GOVERNMENTS, at state and federal level, are only looking at a half the “housing affordability” crisis, if that. The missing bit is that we have to go beyond merely discouraging investors from buying more houses to taking action to encourage existing investors to sell and move their money into more productive activity.
How do you do that? Well, governments got us into this mess – not the market. So only government can get us out of it. State Governments’ contribution to the mess has been ballooning stamp duty and poor tenancy laws. The Federal Government’s contribution has been negative gearing, capital-gains-tax concessions and high immigration.
Any unwinding has to be gradual so as not to cause catastrophic disruption, but there is no need to fully “grandfather” existing arrangements as Labor proposes with its changes to negative gearing and capital-gains taxes. Grandfathering only encourages people to keep their existing housing investments, because to sell them, would mean losing the special concessions.
There is nothing unfair about reversing tax concessions, especially if they are gifts like the capital-gain concession and negative gearing. Tax rules change constantly.
Further, governments should not add any more flames to the fire. It would be insane to allow people access to their super to help pay a deposit. It would just artificially increase demand and therefore prices. If you arm all home-buyers with an extra $40,000 in a market where investors have seemingly limitless funds, you will just push prices up by $40,000.
We saw this with the boost to the first-home buyers’ scheme: people were desperate to get the freebie so demand shot up.
Incidentally, Treasurer Peter Costello was responsible for that, along with the capital-gains concession. He seems to have been the chief architect of this crisis.
Almost half , by value, (49.3 per cent) of housing loans are for investors. That is about 10 percentage points higher than investor share of the existing housing stock. So the trend is the wrong way. It means we have to not only keep investors out of new sales but also encourage existing investors to leave.
We need a subtle and orderly reversal of negative gearing and the capital-gains concession.
On negative gearing the Government should look at the interest component that makes a housing investment negative and reduce the deductibility of those payments by 10 percentage points a year until it is no longer deductible.
Deductions on improvements and outgoings should remain deductible against other income whether they make the investment negative or not. This would encourage improvements for tenants and help the economy.
Meanwhile, negative gearing for investment in shares and active investments should remain. Then we would watch the gradual flow of capital from housing to shares.
Similarly, the capital-gains tax concession should be reduced by 10 percentage points a year until it is gone. But investors should be able to reduce the notional gain by the amount of inflation and should also be able to spread the gain over, say, five years so they do not get unfairly pushed in to a higher income tax bracket in the year of the gain.
Again, it would encourage investors to leave housing. We would watch house prices stabilise of even fall slightly as more houses come on to the market.
And that is the nub here. Politicians are constantly saying that they want houses to be more affordable, but cannot bring themselves to admit that that means that prices would have to come down.
We should also encourage more efficient use of the housing stock by encouraging downsizing by empty-nesters and moving rather than extending by growing families. This would mean getting rid of stamp duty. In the past 40 years stamp duty has gone from a nominal $20 or so to an enormous grab by state governments, discouraging people from moving to more suitable housing. Who wants to hand large amounts to the government for no return?
It could be done at a stroke and be replaced with land tax. There would be no stamp duty on all purchases after Budget night, but there would be a land tax imposed on all dwellings bought after Budget night.
The Commonwealth would have to tide the states over until the land tax (which it would hand to the states) made up for stamp duty, as it soon would. Land tax is a far more efficient tax than stamp duty, so in the long run, we would all be better off. Incidentally, there was a federal land tax until the 1950s, so the idea is not new.
The Constitution gives the Commonwealth power to make laws with respect to taxation, so it could force these measures if the states did not cooperate.
The ACT has made a start in replacing stamp duty with higher rates and land tax with a 20-year program, but in other states rates are a local government matter. Moreover, we should not wait 20 years to make our tax system fairer and more efficient.
Housing affordability must also include renters. Critical to that is security of tenure because of the costs of moving.
Treasurer Scott Morrison is mistaken to think that removal of negative gearing will cause rents to rise. Rental markets do not work on the basis of cost recovery. They work on the basis of charging as much as the market will bear. That is why it would be a good idea to charge GST on rents. Rents would not go up. Rather property owners would bear the tax.
It might also encourage some to leave the housing market.
Greater security of tenure could be achieved with longer leases; automatic renewal of annual leases with rent rises pegged to wages growth; and property owners having to lodge a bond and pay it to the tenant if they breach the lease.
Land tax should be at a flat rate and not increase according to the value of property held, to encourage super funds to invest in housing.
Leases should also require the landlord to pay the first reasonable part of the electricity bill to encourage them to go solar. The tenant would pay the excess to encourage energy saving.
Immigration should be cut to reduce demand.
Lastly, the family home over, say, an indexed $1.5 million or $2 million, should attract capital gains tax and be part of the assets test for the pension and other welfare.
But do not expect any of these sensible measures to be in the Budget.
And even if some were, it has taken 18 since the Howard Government measures made this crisis inevitable, so it will probably take 10 years to get out of it.
This article was first published in The Canberra Times and other Fairfax Media on 15 April 2017,