The housing market seems to defy logic. Last week several suburban records and the overall Canberra record for a house price were broken.
So much for a bust following the boom, or even a slight cooling off. What is happening?
We have plenty of land. Governments, which have the power, profess a desire to do something about it. Australia has one of the most efficient home-building industries in the world.
Yet the price of dwellings as a proportion of income is among the highest in the world.
The Demographia International Housing Affordability Survey which looks as a all major urban markets in Australia, Canada, Ireland, New Zealand, Britain and the US, rates Australia badly.
It calculates affordability by expressing the median price of a house as a multiple of average earnings.
Sydney, on 8.5, was the least affordable city in the world outside the US in the most recent survey. The six Australian state capitals were in the top 25 of the 100 cities surveyed in the six nations.
“The most pervasive housing affordability crisis is in Australia, where all markets in metropolitan areas with more than 1,000,000 have median multiples of 6.0 or higher,” the survey said.
The property lobby groups would have us believe that property taxes and planning and environmental requirements are to blame. They have a point, up to a point.
But the GST hit everything, not just dwellings. As environmental building requirements, the efficient Australian building industry has taken them in its stride and in the long run they make housing more affordable as the cost of running a dwelling falls with energy efficiency.
Most other developed countries have similar property taxes and environmental requirements.
However, it is pertinent that the US and Australia which have the worst affordability have high capital gains taxes and they are both federations.
Capital gains tax is a big sleeper in Australia. It was introduced in 1985 for all the right reasons: to prevent speculation and to end tax-avoidance schemes whereby income is turned to capital and ultimately taken tax free.
It was lowered by in 2000 – effectively halving the rate if the capital item has been held for more than a year.
Even so, Australia remains one of the highest taxing nations for capital-gains tax.
Many people thought that Costello’s reduction of the tax in 2000 caused investors to flock to invest in housing and that pushed the price of houses up. But that is quite simplistic. The tax was reduced on all forms of capital, including shares, so why should there have been a special effect on housing?
I suspect (and it would be good for an expert economist to do the research) that the effect of the capital gains tax on housing has come about slowly over the whole 22 years the tax has been in force. In the first few years after 1985 many property investors who had bought before 1985 thought it best to hang on to their investment because ultimately it would be free of capital gains tax, so why sell and buy into another investment that would attract the tax?
This in itself tightened the housing market.
As time went on and these people retired or otherwise had low-income years they sold, so that now, there are very few houses around bought before 1985 and held continuously. Now the vast majority of investment dwellings were bought after 1985 and will incur capital gains upon sale.
People do not like paying tax. Faced with a whopping capital-gains-tax bill, even after Costello’s cut, they would prefer to hang on to their properties if possible.
It is different for shareholders. They can sell a little bit at a time and pay a little bit of capital gains each year. So shares are freely traded.
But selling a house means one whopping capital gain in one financial year added to your taxable income, pushing you into the highest income-tax bracket.
In short the capital gains tax must mean fewer investment properties changing hands and therefore greater scarcity and higher prices. Why sell and cop a tax and have less to reinvest?
Add to this high stamp duties which make moving less palatable; the highest immigration for decades; the buck passing between the central and state governments; the erosion of the states’ tax base so they rely more on property taxes, as well as all the things the property lobby groups whinge about, and of course you have an affordability crisis.
But my suspicion is that capital-gains tax is a significant but not much-talked-about contributor to the affordability crisis. That and immigration.
Britain has got the right idea. It tapers the tax so it virtually disappears after 10 years. Under the Australian system it hovers until it becomes a de-facto death duty. Indeed, the liability could hover (unindexed) for more than a century in the case of farms and businesses passed to successive generations.
As for governments doing anything about it, the ACT’s experience is a prime example of active inaction.
It set up the “Affordable Housing Taskforce” in February 2002. The “taskforce” reported and the Government responded in 2004. The recommendations and responses are full of blather words: “It is recommended that utilisation of social housing stock be improved through the following actions: a benchmark that reflects community standards for asset utilisation be developed and adopted . . . .It is recommended that the benefits of any affordable housing assistance should be retained by the community so that assistance is sustainable in the longer term.”
Do I have to quote any more?
In fact it is too late. Politically, no government could survive a dramatic fall in house prices, especially if its policies deliberately engineered it. Existing owners (especially those with big mortgages) would freak.
Let’s face it: government policies were largely responsible for the huge rise in the cost of housing in the past two decades, but right now governments simply can’t afford affordable housing.