John Daley: A quick overview of ways to tackle housing affordability

John Daley
John Daley

Our recent Flash Forum on Housing Affordability kicked off (after an introduction by Louis Christopher) with a lightning speed overview by the Grattan Institute’s John Daley on the range of options available to tackle housing affordability.

To think about the universe of options on housing affordability is to think about which things will actually reduce house prices one way or another. Some things won’t actually make much difference. Some things will make quite a big difference. And then of those policies: which of them will be good for the budget, good for economic growth, good for equality? And which will be bad? And you can get yourself a nice little matrix.

And I don’t know why all the nice things always happen in Cairns [in the top right corner of the matrix], but up in Cairns are all the things that will have a really big impact on housing affordability and will also be good for the budget and the economy, and then down of course in Albany you have all the things that will be pretty useless for housing affordability and will also be bad for the economy. So that is one way you can think about this problem.

And then you can also think about it in terms of which of those things might actually be reasonably easy for governments to do politically, and which of those things are going to be difficult. And the problem is pretty much all the things that are good ideas are up in Cairns and are very difficult for governments to do, and all the things that are easy tend to be in Albany if you are unlucky, and in Perth if you are kind of reasonably lucky. So those cosmetic changes essentially range from cosmetic and harmless to cosmetic and essentially counterproductive.

“The problem is pretty much all the things that are good ideas … are very difficult [politically] for governments to do.”

So I want to kind of put aside all of the things that are cosmetic, so whether that is about putting more money in homeowners’ pockets by first home owners’ grants, allowing you to use your super, putting money in accounts – we have been there, we have done that, we know the impact on housing affordability is actually negative. It pushes prices up last time I checked. No one suggested there was a lack of demand in the housing market, and of course all of those things are very expensive to budget. So I’m going to put all of those things to one side and instead focus on what are the small number of things that might actually improve housing affordability and not be horrible for the budget, the economy and so on?

Demand-side interventions

So first of all we have a series of things that would one way or another reduce demand.

Now the largest of those is to impose capital gains tax on owner-occupied housing. I’d be surprised if that shows up anytime soon.

Slightly smaller and actually a plausible candidate is reducing the capital gains tax discount and getting rid of negative gearing. It would certainly push things in the right direction and it would be quite a big plus for the budget.

Putting owner-occupied housing in the pension assets test would help a little bit – mainly it would help the budget and then you are onto things like macro-prudential rules and constraints on foreign investors. They won’t do any harm but history suggests that their impact on housing prices would be pretty small in the medium run. So that’s what you can do on the demand side and, interestingly, pretty much all of those are things the Commonwealth government is responsible for.

Supply-side interventions

Then you can look at the supply side so you can essentially make it easier to subdivide the middle ring, you can make it easier for planning permission to put up buildings with lots of storeys whether that’s in the middle ring or in the centre – either way create lots of apartments. You can make it easier to subdivide and put up apartments along transport corridors, you can increase greenfield land supply – all of these things will obviously increase supply. And they will help. All of these would be material and the largest I would suggest would essentially be around subdivision in the middle ring, because that is the largest area of land. And everyone agrees that that’s a good idea … in the suburb next to theirs!

“The largest [supply side intervention] would essentially be around subdivision in the middle ring. And everyone agrees that that’s a good idea … in the suburb next to theirs!”

I note that pretty much all of those changes to supply are things that are fundamentally jobs for state governments and for local councils, which are of course ultimately subject to state governments. And therefore it is no surprise that the Commonwealth government thinks that housing affordability is a problem with supply and state governments think it’s a problem with demand.

Other issues

And the reality of course is it’s both but I would suggest the big question is around supply – it’s going to be the big leader. And then there are things you can do about improving infrastructure so that it’s easier to get from wherever you are to wherever the jobs are – of course that tends to be extremely expensive improving that kind of transport infrastructure, but nevertheless it can make a difference.

And then given that the reality is that one-third of the population does rent and is probably going to be renting for quite some time, we can make renting a more attractive option. It’s a very unattractive option relative to owner-occupied housing, partly because we give so many tax incentives to owner-occupied housing and partly because we have wound up with a housing market that has very, very few long-term leases and it gives tenants very little rights to make their house into a home – anything from putting a picture on the wall to owning a pet.

Land tax

And one of the things that would actually help there, and not enough people talk about, is the state government land tax regime.

If you have a progressive land tax regime that imposes much higher rates of tax on people who own lots of property then you wind up with very few people who own lots of property, and inherently people who only own one or two properties are very reluctant to have long-term leases because they have no liquidity whereas people who have a property portfolio of 10 properties tend to be much more excited about having tenants on five or 10 year leases because they know if they need liquidity one of their tenants will be moving out in the next six months, because of the law of averages. And a state land tax regime would make that very difficult.

We would do much better to go to land tax regimes with no threshold and with flat rates rather than the current progressive rates, which look very progressive, look as though they will be terrific for reducing inequality and all of that, but in practice wind up just resulting in a residential property market with very little in the way of long-term leases.

So that’s the summary, there’s the good, bad and the cosmetic. Most of the rest of the stuff is cosmetic, and that all lives down in Albany. Of the stuff that is actually remotely good, there’s demand, which is fundamentally a Commonwealth Government problem; there’s supply, which is fundamentally a state government problem; there’s transport infrastructure, which Commonwealth and state governments find ways to conspire to win more marginal seats; and then there’s whatever you decide to do about renting, which again is by and large a state government problem.

John Daley is chief executive of the Grattan Institute.

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One Response to “John Daley: A quick overview of ways to tackle housing affordability”

  • Paul Corrigan says:

    We should improve the way state and federal government interact and compete. More centralised government I think. I believe we need citizen juries as a system of government generally, not just for certain issues. We should not be governed by a ruling class bias of the privileged.

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