Nick Xenophon “Home affordability: a Super idea” – Really?

Nick Xenophon “Home affordability: a Super idea” – Really?

By Catherine Cashmore

Nick Xenophon (along with other groups, such as the REIA,) is advocating a policy that will be responsible for making housing affordability worst.

He is using the Canadian “Home Buyer Plan” as an example to promote a similar idea in Australia. That is – allowing first homebuyers to raid their Superannuation account – ‘sold’ under the pretext of ‘helping them get onto the property ladder.’

The theory goes that to “progress” up this mythological ladder, buyers must bet their income and in this case, future savings, on a speculative process that translates into higher house prices, without thought for the next generation of required ‘property ladder’ participants, who will no doubt fall dependant on similar schemes, to keep the tide rising.

The procedure in Canada allows eligible buyers to withdraw up to C$25,000 tax-free from their retirement fund, on the condition that they pay it back over a 15-year period.

If they fail to do this, the amount withdrawn will be taxed as per the income earner’s tax bracket. Currently, 35 per cent of Canadians fall into this category however, according to the CRA, roughly one out of two – that is, 47 per cent – contributed less than the required repayment amount over the 2011 tax year.

These means, while the Government picks up the added income revenue windfall, buyers, buoyed on by a rent seeking culture that fools the public into believing such policies are designed to be ‘helpful,’ over stretch their budget, and in weak economic conditions, are left to carry the can.

In short – you borrow money from yourself at 0 per cent interest and in doing so; lose 15 years of compounding ‘tax free’ interest with average returns in the order of 7 per cent.

It’s notable that many low to middle-income individuals have inadequate funds to draw upon, therefore even assuming the scheme were to be effective, it’s limited in the difference it can make.

But the real ‘nub’ of the issue, which Nick Xenophon has failed to acknowledge, is that the Canadian Home Buyer Plan was never intended to aid affordability.

It was promoted by the real estate industry as a temporary measure, following the recession in the late 1980’s, to stimulate land values and benefit the FIRE sector, along with it’s economic offshoots – renovations, furniture, appliances, moving costs, tax revenue to government and so forth.

The FIRE sector has lobbied to keep in place ever since and also pushed for the threshold to be raised.

This is because most Western economies have constructed their tax and supply policies, to reward real estate speculation over and above productive enterprise.

The process is assisted and abetted by a banking industry that seeks to lend against land as collateral, favouring the extraction of economic rent, over and above extending loans for the purpose of productive enterprise

canada

Canadian residential real estate tripled from an estimated C$1.3 Trillion in 2000, to C$3.8 trillion in 2014, however, only C$550 billion of this was for renovation projects or new home building – the rest was pure inflation.

By the end of 2011, the Home Buyer plan had been used 2.6 million times, with total withdrawals adding up to around $27.9-billion – that’s $27.9 billion of additional credit, feeding into existing house prices.

Between 2005 and 2011, Canadian house prices rose 58 per cent, while average income for 25-34 year olds, increased by just 6 per cent.

The Royal Bank of Canada reports that detached housing now requires more than 80 per cent of the median household income for mortgage payments in some of the country’s major cities.

Household debt to disposable income in Canada is currently 163.2 per cent, up from 129 per cent at the peak of the boom in 2006 and sitting only a few degrees lower than the recorded level in Australia.

SIZE OF HOUSEHOLD DEBT COMPARED WITH ANNUAL INCOME in Australia, Canada, France and Italy. (ABS)

aus canada

Mainstream economists like to focus on Government debt as a barometer of the heath of the economy. However, high and rising levels of private debt, as a consequence of such policies, constrain demand and eventually exceed the income and economic activity they helped create.

Nick Xenophon cites the Demographica Housing Affordability Report in his press release, however it’s clear he has not read it.

If he had, he would know that like Australia, Canada’s largest major markets are also rated as “severely unaffordable” – and by studying the ‘affordable markets’ such as Texas, or areas of Pittsburgh for example, Mr Xenophon would have a better understanding why these states avoided the harsh consequence of the GFC, and continue to generate healthy levels of economic growth.

Significantly, both cities have land tax and liberal supply policies that deter speculation – helping to keep real estate affordable, while investment is channelled into other areas of the local economy.

While, Australia rewards speculation, allowing the geo-rent (the unearned gains) from rising land values to capitalise into the land price, year upon year, taxing income earners, instead of resource rents, which by design, distorts economic activity, housing supply policy, and subverts social justice. Screen Shot 2014-08-07 at 3.43.20 AM

(Ninety per cent of taxation revenue has distortionary effects, pushing up prices 23% higher than need be, while economic rents from land and natural resources have no such deadweight loss.)

Never, throughout the course of history, has such a policy been sustainable.

At some point the productive capacity of the economy can no longer support the boom and the consequence, particularly for first homebuyers, can be particularly severe, as Australia’s history of land induced financial crises reveal.

However, when you appreciate how lucrative and wide spread this activity can be, it is very easy to see how policy fails us, and it’s additionally easy to see, why, a country with a plentiful supply of land like Australia, submits its younger generation to a life time worth of debt slavery, just to get onto the ‘property ladder.’

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Australia’s City Centric Culture and Failure to Decentralise

What Did The Recent Grattan Review “Mapping Australia’s Economy” Really Reveal?

By Catherine Cashmore

“Too many workers live too far away to fulfil our cities’ economic potential”

– is the conclusion of a recently published study by the Grattan institute.

The report maps the dollar value of goods and services produced by workers within a particular area of Australia’s biggest cities. Demonstrating a disproportionate 80% is created on just 0.2% of the nation’s land mass.

Untitled

It mirrors findings highlighted in a recent speech by Luci Ellis – Head of Financial Stability at the RBA, who collected the addresses of people’s work places from the 2011 Census, to construct a picture that is particularly striking if directly contrasted with where employees actually live.Job to worker ratio

“Inner areas have become even greater job magnets in recent years; some middle and outer areas added people, but not so many jobs, so their job-to-worker ratios actually declined.” 

Places with ratios well above 1 are employment centres. They pull in commuters across the city even from outside its borders.

While the very pale fringe areas, attracting the largest population growth due to pressures of affordability, are the ‘commuter districts,’ dormitory suburbs, where jobs and community infrastructure have failed to follow through.

The picture is one of increased social polarisation – fringe localities; tend to face higher crime rates, elevated levels of unemployment, along with reports of depression and mental illness.

Poor supply policy and delays zoning pockets within the urban boundaries for residential development, means a typical house and land package on a compact 450sqm site, transacts for no less than $400,000.

Instead of a sensible system of bond financing, where residents pay back proportionally over a lengthy period of time, or a broad based land value tax to replace other taxes as advocated in the Henry Tax Review, funds for the provision of essential infrastructure are loaded onto the upfront cost of housing and promptly passed to the buyer.

Yet Councils can wait years for the finances to arrive. The funds are only payable upon subdivision and with no control over the development or release of newly zoned land; buyers can often pay for services they may never receive.

The Grattan report is subtitled “Cities as Engines of Prosperity” and charts Australia’s evolution from a country that “made things,” into one that is now reliant on centrally clustered “knowledge-intensive and specialised services.”

City centric culture

Together, the cities above, account for 15% of Australia’s economic activity but despite declining job-to-worker ratios in the outer suburbs, along with increases in the price-to-distance trade off for home buyers, only 8% of Australia’s employed population actually work in the central hubs of each major capital.

In Melbourne for example, over 50% of jobs in are located more than 13km from the inner core, with fewer that 20% of jobs in the CBD itself.

These are not high paying jobs however, which leads the authors to imply we need to move closer in and –“Minimise barriers to highly productive activity in CBDs and inner city areas”

They suggest this would provide industries with a “wider range of potential workers to choose from.”

“Australia’s cities are the backbone of our economy, with CBDs and inner city areas critically important to the nation’s prosperity….The more highly skilled and specialised a job, the greater the need to find the best person to fill it.”

Knowledge based and specialised services cover a diverse area, including industries such as, finance, insurance, real estate, and business services, as well as cultural, media, communication, and education facilities for example.

They are gaining predominance across the globe, due to a technological boom that is powering us forward in an expansion not unlike the industrial revolution.

3-D printing is lowering the cost and logistics of production. Advances in the research of solar and renewable energy have paved the way for homeowners to store electricity overnight and possibly disconnect from the grid completely.

Companies such as ‘Uber’ and ‘Lyft’ have created innovative ‘apps’ to provide cheaper transport options for consumers and ironically, changes in the way we interact and communicate have allowed people and jobs to disperse over a broader footprint and successfully collaborate across international borders.

However, this is not where Australia excels.

Moves to take advantage of the innovation revolution have been continually hampered by Government intervention, winding back tariffs and scaling down their 2020 Renewable Energy Target, acting to protect the cartel of the Taxi industry’s ‘licensing’ monopoly, and cutting funding to organisations such as the CSIRO.

No – the predominant sector that yields the most “knowledge intensive” gains in Australia comes from the FIRE industry (finance, insurance, and real estate)– which has its infrastructure webbed like a parasite on the back of the great Australian housing boom.

Growth of Finance insurance

At a global banking conference in 2013, the question was asked ‘Why the hell are Australian Banks performing so well!?’ – it was in response to a chart showing a decade rise in market capitalisation on the global banking index, from 2 – 14%.

The answer was obvious; the banking sector makes its money by creating debt – mostly mortgage debt and our highly leveraged ‘too big to fail four’ are the world’s most heavily exposed to residential and commercial real estate, capturing 88% of the mortgage market alone.

To be clear, the FIRE Economy is not a value adding economy; it profits by extracting economic rent from the debt on rising land values, impeding areas of productive enterprise, and trading the interest in a multi trillion-dollar derivatives market to advantage those sitting at the top of the financial pyramid.

To survive, the FIRE sector must sell the illusion that the economy and its participants can achieve economic prosperity through speculation on rising property values.

This has been assisted by tax, housing, and monetary policy, resulting in Australian’s holding some of the highest levels of private debt in the developed world

Tax withholdings or exemptions given to land holders for example, result in an increase of unearned monetary gains (economic rent) available to be capitalised at the current interest rate into the upfront cost of land.

This was aptly demonstrated in a recent release by Moodys’ Analytics, estimating how the tax policy of negative gearing, has acted to inflate Australian house prices by no small degree.

NEG GEARING LOSS

Supply policy has further assisted.

Inelastic responses to market conditions have allowed professional land-bankers to squat on sites at low cost and secure windfall gains when the sites are later rezoned for residential development.

Allowing the uplift of land values to capitalise year upon year into the cost of housing, may be gift-wrapped with corporate spin, to suggest it somehow benefits the community, when a cursory analysis reveals the exact opposite to be true.

It raises the cost of living for every single household, increasing welfare costs, and leaving less to invest in sustainable industries that contribute to the county’s real ‘value adding’ economy.

As demonstrated by the British economist and historian Fred Harrison in his book “The Great Tax Clawback Scam.”

The pull of the centralised core, where property values and wages are highest, results in decades of progressive taxes on every worker in the state being clawed back by a few, as inner city land values benefit from higher incomes, increased demand and improvements to social infrastructure and transport arterials to do precisely as the Grattan review suggests – and keep us locked and reliant on a small pocket of land for our economic gains.

The benefits for homeowners can obviously be substantial.

It brings with it the theory of urban consolation – reduce sprawl and force residents into apartments, however doing so can have the adverse effect of increasing sprawl, as lesser industries ‘hop’ the middle ring, in search of cheaper options, and their employees move out further still.

If we were living in ancient Rome where walking was the general mode of transport, you could understand the need to stay centrally located, however we are not.

We’re in an age of mobility where global research is being poured into innovative modes of transportation such as solar roads and electric cars.

If a buyer is able to travel to the supermarket, park and any other amenity on the priority list within a 30 or 40-minute period, the distance from the CBD is not an imposing factor.

The decider is the time it takes to drop the kids off to school in one direction, and travel to work in the other.

Since the 1970’s, successive governments have poured millions into incentives to try and decentralise and boost regional localities. However, all attempts have failed, because the both the funding and supply mechanisms are flawed.

Decentralisation requires affordable land for both business and buyer, which is not unduly inflated due to policies that promote speculation, as well as growth enhancing infrastructure and flexible supply policy that responds in a timely manner to homebuyer (not speculator) demand.

The Henry Tax review was not slow to point this out, when it suggested slowly phasing out a vast array of ‘bad taxes’ (deadweight taxes) that impede productivity and reduce mobility (stamp duty, payroll, insurance, vehicle registration, and so forth, as well as phasing out those that ‘reward’ speculation) and instead, collecting more of the economic rent from a broad based tax on the unimproved value of land and natural resources/

According to research undertaken by Paul D Egan and Philip Soos, in 2013 we lost a staggering $73 billion of output stemming from deadweight losses of taxation, yet, economic rents, which exhibit no deadweight loss, are a significant component of the Australian economy, comprising 23.6% of GDP.

When extensive research was carried out by ‘Prosper Australia’ on the “Total Resource Rents Of Australia,” it was recognised that almost half of all government revenues could be delivered by channelling the property boom to more productive purposes.

However, while the example is useful for policy reform – even a small shift in the tax base to provide a steady source of revenue in lieu of stamp duty, would assist in reducing speculation and aiding mobility (As economist Leith Van Onselen has repeatedly demonstrated.)

With less reliance on income tax, land value taxation would also act to shift economic power back to state and local government, thereby giving them more control over spending and in a very minimal way, it may also act as a natural countercyclical force.

For example, when land values depress due to a drop in consumer confidence, buyers would have less tax to pay, and therefore more discretionary income to spend into other areas of the economy – Government would reap any fall in revenue back when the reverse is the case. (Albeit, there are many variables that could affect this and other points to discuss.)

Historically, the capture of economic rent (through land tax and to some extent ‘betterment’ taxes) financed some of the most remarkable infrastructure we have. Sydney Harbour Bridge being a case in point. 

It was acknowledged at the time, that residents on the north shore would benefit significantly from an increase in their property values as a result of this essential piece of infrastructure.  Therefore, a framework was set in place to capture a proportion of the uplift – approximately one third – to assist with funding.

This was in no way detrimental to the property owners.

The increased advantage of economic activity coupled with the rise in prices resulting from the enterprise, more than compensated. A win-win if you like – and readily accepted by the public as ‘fair.’

Over time, changes in the way both state and federal government collect tax moved focus away from land values, onto productivity, effectively, placing a fine on labour and doing a good job of keeping us asset rich and income poor.

It’s great for the haves – but not the ‘have-nots’ (our growing pool of tenants.)

A similar concept is recognised by owners of apartments.

When buyers purchase a unit, they expect to pay a yearly corporation fee for maintenance and improvement of community services.

In doing so, it reduces the up front cost consumers are willing to pay as they configure the fee into their budget, yet it is also recognised as an investment, as the benefits and any subsequent improvements help attract future purchasers.

A broad based land value tax is essentially no different.

In markets that have similar policies – a change in the tax mix, with higher taxation on land in lieu of those on productivity in order to fund related infrastructure, coupled with good supply policy, enables a process of decentralisation and increased affordability to follow through.

Both reforms work hand in hand.

The prosperous economy of Texas in the USA is a good example of this.

Since June 2009, about 48% of all jobs created in America have been in the state.

It has booming population growth, high levels of disposable income, low house prices and has been termed “The Texas Miracle.”

This is because with no income tax employees get to keep more of their earnings while higher property taxes used to fund community infrastructure and stem speculative inflation, along with good supply policy, help create a truly decentralised city, with only 7% of jobs located ‘downtown.’

Importantly, when the locational value of land is allowed to capitalise into the price, there is every reason for homeowners and investors to object to an increase in supply.

When this gain is partially taxed away, offset by higher earnings due to lower income tax (as it is the case in Texas,) vested interests diminish and neighbourhood development may even be encouraged in response to population growth as it spreads the burden of taxation and acts to reduce the level payable for the individual owner.

We do not have to mirror another country’s policies, but it does prove the ability to create a system that provides a fairer regime for the funding of infrastructure, stops runaway land price gains as well as assisting households and commerce to move outwards.

However, in an economy that is dominated by the financial sector, and reports such as the latest Grattan review celebrating Australia’s city-centric culture, efforts to decentralise and produce a fairer system for all Australian’s are deteriorating in favour of policies that are there to benefit the rent-seeker, at the expense of the labourer.

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

Can lessons from German culture assist in changing the environment for Australia’s rental population….?

Can lessons from German culture assist in changing the environment for Australia’s rental population….?

Land.  Since history began, it has remained an integral part of the most valuable asset man desired, fought over, possessed and in many cases died for.

Indeed, property rights are a foundational component to a capitalist economy, and under our current system of ownership government’s profit nicely from the advantage.

In Australia, revenue from rates and land accounted for $20 Billion in 2012 – hence why ‘stamp duty addiction’ and the consequential need to incentivise buyers to keep transaction figures high, is all-but a national obsession.

Housing and construction are a driving force behind our economy, and the banks are as ‘pinned’ in their reliance to the ever-expanding growth of our population’s desire to ‘borrow and buy,’ as everyone else is who has their hand in the pie.  And let’s face it, there are plenty of sticky fingers profiting from our national past time, spanning not just the ‘FIRE’ (finance, insurance and real estate) sector, but also its numerous retail, TV and ‘chat forum’ offshoots – often encountered in the land of social media

Following a pre-GFC global (‘borrowing’) shopping spree of cheap credit, Australia’s ‘too big to fail four’ have subsequently become the worlds most heavily exposed to residential real estate.

Therefore, economists such as Christopher Joye, have not been slow to point out the ‘potential’ dangers an acceleration in property prices may herald, if the recent boom in some of our most populated states, is not reigned in.

Leading fund manager James Gruber, (who writes an excellent weekly newsletter entitled “Asia Confidential”) most recently commented;

“…banks have an average leverage of 20x (equity/assets), it would take less than a 10% fall in residential property prices for equity in these banks to be wiped out….”  And the warnings continue.

Whilst you can argue whether to call a bubble or not, house prices in Australia, where most need to live if they wish to maintain good access to hospitals, schools, social amenities, and a healthy job market, are high by anyone’s standards, and certainly so on an international scale.

Comparative countries include the UK, New Zealand, Canada, Denmark, and the Netherlands, all of which experienced an unprecedented house price boom in the lead up to the GFC.

Like Australia, all suffer restrictive planning and zoning laws, which have subsequently placed stress on supply.

I pointed out last week, how the complexities of urban zoning by state governments who publicly advocate affordable housing initiatives, are doing quite the reverse.

Poor policy has ensured we have sparse facilities to meet the demands of those who choose to live in fringe suburbs. Therefore the price of commuting on over-crowded roads, frequently forgoes any benefit gained from paying a ‘marginally’ lower price for the privilege of more space in regional areas.

Additionally a CIE (Centre for International Economics) study, commissioned by the HIA two years ago, demonstrated the total tax expenditure on the land and price of a new home once rolled together, equates to 39% of the sale price. Therefore, aside from constipated supply side policy, expecting developers to deliver affordability as well as profit from their efforts is unduly burdened

The speculative culture that results from restrictive planning laws, coupled with tax incentives that benefit the home owner and investor above that of the ‘lowly’ renter (as is the case in the countries I cited above,) was clearly highlighted in the recent Grattan report entitled ‘Renovating Housing Policy.

Consequentially Australian investment in real estate is pinned to the cyclical nature of the oft termed ‘property clock,’ where valuations seem to forever trend ‘upwards,’ and ownership rates amongst younger generations struggle to maintain their historic ‘norm,’ in a post GFC macro environment where higher unemployment and slower wage growth is all but certain

The nicely manipulated tax incentivised environment promotes speculation into a limited pool of established stock, leading investors to compete against each other in a game not unlike ‘musical chairs,’ as they attempt to shore up funds for retirement.

Yet other countries have accepted a culture far more adapted to renting than owning, where lower demand for the purchase of property and better levels of affordability, coupled with stricter lending requirements, have protected them from the economic woes brought on by the domino effect of the USA sub-prime crisis.

Germany is one such relatively well-known example, and France isn’t much further behind

Whilst home values in Australia over the last 10-15 years have doubled (and in some cases and localities trebled,) property prices in Germany have struggled to track the rate of inflation.

Subsequently, the feeling of ‘buy now, or pay more later’ is not evident in their cultural mindset, with a little less than 50% of the population happy to accept a rental lifestyle.

It’s not always been as such.  In the 1990s generous tax benefits heavily favoured the investor, so much so, a complete renovation could be written off against a property owner’s tax bill.

This inevitably lead to speculation into rising values, resulting in a boom of high-density inner city development with little due diligence taken into the analysis of genuine demand from a home buyer market.

A glut of supply consequently occurred and the boom came to a painful end in the late 1990s.  Tax incentives were stripped away and the  ‘euphoria’ ceased – but the hard lessons were learnt, and Germans remain wary of booming real estate values, which to some extent has kept them insulated from manipulating a repeat scenario.

The subsequent Dot Com bust in the early 2000s added insult to injury as unemployment peaked and the country suffered through periods of recession.

However, a lengthy duration of stagnated home values in the lead up to the GFC, coupled with strong laws protecting tenants, and restrictions on high loan to value borrowing ratios, arguably created a normal ‘supply/demand’ environment, where home buyers looking to ‘settle’ were able to save and acquire accommodation outside an inflationary atmosphere, and renters did not suffer undue discrimination.

Minimum tenancies in Germany are long – often starting at 2 years, with most ‘unlimited’ – meaning a landlord cannot easily evict without good reason to do so (and then only through a court process.)

Rent increases are strictly regulated – at a minimum occurring only once every 12 months, with limits on the incremental rise over any given period. For example, as a general guideline, a maximum could be 20% over 3 years (although this varies across different municipalities.)

Reasons for eviction can include a landlord needing to use the premises to reside in, however the ‘need’ must be justified – and not simply because they would ‘like’ to do so (as in Australia.)

Properties must be presented in good condition – painted prior to each new tenant moving in, with renters often responsible for the provision of various fixtures and fittings, such as lights and window furnishings.

If the landlord wants to sell, they must provide proof that selling without a tenant would profit their cause more so than selling with.  Therefore due to the length and roll over of tenancies, rental stock is generally sold onto investors rather than owner-occupiers, with the renter protected from eviction.

Bonds equivalent to 3 months rent, are placed in interest bearing accounts, so renters don’t lose out on the rate they could expect to achieve if the cash was deposited in a normal savings account.

Long-term tenants are permitted to decorate accommodation and change the decor to suit their own tastes, promoting at least the feeling of ‘ownership’ over that of a temporary dwelling.

Property investors can expect a 7% yield, which at current borrowing rates is, particularly attractive to larger off shore equity firms and this sector is growing.

‘Publicly subsidised housing,’ or ‘housing promotion’– the terms generally used for social housing – is controlled by local government and refers to shelter provided below market rent for low-income families.  This type of accommodation represents around 5% of the national housing stock – although recent sales of a large percentages to off shore yield seeking investors by local government has lead advocates to warn of a shortage.

As for home-buyers, when Germans purchase accommodation it’s for an extended period of time – usually life – and in the absence of highly restrictive planning and zoning laws such as those experienced in Australia and the UK, many choose to self build – therefore adding, not diminishing from the housing supply.

According to the ‘National Association of House Builders’ in the UK, who have compared self-build rates across the EU, 60% of German housing stock is classified as such, and competition between small homebuilders high

When large tracts of farmland are identified for housing developments in Germany, the local municipality acquires the land, paying only a small sum of compensation to the landowner.

The blocks are then sub-divided and sold at an affordable level with priority given to local homebuyers, who then approach a builder of their choosing to construct their preferred accommodation.  Hence why the atmosphere is more competitive than our own, leaving larger developers no opportunity to ‘land bank.’

Building in both the city and regional areas faces fewer restrictions than Australia.  Developers are not burdened with lengthy periods during which holding costs accumulate whilst waiting for planning approval, and outside of a general ‘master plan;’ developers are free to commence construction upon demand

For those wanting to investigate this further, I recommend reading the writings of Mark Brinkley, author of the ‘House builder’s Bible’ who has a good grip on the comparative details.

Unlike in Australia, banks don’t court the buyer market – there are no property grants and few tax incentives.  Deposits are a minimum of 20%, and there’s a general, inbuilt, reluctance to borrow or even spend on credit.  Additionally, interest rates are fixed – thereby avoiding the inflationary tendances changes to a variable rate can evoke.

Whilst, the absence of restrictions on foreign investment and relatively stable economic atmosphere compared to the rest of the EU, has lead to recent and robust off-shore acquisition of residential real estate, producing a somewhat concerning rise in prices and rents in cities such as Munich, Hamburg, and Cologne – for the time being, the Germany market remains attractive to both home buyer, investor and renter.

Drawing comparisons between two countries and their ‘in-built’ cultures is complex and I’m not suggesting we copy the German system in its current form.

However there are attractive elements in the tenancy laws, which in light of a cultural switch toward renting over ownership in a younger generation who change jobs often, and require a longer period to save if they want to enter the market – tighter rental controls, longer tenancies, and restrictions on incremented rises in yields, are worthy of consideration.

The subject deserves deeper analysis, which should be immediately undertaken and funded by local authorities, especially in light of recent headlines showing a sharp rise in evictions due to financial circumstance.

Meanwhile, whilst we continue to exist in a speculative atmosphere with a tax environment that consistently marginalises ‘generation rent,’ instead rewarding a ‘gamble’ on rising valuations in established accommodation – improving affordability, especially in the absence of effective low priced supply, is highly improbable.

 

Catherine Cashmore

 

 

 

 

 

 

 

The complexities of urban zoning by State governments, who openly advocate affordable housing initiatives, yet in truth are doing quite the reverse.

The complexities of urban zoning by State governments, who openly advocate affordable housing initiatives, yet in truth are doing quite the reverse.

The debate about house prices rises or falling, and what is, or isn’t a good for the economy, continues to dominate headlines – and not just in Australia.

Indeed, the cost of accommodation in most developing nations, is often coupled with wide spread reports of a growing divide between those who entered ownership early enough to reap the financial rewards stemming from a substantive period of healthy capital gains, against a generation who are finding the challenge of funding vastly higher capital prices, is coupled with less than desirable choices resulting from poor supply side policies.

Yet the governance of housing supply is hamstrung firstly by the idea that everyone should stay centrally located, squeezed into an area parallel to existing transport networks, which although already over capacity, results in intensive development of high density, low grade, accommodation.

In part this is based on the faulty logic that a larger percentage of residents not only want to live in the city, but if located adjacent to tram and train routes, would ditch the car in preference of either for their daily commute to work.

Whilst my experience as buyer advocate bears evidence that the concept of being close to public transport, is desired by the vast majority of purchasers, various studies have dispelled the myth that increasing percentages are using the crowded networks for their daily commute.  Not to mention the difference between living ‘walking distance’ from public transport, or feeling the house rattle as the train or tram trundles past

In Melbourne – unless you work directly in the CBD – travelling by rail usually entails a second trip by either bus or taxi at the other end. And as around 81% of jobs are located outside this area, with most being scattered broadly across the wider metropolitan regions, road networks are still the quickest and therefore preferred option for the larger percentage of residents – (as evidenced in the study ‘Making Public Transport work in Melbourne,’ by Bob Birrell, Rose Yip and David McCloskey.)

This goes some way in resolving the misadvised notion that dense living can reduce pollution, rendering it ‘environmentally sustainable’ – with studies by organisations such “Sustainable Population Australia” showing;

“…that high-rise housing increases per-capita greenhouse gas emissions by up to 30% due to a total reliance on power switches and being unable to enjoy the natural cooling of shady trees and living sustainability. Department of Planning and Energy Australia study (NSW) and the ACF Consumption Atlas show high-rise buildings emit more greenhouse gases per dwelling and per person than smaller blocks of flats, townhouses or detached homes”

As for those living in outer suburban districts, any concept of fast public transport to attend a football match, a day at the races, or experience inner-city ‘night’ life, is a long gone fantasy.

Some of Melbourne’s non-existent train lines were initially ‘mooted’ as far back as the 1890’s – and following numerous feasibility reports which amount to millions of ‘arguably” wasted dollars, they’ve become no more than dotted lines in the Melways.

Obviously units offer a cheaper entry point into tightly constricted markets.  The price difference in median values between an apartment and house ranges from around 12 to 30% (dependant on area and size – RPData.)

However, In Melbourne, the challenge of keeping apartment prices low is complicated by new zoning regulations, rendering some neighbourhoods immune from dense development, whilst others have the green light.  This further limits the concentration of land where construction can occur, and escalates already inflated land values.

Additionally, to get planning and building approval for an apartment block is a costly venture, requiring 100% debt cover and often resulting in a period of years from concept to ‘lock up.’

The complexities include levies for funding of communal facilities (such as underground parking, street lighting and so forth), which contributes significantly to the cost of the product.

Getting council approval can involve a lengthy period to resolve protests from existing residents and local councils, who fear the social and economic impact on their neighbourhood culture and local environment, and all of the above adds to developer holding costs until the project is finalised.

To obtain the necessary funding, the larger percentage are marketed to overseas buyers using vastly inflated commissions, who face no restriction when purchasing ‘off the plan.’

They are constructed with a ‘squeeze as many as possible’ mindset, compromising natural light and storage space along the way, and providing the finished product at an affordable price point (below existing unit medians) is no easy task.

High owner corporation fees to fund the required security features, lighting in corridors, lifts, lifestyle amenities (such as a gym or roof top garden for example) equates to at least a few thousand a year. Rental guarantees are often marketed to promise a return not possible once the guarantee has expired. – And if the developer encounters financial difficulties during this period, there is no government legalisation backing up any promise of payment.

Hence the supply of high-density accommodation is mostly purchased by the investment sector who find it easier to obtain funding, than the first home buying demographic, yet it seems a significant proportion sit vacant for periods of time.

For example, Melbourne’s Southbank has a vacancy rate close to 8% (SQM) which also falls in line with data obtained from Prosper Australia’s speculative vacancy report, which analyses water usage to assess residential vacancies across the metropolitan region over a 12 month period – the methodology of which is explained in detail here.

The research shows 7.9% of accommodation in the suburb uses no water at all, and over 22% less than 50 litres per day (a statistic which may be influenced by some being serviced apartments.)

All of the above, works on the ‘assumption’ that most people like to live close to the city and whilst this may apply to residents in their early years, who delight in the hub and bub of an inner city lifestyle, including student renters who need to locate close to nearby university campuses, there isn’t much evidence that the rest of us are prepared to give up space, to live in the type of accommodation provided.

Indeed, the idea that demographically we’re becoming a nation of downsizers is somewhat mythological, but it doesn’t stop the flow of regular articles suggesting we’re all becoming a nation of ‘happy strata dwellers,’ with “families are increasingly flocking to high-rise apartments.”

Whilst there’s no doubt we’ll see an increasing shift to apartment living due to lack of feasible alternatives, there is no evidence to suggest this is desired by the vast majority of ‘home buyers.’

It’s been shown the elderly overwhelmingly downsize to medium density accommodation thereby avoiding high-rise developments altogether – younger generations in their 20s and 30s have a better propensity towards high density living ,and the proportion is increasing; however figures still only peak around 14% at the age of 27, and the trend across all age groups is marginal, with only 1 in 20 choosing this form of accommodation nationwide (as of the 2011 census.)

Obviously, most local home buyers prefer houses to apartments – and for the high-rise price tag of a two-bedroom flat, there’s far more bang for buck in established accommodation that doesn’t come with the additional risk of a view being built out, queues to exit the car park, and 150 immediate neighbours traversing through various stages of their housing ‘career.’

Extra supply for the buy to let market should not be diminished, and it’s not my intention to do so.  However, there’s a broader need to establish quality accommodation for a larger proportion of home buyers who will accept townhouse living if locating inner city, but reject high density developments. And contrary to popular belief, it is possible to accommodate an equal number of residents in medium density dwellings without building to the skies.

Movements such as Create Streets in the UK are at the forefront of pushing low rise initiatives, and Robert Dalziel – the London-based architect for Rational House, who visited nine cities around the world, including Mexico City, Shanghai and Berlin, has comprehensively examined how high-density can be made agreeable for a broad demographic of home buyers.  More information can be found in his book –commissioned and published the Royal Institute of British Architects: entitled A House in the City — Home Truths in Urban Architecture.

However, families require houses (not apartments) gardens, green areas and local schools. They need community facilities, a local doctor on hand, good public transport and nearby shopping centres – and they need it all at an affordable price point.

It’s probably for this reason, that the major part of Victoria’s growth has been evidenced in fringe localities such as Wyndham, Melton and Whittlesea. And one thing we’re not short on in Melbourne is land. Yet regulatory constraints in outer suburban localities cause their own complexities that increase land prices making the entry point for such developments effectively double what they should be.

As Alan Moran recently pointed out in the Herald Sun “Without government restrictions on (the) city edge, land … would cost under $100,000. Regulatory-driven scarcity adds $100,000 to $150,000 to costs which the new homeowner must bear.”

Even within a wide expansive boundary as mooted in Melbourne’s new urban growth strategy, the government limits land use until they have gone through a lengthy process of mapping out areas for infrastructure known as a ‘Precinct Structure Plan’ – and as soon as you restrict the supply of anything, scarcity inevitably inflates values.

Larger developers are not slow to purchase swathes of acreage prior to rezoning, and then once ‘Psp’s’ have been finalised, drip feed it onto the market.

Consequently, government bodies have little understanding how released plots respond to consumer demand or control over unnecessary land banking.

There’s little sense creating new suburbs without the necessary infrastructure. However, such facilitation is currently financed via hefty development overlays, which are passed onto the buyer rather than initiatives such as bond financing, where residents pay back proportionally over a lengthy period of time, thereby bypassing an upfront fee which is piled onto the capital cost of their initial purchase (the detail of which I’ll go into in a future column.)

Additionally, a broad based land value tax, as advocated in the Henry review, would recoup a percentage of the windfall developers advantage, as prices increase though urban zoning, providing further encouragement to bring the plots into effective use and provide further funding for essential amenities.

The subject deserves deeper analysis, but the above touches on some of the measures we’re unwontedly subject to, by State governments who ‘spruik’ how they’re bringing affordable housing onto the market, yet in truth are doing quite the reverse.

Catherine Cashmore

 

 

Why first home buyers are not buying, and ways to solve it.

Why first home buyers are not buying, and ways to solve it.

The latest ABS data has indicated the percentage of first homebuyers active in the market has once again fallen, from 14.7% in July, to 13.7% in August.

Subsequently we’ve been bombarded with commentary asking why this should be so in a low interest rate atmosphere, where, there are ‘plenty’ of acquisitions available for sub $300,000?

Not withstanding, whilst 10 years ago $200,000-$300,000 would have secured a modest home in reasonably facilitated suburb, today – due to woeful supply side policy – you’d struggle to find family size accommodation on the fringes of our major cities for the same expense.

First home buyers will always wax and wane to some extent, based on their perception of value and ability to save over and above items of affordability alone.

And whilst a lower percentage entering the market can in part be attributed to lifestyle factors such as labour mobility, getting married later in life, numbers falling under the radar on loan applications, and the shadow effects of various grants and incentives being introduced and subsequently scaled back, thereby producing a demographic shift in the timing and age at which buyers enter the market, there are other factors at play which clearly point towards pressures of affordability.

For example just from the last census alone, we can see the percentage of 1 person households has decreased for the first time in over 100 years from 24.4%-24.3% – whilst at the same time group households have jumped from 3.9%-4.1% and crowded houses with 3 or more families have risen nationally by 64% to 48,499.

A closer look at exactly what it costs to rent a modest apartment within commutable proximity to our capital cities gives some indication why this should be so.

For example, in Melbourne – (which currently has one of the highest vacancy rates of any capital – 2.7% (SQM) for the month of September) – if you’re halfway fussy, requiring good proximity to transport, a modest balcony, or internal floor space over 40sqm, you’ll be hard pushed to get a 1 bedroom apartment in original condition under $320-$350 per week.

In Sydney, the equivalent will cost between $450 and $500 per week – therefore it makes sense to share expenses, and this is certainly the case with renters I’m in contact with.

An argument consistently put forward when discussing the first home buyer demographic, is the idea that many want to rent, rather than buy – and it’s certainly one I have sympathy with, whether that be for lifestyle, affordability, or work purposes.

However when two people meet, and plan a family, there is a natural desire to ‘settle.’ And in the absence of long-term lease and rent controls, most would preference purchasing over renting.

Therefore, a drop in ownership for this demographic, falling 79.5%-77.2%, coupled with increasing numbers becoming long-term renters, is concerning.

The Grattan report, released early last week, clearly demonstrated how tax policy is disproportionally weighted toward the owner/investor at the expense of the renter.

Indeed, so imbedded is it in the Australian culture that home ownership is the key to financial freedom, there is an un-witting air of sympathy when we refer to ‘generation rent.’

As for the first home buyer – assuming their initial property is not going to be their last, it would be more apt to term the demographic ‘first time investor’ with the need to purchase a ‘growth’ generating asset in an area with enough projected consistent buyer demand, to ensure equity to ‘tap’ into, when time comes to upgrade.

Notwithstanding, the investment potential of their purchase is always an initial question from homebuyers I assist.  And to get on what’s the commonly termed the ‘property ladder’ today, is markedly different from the post war environment baby boomers were born into.

Much of the newer accommodation being constructed is generally not attractive to consumers – being high-density, low-grade apartment blocks for which first homebuyers can have difficulty obtaining finance.

And whilst it’s not impossible for those who have saved a deposit to enter the established market – the stronger financial arm of the investment sector competing for a similar pool of dwellings around the suburban median price bracket, can present a significant challenge.

Urban boundaries and the propensity to towards land banking, hefty tax overlays and poor infrastructure development, has ensured land on the outskirts is already artificially inflated, rather than representing a cost that would assist purchasers to compensate for the expense of commuting greater distances to work related services.

The residents who purchased in Melbourne’s Point Cook for example, which was expanded in line with the 2030 plan and initially marketed as “A thriving neighbourhood … just 22km from Melbourne’s CBD” with “convenient access to established schools, shopping, recreational facilities and public transport” have seen their home values fall, battled with overcrowded roads, and a minimum 2 hour commute to the CBD in peak hour traffic.

So whilst it’s easy to accuse first home buyers of being picky, one could just as easily ask why they should they forgo a hard earned deposit to accept what’s currently on offer, or exceed the budget to outbid competition for a limited number of established dwellings?

First homebuyers are not a ‘buy anything as long as it’s cheap’ consumer – although some mistakenly assume they should be if they want to get into the housing market.  

And whilst commentators use low interest rates to support the argument that housing affordability has improved, it is important to understand that housing affordability and the cost of servicing a mortgage are two separate entities.

Mortgage rates are set up with different structures dependant on circumstance, and subject to interest rate changes influenced by the macro environment.

To take out a 25 year mortgage requires the expectation of secure employment in a terrain where frequent job changes or part time work are becoming a norm.

They may influence house prices through a cycle, but they do not take away the fact that home prices now – even with lower lending rates – require longer terms to pay down, with the interest over the duration of that period adding considerably to the capital cost.

So what can be done?

As recorded by APM, Sydney’s median house price has increased by +4.2% over the September quarter to $722,718 – ‘the first capital to reach this milestone,’ whilst, the unit median has pushed past the half million landmark to $510,000.

The current rental yield for a unit would be around 4%, therefore most new investors would be negatively geared and speculating on capital growth accrued during the period of ownership plus another like minded investor paying more at the end of that duration, to make the strategy productive.

Yet, despite this robust activity from the investment sector making up around 50% of the buying market, Sydney’s vacancy rate recorded the largest monthly decline in September of any capital – now at 1.8% (SQM).

This is because, the concentration of investment is focused overwhelmingly on the established sector through policies such as negative gearing coupled with 1999 decision to tax capital gains at half the rate applicable to other income. Since implementation, supply has not increased; rather investor activity around a limited pool of second-hand dwellings has multiplied. (see next graph)

Image

Needless to say, common sense dictates that maximisation of policy initiatives to increase supply cannot occur if we don’t address this mindset.

As I touched on last week, prior to negative gearing being quarantined in 1986 – rents were already rapidly rising in Sydney and Perth, with vacancy rates below 1%.

Therefore, it is not clear whether subsequent rises were wholly due to the tax changes.  It is also not clear that a continual sharp increase in rents would have been worst had the policy backflip not occurred.

However, without effective supply side initiatives to offset the inflationary elements investment in established property has produced, the market is simply a game of musical chairs – replacing a property for sale with a property for let.

Solution

I’ve said on many occasions that the challenge of creating a balanced, affordable, attractive market for homebuyer, investor and renter alike cannot be tackled on one front.

There are many distortions that need to be slowly unpicked, whilst robust activity to lower land values and increase supply implemented.

As it stands, considering the number of investors who rely on negative gearing as a tax/investment strategy, we’ve arguably painted ourselves into a corner.

I am a full agreement that negative gearing is a failed policy however; I would hesitate in abolishing it in one foul swoop for the following reasons.

Whilst here is little evidence to suggest there’d be an investor exodus, there’s also scant evidence that first homebuyers would be in a position to immediately soak up any additional stock at current prices – bearing in mind negatively geared investments are most suited to this demographic (being smallish 1/2 bedroom apartments.)

The average first homebuyer borrows around $280,000-$300,000 – therefore we’d need to see more than a light correction in values to provide a competitive entry point – not to mention the difficulties most have saving a deposit

Furthermore, even if established supply were to increase with projected lower demand from investors, to see substantial drops in values assumes vendor’s being forced to sell at a loss.

As evidenced in some of our previous downward cycles (most recently during 2011 to 2012) markets can stagnate rather than truly ‘correct’ with many buyers taking a back seat expecting further falls.

However, a gradual deployment of speculation away from established dwellings, with incentives to investors to purchase new over old, coupled with assistance to potential home buyers to either save, or enter into shared equity schemes, would be a start to meeting any increased supply with new home buyer demand.

The policy could be gradually phased out by limiting it to a fixed number of investments  – 2 for example – or taking the suggestion made by the Henry Tax review of tightening current arrangements with a lesser 40% of interest allowed as a deduction, and capital gains taxed at the slightly higher rate of 60%

This at least would be a starting point toward a fairer market

Additionally, dramatically increasing supply of new ‘quality’ accommodation with some reserved for low-income workers must take priority, as well as a structured plan to increase infrastructure through the consideration of bond financing for example

Over the 17 years to 2012 negative gearing cost Australian tax payers around $33.5 billion (inflation adjusted for the period estimated.)  Considering we have an ageing population requiring increased spending on healthcare and other related services, coupled with a widely spruiked shortage of housing and, as Tim Toohey pointed out in a recent Goldman Sachs publication, forecast income growth of 3.5% in 2013-14 compared to an average of 15.5% over the last 15 years, it’s hard not to see better ways to manage the budget.

Indeed – any politician with more than a short-term mindset – would be blinkered to imagine we can continue with the current status quo for ever.

Additionally, an overhaul of policy surrounding tenancies is also necessary. However, that’s for another column.

Catherine Cashmore

A few thoughts on Negative Gearing – the contradictory policy which benefits investors whilst negatively impacting renters.

A few thoughts on Negative Gearing – the contradictory policy which benefits investors whilst negatively impacting renters.

It’s hard to believe we need to consistently go over the impact a concentration of investment into established housing has on affordability to the detriment of low-income workers and renters.

I’ve written extensively on it in the past, and many papers have been produced to outline the consequences in detail. However, over the past week, I received a string of emails from interested readers and journalists asking for my comments on negative gearing, therefore, I hope you will forgive me for reiterating a few basic points.

To be against negative gearing as a policy incentive is not a stance against investment into the housing market.

Indeed we need a steady provision of rental accommodation because there will always be a proportion of the population unable or unwilling to purchase, or in need of a transitional period of tenancy due to job changes.

Albeit, a drop in ownership rates from families with children falling from 79.5%-77.2% over the last census interim – our biggest demographic of homebuyer, – coupled yields outpacing both wage growth and inflation over the corresponding period and beyond, highlights a growing and somewhat concerning trend.

Leading up to the peak of 2010, Australia had an unparalleled property boom which not only heralded us top of the “Annual Demographia International Housing Affordability Survey” for subsequent years, but placed household debt to income ratios at around 150% which can hardly be called healthy.

I’m sure many have grown tired of being ‘lectured’ on the many ‘viable’ reasons why we’ve seen prices and subsequently household debt increase (ease of lending, lower borrowing rates, and wage growth to name but a few) however, whilst you can argue over the details contained in housing affordability reports as many have done in the past – or fall back on previous statements made by the RBA which conclude’

“Australia is now broadly in line with other comparable countries, having risen relative to other countries since 1980 when it was at the lower end..”

..it’s rather embarrassing that these ‘comparable countries’ include the UK, New Zealand, Denmark, the Netherlands, and Canada – all International terrains which having been through somewhat harder lessons than our own, also battle to induce first home buyers out from underneath their ‘rental’ blankets as high prices and shortages of stock herald arguments similar to those voiced here.

Yes – Australia has a shortage of accommodation in areas most want to live, work, play and importantly purchase. As I argued last week, this pattern of behaviour has predominantly been driven by years of poor planning for population growth, leading many to conclude, they have little option but to situate close to centralised job districts rather than incur the inflated cost and time of commuting on already over-crowded arterials.

However, all of he above has also been exacerbated by our tax policy of negative gearing.

As the Henry Tax review pointed out, Australia has a system that taxes income from work and savings at a higher rate than other forms of investment (including borrowing and speculating,) which are taxed at a lower rate.

In other countries such as the USA, investors of geared properties can only claim tax deductions for interest on borrowings against the income generated by the property until sold.  However, the Australian system allows heavily geared investors to deduct against wages thereby reducing their overall tax bill, which, when combined with various other incentives such as depreciation, makes it a very attractive policy for high income earners to the disadvantage of lower wage individuals, unable to bridge the gap between the income the property generates and the outgoing expenses.

The success of negative gearing relies solely on the growth of the asset.  Without good capital appreciation, negative gearing doesn’t work.  Therefore, investors taking advantage of the incentives are for want of a better word ‘speculators’ who have concentrated their attention on the established market principally in the inner and middle ring suburbs – areas that attract the highest levels of concentrated buyer activity.

Consequently, 92 per cent of residential investors borrow to purchase second hand dwellings, leaving the ‘new housing market’ without enough investment to induce an adequate provision of supply or infrastructure. This inflates the cost of established stock, leaving a widening gap between price and yield – leading investors even more reliant on the band-aid of negative gearing to fund their activities.

With 1.2 Million negatively geared investors (speculators) relying on appreciation, predicting movements in the market place is a national past time.  You’ll hear it trotted out frequently that we’re at “such and such” stage of the “property clock” or “property cycle.”  Second-guessing rises or falls in the RBA rate has become a popular sport on Twitter and various other media outlets.

The RBA noted as early as 2003, when advocating a moderation of demand in the property market amongst investors, by way of tightening of the current negative gearing rules – the rises in Australia’s established market have been inflated principally from a growth in investor demand aimed overwhelmingly at the second hand dwellings.

The RBA described the demand as ‘unprecedented’ with the concentration overwhelmingly on properties around the median price point (currently circa $500,000) where overall demand from homebuyers is also at its highest.

On the surface it may seem somewhat contradictory that a policy benefitting investors could negatively impact renters.  Albeit, rather than having the ‘spruiked’ desired effect of aiding rental affordability and rental supply, the results speak for themselves.

Over the previous five years, Australia’s rental yields have risen 49.2 per cent, outpacing growth in housing loan repayments for the same period. Furthermore, long-term vacancy rates sitting firmly below 5 per cent and in established areas they hover closer to 2 per cent. Does this alone not ring bells that negative gearing as it stands, is doing little to solve rental shortages and consequently a growing affordability crisis?

Some put forward the debate that property investment should be viewed no differently from any other small business such as dog washing and so forth.  However, property is not only a wealth generating asset, but as essential requirement for all – on a par with good medical care and food. Governments have a responsibility to provide policies that balance the market for investor, renter and most importantly the homebuyer alike. Not an easy task – but certainly not impossible.

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 (Sydney and Perth) both of which were already experiencing vacancy rates below 1 per cent and therefore had other factors weighing into the statistic – however in other states there was no such rise, and in some – such as Melbourne, rental growth actually slowed.

Additionally, the change in policy didn’t stay around long enough to take us through this transitional period and enable effective assessment of the results. Stringent lobbying by the real estate fraternity and property investors ensured at first opportunity the policy was re-introduced.

This is because real estate industry professionals love investors.  The transaction process is generally smoother with less emotional content involved and the selling agency benefits from the rental management once the purchaser has settled.  This helps cement a lasting relationship with their client’ as well as an ongoing potential income stream.  Hence why the majority would rarely voice opposition.

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.  And whilst I agree that a sudden and complete retraction of negative gearing in its current form would be foolish – favouring a slow wind-down whilst other policies are implemented such as strategies to aid development and increase supply – the notion that touching the ‘golden egg’ of negatively geared property assets in a way which may dissuade buyers from ‘banking’ on the established market to fund their retirement would be disastrous – seems to be one that’s culturally ingrained in the real estate fraternity.

You only have to turn on the TV to be bombarded with programs from The Living Room to The Block, which make everyone feel like a rookie renovator able to ‘tap into’ the wealth of their property investments with a quick makeover, or fuel the perception that you can pick up a good property as some magically suggest –‘below its intrinsic value’ and ‘add value’ to create profit – to know obsession with property investment goes above and beyond negative gearing alone.

Indeed, if someone could prove to me that any of our current modes of investment have lead to

1)      An improvement in housing affordability and supply;

2)      An increase in vacancy rates;

3)      A substantial boost to new housing and consequently infrastructure in ‘growth’ suburbs; and

4)      Lower rents for the most venerable in our society

I would be the first campaigning on the streets in in favour of the plan.  However all of the above, negative gearing has failed to do.

I can’t help thinking back to a talk I attended at a previous REIV conference 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. Therefore, you have to wonder who our leaders are protecting when opposing changes to the current status quo – it’s certainly not the low-income earner or renter.

In other words, negative gearing, as been more to do with promoting property inflation ‘growth at any cost’ rather than aiding society – however, for those who want more detail on the consequential impact, I suggest reading the latest research paper from the Grattan Institute which can be downloaded here.

Catherine Cashmore