Harold Levien on Housing
Solving the Housing Problem in Australia
The Abbott Government’s economic policy has aggravated Australia’s serious housing problem. The Reserve Bank Governor recently explained the Bank’s repeated interest rate reductions attempted to stimulate the depressed economy. He suggested the Government could borrow at record low interest rates to expand infrastructure spending, which has dramatically fallen since coming to Office, to provide much needed economic stimulus. There was no Government response.
These low interest rates have concerned the new Head of Treasury fearing 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. This concern over interest rates has dismayed Mr Abbott--who, against all precedents, recently appointed the new Treasury Head from outside the public service-- and expressed his support for rising house prices.
The low interest rates have attracted very many housing investors especially in Sydney and Melbourne. This has led to escalating housing prices in those cities making them increasingly unaffordable for first home-buyers.
Ironically, despite 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 income ratio has increased from 3.4 to 11.4; and with virtually static wages and rising house prices, this ratio will worsen. The Government’s response has been muddle-headed words.
There are three obvious steps to solving the problem.
- The first: reduce housing demand from local and foreign investors seeking capital gain (resulting from the demand-supply discrepancy) and from local investors also seeking to reduce their taxable income.
- The second: 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: increase the supply of housing.
Looking at these, the Government could readily block the sale of housing to overseas residents, now accounting for over 20 per cent of purchases in Sydney and Melbourne. This would aim to protect the interests of Australia’s first-home buyers over non-residents seeking capital gain. The Government’s recent concern with overseas housing investors has been confined to their limited purchase of established housing as against 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 not only increase housing demand and therefore prices they substantially cut Commonwealth revenue.
The Australia Institute estimates that this year negative gearing will cost revenue $4.2 billion. This could fund around 17,000 homes that, over six years, could house the current estimated 100,000 homeless. Despite the Government’s claims that negative gearing increases housing supply, statistics show the great majority of such investment is in established housing.
The Government has not only permitted but also played a role in the manipulation of the market that has made housing increasingly less affordable for first-home buyers. This hits first home buyers at their time of greatest need. Moreover, housing is the largest and most important material component in the living standards of the vast majority of Australians.
On the supply side the Australian Government could establish a National Housing Corporation (NHC) to construct additional housing for sale and rent to overcome the market’s shortage of affordable housing.. The requirement is variously estimated at up to 500,000 houses and apartments. It could be done at no expense to the budget. A National Housing Corporation could borrow at the current record low interest rates. Since Government can borrow at around 2% 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 significantly below current market prices. Moreover, the increased supply would substantially reduce 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.
These policies would lead to a considerable reduction in current housing stress which is defined as mortgage repayment or rental cost exceeding 30% of gross household income. This has been steadily increasing over recent decades 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!
The NHC could also 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.
Harold Levien is a freelance writer on political and economic issues. After graduating in economics he founded and edited a monthly review of current affairs, Voice, The Australian Independent Monthly. It lasted five years. After its demise he lectured in economics. He is now retired.