Housing supply and housing affordability
Australia is having a false housing affordability debate. While the problem is very real, the solutions being bandied have nothing to do with the problems that has left us with entry level housing that is far more expensive than it needs to be.
The National Housing Supply Council, established by the previous government and dismantled by the Coalition, estimated in 2013 that Australia had a housing deficit of 228,000 dwellings. With a supply deficit of this magnitude, and with population growing all the time, the pressure on prices has been immense.
There's no running away from the laws of supply and demand, and it's what all the experts - including the Reserve Bank and the Henry Tax Review - have pointed to as the real cause of our affordability woes.
Some have argued that it is investors that are driving up house prices. The evidence does not support this. The fact is that owner-occupiers account for two in every three purchases. Far from crowding out home buyers – investors are supporting supply. In 2015, investors supplied 58,000 new dwellings nationwide.
Moody’s has reported that while housing affordability is steady nationwide, it is deteriorating in our largest cities. In Sydney, a two income family spends over 35 per cent of their income on mortgage repayments and in Melbourne it is 30 per cent (up from 27 per cent in 2014). This should not be a surprise because this is where we are seeing continual population increases. It should be recognised that as the percentage spent on mortgage repayments increases, the amount spent across the economy decreases.
While we can take some comfort from additional housing supply taking the edge off housing price increases and rents (rents are stable and in some cities like Brisbane, Darwin, Perth and Adelaide actually falling), this could be a temporary abatement.
Unless we make a serious attempt to address housing supply we will continue to see a deterioration in housing affordability in our country.
One of the reasons the property industry opposes changes to negative gearing is because we believe it will impact housing supply. You can’t put $32 billion in new taxes on the property industry and not expect it to harm housing supply and make a bad situation worse. No modelling has been produced on the Opposition’s proposed changes to negative gearing. No one can be certain about its impact on investment, construction, prices and rents.
Our real challenge is still how to remove the blockages that hinder the supply of housing – and to identify ways of continuing the strong investment of recent years.
Frankly, we need real action on the causes that are driving property prices. In this campaign, we have a tax debate masquerading as a housing affordability debate – and ultimately, it will not address housing affordability.
There are two areas where the Commonwealth and States and Territories working together can improve housing affordability.
First, we should re-establish ‘national competition payments’ and incentivise the States and local government to reform outdated planning laws. While we have seen piecemeal improvements from state governments in recent years, our planning systems are stymieing growth and putting artificial pressures on house prices. Research undertaken by Deloitte indicates that national competition payments could provide up to $3 billion in economic uplift.
Second, we need to kick-start the debate on state taxation. Stamp duty is a dreadfully inefficient tax that is a drag on the economy and kicks every house buyer in the shins. Stamp duty has become a woeful crutch for state government budgets. In Sydney, the typical householder pays $35,000 in stamp duty, in Melbourne its $32,000 and in Perth $16,000. Worse still, when homeowners put the cost of stamp duty onto their mortgage, over the life of a loan they are paying the tax all over again.
Australia has a housing affordability crisis that can be tackled – but it requires systemic changes to state planning laws, state taxes and continued predictability in terms of federal taxation. This would be meaningful reform that would a real difference to our economy and to people’s day to day lives.
First published in the Australian Financial Review, 15 May 2016.