often not enough to beat the competition.  For those unable to provide such incentives, it makes you wonder how low-wage recipients and the unemployed cope with finding appropriate shelter. Perth’s vacancy rate has now dropped below 1%, Sydney 1.5%, Adelaide 1.3%, Canberra 0.7%, Darwin 0.7% and Brisbane 1.6% (all figures courtesy of SQM). Possibly the only capital offering a marginally easier terrain is Hobart, with a vacancy rate of 2.4% – however, it’s sparse comfort.

Tenants who are knocked off the rental ladder (a frighteningly increasing statistic nationwide) confront a truly dire situation.  In 2010 – even after a tightening of the rules of who could, and couldn’t, apply, there were 248,419 people on the waiting list for government-assisted accommodation. The recent McKell institute’s ‘Homes for All’ report cited the increased and very real need for public housing.  The latest ‘State of Supply’ report highlighted similar issues.

A recent and damning audit commissioned by the Victorian government‘Access to Public housing’ reads like a company about to go into administration.  Apparently, Victoria has “a $17.8 billion property portfolio, housing 127,357 Victorians”; however, there is a massive42% gap between income and rental expenses.  Furthermore, thedeficit is set to “more than double from $56.4 million in 2011, to $115.1 million in 2015.” Victoria’s apparently “facing a cash crisis with all cash reserves expected to be exhausted during the 2012–13 financial year based on current budget estimates”!  The report can’t even pinpoint where it all became “unsustainable” – “because the division has funded deficits by deferring acquisitions and maintenance and using cash received in advance for long-term programs, along with unspent cash from capital programs.” Recent news confirming the waiting list for public housing in Victoria has fallen by 1,582 is no light on the horizon in the face of such a dire situation, especially considering there are in excess of 38,500 still stuck in “limbo”.

To be fair on the current Victorian government, this is the most detailed report I can find on the subject in the Auditor’s archives.  It’s therefore evident the crisis spanned back well into the previous government’s term and was never adequately addressed or assessed. In light of this, it’s positive that such a review was indeed commissioned, however it’s yet to be seen if the “insurmountable” problem is able to be resolved in the near or long term.

They are all facts and figures that make up part of one of many public reports – reports that have been addressed previously – reports that cost taxpayer money – reports that result in little if any change no matter who’s in power.

Of most concern is the national review on how housing affordability has been managed.  On the Australian National Audit Office’s website you can source a damming overview into the administration and implementation of the federal government’s “Housing Affordability Fund (HAF)”.  The objective of this fund was to increase the supply of new homes whilst also reducing their cost, with the key focus being on the “reduction of housing development costs associated with infrastructure projects”.  This is an issue that sorely needs addressing, yet the report is an embarrassment to read. The funding was to be in the form of $500 million over a five-year period from 2008-09 to 2012-13, with a further $12 million allocated for administration costs. Qualification for the funds was assessed on a strict “needs” basis looking at the number constructed, against the projected savings to the home buyer.  In other words, the funds would not be rationed equally across all states.

All was going OK, until a shortfall in spending to the tune of $12 million was brought to light.  There followed an administration nightmare, with funds allocated to projects that fell clearly outside of the assessment criteria.  Projects that should have been funded weren’t, and those that failed the assessment guidelines and should have been rejected were approved.  Furthermore, it was clear that funded projects did not make evident the amount of savings passed onto the buyer, and neither were the results of those funded fully assessed on completion.  All in all, considering the result to date has only assisted 749 home buyers for an outlay of $12 million in administration costs and a promised $500 million for the projects, it’s clear better strategies could and should have been implemented.

Comparing property markets across the world is difficult due to the way statistics are collated, with some markets substantially less transparent than others.  However, in the International Housing Affordability Annual Survey, the only market that eclipses Australia in terms of income-to-housing cost is Hong Kong.  The survey rates each country by dividing the median house price by the annual median pretax wage.  Australia has a score of 6.7; however, Hong Kong has a score of 12.6.  While there’s plenty of healthy debate over how the figures are calculated, showing that it’s not quite as black and white as it seems, there’s no doubt Hong Kong stands out and it’s therefore worth looking how affordability has affected its most needy – especially considering we’re well on our way to a similar level of disparity.

The country is one of the most densely populated in the world – and with such a finite source of land, it’s no wonder the existing real estate holds its price. Hong Kong has no option but to build upwards – high-rise living is therefore widely accepted, and apartments are small by our standards.  However, since 1953 when the first public housing scheme was initiated, the number of people living in government-assisted accommodation has now reached 50% of the total population. The split between those who can and those who can’t purchase has led to a range of initiatives aimed at providing adequate shelter for not only the poorest, but for increasing numbers of low- and even middle-income recipients not qualifying for public housing, but still sandwiched out of ownership.

Schemes now include public rental housing estates, home ownership scheme estates, tenants purchase scheme, flat-for-sale schemes – the list goes on. None of the above mentioned has been a “cure” for which statistics of “homeless” have now been replaced with those “caged” in high-rise accommodation.  Accommodation where the standard of living is no better than battery farmed chickens in a coop.  However, action has been taken and to date, it seems to far exceed Australia’s efforts.

Here we are fast losing the battle altogether, however unlike Hong Kong we have one of the least densely populated countries in the world with an abundance of land – land we haven’t properly used! Furthermore there are a growing number who, like those in Hong Kong, are “sandwiched” – unable to qualify for housing assistance (for which application rules have been tightened) and yet can’t afford adequate rental accommodation close to the transport facilities they need for employment.  Yet we’re told daily how prosperous Australia is in comparison to other nations as if everyone is ‘enjoying’ the ride.

Do we really want to end up like Hong Kong with 50% of the population needing government-assisted housing simply because successive governments haven’t gone far enough to action effectively the recommendations of their various multimillion-dollar funded reports?  Planning rules must be relaxed in outer-suburban areas.  There needs to be a fresh look at the requirements to build “green”, which I’ve previously spoken about here.  Provision of facilities, making regional locations feasible for home buyers working in central towns and cities, need to be timetabled and implemented (another issue I’ve addressed – along with others – on numerous occasions).

We don’t need an “HAF” that helps fewer than 1,000 recipients for an outlay costing hundreds of millions. Nor should we be giving out “nanny” incentives, which place inflationary pressure on existing real estate such as the FHOG (first-home owners’ grant). Instead, we should remove stamp duty on new dwellings and consider a change in policy on negative gearing and other such recommendations cited in the Henry Tax review.

We may be rolling along on a mining boom, which looks great on paper.  Nevertheless, like the “unsinkable” Titanic on calm waters, no one seems to be flagging the great iceberg ahead.

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.

Unless we address affordability, Australia’s property market will hit an iceberg: Catherine Cashmore

Unless we address affordability, Australia’s property market will hit an iceberg: Catherine Cashmore

By Catherine Cashmore
Tuesday, 17 April 2012

There’s an old Jewish proverb, which – as a rough translation – says: “People come to poverty in two ways: accumulating debts and paying them off.” Perhaps our politicians should take note, because it’s clear we’re becoming a society split down the center of “those who have” and “those who have not”. You don’t need the brain of a statistician to work out why the polls are so low.  It’s not just about lowering hospital waiting lists and reducing ever rising electricity bills, which are always on the agenda for any state or federal government in power. Neither is it about handouts to “appease” changes in policy such as the carbon tax, or other “nanny” initiatives.  No – it’s as simple as an effective policy to provide shelter for those unable to commit 50% or more of their wages to accommodate for their needs – let alone that of a growing family.

I admit to being a bit of an ABC junkie, always tuned into one of the various news stations.  I listen to MPs’ voices coming over the airwaves daily, reminding me of Australia’s “sunny” outlook in the light of Europe’s economic woes. I hear our Prime Minister remind me that by 2013 we’ll have a surplus and I read reports of the flood of “economic” migrants flocking to our shores to take advantage of our low unemployment status.  This is all fair enough and on the face of it, not untrue.  However, while there’s no shortage of “those who can” in the divide of the “wealthy” and the “struggling” – there’s an increasing shortage of “those who can’t”.

Most recently I read of an English northerner, a hard-working former paper-mill operator by trade, who refused to go on the dole in the UK to provide for the needs of his family of dependents (all 13 of them).  Frustrated with the lack of opportunity in the UK, he’s taken to the seas and like a pioneer – determined to make a new life for his family – has moved to Queensland.  Staying with relatives, he believes our “positive portfolio” will provide opportunity here, which he’d be unable to furnish elsewhere – and he’s probably right.  However, what he may not have factored in is the cost of housing.  With 12 children among his dependents, finding a house to comfortably accommodate his needs won’t be easy – or cheap. Especially if he wants to be within cooee of transport, schools, and shopping facilities.

But it’s not just about purchasing; the rental market in every capital city is stressed to the max. You may pull me up here and emphasise certain media reports quoting figures “indicating” that Melbourne’s vacancy rate has “softened” under the boom of construction.  If so, it’s worth remembering most of this new construction is in the form of high-rise accommodation, which offers neither affordable rent nor (for those on an average wage) a quality lifestyle.  Investors, looking for good yields, have purchased most of the smaller apartments and you’d be hard pressed to get a studio flat with no parking facilities for less than $300 per week – hardly affordable for those on an average wage.

While writing this, I have just paused to have a conversation with a young girl about to vacate from her current accommodation due to the current owners wanting to move in.  We spoke briefly about an established two-bedroom apartment that has just been let.  Such was the demand for this relatively small unit, numerous applications had been fielded, offering some $50 per week above the advertised yield (which isn’t by any means an unusual occurrence for apartments in boutique blocks of this type).  It doesn’t just happen in affluent locations, it happens in the poorer areas also. Suburbs in the outer-western Melbourne regions where the market’s arguably more affordable also fall under high demand for an increasing number unable to save for their own homes.

During the conversation we touched on the subject of the current “abundance” of high-rise apartments currently sitting vacant in the CBD (SQM has the vacancy rate sitting at 4.6%); however her comments were along the lines of “small, expensive and anything but appealing”.

I was then told how she always offers three months rental in advance (not including the bond, which would be an additional cost).  However, even this is often not enough to beat the competition.  For those unable to provide such incentives, it makes you wonder how low-wage recipients and the unemployed cope with finding appropriate shelter. Perth’s vacancy rate has now dropped below 1%, Sydney 1.5%, Adelaide 1.3%, Canberra 0.7%, Darwin 0.7% and Brisbane 1.6% (all figures courtesy of SQM). Possibly the only capital offering a marginally easier terrain is Hobart, with a vacancy rate of 2.4% – however, it’s sparse comfort.

Tenants who are knocked off the rental ladder (a frighteningly increasing statistic nationwide) confront a truly dire situation.  In 2010 – even after a tightening of the rules of who could, and couldn’t, apply, there were 248,419 people on the waiting list for government-assisted accommodation. The recent McKell institute’s ‘Homes for All’ report cited the increased and very real need for public housing.  The latest ‘State of Supply’ report highlighted similar issues.

A recent and damning audit commissioned by the Victorian government‘Access to Public housing’ reads like a company about to go into administration.  Apparently, Victoria has “a $17.8 billion property portfolio, housing 127,357 Victorians”; however, there is a massive42% gap between income and rental expenses.  Furthermore, thedeficit is set to “more than double from $56.4 million in 2011, to $115.1 million in 2015.” Victoria’s apparently “facing a cash crisis with all cash reserves expected to be exhausted during the 2012–13 financial year based on current budget estimates”!  The report can’t even pinpoint where it all became “unsustainable” – “because the division has funded deficits by deferring acquisitions and maintenance and using cash received in advance for long-term programs, along with unspent cash from capital programs.” Recent news confirming the waiting list for public housing in Victoria has fallen by 1,582 is no light on the horizon in the face of such a dire situation, especially considering there are in excess of 38,500 still stuck in “limbo”.

To be fair on the current Victorian government, this is the most detailed report I can find on the subject in the Auditor’s archives.  It’s therefore evident the crisis spanned back well into the previous government’s term and was never adequately addressed or assessed. In light of this, it’s positive that such a review was indeed commissioned, however it’s yet to be seen if the “insurmountable” problem is able to be resolved in the near or long term.

They are all facts and figures that make up part of one of many public reports – reports that have been addressed previously – reports that cost taxpayer money – reports that result in little if any change no matter who’s in power.

Of most concern is the national review on how housing affordability has been managed.  On the Australian National Audit Office’s website you can source a damming overview into the administration and implementation of the federal government’s “Housing Affordability Fund (HAF)”.  The objective of this fund was to increase the supply of new homes whilst also reducing their cost, with the key focus being on the “reduction of housing development costs associated with infrastructure projects”.  This is an issue that sorely needs addressing, yet the report is an embarrassment to read. The funding was to be in the form of $500 million over a five-year period from 2008-09 to 2012-13, with a further $12 million allocated for administration costs. Qualification for the funds was assessed on a strict “needs” basis looking at the number constructed, against the projected savings to the home buyer.  In other words, the funds would not be rationed equally across all states.

All was going OK, until a shortfall in spending to the tune of $12 million was brought to light.  There followed an administration nightmare, with funds allocated to projects that fell clearly outside of the assessment criteria.  Projects that should have been funded weren’t, and those that failed the assessment guidelines and should have been rejected were approved.  Furthermore, it was clear that funded projects did not make evident the amount of savings passed onto the buyer, and neither were the results of those funded fully assessed on completion.  All in all, considering the result to date has only assisted 749 home buyers for an outlay of $12 million in administration costs and a promised $500 million for the projects, it’s clear better strategies could and should have been implemented.

Comparing property markets across the world is difficult due to the way statistics are collated, with some markets substantially less transparent than others.  However, in the International Housing Affordability Annual Survey, the only market that eclipses Australia in terms of income-to-housing cost is Hong Kong.  The survey rates each country by dividing the median house price by the annual median pretax wage.  Australia has a score of 6.7; however, Hong Kong has a score of 12.6.  While there’s plenty of healthy debate over how the figures are calculated, showing that it’s not quite as black and white as it seems, there’s no doubt Hong Kong stands out and it’s therefore worth looking how affordability has affected its most needy – especially considering we’re well on our way to a similar level of disparity.

The country is one of the most densely populated in the world – and with such a finite source of land, it’s no wonder the existing real estate holds its price. Hong Kong has no option but to build upwards – high-rise living is therefore widely accepted, and apartments are small by our standards.  However, since 1953 when the first public housing scheme was initiated, the number of people living in government-assisted accommodation has now reached 50% of the total population. The split between those who can and those who can’t purchase has led to a range of initiatives aimed at providing adequate shelter for not only the poorest, but for increasing numbers of low- and even middle-income recipients not qualifying for public housing, but still sandwiched out of ownership.

Schemes now include public rental housing estates, home ownership scheme estates, tenants purchase scheme, flat-for-sale schemes – the list goes on. None of the above mentioned has been a “cure” for which statistics of “homeless” have now been replaced with those “caged” in high-rise accommodation.  Accommodation where the standard of living is no better than battery farmed chickens in a coop.  However, action has been taken and to date, it seems to far exceed Australia’s efforts.

Here we are fast losing the battle altogether, however unlike Hong Kong we have one of the least densely populated countries in the world with an abundance of land – land we haven’t properly used! Furthermore there are a growing number who, like those in Hong Kong, are “sandwiched” – unable to qualify for housing assistance (for which application rules have been tightened) and yet can’t afford adequate rental accommodation close to the transport facilities they need for employment.  Yet we’re told daily how prosperous Australia is in comparison to other nations as if everyone is ‘enjoying’ the ride.

Do we really want to end up like Hong Kong with 50% of the population needing government-assisted housing simply because successive governments haven’t gone far enough to action effectively the recommendations of their various multimillion-dollar funded reports?  Planning rules must be relaxed in outer-suburban areas.  There needs to be a fresh look at the requirements to build “green”, which I’ve previously spoken about here.  Provision of facilities, making regional locations feasible for home buyers working in central towns and cities, need to be timetabled and implemented (another issue I’ve addressed – along with others – on numerous occasions).

We don’t need an “HAF” that helps fewer than 1,000 recipients for an outlay costing hundreds of millions. Nor should we be giving out “nanny” incentives, which place inflationary pressure on existing real estate such as the FHOG (first-home owners’ grant). Instead, we should remove stamp duty on new dwellings and consider a change in policy on negative gearing and other such recommendations cited in the Henry Tax review.

We may be rolling along on a mining boom, which looks great on paper.  Nevertheless, like the “unsinkable” Titanic on calm waters, no one seems to be flagging the great iceberg ahead.

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.

Australia’s obsession with bigger and better property is making it less and less affordable

Australia’s obsession with bigger and better property is making it less and less affordable

By Catherine Cashmore
Tuesday, 03 April 2012

We’re about to launch into the mid-season compulsion with renovation programs.  It seems only moments since the last great furore over Channel 9’s The Block, which hit our screens mid last year.  During the course of the open house inspections, more than 300,000 people queued outside the homes to take a sticky beak over the intricacies of design.  Details of the price initially paid, previous owners and subsequent buyers were fished out and endless analysis followed. Such was the furore that many were convinced sales expectation would be achieved. However, the finale was heralded a disaster.  Only one property sold under the hammer and when renovation, stamp duty and subsequent sales costs were totted up, none of the homes – in and of themselves – made a profit.  However, that wasn’t the point.  Far exceeding expectation, it was the station’s highest-rating show of 2011 and factoring in the sponsorship and endless publicity, the “owner” (Channel 9) could have given away the homes and still made a healthy profit.

Obsession with property isn’t unique to Australia, however it’s manifested itself as one of the great foundations of our culture to the point of being heralded – above everything else – as “The Great Australian Dream”.  Go out on a Saturday in Melbourne and you’ll see street auctions attended by 50 or so people, of which three-quarters will be there for the fascination value alone, intently concentrated on the numbers and either comparing their own properties against the result or dreaming of pursuing a similar acquisition. Although the desire to own property doesn’t set us apart as a nation and no one relishes the thought of paying a landlord well into old age, other countries have accepted a culture far more adapted to renting than owning and consequently overall demand for the purchase of property has been lower along with price appreciation.

Germany is one such relatively well-known example. In Germany, the accepted culture is to rent rather than buy, with less than 50% of the population recorded as “owner-occupiers”. Because of this, rents have outpaced house prices since the year 2000. As with any country, the market is fragmented, with some cities performing better than others and there’s still a clear east/west divide. To accommodate a larger rental landscape, yields are monitored closely with a regularly updated publication called the Mietspiegel (Rent Mirror), which lists average rent prices in each district, and landlords are required to adhere to them. Leases are expectedly lengthy and agreed over years rather than months.  The responsibility to decorate or renovate falls upon the tenant, not landlord, and is often part of the negotiated contract. Tenants are given free rein to make the property at least “feel” as if it’s their own providing they return it to a “neutral” state upon vacation.

The rental market in Germany is tight and it can take months for families to secure suitable accommodation.  In some towns, at least half the family wage is dedicated to the task. You may wonder why more don’t decide to purchase, and there are various reasons attributed to this.  Unlike in Australia, banks don’t court the buyer market – there are no property grants and few tax incentives.  Deposits have to be large and there’s a general, inbuilt, reluctance to borrow or even spend on credit. Interest rates are fixed – thereby avoiding the inflationary tendances changes to a variable rate can evoke – and population growth is low and has been falling since the year 2000.

As with any country, Germany’s growth rates vary across different regions depending on supply and demand, however since the mid-1990s capital growth in the housing market has been unimpressive at best. Perhaps this is one reason we don’t see the same rate of real estate obsession in various European countries such as Germany as we witness here? For example, you won’t find streets lined with real estate agencies in Germany, or listen to discussions on “the state of the market” around the kitchen table. Property advocates are there to help people secure rental accommodation rather than purchase or sell. It’s a different landscape altogether.

Australia’s obsession is built into the very fabric of our culture. Even the modest backyard cubby house has started to take on grand proportions, with companies specialising in building “eco-friendly” models complete with solar panels and plasma TVs. For those interested, they can fetch prices, up to, and in excess of $15,000 – and when you see the work involved, there’s no surprise why.  At the root of this obsession lays the widespread acceptance that property always goes up in value. It’s looked upon not so much as a place to live, but a key to building wealth and establishing financial security. I’m not telling you anything you don’t know; investment in bricks and mortar is encouraged from every quarter, from 95% LVR loans to open-handed tax incentives and property grants.

However, we seem to have worked ourselves into a catch 22 situation because as the market ebbs and flows through its cycle and the supply of affordable and appropriately located accommodation diminishes, rental demand increases and yields rise, thereby locking a large section of society out of the market all together.  Consequently, gaining a foothold on the property ladder for first-home buyers is both a huge commitment and celebrated achievement. Once the first acquisition has been secured, it’s no wonder expectation and anticipation surrounding property prices feeds the obsession we feel when analysing price growth. However, in this respect, there’s a fine line to be drawn between obsession and greed.

As entertaining as they are, programs like Channel 9’s The Block play to the latter, feeding the concept that it’s possible to renovate and “flip” a home immediately back onto the market, covering costs and gaining a healthy profit on the outlay.  Updating an old-styled home through a carefully thought out renovation is a fantastic idea if the owner is a)careful not to over capitalise and b) hold the property for a period of time suited to market conditions.  The first rule is perhaps the most important because one person’s tastes are not universal. Most potential owner-occupiers want to place their own stamp on a home, so while a good floor plan and effective use of interior space will provide a backdrop for a new buyer to do this, few want to pay a premium for someone else’s extravagance and it takes experience to recognise how to balance the difference.

Interestingly, from all the “serious” buyers who viewed the properties used on The Block last year, three of the four homes were purchased by investors and subsequently rented for around $1,000 per week. No doubt most of the home buyers would have been interested in adapting the renovation ideas to their own tastes rather than paying a premium for a completed version not specifically tailored to their needs. It really was a perfect example of over capitalisation; however clearly that was half the fun of the program and proved great entertainment. Whether the properties will attract current yields in years to come as the initial shine wears off, especially considering the compromised position opposite a multistorey car park, is debateable. However, no doubt this year’s series will attract a similar level of obsession as the last.

Back in 2010, the consequences of a nation obsessed by renovation was discussed by Phillip Lowe – assistant governor at the Reserve Bank. He, along with others, argued that our obsession with renovating homes and building ever “bigger and better” is stagnating investment into new dwellings and exasperating the nationwide shortage of affordable accommodation.  The more we pour into renovating existing dwellings not just for our own living :wants”, but with a view to expecting a return “plus profit” on the initial outlay, the more expensive property becomes and the harder it is for first-home buyers and renters to secure a foothold. However, higher prices aren’t limited to homes renovated in inner-urban locations; government overlays and strict building regulations imposed on builders to ensure every new home meets the new “six-star” energy rating now adhered to in most states places additional and arguably unnecessary premiums on prices.

It’s yet another example of how this obsession to build bigger and better has somehow traversed itself into policy proving that “affordable” isn’t the priority, less carbon emissions are.  Consequently, prices are unnaturally high in the growth regions of our capital cities – or at the very least, higher than they should be. As the population slows and affordability continues to take a hold, it’s likely that those who purchased new developments in the boom phases of the market cycle will lose money on their investments, at least in the short term.

This requirement and obsession with property along with overcapitalisation on renovation hamstrings the market making property ever more unaffordable for a large section of our society. It’s not unique to Australia; other countries have similar issues providing affordable housing under strong population growth. Israel is one such example. Israel’s recent “Occupy movement, during which a record 7% of the population moved into a tent city, was initiated by a single renter unable to secure affordable accommodation in the inner-urban localities – areas with adequate facilities not available on the periphery. However, in Australia we have something these other countries don’t have, we’re different.  We have an abundance of land along with a comparatively smaller population and one of the best-performing economies in the world!

It’s therefore should be a priority that we move the focus onto the low-income groups and come up with a broader debate on how we can make property more affordable for the larger percentage of our population most at need – both renters and home buyers.  It’s not just about building more roof space, it’s about doing it in combination with adequate facilities which will provide options for those stuck with high cost accommodation in inner urban suburbs, combating ever rising house prices and extreme rental yields.  These policies must be addressed nationwide if we’re to secure a prosperous future for all Australians – not just a privileged few.

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.