The Tale of One Auction – and its impact on the ‘Welfare State’

The Tale of One Auction – and its impact on the ‘Welfare State’

A few weeks ago, I attended an auction in a popular suburb of Melbourne’s inner east

The home was an attractive four-bedroom townhouse on roughly 260 square metres of land, and initially quoted at $700,000 ‘plus’ – very typical of the type of accommodation featured in the area.

As is commonly the case in Melbourne, the quote was ‘stepped up’ in the final week of the campaign to ‘$750,000 ‘plus’ – albeit, the listing agent informed me more than once he had $800,000 “covered” and a mere blink at recent comparable sales, indicated a price well in excess of $850,000, or even $900,000, considering the level of demand and lack of comparable listings being marketed.

This was confirmed during the auction, when a neighbour I’d casually interacted with, leaned over, and in little more than a whisper, told me “I know the vendor – she wants $1 Million” and considering the property didn’t reach its reserve until $900,000, I suspect she was correct.

With competition from nine bidders, the property sold in front of a crowd of 100 or so for $1,011,000, and the agent, delighted with the result, wasted no time swooping in on the ones who missed out, to share information of ‘similar’ listings currently for sale.

Needless to say, it’s a story that drives many Australian’s irate, with the focus inevitably aimed at the misleading way in which it was quoted – which is an issue I’ll explore further in another column. However, this isn’t what should drive our sense of injustice to kick into gear.

The Undeserving Poor..

Debate is currently rife in Australia surrounding the ‘relentless’ costs of our welfare system, with social services minister Kevin Andrews heralding it ‘unsustainable,’ whilst looking for ways the government can cut entitlements to the ‘undeserving’ poor.

The review has concentrated primarily on disability payments, and Newstart ‘job seekers’ allowance, which keeps the ‘income-less’ in relative poverty.

“Work is the best form of welfare!” was the statement Mr Andrews used, and considering the uptick in unemployment, with industries such as Ford, Alcoa, Qantas, SPC, Sensis, Telstra, Shell and Toyota, moving jobs and business off shore. A fall in the participation rate – due in part, to an asset rich, income poor retiring population – and a rise in part time and casual positions over that of full time, concerns are warranted.

In the 2013-14 Budget, the Government correctly stated that, “Australians value a fair society” and underlined its commitment to a tax system that provides a strong and stable funding stream for important public services such as “health, education and, Disability Care” whilst “rewarding innovation and productivity,” for economic growth.  And on an international scale, our tax-transfer system is perceived as ‘comparatively’ generous.

According to the OECD, Australia’s ‘Robin Hood’ economy redistributes more to the poorest 5% of the population than any other member country, whilst the much-criticised policies of ‘middle class welfare’ are seemingly the lowest.

We’re deemed to have the most “unique” and “target efficient” social security benefits in the OECD, apparently yielding “significant gains” to both the economy and society, and when compared to the USA which has the highest income inequality amongst the ‘rich’ nations by some significant degree, we look comparatively ‘healthy.’

Yet, despite its many reforms, and varying degrees of success, shaped in part by demographic changes (more women entering the labour force for example,) and a small reduction in high end salaries during the GFC – widening disparities between incomes have continued unabated since the mid 1990s, and as the labour market struggles, there’s nothing to suggest the trend will stop.

Mind the Gap..

There are all sorts of reasons to narrow the gap between the rich and poor, and prevent an ever-widening chasm – significantly, the way that income is invested into the economy and the roll over effect to society.

Income inequality and economic growth can only work hand in hand, when individuals are enabled to strive for greater heights from a foundation of equal opportunity – the basis of which is education.

As economist and inequality expert Andrew Leigh commented late last year;

“Education is the greatest force that we’ve developed, not only for boosting productivity, but also for making Australia more equal” ensuring “the circumstances in which you’re born don’t determine the circumstances in which you die.”

Yet our schooling system is becoming increasingly segregated. The correlation between poor performance and social disadvantage are stronger here than any other comparable western nation.  If our tax and transfer system were meant to offset this, you’d have to assess its been an abject failure.

Why?

Australia has enjoyed a period of economic prosperity, which over the last 23 years has been nothing short of remarkable.  According to Credit Suisse ‘Annual Global Wealth Report,’ we’re the “richest people in the world,” with a median wealth ‘each’ of US $219,500.

Over the past year alone, Australia added an estimated 21,000 millionaires to the population. Yet, contrary to what the textbook version of economic theory would have you believe – household savings, reaped from an economy surfing the wave of a commodity boom, have not flowed into business investment, or nurtured productivity and education standards in the young.

As noted in the Credit Suisse assessment, our ‘riches’ are “heavily skewed towards real assets” a manifestation of “high urban real estate prices” acquired and generated through the destructive cyclical impacts of a property market, which, as I emphasised last week, sees the gains from income growth and investment, flow directly back to the land.

Both homeowner and speculator..

Home ownership is seen as one of the great pillars of our collective culture.  It’s assessed to improve health and school performance in children, activate social engagement as well as reduce local crime.

However, the way we go about promoting ownership, is to nurture a system that teaches rising land values – outside of any productive activity such as renovation or effective utilisation of the resource – is due reward for having saved hard and got onto the ‘ladder’ in the first place.

Our tax system is skewed toward ownership, with policies, that according to last year’s Grattan report, provides potential benefits to homeowners worth $36 billion a year, or $6,100 on average per ‘household’ through items such as capital gains and pensioner eligibility test exemptions. Investors (or those choosing to rent and invest) reap $7 billion a year, or $4,500 on average ‘each,’ by way of negative gearing rules and the capital gains discount introduced in 1999. Whilst renters, one in four households, see no gain – unless their income is low enough to require welfare assistance.

In effect, we’re an economy that relies on ever-rising values of irreplaceable fixed assets, to fund the individual wealth of its nation – and this is only achievable if policies are in place to ensure values remain high and climbing, and debt levels ‘affordable.’

Capital growth..

Speculation and investment are two sides of the same coin. When we assess a good business model for example, we speculate that the productive activity that flows from that investment, will build on a growing base of demand, and through competition and diversity, go onto produce a profit.

Yet the ‘Capital Growth’ in land values does not occur by way of some abject force of nature. Everything that makes our cities ‘liveable’ comes from the collective ‘investment’ of our taxpayer dollars – which we ‘grudgingly’ pay in the first place, to provide the social amenities needed to form the base from which we can all progress.

This would include, community services such as, transport, parks, roads, trains, trams, medical facilities, and most importantly, schools.

Yet, it is also these facilities that produce the needed demand for real estate that pushes values upwards.  Not through the efforts of the individual homeowner, but the productive efforts of the taxpayer – renter, homeowner and investor alike.

Housing on its own is worth nothing without the infrastructure that surrounds it and rising land values are ‘reward’ for nothing other than unwontedly buying into a system that – under the current structure – promotes inequality and forces social polarisation.

Unlike our business model above, we can’t ‘make’ more land in a particular location to fulfil the demand produced from the facilities our tax system both funds and maintains.  Therefore effective utilisation of the resource is vital.

However, the speculative process alone, along with the added impact of a tax system that impedes turnover by way of stamp duty at one end, and capital gains at the other, simply feeds a process of hording.

This is because most advantage best from investment into housing through the process of “buy and hold” – leveraging the ‘equity’ to produce needed funds, rather than selling. A system that drives underutilisation and ‘land banking.’

But land is fixed in location; therefore we must always ‘hop’ over it to find the next predicted ‘hot spot’ to raise our families, until this too becomes out of reach through the process described above – like a cruel game of musical chairs.

Back to the beginning. 

Let’s go back to the case study I cited at the start of this article.  The reason the four-bedroom townhouse attracted such strong demand in the first place, is because it’s located in a top government school zone.

Only high-income earners can afford to live in this zone, and no doubt they feel – through their income tax contributions alone – they pay their fair share toward facilitating the opportunity for their children to obtain that higher education. As the OECD said, our tax and transfer system is high progressive – the “rich” pay more.  Or do they?

Allowing for stamp duty, the new owner who purchased the townhouse would have paid $1,066,605 yet despite two years of effectively ‘stagnant’ growth in 2011/2012, the median price in the suburb has escalated close to 60% from $850,000 in December 2009, to $1,355,000, therefore they probably assess it a ‘worthy’ investment.

As for those who arrived early in the process, to paraphrase what one homeowner relayed to me some time back – she has earned more from the ‘capital growth’ of her home over the past 10 years or so, than she has in earnings.

Outside of a ‘crash’ or the demise of the education facilities provided, there is nothing to suggest prices in this school zone will drop. From the tight zoning regulations alone, and rising population of immigrants and local buyers looking to advance their children’s education, the very ingredients to attract a consist source of buyer demand are set in place – and rents will rise accordingly.

The taxpayer continues to subsidise the school, whilst the gains are capitalised in rising land values, which flow directly to the individual homeowner not the school or community, keeping values high and placing further pressure on the public purse to fund additional services, whilst underfunded schools, in the over populated ‘fringe’ suburbs, start to produce an English style education ‘class divide.

Under such a system, we are not subsidising the ‘poor,’ we are ‘paying’ the wealthy.  Yet, it’s clear, if we’re to navigate the structural changes ahead and keep unemployment low, whilst at the same time, reduce the projected burden on the ‘welfare state,’ our economy is reliant on maintaining a highly skilled work force, and for this to occur, an elevated level of tertiary education and business investment is vital.

A better model of ‘Welfare..’

Notwithstanding, the correct way to fund local schools would be via broad based and effectively administered land value taxation, which in its purest form – as advocated by the Classical Economist, Henry George – would result in a single tax on the unimproved value of land to replace all other taxes, which hamper productivity – significantly income tax.

George’s ideas won favour amongst many, including the great economist and author of “Capitalism and Freedom” Milton Friedman as well as other influential figures including Winston Churchill, Adam Smith, and more recently, Chief economics commentator at the ‘Financial Times’ Martin Wolf, and author and economist Fred Harrison – aalthough, notwithstanding, a single tax would be unlikely to hold water in current political circles.

The Henry tax Review commissioned by the Government under Kevin Rudd in 2008 concluded that “economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases” proposing that stamp duty (which is an inconsistent and unequitable source of revenue) be replaced by a broad based land tax, levied on a per-square-metre and per land holding basis, rather than retaining present land tax arrangements.

Whilst arguments over school funding will likely continue, centred in the political battle over funding of the suggested Gonski reforms. Unless we narrow the gap in education, we’ll never narrow the broadening gap in income, and consequently, the growing burden on our welfare state.

Therefore – when times comes that the ‘chatter’ around affordability, finally evolves into ‘real’ action – a broad based LVT should form an important part of both the debate, and solution.

Catherine Cashmore

Regular journalist, blogger, advocate, policy thinker, and well know media commentator for all things property. www.catherinecashmore.com.au, @ccashmore_buyer.

 

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Inequality and economic growth…

Inequality and economic growth…

To a limited extent inequality and the ‘rich/poor’ gap is tolerated within society because economists have historically seen it as a necessary platform to stimulate ‘economic progress’ or even activate a sense of competitiveness within individuals in order to elevate themselves up the social ladder 

Certainly in the housing market this is evident.  Who hasn’t aspired to their ‘dream’ home – or visualized some improvement similar to that of their neighbours? 

It’s what the success of programs such as ‘Grand Designs’ thrive upon – the emotional aspect of ‘wanting’ bigger and better – and a proportion of home owners will stretch their budget in order to achieve their desired property of choice, taking on a larger mortgage to do so.

However, whilst a degree of inequality may be tolerated as an inevitable consequence of the benefits offered in a capitalist society, a widening gap can become disabling to ‘progress,’ or even dangerous, if items of basic need are perceived to be increasingly out of reach.

In their 2012 ‘Global Risks’ annual report, the Word Economic Forum put it like this;

“…when ambitious and industrious young people start to feel that, no matter how hard they work, their prospects are constrained, then feelings of powerlessness, disconnectedness and disengagement can take root. The social unrest that occurred in 2011, from the United States to the Middle East, demonstrated how governments everywhere need to address the causes of discontent before it becomes a violent, destabilizing force.”

The comments build on other research undertaken by Andrew Berg and Jonathon Ostry, two senior staff in the IMF’s Research Department, who found that once a country had entered a period of economic growth, the more equal the distribution of wealth over the ensuing period, the longer it lasted. They conclude  “…sustainable economic reform is possible only when its benefits are widely shared.”

Inequality in Housing

The consequences of inequality in the housing market are painful and slow. The trend is increasingly evidenced over a lengthy period of years – not in the volatility of month-to-month first homebuyer statistics – always marginalizing those at the bottom of the income stream, whilst advantaging those at the top.  

Effects include;

  • Social polarization,
  • A decrease in the number of low income buyers obtaining ownership,
  • A drop in the number of affordable rental dwellings with demand outstripping supply,
  • Greater requirements for public housing,
  • A rise in homeless percentages, and those who drift in and out of secure rental accommodation.
  • A rising percentage of long term tenants, and falling percentage of property owners, – across all demographics, – but particularly families with children. 
  • Fewer Australians – across all demographics – owning their homes outright.
  • Evidence of severely crowded accommodation…. And so forth.

The list, which names only a few of the prevailing concerns, creates a growing body of evidence that we have more than an affordability issue in Australia, which focuses overwhelmingly on first home buyer figures.

We have a growing structural problem, which, if allowed to continue, with have a societal impact, chipping away at the future growth and stability of the property market, affecting the majority – not just a ‘few.’

Why?

The reason this has occurred is down to our property cycle – or perhaps better-termed a ‘land cycle’ – which has been further accentuated by poor housing policy – restrictive planning conditions and generous tax incentives, which are ultimately destructive.

Rising prices, and the expectation of such are initially seen as a ‘good’ thing, because they drive the economy, increasing consumption (the ‘wealth’ effect,) stimulating economic growth, infrastructure investment, construction activity and demand for ‘durables.’

This in turn flows through to wages – which advantage the workers at the top of the income stream, rather than the labourers at the bottom. (See Andrew Leigh’s, The Story of Inequality in Australia (2013,) which points out, since the mid-1970s, earnings after inflation for the bottom tenth of the population has grown 15%, in comparison to 59% for the top tenth.)

The gains are subsequently capitalised into rising land values, as investors, buoyed on by inflationary expectations, easier lending conditions, and ‘fear of missing out,’ lead a bull market of speculative activity (such as we’re seeing in Sydney) – until reality eventually steps in, and the trend inevitably turns.

In other areas of the economy that suffer from inflation, some form of substitution can typically occur, however land – and the infrastructure that gives it its value – is fixed in supply, an absolute necessity to all business and personal needs, therefore as land values rise, there is an inevitable strain on productivity, affecting job growth, private debt, small business, and unemployment (such as we’re seeing in Australia presently.)

Whilst monetary policy and the interest rate ‘lever’ are employed to moderate the damaging effects of a property cycle – at every step of the process, real estate has been used as collateral for further economic investment, a revenue generating machine for government, and ‘wealth’ fund for retirement, therefore whilst the aim is to prevent a ‘hard’ landing, the motivation is always bent on protecting existing values, rather than letting them fall.

Hence why demand side subsidies are favoured as a ‘band-aid’ to affordability, rather than cure.  

The result

Without direct political intervention to rectify the damage, the greater and more destabilising the divide becomes, not only placing pressure on the welfare system, but evidenced ‘vocally,’ as rising numbers enter the housing market later, pay far more over the lifetime of their loan, and risk reaching retirement still servicing household debt – as is the case in Australia.  

This was noted back in 2012 in a CPA study entitled ‘Household Savings and Retirement – where has all my super gone?’ And most recently by executive chairman of ‘Yellow Brick Road,’ Mark Bouris, who ‘concerned’ about lump sum superannuation payments being used to pay off mortgages, made a submission to Joe Hockey’s parliamentary financial inquiry, suggesting we can ‘solve’ the above impacts, with additional tax breaks to allow people to pay down their housing debt faster 

Needless to say, it doesn’t take much of an economist to understand that subsidies – no matter attractive they may seem – are ultimately capitalised into prices, thereby raising the entry costs for first home ownership further, and increasing the pain for the next generation of aspiring buyers. 

But then considering the line of business Mr Bouris represents, I suspect this is isn’t about ‘solving’ the crisis, so much as supporting it.

The self perpetuating cycle..

To some extent, it’s a self perpetuating cycle – after 30 years of mortgage repayments dedicated to paying off their principle place of residence, vendor’s obviously don’t want to see the price of their biggest asset drop. 

Investors are similarly motivated, an AHURI study released in December 2013, identified the typical investor, as one who expects their property to ‘double every ten years’ as a strategy to finance retirement. 

Incidentally, the same study also noted that three-quarters of the investors surveyed, do not see negative gearing as a reason to purchase – but merely as ‘an added bonus’ – thereby weighing against the myth of an ‘investor lead exodus’ should the policy be scrapped.

However a system that tries to both feed speculation, whist creating unaffordability through supply constraints, is ultimately set to fail, as low-income households are continually forced to the outskirts, whilst the higher income individuals get to purchase the front row seats.

Social polarisation…

This results in social polarisation, which is clearly visible on the Melbourne map below, taken from the REIV, which illustrates the median house price by suburb, relative to the metro median.

 REIV social polarisation

The colours coded with the darkest blue indicate house prices more than double the metro median, and orange, house prices that are more than 25% below the metro median.  (The white spaces are areas for which there is insufficient data.)  

This aligns very closely to a map constructed using data from the ABS, which ranks geographic areas in terms of their relative socio-economic advantage and disadvantage, highlighting diversities such as incomes, education levels, occupations, rent and mortgage payments, family structure and unemployment. 

 ABS socio-economic

Once again, the beetroot red and bright orange ‘fringe’ suburbs, sit well away from the affluent dark blue vicinities, which contain the top schools, medical facilities, shopping strips, high paying jobs, train and tram networks, childcare centres, social amenities, and so forth – all of which our tax payer dollars collectively fund – yet under the current structure, only the local home owners get to advantage.

This would include not just the various social benefits offered, but the additional on-flow of capital gains each property attracts from a squeeze of consistent market demand.

To emphasise, top performing government schools in Australia, do not reserve places for those showing merit, rather the families both willing and able to support the 20-50% premium, charged for accommodation in a desirable school’s catchment zone. ‘Fair go Australia.’

In case you need further convincing, you can chart how the trend has evolved using the image below, which is taken from a previous AUHRI investigation, showing how the percentage of affordable dwellings available for low to moderate-income purchasers, has changed in Melbourne, between the years of 1981 and 2006.

 AUHRI

The darker areas are the ‘most’ affordable, whilst the white patches are the least.

 What of the ‘price’ ripple effect?

Even heading 45km or so away from the CBD, low-income purchasers can only acquire affordable accommodation – in the range of $200,000 – $400,000 – if the lot size is much smaller than 600 square metres, which is still deemed ‘standard’ in many middle suburban regions of Melbourne.

Further more, any hope of ‘backyard cricket’ is unlikely, as the new developments are littered with homes that have a footprint, which extends to the boarders of each block.

The graph below highlights why this is so – it was put together by a colleague, Steven Armstrong – using valuer general statistics, and it charts the extraordinary rise in land values per square metre in Hume City – an outer metropolitan growth zone in north-western Melbourne – between the years 1983 to 2012.

Graph land prices

 The remarkable escalation in prices had nothing to do with homeowners wanting the castle, when a modest suburban home would do. Rather the issues I outlined last week in regard to planning restrictions (false scarcity,) tax and infrastructure overlays, land speculation (the underlying cause of ‘all’ bubbles,) that are exasperated further by ineffective supply side policy.

It’s important to make this point, because whilst most people assume the ‘price/ripple’ effect works outwards – under the current system, the causation works both ways.

It’s the marginal price of land at the fringes of our capital cities, that sets the ‘base’ value for the better-located plots further in.

In other words – it’s not supply that ‘solves’ affordability for low-income purchasers, but the cost at which that supply can be delivered to the ‘homebuyer’ (not speculator) market.

Property Overvalued? A bubble? A concern??

In light of the information above, when I was recently asked to make comment on whether Australian real estate was overvalued or not, I sensed the intention was to take the traditional view, and instead of charting ‘why we’re here’ – assess whether job growth, population expansion, demand for credit, housing turnover, wage growth, interest rates, mid term supply and so forth, were supportive of a future sustained increase. 

However, whilst the above data will give a mid term indication over whether current process are ‘serviceable’ at existing rates, or if market turnover can maintain pace, it gives little indication as to the long-term effects I’ve highlighted above, which in my mind, present a far greater destabilising force, as we bear witness to a slow generational shift, eating at the edges of home ownership in the months and years ahead.

I’ll leave the reader to come to their own predictions on market movements as we traverse through 2014. Albeit, in light of the Government’s response to previous housing ‘affordability’ enquiries, I think the above concerns will merely worsen rather than improve – and at some point, we’ll all feel the impact.

Catherine Cashmore

The Question the Government must agree to, before the Senate Enquiry into Housing Affordability can commence.

The Question the Government must agree to, before the Senate Enquiry into Housing Affordability can commence.

As the deadline for the senate enquiry into housing affordability approaches, some notable submissions have thus far been made

  • Saul Eslake, One of Australia’s most respected chief economists, and previous member of the now disbanded ‘National Housing Supply Council,’ has submitted the address he gave last year at the 122nd Annual Henry George Commemorative Dinner, in which he eloquently outlines Australia’s “50 Years of Housing Failure.”  Eslake advocates the need to remove policies that stimulate demand, such as negative gearing, in favour of those that increase supply. ‘Rethinking’ infrastructure financing and removing stamp duty, in favour of a broad based tax system on the unimproved value of land, as was recommended in the 2009 Ken Henry tax review.

Any detail Eslake misses on the supply side, is dutifully covered by Senator Bob Day.

  • Senator for South Australia, a registered builder and founder of major construction companies, such as ‘Homestead Homes and Home Australia,’ Bob Day’s submission, is his May 2013 policy paper – ‘Home Truths Revisited,’ – in which he shares an intricate understanding of the history and complexities of supply side policy, which have seen land prices increase more than ‘tenfold,’ in comparison to the cost of building, which has seen ‘virtually no increase at all.’   Importantly, for my industry colleagues who ‘blog’ that price rises were simply down the increase in demand stimulants, (such as dual income households.) Senator Day notes, “while influential bodies like the Productivity Commission and the Reserve Bank focused their attention on demand drivers, like capital gains tax treatment, negative gearing, interest rates, readily accessible finance, first home buyers’ grants and high immigration rates” … the real culprit, the real source of the problem, was the refusal of state governments and their land management agencies to provide an adequate and affordable supply of land for new housing stock to meet the demand.”
  • Other notable submissions come from ‘Grace Mutual Limited,’  – a not-for-profit entity who “designs investment mechanisms to attract wholesale funding into the social sector” – in particular -“the National Rental Affordability Scheme.”  GML outline the ‘unduly complex’ regulations that have disadvantaged investors, noting; “Large numbers of NRAS incentives (at least 4,000) were awarded for the construction of student housing,” yet “There appears little evidence that this has any positive impact on the middle to low-income families that were the target of the original policy.”
  • And the last two submissions to date (2/2/2014) come from “Home Loan Experts,” who want an abolishment of negative gearing, but predictably think that the first homebuyer grant should stay.  And an anonymous letter, with an overview of the points made by both Saul Eslake and Bob Day, noting as I did back in December 2013 that nothing has been done since the last Senate enquiry.

Rinse and Repeat

To emphasise – The 2008 Senate report, entitled “A good house is hard to find: Housing affordability in Australia”

  • Made the same points regarding Australia’s tax policies, such as capital gains tax and negative gearing, which impact affordability and market activity.
  • It made the same points regarding each states planning laws, overviewing the construction industry’s future skilled labour workforce, the impact of urban boundaries on land prices, and the funding of community infrastructure.
  • It made the same points regarding the need for a diverse range of accommodation suited to both young and old alike, advocating greater competition within the building industry.
  • It made the same points in relation to both the both the public and private sector, addressing tenancy laws, and renters rights.

It was both comprehensive and detailed in content, and yet – 5 years later – at every level – both state and federal government have failed.

Failed to provide a ready surplus of ‘cheap land.’

Failed to overhaul infrastructure funding.

Failed to boost a sluggish construction sector in relation to population growth.

Failed to reign in speculation.

Failed to overhaul a system that results in too few rental properties for low-income households. And;

Failed to reduce the need for social housing or raise standards in the public sector.

Instead – we’re left with a new record median house price, which sits close to $600,000 ($597,556 APM.) – Following the highest quarterly rise for 4 years – built on the back of a diminishing first home buyer sector, which is instead supported by a record number investors, benefitting from a pace of growth in Sydney, which all agree, is ‘unsustainable.’

As far as affordability is concerned, we’re simply sitting on a merry-go-round of repeated mistakes.

Housing affordability a Mystery – too complex?

This is not due to any lack of understanding on the Government’s part. There is no secret or mystery to housing affordability. The solutions are well understood.

  • They were discussed at length in the previous senate enquiry.
  • AHURI has repeatedly tacked both supply and tax  policy.
  • And this senate enquiry will do the same.

The recommendations fall in line with other countries and states that have successfully achieved a consistent correlation between gross median house price and income – and so to some degree of detail or other, share the following two points in common;

1) They have taxation system that discourages speculation, but encourages productivity. The most successful of which is well-administrated broad based land value taxation system, such as that adopted in various cities in the USA – like Pennsylvania for example – where the tax on the unimproved value of land is heavier than that of property –a process of which I explain in full here – or as in Texas, where property is taxed, yet income isn’t, reducing the level of speculative demand.

And;

2) They have created an environment in which liberal supply side policies ensure ‘fringe’ land is sold close to its agricultural value, ensuring zoning laws do not impede development, and there remains strong competition within in the construction sector.

Why we have failed.

Yet, the reason countries like Australia, the UK, certain states in the USA, for example, fail to successfully move away from the boom/bust cycle, which leaves us counting the minutes on the ‘property clock,’ until a major correction is experienced, – which ultimately offers little help to struggling home buyers, small business, or low income earners, due to consequential restrictions in lending.

Was summed up neatly in a 2007 parliamentary report entitled New directions in affordable housing: Addressing the decline in housing affordability for Australian families: executive summary – in which it confidently stated;

“Improving housing affordability does not mean reducing the value of existing homes, which are usually the primary asset of any individual or family.”

It’s a comment that sits right up there along with ‘saving doesn’t mean spending less’ or ‘dieting doesn’t mean reducing calories.’

If only it were so…!

To create a sustainable and affordable housing market, in line with the majority of recommendations put forward in the senate enquiry, would inevitably have a dampening effect on existing house and land values, in particular sites which are banked for ‘idle’ speculation.

Fear over falling prices justified?

The fear is understandable when you consider residential real estate is Australia’s largest domestic asset class, with an estimated aggregate value of over $4 trillion, pinned to a banking sector which has the highest exposure to residential mortgages in the world, in a country in which most Australian’s are home owners.

However, please don’t fall into the trap – once again as many of my industry colleagues do – of thinking just because a large number of homeowners in Australia own their own properties debt free, it prevents a potential ‘crash’ in prices – because the level of commentary on this matter is really very low.

A huge portion of private debt for the appropriation of business and commerce is secured against residential real estate.

A lack of active buyers in the market – (which produces an atmosphere in which price falls are inevitable) – stagnates turnover, prevents those who need to ‘fund’ their retirement through an equity release from doing so. Prevents those that need to move state to find employment else where, from doing so. It locks people into their homes – unable to downsize or upsize – and the effects are felt across all demographics.

Businesses which run into financial trouble are unable to reach into their house ‘ATM” and secure additional funding, and as a result, industries close, lay offs are invoked, investment ceases – the list goes on.

Importantly, it does not prevent a major economic crisis.

It did not prevent it in Ireland, America, or other countries in Europe, which also had a large proportion of owners, who owned outright.

We are not immune from a major downturn – no market, which exhibits land cycles is – and be assured, when it does happen, it won’t matter whether the banking system is ‘wiped out’ or not (as suggested as another reason we cant ‘crash’) – the Government will rush to their assistance – leaving ordinary people to suffer their debt consequences alone. As has been demonstrated repeatedly on an international scale.

Rising house prices or a stable market?

An economy that relies on high and rising house prices is one that’s ultimately set to fail.  It’s a symptom of poor housing policy and can only supported over the longer term, by making debt ‘ever more affordable.’

Therefore the best protection from such, is political reform, which ensures stability across gross price to income ratios – and if managed proficiently in line with the two points outlined above;

  • It would assist productivity,
  • Boost the construction sector,
  • Aid infrastructure financing,
  • Keep prices accessible for new homeowners and business – which need to buy or rent land to compete with established players.
  • Ensure tenants are not subject to ever increasing yields.
  • Weather the unwanted impact of real estate ‘booms and busts.’
  • Protect vendors from plummeting property values during an economic crisis – (whenever that point in Australia’s future is) – and;
  • Reduce inequality between the asset rich and income poor.

Land speculators would not advantage from it – but ordinary taxpayers would love it.

What the Senate & Government must agree to allow, prior to commencing its enquiry.

Thankfully, we don’t need to have an initial debate with the senate, over whether the market is or isn’t affordable – as has been the case with various commentators across the mainstream media.

Instead, we need collaborative assurance from the government, that any outcome from yet another Senate enquiry, will allow land prices to reduce – the process of which would have an gradual roll-on effect across the established real estate sector

Once – and only once, we have an affirmative answer to that question – can we begin the debate over how this can be achieved – and once we do, it must ensure the following.

1)   That fringe land is immediately available for residential development, overriding existing urban boundaries and zoning requirements that render it otherwise, and ensure it remains close to its agricultural value.

2)   Increase competition within the construction sector, simplifying the planning process, and eliminating ‘upfront’ infrastructure costs.  Additionally, a review of the many ‘hidden taxes’ such as development overlays, application fees, stamp duties and so forth, that are charged through the planning and development process, must be reduced to ensure they are ‘fair and transparent’ as advocated by the HIA.

3)   The removal/phasing out of policies such as the first homebuyer grant and tax incentives, that reward speculation into the established sector, and rely on housing inflation to stimulate demand.

4)   Reopen the discussion to abolish stamp duty; moving instead toward a broad based land value taxation system. Following practices across the world where it has been deployed with success, and noting that the ACT is adopting such measures, over a slow transitional 20 year period. And;

5)   Ensure we build for homebuyers, not just investors – paying particular attention to the needs of an ageing population, for which downsizing into apartments is not the preferred, or readily adopted option.

The above recommendations would assist the rental sector, but additionally, the Government should work closely with organisations such as Shelter and the Tenants Union, to satisfy that the quality, provision and standard, of both rental and public housing, is improved and maintained, along with an overhaul of tenancy laws for long-term tenants.

Conclusion.

The details on how to achieve this will be overviewed in another column, however, if both state and federal government refuse to let land prices drop, acting reactively to affordability issues, rather than proactively. I suggest you use whatever vote you have wisely – ignoring both major parties – and instead, place it behind smaller players, who act in the best interests of community, and not their ‘back pockets.’

Catherine Cashmore