The Abbott Government’s economic policy, or perhaps more accurately lack of it, has greatly exacerbated Australia’s housing problem. The Reserve Bank’s repeated interest rate reductions, as Governor Stevens recently explained, were aimed at stimulating the depressed economy. He suggested the Government could take advantage of record low interest rates to borrow for infrastructure spending, dramatically fallen since it came to Office, to provide the much needed economic stimulus. The Government has not responded.
The low interest rates have concerned the new Head of Treasury who fears they are creating a housing bubble. Presumably he had memories of the 2008 US housing collapse following an immense “bubble” funded by irresponsible lending—albeit much worse than Australia’s situation. His concern over interest rates has dismayed Tony Abbott who expressed his support for rising house prices. However it was the PM, against all precedents, who recently appointed the new Treasury Head from outside the public service.
These record low interest rates have attracted a multitude of housing investors from both within Australia and overseas. Their investments, primarily in Sydney and Melbourne, have driven up house prices to the extent that housing has become increasingly unaffordable for first home buyers.
Sydney and Melbourne residents are now faced with the ironic situation that despite almost continuous increases in productivity and per capita income over the past 70 years housing is now less affordable in these cities than in the 1950’s. Since 1985 the housing price to median income ratio has increased from 3.4 to 11.4; and with virtually static wages and rising house prices this ratio is certain to worsen. The Government’s response has been limited to muddle-headed words. Since housing is the largest and most important material component in the living standards of the vast majority of Australians their affordability for first-home buyers should surely be a high priority for Government.
There are three obvious steps to solving the housing problem. Firstly, reduce housing demand from local and foreign investors seeking capital gain (resulting from the demand-supply discrepancy) and from local investors who also seek to reduce their taxable income. Secondly, reduce the rate of population increase. At 330,000 last year–of which net migration was 184,000—this is close to adding the population of another Canberra. The third step is to increase the supply of housing.
Examining these steps
The Government could readily block the sale of housing to overseas residents, now accounting for over 20% of purchases in Sydney and Melbourne, to protect the interests of Australia’s first-home buyers over the interests of non-residents seeking capital gain. The Government’s recent concern with overseas housing investors has been confined to their limited purchase of established housing rather than with their much greater investment in new housing.
The Government could also phase-out tax advantages given to local investors through both negative gearing (permitting interest on housing investment as a tax deduction from total taxable income), and discounted tax on capital gains. These tax perks, going primarily to the well-off, not only increase housing demand and therefore housing prices but substantially cut Commonwealth revenue. The Australia Institute estimates this year’s negative gearing will cost revenue $4.2 billion. This could fund around 17,000 homes for low income earners—enough to house the current estimated 100,000 homeless in a few years. While the Government claims negative gearing increases housing supply the statistics show the great majority of such investment is in established housing.
Thus the Government has not only permitted, but played a crucial role in, the manipulation of a market which has made housing increasingly less affordable for first-home buyers. And this occurs at their time of greatest need.
On the supply side the Australian Government could, at no expense to the budget, establish a National Housing Corporation (NHC) to construct additional housing for sale and rent to overcome the market’s shortage of affordable housing. The National Housing Supply Council, within the Australian Government’s Department of Treasury until it was abolished by the Abbott Government shortly after coming to Office, estimated the shortage of affordable housing was 599,000 in 2010. Considering the steep rise in housing prices and the very small increase in average earnings since then this figure would now be much larger.
The proposed NHC could borrow at record low interest rates. And since Government can borrow significantly below the rate to the private sector and because the Corporation could be established as a community service, rather than as a profit-making enterprise, it could sell or rent housing well below current market prices. Moreover, the increased supply would substantially reduce these market prices. Since interest and administrative costs could be built into sale prices and rental charges the NHC could operate without cost to the budget. Of course, the Government could use the budget to subsidise a proportion of these houses to assist low income earners and those dependent on social services.
These policies would lead to a considerable reduction in current housing stress-- defined as mortgage repayment or rental cost exceeding 30% of gross household income. Over recent decades this has been steadily increasing and, with unchanged policies, will further increase.
As a major social bonus the NHC could be subject to statutory requirements for quality architecture and town planning. Furthermore it could be required to take account of location concerning both public transport and employment opportunities usually ignored by private developers. Such policy, perhaps complemented with the establishment of an Urban Development Authority, could eventually help save State Governments many billions of dollars in transport costs for both new roads and expanded public transport designed primarily to move workers from their housing to place of work!
Taking account of the potential of the NHC it could make the single largest contribution to reducing poverty since mortgage repayments and rent represent by far the largest item in the vast majority of low to middle income family budgets.