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If they fail to do this, the amount withdrawn will be taxed as per the income earner’s tax bracket.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

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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)

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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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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

Empty words as FHBs sold out on housing policy…

Since I started writing about housing policy and citing the growing concerns many are having with the rising price of accommodation, it’s been somewhat heartening to see a greater array of individuals acknowledge an undeniable widening gap between existing owners, and a growing pool of ‘wannabe” renters.

Most recently, ALP member for McMahon in New South Wales, Chris Bowen, was reported saying “”I can see the difficulties for young and first home buyers of getting into the market,” citing an ‘affordability crisis’ to be a“serious national issue”.

Whilst many parents would recognise the struggle first homebuyers face and wish for an easier path to enable their children, to gain a foothold into what’s too commonly termed the ‘property ladder’ – as if it’s something to be conquered – emphatic remarks such as those offered above are easy to make when decision-making is out of party hands.

Yet, it was only a few months ago, when challenged over affordability on Q&A, and lacking any real policy initiative going into the federal election, that Chris Bowen remarked:

“There (are) two big things that we can do to help with housing affordability. That’s keep unemployment as low as possible. Because you have got a job, that’s the best thing you can do to get into the housing market. And also to keep interest rates low and interest rates are as low as they’ve ever been in Australia”

No one would doubt keeping unemployment numbers low is an important component to a steady housing terrain – however, as for low interest rates, they have done little more than inflate established property prices and speculation on financial markets, which is scant benefit to those facing rising yields, or paying an inflated cost to secure a property at the offset.

On the same program, Joe Hockey’s comments took a similar stance – except he did touch on the issue of supply:

“..the fact is you’ve got to increase the supply. I mean it’s a market. There is plenty of demand and increasing demand but what are we going to do for supply? I have some plans on that which we’ll be talking about before the end of the election.”

When making these comments, it’s unclear whether Joe Hockey had prior awareness of the Coalition’s plan to abolish the National Housing Supply Council, which was established specifically to identify gaps between housing supply and demand.

Apparently, the council’s activities are ‘no longer needed’ and will be ‘absorbed’ into other departments which aren’t entirely transparent, as Scott Ludlum found when questioning as such. Whatever the reason, it’s clear the current government does not hold supply policy high on the priority list.

As it is, saving hard on an average wage is no longer a guaranteed ticket into the breastfed dream of home ownership – especially if you live anywhere close to Sydney.

Martin North Principal of Digital Finance Analytics demonstrated this on a recent blog entitled “The Truth about House Price and Income Growth” charting house prices compared to average disposable income across the NSW market back to 2002.

ScreenHunter_509 Dec. 03 07.20

Whilst the higher quartile’s income has kept pace with house price inflation, the other quartiles have only seen their wage grow marginally, his study clearly demonstrates that prices are now outpacing earnings for the larger proportion of residents and therefore effective solutions need to be found.

Of course, each state faces its own challenges, and some are fairing better than others. But presently first homebuyers are clashing budgets with an equal to larger proportion of investors and downsizers and therefore targeting similar stock against those who have an existing equity stream to tap into.

Unfortunately, aside from some tinkering around the edges of housing policy with schemes such as the NRAS, which quickly became over subscribed and jumped upon by SMSF spruikers, it remains a reality that neither political party has yet seen past burdening new buyers with cheap credit by way of grants, low interest rates and incentives, in a vain effort to mask the rising cost of accommodation under the false premise that they’re doing ‘something.’

And Australia faces challenges ahead – with a falling participation rate due to an aging population, fewer full-time positions coupled with a rise in part-time work inflating the ‘underemployment’ figures – job creation is not keeping pace with increases in our working age population.

This was outlined in the freshly released Productivity Commission paper entitled “An Ageing Australia: Preparing for the Future” which projected:

“Australia would have four million more people aged 75 years or older by 2060, with 25 centenarians for every 100 newborns, compared with one centenarian for every newborn in 2012.”

Not only will aging Australian’s have to work to the age of 70, to bridge a shortfall in savings, but the report suggested retirement should be funded in part through a house value ‘equity release scheme,’ claiming:

“House prices have risen over time in real terms, a trend that is likely to continue. Against this backdrop, even under conservative assumption allowing households aged over 65 years to easily access their home equity to help fund health and aged care costs could have a significant impact on reducing fiscal gaps”.

However, under such schemes, not only do Governments have a vested interest in keeping house prices high and rising, they are pinned to the necessity of such to fund future budgets.

Balancing an economy for an aging demographic is not unique to Australia. However, if house prices weren’t as burdensome, requiring an increasing proportion of savings just to enter ownership, not to mention the longer mortgage terms needed to pay down the loan, it would be possible to invest a greater proportion of the household budget into areas of productivity and small business development, as well as channeling savings elsewhere for retirement without the need to use the principle place of residence as a sole equity fund.

In this respect, Australia differs little from its closest Neighbour, New Zealand, where the costs of rising accommodation also bites a good way into a household’s budget for new buyers.

In an article in the New Zealand Herald concentrating on an increasing difficulty accessing ownership following a sensible requirement on lenders by the RBNZ to maintain an 80% loan to value ratio, a young couple were highlighted as a somewhat typical case study.

Putting aside the additional ‘useful’ tips for saving the $90,000 deposit needed for their $450,000 purchase, such as ‘take a packed lunch to work’, it seems the only way this couple were able to purchase adequate accommodation in the Auckland locality was to tap into the ‘bank’ of their respective parents, who borrowed against the accumulated equity in their own home to shore up their children’s deposit.

The couple’s take home pay is $6000 per month, therefore a weighty 50% will go toward mortgage repayments – yet the price of their accommodation is not out of step with what we expect our own duel income first timers to pay for a modest sized home which will provide adequate facility for more than 2 or 3 years.

New Zealand resident and Co-author of the Annual Demographia International Housing Affordability Survey –Hugh Pavletich – makes some sensible comments in relation to this:

“Within normal housing markets with properly functioning Local Governments that have not lost control of their costs, young Jamie Clark and Jenna Close on their household income of $70,000, should be able to buy a new home for about $210,000 with a sensible mortgage load of $175,000 requiring a deposit of about just $35,000.”

Pavletich’s comments are endorsed by Australian Senator – elect Bob Day who in reply to the comment above stated:

“For more than 100 years the average New Zealand family was able to buy its first home on one wage. As you have frequently reported, the median house price was around three times the median income allowing young homebuyers easy entry into the housing market.

As discussed in your report, the median house price is now, in real terms i.e. relative to income, up to nine times what it was between 1900 and 2000…a family will fork out approximately $500,000 more on mortgage payments than they would have had house prices remained at three times the median income.”

The demographica survey rates 337 different housing markets using a “Median Multiple” (the median house price divided by gross annual median household income) to assess affordability. The methodology is a measure recommended by the United Nations and World Bank Urban Indicators Programs and employed by Harvard University’s Joint Centre for Housing – to name but a few.

An affordable market is therefore deemed to be one with a median multiple of 3.0 or less, and whilst it’s never easy to draw an exact correlation between the complexities of international policies compared to our own, the report does provide a basis for research into precisely how other markets with rising populations and relatively healthy economies, manage to maintain their affordable nature.

Supply

The reports primary focus is on supply – removing barriers such as urban boundaries and tax overlays, and portrays the model employed in Texas, where aside from environmental compliance there are no zoning restrictions outside the city outskirts, and planners see themselves as regulators rather than interested parties in town design.

Texas is also a market, which has successfully financed infrastructure by electing local residents onto boards and providing them with access to tax free bonds, which are subsequently allocated for the provision of essential amenities.

Property rights in Texas are clearly strong in nature with limited regulation, covering little more than the land itself – therefore, housing affordability isn’t a burning concern for Texans, and judging by the number ofAmerican’s moving there, the market is an attractive one.

Tax

Secondly, as I highlighted last week, markets such as Pittsburgh in the USA, which has a median multiple below 3.0, is an example where land value tax has been successfully employed.

When land value tax is implemented – with the burden taken of buildings and their improvements ensuring good quality assessments and sensible zoning laws – it not only assists affordability keeping land values stable, but also benefits local business through infrastructure funding, discourages urban sprawl, incites smart effective development of sites, reduces land banking, and as examples in the USA have demonstrated – assists in weathering the unwanted impacts of real estate booms and busts.

Speculation and strong tenancy laws

Another commonality shared amongst ‘affordable’ markets is the lack of speculation that inspires the ‘get in quick’ feeling for aspiring owners. Germany is one such example where until fairly recent times; real house prices had remained stable since at least the 1970s.

Home ownership in Germany is not embedded in their culture. And as I pointed out a few weeks ago, strong tenancy laws along with liberal supply policies ensures when time does come to purchase, there is plentiful option to do so without breaking the budget.

Australia?

Whether we will ever achieve the significant reform needed to turn Australia’s housing market into an affordable one is debatable. However, with the rise of the internet and the ability of those searching for answers to delve a little deeper than they perhaps would have done before the world became a mirror of reflections, as every action and movement is recorded, posted and photographed in real time, and offered up for an immediate judgement on social media – it can only be hoped, that a majority, not minority, are taking opportunity to look past the frivolity of what I think most would agree, (whether by design or purpose) have to date been fairly meaningless and unsatisfactory open government debates on housing policy.

In the end, it will be up to the growing generation of struggling first timers and priced-out renters to vote for the brave advocates who enter politics with what are currently deemed unpalatable plans for true and meaningful reform.

Property Tax and Housing Affordability

 

Property Taxation and Housing affordability.

There’s been a lot of debate around property taxation in Australia – significantly negative gearing, which allows an investor to use the short fall between interest repayments and other relevant expenditure, to lower their income tax

The policy promotes speculative gain meaning the strategy is only profitable if the acquisition rises in value rather than holding or falling – therefore, in Australia, investor preference is slanted toward the established sector  – the sector that attracts robust demand from all demographics and as such, in premium locations, has historically gained the greatest windfall from capital gains.

Aside from the impact this creates in terms of affordability – pushing up the price of second-hand stock, burdening new buyers with the need to raise a higher and higher deposit just to enter ownership.  It also negatively affects the the new home market, which traditionally struggles to attract consistent activity outside of targeted first homebuyer incentives– albeit, the headwinds resulting from planning constraints and supply side policy should also not be dismissed.

Additionally, Capital Gains Tax and stamp duty have also received much debate. Both are transaction taxes, and therefore have a tendency to stagnate activity, acting as a deterrent to either buying and selling.

Stamp duty as modelled by economist Andrew Leigh, is shown to produce a meaningful impact on housing turnover, leading to a potential mismatch between property size and household type – a deterrent to downsizing and therefore selling

Additionally, it burdens first time buyers by increasing the amount they need to save in order to enter the market, and frequent changes of employment concurrent with a modern day lifestyle, are hampered as owners, unwilling to move any meaningful distance outside their local neighbourhood, search for work in local areas alone.

But, outside of academia and intermittent articles, there is scant debate in Australian mainstream media regarding land value tax and it’s practical impact.

The theory is taken to its extreme, and best advocated by American political economist and author Henry George who wrote his publication ‘Progress and Poverty’ 1879.- an enlightened and impassioned read – and subsequently inspired the economic philosophy that came to be known as ‘Georgism.’

The ideals of Henry George reside in the concept that land is in fixed supply, therefore we can’t all benefit from economic advantage gained from ‘ownership’ of the ‘best’ sites available without effective taxation of the resource.

George advocated a single tax on the unimproved value of land to replace all other taxes – something that would be unlikely to hold water in current political circles, however his ideals won favour amongst many, including the great economist and author of “Capitalism and Freedom” Milton Friedman and other influential capitalists such as Winston Churchill, who gave a powerful speech on land monopoly stressing;

“Unearned increments in land are not the only form of unearned or undeserved profit, but they are the principal form of unearned increment, and they are derived from processes which are not merely not beneficial, but positively detrimental to the general public.”

In essence, raising the percentage of tax that falls on the unimproved value of land has few distortionary or adverse affects.  It creates a steady source of revenue whilst the landowner can make their own assessment regarding the timing and type of property they wish to construct in order to make profit without being penalised for doing so.

However when the larger percentage of tax payable is assessed against the value of buildings and their improvements – through renovation, extension or higher density development for example – not only can those costs be transferred to a tenant, there is less motivation to make effective use of the site – having a flow on effect which can not only exacerbate urban ‘sprawl’, but also increase the propensity to ‘land bank.’

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.

The Australian Housing and Urban Research Group attempted to mimic the proposed changes using their AHURI-3M micro-simulation model in a report entitled The spatial and distributional impacts of the Henry Review recommendations on stamp duty and land tax

And whilst it’s difficult to qualify how purchasers may factor an abolition of stamp duty into their price analysis, perhaps adding the additional saving into their borrowing capacity, and therefore not lowering prices enough to initially assist first homebuyers.  It does demonstrate how over the longer-term falls in house prices have the potential to exceed the value of land tax payments, assisting both owner-occupier and rental tenant as the effects flow through

Additionally, increasing the tax base would provide developers with an incentive to speed up the process and utilise their holding for more effective purposes.

And importantly for Australia, it can provide a reliable provision of revenue to channel into the development of much-needed infrastructure.

The rational for this is coined in the old real estate term ‘location location location.’  Everyone understands that in areas where amenities are plentiful – containing good schools, roads, public transport, bustling shopping strips, parks, theatres, bars, street cafes and so forth – increases demand and therefore land values, invoking a vibrant sense of community which attracts business and benefits the economy.

The idea behind spruiking a ‘hotspot’ – such a common industry obsession – is based on purchasing in an area of limited supply, on the cusp of an infrastructure boom, such as the provision of a new road or train line for example, enabling existing landowners to reap a windfall from capital gains and rental demand for little more effort than the advantage of getting in early and holding tight whilst tax payer dollars across the spectrum fund the work

Should a higher LVT be implemented, the cost and maintenance of community facilities could in part, be captured from the wealth effect advantaging current owners, compensating over time for the initial outlay.  Imagine the advantage this would offer residents in fringe locations who sit and wait for the failed ‘promises’ offered, when they migrated to the outer suburbs initially

Take New York for example – between the years 1921 and 1931 under Governor Al Smith, New York financed what is arguably the world’s best mass transit system, colleges, parks, libraries, schools and social services shifting taxes off buildings and onto land values and channelling those dollars effectively

The policy influenced by Henry George ended soon after Al Smith’s administration, and eventually lead to todays landscape – a city built on a series of islands, with limited room to build ‘out’ facing a chronic affordable housing shortage with the population projected to reach 9.1 million by 2030

More than a third of New Yorkers spend half their paycheque on rent alone yet like London, there is little motivation for developers to build housing to accommodate low-wage workers concentrating instead on the luxury end of market, broadening the gap between rich and poor as land values rise and those priced out, find little option but to re-locate.

New York’s Central Park is the highest generator of real estate wealth.  The most expensive homes in the world surround the park with apartments selling in excess of $20 Million, and newer developments marketed in excess of $100+ million.

Like London it’s a pure speculators paradise – in the ten-year period to 2007, values increased by 73% – owners sit on a pot of growing Gold and there’s little to indicate America’s richest are about to bail out of their New York ‘addiction’ with an expansive list of ‘A’ class celebrities, high net worth individuals, and foreign magnates, owning apartments in the locality.

New Mayor-elect Bill de Blasio who won his seat, based on a promise to narrow the widening inequality gap – preserve 200,000 low and middle income units, and ensure 50,000 affordable homes are constructed over the next decade, will struggle to subsidize plans whist facing a deficit reputed to be as much as $2 billion in the next fiscal year.

Yet economist Michael Hudson has recently assessed land values in New York City alone to exceed that of all of the plant and equipment in the entire country, combined

Currently more than 30 countries around the world have implemented land value taxation – including Australia – with varying degrees of success not only based on the percentage split between land and property, but how those funds are channelled back into the community, and the quality of land assessments in regularly updating and estimating value.

Pennsylvania is one such state in the USA to use a system which taxes land at a greater rate than improvements on property – I think I’m correct in saying nineteen cities in Pennsylvania use land value tax with Altoona being the first municipality in the country to rely on land value tax alone.

Reportedly, 85% of homeowners pay less with the policy than they do with the traditional flat-rate approach. When Mayor of Washington county Anthony Spossey who also served as Treasurer from 2002 to 2006, and under his watch enacted an LVT was interviewed on the changes in 2007, he commented;

“LVT ..helps reduce taxes for our most vulnerable citizens. We have an aging

demographic, like the county, region and the state. Taxpayers everywhere are less able to keep up with taxes, and that hurts revenue. LVT helps us mitigate the impact both to them and the city. It’s a win/win..”

Until fairly recent times, another good example to cite is Pittsburgh. Early in the 1900s the state changed its tax system to fall greater on the unimproved value of land than its construction and improvements.

Pittsburgh’s economic history is a study in itself, and has not been without challenges.  For those wanting to research further, I strongly advocate some of the writings of Dan Sullivan – (former chair of the Libertarian Party of Allegheny County, (Pittsburgh) Pennsylvania) – who is an expert on the economic benefits of LVT and has written extensively on the subject.

Sullivan demonstrates that Pittsburgh not only enjoyed a construction boom whilst avoiding a real estate boom under a broad based LVT system, but also effectively weathered the great depression whilst maintaining affordable and steady land values along the way.

In comparing it to other states struggling to recover from the recent ‘sub-prime crisis’ he points out;

“In 2008, just after the housing bubble broke, Cleveland led the nation in mortgage foreclosures per capita while Pittsburgh’s foreclosure rate remained exceptionally low. Since then, the foreclosure rates in Las Vegas and many Californian cities, none of which collect significant real estate taxes, have passed Cleveland’s foreclosure rate. However, on September 15, 2010, The Pittsburgh Post-Gazette reported that while at the end of the second quarter of 2010, 21.5% of America’s single-family homes had underwater mortgages (the American term for negative equity), only 5.6% did in Pittsburgh. As a result Pittsburgh was top of a list of the ten markets with the lowest underwater mortgage figures.”

When land value tax is implemented – with the burden taken of buildings and their improvements, ensuring good quality assessments and sensible zoning laws – it not only assists affordability keeping land values stable, but also benefits local business through infrastructure funding, discourages urban sprawl, incites smart effective development of sites, reduces land banking, and as examples in the USA have demonstrated – assists in weathering the unwanted impacts of real estate booms and busts.

Despite the numerous examples across the world where a broad based land value tax has been deployed successfully, changing policy and bringing about reform is never easy and rarely without complication.

Additionally, the implications of a yearly tax on fixed ‘low-income’ retirees must be handled with care and understanding, as there are ways to buffer unwanted effects whilst changes are implemented.

Therefore, the process adopted in the ACT which is abolishing stamp duties over a slow transitional 20 year period to phase in higher taxation of land is not altogether unwise.

With any change to the tax system, the headwinds come convincing the public that it’s a good idea. In this respect balanced debate and conversation is necessary, as questions and concerns are brought to the fore.

The increased tax burden also falls on those who have significant influence across the political spectrum; therefore strong leadership to avoid lobbying from wealthy owners with vested interests is essential.

Albeit, as I said last week, we have a new and growing generation of enlightened voters who are well and truly fed up with battling high real estate prices, inflated rents, and care not whether it’s labelled as a ‘bubble’ – but certainly care about their future and that of their children.

Therefore – I do see a time when all the ‘chatter’ around affordability, will finally evolve into ‘real’ action – and a broad based LVT should form an important part of that debate.

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)

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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