Tim Colbatch, Economics editor at The Age, has been trying to keep the issue of affordable housing on the boil (see here and here for earlier pieces) – even if our politicians seem treat the issue like playing pass-the-parcel with a time bomb (sorry about the mix of metaphors). Not being an economist, I find it very difficult to understand what causes the decrease in housing affordability, especially (as Colbatch points out) when we are living in a time of economic prosperity. He asks the very question that Perry asked a week or so back in the combox: Why is it that “a million or so young and lower-income Australians who want to buy a home of their own are now unable to afford a home that suits them”?
His article this morning is prompted by a new paper for the Australian Housing and Urban Research Institute. While he acknowledges the paper’s suggestion that the solution lies in “a range of targeted solutions”, he also has this to say:
The weakness of their paper is that it looks for demographic reasons for the fall in home ownership, when it is clearly the result of competition from housing investors.
In the 1980s, 85 per cent of finance to buy existing homes went to owner-occupiers and 15 per cent to investors. In the ’00s, investors’ share averaged 41 per cent. In Victoria, in May and June 2010, investors buying existing homes got 51 per cent of bank finance, and owner-occupiers 49 per cent.
You cannot have investors increasing their share of the market without squeezing out the first home buyers. It’s a zero-sum game, and politicians such as Wayne Swan who give $5 billion a year in tax breaks to investors are in effect blocking young and low-income buyers from owning a home.
Oh no, they say, you can’t take away the negative gearing tax break without creating a shortage of rental housing. Yes, you can.
Aspiring first home buyers are mostly renters. When they buy a home, they cease to rent. There is one less home to rent, but one less household wanting rental housing. Supply falls by one, demand falls by one, and the net balance is unchanged. The market does not tighten. Rents do not rise. Families are not thrown out on the street.
This is an issue ripe for a reform government that is prepared to lose some skin to make Australia work better.
As Colbatch says in one of his earlier pieces on the subject: “Housing exists to provide shelter for families, not shelter from tax, and the law should be changed to reflect this.” I generally agree with Colbatch – comparing the massive change in investment to first-homebuyer lending would indicate that this is where the problem lies (in the main, anyway). And I agree with his simple point that in the long run there would be no “rental shortage”. Yet I am also aware that any changes to the current tax situation would need to be gradual rather than dramatic, because in the short term a removal of negative gearing and other tax breaks for rental investors would drive our rental prices up very rapidly. This would settle in time, but there would be a period of pain for both landlords and renters. Still, what must be done must be done. And yet one is all too aware that for any government to actually do this would require, in Sir Humphrey’s words, “courage”…
Realistically, the removal of negative gearing has to be gradual. If somebody took out a mortgage last year on the basis of a particular tax treatment, that mortgage may be simply unaffordable if the tax deductibility of the interest is withdrawn this year. Even if we think the government was wrong to offer the incentives it did, I think justice requires that if people respond to those incentives and take on debt obligations the government should have some moral responsibility not to pull the rug from under them.
And I don’t think the housing market – or the economy generally – will be improved by a rash of defaults on suddenly unaffordable mortgages, or a rash of personal bankruptcies. Not to mention the re-election prospects of the government concerned.
I think what you would have to do is withdraw (or limit) tax deductibility for the interest on new borrowings for rental property. That would reduce new investment in rental properties, while leaving the tax treatment of existing landlords unchanged.
(They would still be indirectly affected, though, if this plus other measures combined to make housing purchase more affordable. The more people who purchase houses, the less who are looking to rent them, so demand for rental properties should fall, driving rents down. Landlords would still suffer some pain.)
As I suggested in my earlier post, I also think you should withdraw or limit the capital gains tax exemption on the taxpayer’s principal residence.
And I think the extra revenue generated should go to providing a tax deduction for mortgage interest on the principal residence, or to some other measure designed to make entry-level housing more affordable.
What stops this happening? Well, there are more middle-aged people owning houses than there are young adults looking to rent. So the measures would (apparently) disadvantage more people than they would benefit. Plus, prosperous middle-aged people are generally more politically influential than not-so-prosperous young adults.
Yes, I think it would be prudent to have any changes to negative gearing relate only to new investments. That would be just, and as you say, it would still have the desired effect in the long run.
With so many rental properties, why is there a squeeze on rental properties also? At least there is in Adelaide and I think there has been in other parts of the country.
I have generally thought there is insufficient stock.
What do people think?
Lack of affordable housing is one of the most important problems we currently have and is not being looked at by the powers that be.
My brother worked in youth homelessness and then general aspects of homelessness for years and now works in Social research . He has maintained for a long time that we need to change the investment rules so that people who wish to buy their first home are not disadvantaged by absentee landlords who live in another locale- whethe rit be the suburn next door or the next continent.
Does this all come back to society’s acceptance of feminism?
What?
I agree What has feminism have to do with a lack of housing ??
Actually, he has a point, sort of.
One of the biggest social changes in the past fifty years or so has been the large growth in the numbers of married women participating long-term in the workforce. Since real wages have risen, not fallen, during that time, the net result is a [i]huge[/i] growth in the income of the typical family.
Some of this extra income goes into the costs associated with having both adults working – running two cars, paying for childcare, paying for housework – but not all of it. So disposable income has also grown significantly, especially – and this is important – in couples who have been married for ten years or fifteen years or so, or longer.
Why them? Because a lot of the extra costs they had to suffer in earlier years as a result of both working are declining. They don’t, for example, have to pay so much for childcare, since their children are older and don’t require the same level of supervision. And because they are in their forties, if they have both worked more or less steadily they are typically moving into the peak of their earning career.
And, as well as having more money, they can borrow more money. The mortgage they took out ten or fifteen years ago has reduced somewhat but, more to the point, their higher earnings means they can borrow larger amounts anyway.
What are they going to do with all this extra spending power? What I said before; they are going to spend some of it on holidays, etc but a good chunk goes into property; either their own houses (they trade up, or they build on) or into investment properties.
Young adults, who may be single and who almost certainly have lower earnings, are competing with them in the property market. It’s not a very even competition. All that money looking to buy properties drives prices up. The older married couples with two incomes don’t feel fantastically wealthy, because house prices have risen a great deal relative to earnings. But they are a good deal better off than young adults, many of whom are single and most of whom have lower earnings, and who can’t easily chase the prices that the older married couples are bidding up.
Supply and demand my dear friends.
I am inclined to think that the greater numbers of two-full-time-income couples has contributed to the inflated prices.