A housing affordability policy for federal Treasurer Mr Scott Morrison
8 May 2017
Here it is: The Fifth Estate’s policy proposal on housing affordability for the federal government, crafted from the Flash Forum on Housing Affordability on 2 May 2017, and related investigations:
Remove negative gearing
Remove capital gains tax concessions
Dramatically increase the supply of social and community housing, including through bond aggregation and professional management/coordination of the sector
Link state and territory funding to housing outcomes in order to stimulate more localised action that targets improved qualitative sustainable outcomes
Improve public transport infrastructure to connect housing and jobs including in regions
Tax foreign investment and develop reliable and transparent analysis of its profile and impact
Tax empty housing alongside a fair, efficient and transparent methodology for its assessment
According to a cross section of the most relevant and informed people on housing affordability who attended our Flash Forum on Tuesday night, 2 May in Sydney, the issue of runaway housing prices in Sydney and Melbourne is complex and requires multiple actions on a number of fronts.
- Watch for our full edited transcript next week
- See this week’s editorial on why the state government has so much of the power in housing
The levers available to the federal government might be limited – some by the impact on the budget, mostly by the politics – but they are powerful.
At the conclusion of our forum, the spotlight turned to the states and territories the localised actions available to this level of government. But the federal government can play a big role with this level of government by demanding better outcomes in its funding assessment criteria, such as more creative, sustainable solutions in delivering supply that are better linked to environmental and community needs than they have been in the past.
In our biggest cities, the issue is urgent for our young first home buyers and many older people. Serious momentum is building for action.
It might be too late to influence this year’s budget due to be handed down next week, or is it? It’s possible the Treasurer has a few alternative options ready to go, waiting to see what the mood of the people is at the last minute, to decide which one to use.
But action is needed if not now, soon. Because time is running out.
As Grattan Institute chief executive John Daley said the day before our forum, “Continuing inaction will further reduce home ownership, increase inequality, dampen economic growth, and increase the risks of an economic downturn.
“The public has figured out that there is a real problem. Unless governments improve the reality rather than appearances, public trust in political institutions will continue to fall. Pretending there are easy answers will only make things worse.”
We promised a policy that could be used as a set of solutions by federal Treasurer Scott Morrison to hopefully give him some confidence to act.
Following are the specific proposals from our panellists and moderator:
John Daley, chief executive, Grattan Institute
- Include owner-occupied homes in the pension assets test.
- Scale down capital gains tax over five years, not grandfathered. So 50 per cent this year, 45 per cent next year and so on.
- Remove negative gearing.
Nicki Hutley, chief economist, Urbis
- Remove Capital Gains Tax concessions
- Assist the community housing model to increase the supply of affordable housing.
Adrian Harrington, Folkestone head of funds management, the Treasurer’s appointment to the AHURI board
- Invest in infrastructure to support density, such as more high speed rail to connect cities, and invest in more transit within cities to connect people with employment opportunities.
- Establish a financial aggregator to facilitate institutional investment into affordable housing at scale by allowing community housing providers to access to capital markets.
- The federal government to provide a forum for innovative and expert advice to support delivery of affordable housing in Australia with representatives across industry, community housing, and local and state and federal government groups.
Robert Harley, Flash Forum moderator, former property editor, AFR
- Consider a change to capital gains tax discount
- Increase social housing bond aggregation
- A federal tax on empty properties
Fair Housing Australia, audience members at the Flash Forum
- Develop a National Housing Policy with specific housing objectives that can then be used to inform other policies like tax, foreign investment, tenant rights, financial regulation, planning and development, infrastructure planning
- Quarantine negative gearing and remove CGT discounts
- Reinstate the pre-2009 foreign investment policy which stated that the net impact of foreign investment policy for housing is to “maintain greater stability of house prices and the affordability of housing for the benefit of Australian residents.”
- Tax land banking and empty dwellings
- Restrict the level of leverage self managed super funds can use to invest in housing
- Include full housing costs in the RBA’s calculation of inflation
- Improve renter’s rights and security of tenure
- Remove all FHB incentives
See separate article for further explanations of these policies
Behind the policy
See the state of the market report presented at the forum by Louis Christopher from SQM Research.
- An edited transcript of the proceedings will appear next week.
Flash Forum moderator Rob Harley, former property editor at The AFR, said the broad consensus from the experts, is that “just three things will bring prices down: dramatically curtail immigration; pump up interest rates dramatically, or remove capital gains tax from the family home.”
All of these are politically and economically unpalatable, most agree.
Having said that, and thinking about the drivers for investors over a long period, capital gains tax doesn’t figure so strongly, he said. The immediate tax write off of negative gearing is a bigger driver.
“Property is a secure form of investment and negative gearing allows you to bid more.
He said what happens to the market if capital gains or negative gearing were suddenly changed depends in part to underlying conditions.
In 1985 capital gains tax was introduced on property and then the government removed negative gearing. Rents in Sydney soared.
But the same thing didn’t happen to Melbourne or Perth because in Sydney there was a fundamental lack of supply and built up demand, so as investors exited the market rental stock was removed.
“It is not ergo a negative gearing problem.” In other words, what happens to the market depends on other conditions as well, he says.
“We need a holistic approach; we need to address demand and supply.”
So Harley suggests that on the social housing side bring on housing bonds that addresses that particular sector of market.
Which is not so large, at least in Australia – at about five per cent. In other parts of the world, it can be significantly higher.
However, there is some concern that changes now would have too negative an impact on prices at a time when the market has peaked.
“I don’t think [Treasurer Scott] Morrison should be thinking about changing it now.”
Harley also pointed out that prices can adjust downwards in Australia but in the past they haven’t dropped by much.
Louis Christopher’s presentations at the forum was a vote of faith in continuing strong prices. Christopher pointed to significant wealth in the market that could be expected to hang on tight to their properties during a downturn and not sell.
Australians have a long track record of not ditching property and hanging on, Harley says.
Unless there is a major economic downturn.
Christopher said the weak link could be the level of debt carried by stretched households.
Harley pointed to the “sheer influx of people in Sydney and Melbourne”, an improving local economy and an improving global economy.
“Hopefully it will peak out.”
Citi this week forecast potential price drops of seven per cent and this was “about right”, Harley said. “That’s what happens when the music stops. Even in 1989-90 when it fell back after being absolutely crazy it dropped back 11 per cent.
“So if it falls back even 10 per cent now, that takes you back to August last year.”
John Daley wrote a lengthy article in Inside Story this week where ahead of our forum he ran through the all the potential levers flagged in recent months, and demolished most of them.
“If governments want to be seen to be serious about housing affordability, they’re going to have to make tough choices and avoid the temptation to do the easy (and stupid) things,” he wrote.
In financial terms the overall impact on investments of removing capital gains tax is a bigger deal than negative gearing, but in the short run negative gearing is about less tax this year than next, so it could have a bigger impact on behaviour, he told us on Thursday.
(People will tend to weight today’s financial benefit or impact more highly than and equally weighted impact in the future.)
On immigration he said cutting this would help but would impact negatively on the economy.
Daley said in his article that a key challenge for the government was to explain why improving housing affordability mattered. It would presumably mean any pain associated with action will be more easily borne.
Among ideas that would have just marginal impact on affordability were “shared equity” schemes, a bond aggregator for the social housing sector thought it would boost the supply of social housing – restricting foreign investment, and taxes on foreign investment in housing.
Using superannuation to buy a first home has been pilloried by most economists. By Daley here and by Saul Eslake in these pages here. As have any other “solutions” that put more money in the hands of buyers: inevitably buyers simply use that additional money to pay more for the property.
Daley also doesn’t like incentives for seniors to downsize their homes.
Cutting immigration would bring prices down but harm the economy.
The most obvious way the government can materially reduce housing demand is by reducing the capital gains tax discount and abolishing negative gearing,” he says.
But he says, the effect on property prices would be modest – they would be roughly two per cent lower than otherwise – but would-be home owners would benefit.
Economic benefits would flow too. The current tax arrangements distort investment decisions and make housing markets more volatile.
Contrary to urban myth, rents wouldn’t change much, nor would housing markets collapse.
“If phased in, the reforms would be easier to sell politically and would dissuade investors from rushing to sell property before the changes come into force.”
Nicki Hutley said her suggestion on community housing was “a question of funding support for state governments to invest through land grants and housing stock transfers.
“The federal government is fairly limited in what it can do on this front. The Bond Aggregator model will only lower costs for CHPs at the margins.”
She remained neutral on negative gearing.
“I am not yet convinced on negative gearing and don’t think the evidence is there to suggest that tweaks would help.”
Adrian Harrington said on negative gearing that this issue is that “mums and dads are major providers of rental accommodation in Australia and we don’t have institutional ownership of rental accommodation as in other countries like the US and the UK.
“Tinkering with one part of the tax without comprehensive a tax reform program is a recipe for disaster.
“And while everyone is concerned with the extent of price growth in Sydney and to lesser extent Melbourne, what will changing the negative gearing what will it do to key transient cities like Wagga, RAF town and Bathurst, a university town?”