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BFCSA: State and federal governments are promising action to make property more affordable for first-home buyers. But are they best policies?

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From my recollection stamp duty was to be abolished when GST was introduced...

The green, amber and red of housing affordability policies

State and federal governments are promising action to make property more affordable for first-home buyers. But what would be the best policies?

Matt Wade Jessica Irvine

18 April 2017

http://www.smh.com.au/business/the-economy/the-green-amber-and-red-of-housing-affordability-policies-20170414-gvl9ci.html

It costs $47,880 each year to service a typical loan on a median-priced house in Sydney, research by the Housing Industry Association shows.

Numbers like that have pushed public anxiety about housing costs to an all-time high. The latest Ipsos Issues Monitor poll found 41 per cent of people in NSW now rate housing as one of the most important challenges confronting the community, up from 29 per cent in 2013.

The experience of people such as Daniel Stone is driving the public's apprehension about property.  Despite owning his own business and having a good income, the 29-year-old says he still can't break into Sydney's "crazy" housing market.

"When people start seeing houses like a game of monopoly, it becomes impossible for the rest of us," Stone says.  He believes government policies have made getting in the game much harder for young people now.

"It was always tough, but the first rung of the ladder was easier to access than it is now," he says.  "We just keep removing barriers for demand and government policies are adding fuel to the fire, it's creating competition for magic money."

State and federal governments are promising action to make property more affordable for first home buyers.  But what would be the best policies to achieve that?

As the Treasurer, Scott Morrison, warned in a speech last week "there is no silver bullet" to improve affordability. For start, housing policy depends on all three levels of government, which makes a co-ordinated response difficult.

But some policies would be more effective than others. We've divided potential affordability policies into three categories. Green – the best policies on offer. Amber – measures that would help but are probably not game-changers. And red – policies to be avoided.

Green light: the best options

Reduce the capital gains tax discount

When it comes to policies to promote housing affordability paring back the 50 per cent capital gains tax discount is the lowest of the low-hanging fruit.

The discount, introduced by the Howard government in 1999, has enhanced the appeal of property investment

and stoked demand for housing.

Independent economist, Saul Eslake, says this preferential treatment of capital gains also "distorts savings and investment decisions" and detracts from the overall equity of Australia's personal income tax system.

The 50 per cent discount will cost the federal budget $6.8 billion this financial year rising to more than $9 billion

by the end of the decade.

The 2010 review of the tax system by former Treasury boss, Ken Henry, recommended the capital gains tax discount be reduced to 40 per cent.

Many experts, and the Labor Party, think there's a case to go further. Before the last election the ALP promised to "reduce the capital gains tax for assets held longer than 12 months from the current 50 per cent to 25 per cent".

Paring back the discount would ease pressure on house prices by making property investment a little less attractive. The federal government has no better option at its disposal to limit upward pressure on property values.

More supply ... but in the right places

Politicians of every stripe go on about the importance of increasing the supply of housing. They are right with one proviso – our biggest cities, especially Sydney, need more houses in well-located areas.

While the number of dwellings built in Sydney has increased markedly in the past five years not all that new supply has necessarily come in areas of most demand.

Many new apartments have been built in and around the CBD and a considerable number of new dwellings have been constructed in outer metropolitan districts including Blacktown, The Hills and Liverpool. But the supply boost has not been nearly as strong in the so called "middle-ring".

John Daley, chief executive of the Grattan Institute, says substantial demand for housing in those well-located, middle-ring neighbourhoods is still not being met.

"While some of those people might settle for an inner-city apartment many are not keen on that so instead, they will keep bidding up the price of middle-ring houses," he says.

"Unless you turn a lot of those middle-ring homes into townhouses ... you may not get that much change in buying behaviour."

Daley says good planning that allows a significant increase in housing supply in the middle-ring would be "the biggest game changer" of all for housing affordability.

But that poses a stiff political challenge, especially for state and local governments, because many long-term

residents of middle-ring suburbs resist major changes to the character of their neighbourhoods.

In the longer term, the supply of well-located urban properties can also be increased with fast, efficient public transport.

Cut taxes on bank savings

A little remembered recommendation from the Henry tax review was that all forms of savings should be taxed at the same rate, to avoid distorting investments.

Along with recommending a reduction in the discount on capital gains on property and shares from 50 to 40 per cent,

Henry also recommended the discount be extended to interest earned on term deposits and other bank

accounts.

This would level the investment playing field between cash, shares and property, taking some heat out of the property market.

It would also give a boost to first-time buyers who typically save their money in term deposits.

While this would come at a cost to the budget, if introduced as part of a package to wind down the capital gains discount on property and shares, it could be cost neutral, or even boost the budget bottom line.

More public and social housing

There's a curious twist to Australia's housing boom. While investors have been piling into the property market, governments have reduced their public housing stock. Morrison noted last week that Australia now has 16,000 fewer public housing dwellings than in 2009.

Richard Denniss, the Australia Institute's chief economist, quips that the only people in Australia who seem to think housing is a bad investment are governments.

"Those with planning powers who can borrow money cheaper than everyone else apparently think housing is a dud," he says.

With the national waiting list for public or community housing approaching 200,000 there is a strong case for a sustained increase in the supply of public and social housing.

"If we had any interest in the affordability of housing then the state would be building affordable housing in convenient locations and renting it to teachers, nurses or whoever they think deserved it," says Denniss.

"If they wanted to sell it in 20 years' time they would make a fortune and then build some more."

One alternative proposal championed by Morrison that may be included in May's federal budget is the establishment of a "bond aggregator" to help community housing providers borrow at cheap rates to build affordable rental housing. This seems a sensible proposal.

Amber: next best

Sensible, consistent surcharges on foreign investment in housing

Housing markets across the Pacific Rim, including Sydney and Melbourne, have recently attracted a lot of interest from foreign investors, especially from China. This is likely to grow as China becomes more integrated into the global economy.

Research published by merchant bank Credit Suisse last month found foreigners are buying 25 per cent of new housing supply in NSW and 16 per cent in Victoria. The analysis, based on information obtained through freedom of information requests, said almost 80 per cent of foreign demand for housing in those two states is from China.

NSW and Victoria introduced foreign investor stamp duty and land tax surcharges last year. Several Pacific Rim housing markets, including Vancouver and Hong Kong, have similar schemes.

That means well designed – and possible much higher – levies on foreign investment in housing will be probably justified to ensure local first-home buyers are not disadvantaged.

Phase out stamp duty and replace it with a broad-based land tax

It's high time we did away with our worst tax – stamp duty – and replaced it with a broad-based property tax. A host of studies have shown stamp duty is gravel in the gears of the economy. One of its many distortions is to discourage families from moving to housing that best suits their needs.

Modelling by KPMG last year found a switch from stamp duty to a broad-based land tax would boost gross state product in NSW by $5 billion a year.

This change would reduce the upfront cost of a home (stamp duty on a median-priced Sydney home is now more than $40,000). And because this reform would encourage land to be put to its most productive use, it would help improve the affordability of housing over time.

A cap on negative gearing

A swag of economists have called for an end to negative gearing as well as a reduction in the capital gains tax mentioned earlier. Labor's policy is to only allow newly-constructed housing to be negatively geared by investors.

If a reduction of the capital gains tax discount fails to curb excessive investor demand for housing, changes to negative gearing could be considered.

The Reserve Bank has said there "is a case for reviewing negative gearing".  But there are also good arguments for leaving it alone.

Negative gearing – running losses in the short term – only works as an investment strategy if eventually the property appreciates in value enough to overcome those losses. As such, it is the prospect of capital gains that is the real driver of investment in property, which could be better addressed by winding down the capital gains tax discount.

Secondly, negative gearing is consistent with how other types of investment are treated in the tax system. A small business person who sets up a new business and employs staff is entitled to deduct any costs incurred in doing so. Too much complexity in the tax system can come at a cost.

Still, a sensible cap on the number of properties that can be negatively geared could help to curb some of the worst excesses in the market.

Red: policies to avoid

Allowing first-time buyers to use their super to fund a home deposit

Several prominent Coalition MPs have recently backed a plan to allow young people to put superannuation savings towards the purchase of a house. It's not a new idea – the former Treasurer, Joe Hockey, was the last politician to moot such as scheme in 2015.

But it's difficult to find an economist who thinks this is a good option.

Daley has labelled it a "fundamentally bad idea". Eslake calls it "fundamentally bad" and professor of economics at University of NSW, Richard Holden, labelled the plan a "complete own goal". The list of expert critics goes on.

The reason for their scepticism is that any policy that gives a large number of potential buyers more cash to spend in a hot market is likely to just push up prices.

The upshot? Wealth is shifted from young savers to older property sellers. Let's leave superannuation to do what it was designed for – provide a stream of income in retirement.

Tax breaks and grants to first-home buyers

Eslake warns that Australian politicians have experimented with "demand-side interventions" – various methods of support for home buyers – for 50 years without success.

These experiments have taken various forms from cash handouts such as first-home buyer grants to tax breaks like stamp duty concessions.

But none have stopped the steady decline in home ownership among younger households.  Eslake reckons it's

difficult to find a government policy that has been tried for so long despite such overwhelming evidence that it

doesn't work.

 

 

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