Source: ABC News
I have been writing for 2 years that I believe the actions by state, federal and local governments to address housing affordability have been laughable. The reality is they know that the majority of voters, while voicing concerns for those attempting to get into the housing market, dont really want to see the value of their assets drop by 10 – 20% to make this possible. Least of all politicians, who as a demographic, are highly represented in the property investment space.
Ian Verrender writes of the real issues facing anyone wanting to address this issue:
There’s a nasty little secret about housing affordability.
For all the furrowed brows, the sombre looks and the public handwringing from policy makers, no-one is actually serious about fixing the problem because they all fear the potential fallout.
The Government is running in circles on the issue while the Reserve Bank is praying the mess will slowly evaporate over time.
It’s become a regular event; a politician conjures up an outlandish idea to again make housing affordable to the masses.
If it’s not a cash splash to first home buyers, it’s a harebrained scheme to allow younger Australians to dip into their superannuation. Last week, it was a plan to force banks to lower lending standards.
In each case, the net effect would be to lift demand and raise the cost of housing.
Unfortunately, at this point in the economic cycle, there are only two mechanisms that could solve the social and political issue of our time.
The first is for housing prices to experience a dramatic fall. And the second is for wages to rise substantially.
The first comes with a nasty side-effect: it would create economic chaos and send many of our banks to the wall.
Achieving, or at least promising, the second might get you elected but ultimately would prove disastrous with spiralling inflation and, you guessed it, a probable spike in housing prices.
Both are unthinkable. A crash could be catastrophic because our banks essentially have morphed into glorified building societies, with the bulk of their earnings geared towards residential mortgages.
The two biggest lenders, Commonwealth and Westpac, have around 60 per cent of their loan books devoted to housing.
What’s the problem with asset price bubbles?
Real estate is baked into the Australian psyche. We talk about it ad nauseam, owners obsess over upgrades and renovations and those outside the owners’ club fret about how to enter.
All up, Australians are in hock to the tune of more than $1.4 trillion on housing. That’s a hell of a lot of debt just to keep the wind and rain out. Of that, more than half a trillion is on loan to property investors.
If you want an example of just how painful a property market crash could be, cast your minds back to 2007 when a meltdown firstly in the American and later the European property markets were the catalysts for the greatest ever crisis in global finance.
It would be a similar story here and once again, it would be taxpayers riding to the rescue.
So how about the slow, grinding house price slide? Unfortunately, that could be just as debilitating.
That’s because modern economies are completely geared to growth. At the micro level, profits, wages and taxes all ideally should steadily increase, feeding into a moderate inflation rate and modest rises in asset prices that feeds into an expanding economy.
When asset prices — like housing — slowly deflate over many years, investment freezes, confidence evaporates, consumers spend less, and the economy becomes moribund.
Think Japan. It’s been in almost a constant state of recession since the great 1980s real estate bubble began unwinding in the early 1990s.
And therein lies the problem with asset price bubbles. All that joy and exuberance on the way up comes with an equal dose of pain and hardship when it all unravels.
Governments and central banks will do almost anything to avoid a bubble bursting, which is why no-one is serious about housing affordability.
Australia’s obsession with real estate reflected in tax system
So how have we arrived here? Australian housing was already among the world’s most expensive before the Reserve Bank began hacking into interest rates in 2012.
But in the years since the financial crisis, Sydney and Melbourne real estate has almost doubled along with strong gains in most capitals.
Our obsession with property is reflected in our tax system.
The family home, now the biggest asset for most Australians, is tax free.
For investors, a punt on another dwelling allows you to reduce your income — and your annual income tax — and as an added bonus delivers the ultimate gift: a profit that’s taxed at half the rate your normal income attracts.
Despite what anyone tells you, the tax system bears a great deal of responsibility for our current predicament.
Investors have plunged into the housing market during the past five years and, in terms of new loans, have regularly accounted for around half the money lent for real estate.
It wouldn’t be a problem if they were investing in new housing. That would increase the overall housing stock, increasing supply, providing a counter to the increased demand.
But until recently, investors overwhelmingly favoured existing houses, with about 93 per cent of investor loans bidding against owner-occupiers.
Unwinding those incentives would be a first step in fixing the problem.
But when a partial wind-back of negative gearing was proposed at the last election, it took no time at all for the politics to kick in with Prime Minister Malcolm Turnbull quick to deride the policy, arguing it would “smash home prices”.
Even if prices drop 10pc, housing remains unaffordable for many
Last week, reports surfaced the Prime Minister had formulated his own plan, to scale back the discount on capital gains tax.
As a policy, it could have been even more efficient at tidying up the property investment problem than the ALP’s.
But, as has become the norm, it was a policy floated anonymously in the media before the inevitable backflip and official denials.
As a tax change proposal, it lasted all of four hours, shot down within the party room.
In the ensuing policy vacuum — and with the tax system geared to turbocharge prices — the Government and the Reserve Bank are praying for a moderate but relatively quick property market slump; a minor correction and a plateauing in national prices at the lower levels.
They’ve got all their chips loaded onto the supply argument.
Rather than curbing demand by eliminating investment distorting tax policies, they’re hoping that all those new apartments coming on stream in Brisbane, Sydney and Melbourne, will flood the market and put a lid on price growth and maybe even cause prices to fall.
Investors, they hope, will be taught a valuable lesson: that prices don’t always rise. And the handy side-effect will be that all that construction in the past few years has provided a lot of new jobs.
The problem is, if prices drop — say 10 per cent — in a correction, they’ll still be way above where they were just five years ago.
Even if they stagnate from then on, as everyone hopes, it will take decades before housing becomes affordable for first-time buyers.
Unfortunately, it appears the great Australian dream is coming to an end.
Future generations increasingly will only be able to afford real estate through inheritance — creating class divisions — unless there is a major overhaul of the tax system, or a collapse in prices.
In the meantime, don’t believe anyone who claims they have an easy and painless way to make housing affordable.
It just doesn’t exist.