Can the Senate address housing affordability

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By Catherine Cashmore

Reposted from Macrobusiness

In the final hours of Federal Parliament for 2013, Labor Senator Jan McLucas succeeded in establishing an inquiry by the Economics References Committee, in addressing Australia’s growing housing affordability crisis, stating; “…pressures on affordability of housing in Australia have continued to intensify, especially in capital cities and mining communities.”

This appears to be ‘good news’ and something a growing ground swell of homebuyers and renters, limited by budget and feasible supply have been hoping for.

The inquiry is set to investigate the role of all levels of government in facilitating affordable home-ownership and affordable private rental, social, and public accommodation.

Importantly, it will, also look into policies designed to increase the supply of housing – perhaps the most critical and well proven factor in the potential long-term effectiveness of any sustainable solution.

However, as welcome as any inquiry into housing affordability is,  I question why we are using taxpayer dollars to produce a repeat version of the investigation undertaken under the Rudd administration, in June 2008?

The 2008 report entitled “A good house is hard to find: Housing affordability in Australia” was detailed in its content, drawing on evidence from organisations such as the Housing section in the Department of Families, the Master Builders’ Association, the Planning Institute, the Urban Development Institute, the Housing Industry Association, NATSEM, and the Treasury.

It addressed Australia’s tax policies, such as capital gains tax and negative gearing, which under the current structure, are widely recognised as having a negative impact on affordability and market activity – and an assessment of the construction industry’s future skilled labour workforce – a job to be undertaken by the National Housing Supply Council, which has subsequently been abolished by the Abbott government, thus giving a very clear indication where their priorities lie (not with housing).   It also covered rental accommodation, and social housing policy.

The report correctly stated “the need for greater responsiveness of land release and housing supply to market demand.” Stressing, “efforts to this end should occur in a variety of contexts.”

Some of the highlights included:

• Recognition that state and local governments’ planning processes are too complex and often involve long delays and high costs.

• Housing supply not adequately facilitated with community infrastructure.

• Developer infrastructure charges excessive and further restricting supply and inflating purchasing costs.

• The negative impacts of the ‘urban growth boundaries’ implemented by the Victorian and South Australian governments, resulting in land banking and increased prices.

• The type and quality of housing being constructed – i.e. not appealing to elderly downsizers or single parent buyers.

• And notably – a critical assessment of New South Wales, with the suggestion it had ‘probably’ done more than any other state in Australia to restrict the opportunities for urban growth on fringe land.

The 238 page document contains many submissions, including this one, by the New South Wales Division of UDIA (Urban Development Institute of Australia) in which Mr Blancato recommends the Commonwealth government expedite the release, rezoning and servicing of Commonwealth land with critical lead infrastructure to support the supply of new dwellings to the market:

“We are proposing that there should be an amount of land—a forward train of land of maybe 20 years—that is released and serviced.

The word ‘released’ is something that is very difficult to get a handle on. You will have successive governments release the same patch of land five times but not a dollar will be spent on infrastructure.

“The government used to invest in it—20 years ago you would go out to a release like Blacktown and the main sewer carriers were in and the sewage treatment plant was built. You would go out there and you could develop this five-acre parcel or that five-acre parcel. You might do a little bit of a lead-in, connecting infrastructure, but it was affordable.”

Whilst I wouldn’t advocate all the recommendations concluded in the paper, it is five years later and we seem to be no further forward.

Prices continue to rise from a bull run on established property in our most populated states – and first homebuyers are barely treading water against a speculative investment sector.

Urban boundaries and a propensity towards land banking, hefty tax overlays and poor infrastructure development, ensure land on the outskirts, continues to be priced at a level that doesn’t incentivise buyers to correctly evaluate the trade-off between price and time, and therefore demand remains marginal, with a downward slide in the number of new dwellings completed per annum.

There is no forward thinking on infrastructure financing, or a full understanding that people don’t purchase houses as much as they buy into communities.

Additionally, there is little diversity on the type of housing built in greenfield developments to enable newly created suburbs to market to a broad socioeconomic mix of residents, who do not just want McMansions built to the edges of a 400-500sqm blocks of land.

Rents continue to rise, with vacancy rates in areas such as Sydney, close to 1%.

Crowded houses – with three or more families sharing accommodation, has increased nationally by 64% to 48,499 (ABS).

The ACT is abolishing stamp duty over a slow transitional 20 year period and reverting to a land tax system, and some states have reduced stamp duty payments for first home buyers, however there has been no action federally on recommendations in the Henry Tax Review on negative gearing, capital gains tax, or the rapid rise of residential investment and gearing in SMSFs.

So what happened?

In one respect it’s the deluded thinking perpetuated by policy makers, who theorise urban sprawl to be essentially bad, imagining it’s possible to develop affordable housing on expensive land in inner urban localities, whilst painting a picture of a bright ‘future’ where residents live a handbreadth apart, compacted in small apartments around existing infrastructure hubs within computable distance to the CBD, as if nothing exists outside of our capital city gates – questioning ‘isn’t this where everybody wants to be anyway?’

As if to prove their point – when fringe land is released, and an additional abundance of ‘roof space’ is built, it fails to lure a diverse range of homebuyers because – as the 2008 report correctly highlighted – the housing lacks diversity, the cost of raw land remains too high, and the developments are burdened with hefty taxes transferred onto the buyer.

More importantly, the surrounds are not adequately facilitated with infrastructure such as schools, transport, medical and recreational facilities, to cater for an individual and family’s personal needs.

Therefore, our outer suburbs tend to be black listed as low socio economic hubs, populated by those who are deemed to sit at the ‘bottom’ of the housing ladder.

I listened to an auctioneer’s pre-amble a few days ago, which summed it up perfectly. After he elucidated the various attributes of the modest 2 bedroom home, he threw his hands up and with a flourish, exclaimed, “and let me tell you what you get for free!” – and proceeded to point out the local school, shopping strip, and park.

Accordingly, if a buyer is able to travel to work, the supermarket, and any other amenity on the priority list within a 30-40 minute period, the distance from the CBD is not an imposing factor – the decider is in the time it takes to drop the kids off to school in one direction, and travel to work in the other.

Furthermore, an acknowledgement that the value of land, and the capital gains achieved by its owner lays in the facilitated connections around it, forms the argument for broad based land value tax, as I explained here.

The Annual Demographia International Housing Affordability Survey has aptly demonstrated, in cities where supply is not artificially constrained by poor policy and planning, which fails to cater for community needs, house prices remain affordable and relatively stable.

Realistically, a well developed city, which has policies flexible enough to meet the demands of its home buying demographic, should see price rises track only the rate of inflation, with growth in household incomes somewhat influential in those areas in which there is greater demand.

Not the well spruiked figures of 7 per cent + median growth per annum we experienced in some suburbs prior to the GFC – or figures outpacing both wage growth and inflation.

Across Australia, every state faces its own intrinsic economic and geographical challenges, for which housing policies need to be flexible enough to adhere, local resident voices need to be heard, and councils need to have the freedom to respond.

However, if the only options we offer first home buyers are candy style incentives in a low interest rate environment, which must stay at rock bottom levels in order to support the inflated levels of debt it encourages – then over the longer term our real estate obsession from which so many feed, will become a noose around the neck, provoking broader concerns.

It’s very important we correctly understand where our policy makers have let us down in the delivery of affordable housing stock, because a worrying trend is starting to emerge which was highlighted in a recent news report, showing footage of Julia Gillard’s Altona house auction.

In the post auction interview, the sales agent said that the Chinese purchaser wanted her to express to everyone that “she is an Australian citizen…”

The comment speaks volumes – emphasising how important it is to stop blaming current high prices solely on ‘foreign buyers’ whilst at the same time, singling out a unique demographic – a large proportion of which are Australian citizens, work and pay their taxes, and have a right to purchase residential real estate.

One of the most powerful tools for the regulation of any market is transparency. Without it, speculation ensues and leads to undesirable assumptions – such as the belief that every Asian face seen at an auction is ‘foreign’ – and clearly this Chinese lady has noted the negativity.

The reason real estate prices are high in Australia, is due to years of poor government policy and planning – and this is where the blame should be placed and this is where the pressure should be directed.

3 Comments

  1. May Hem18-12-2013

    what a shame this thoughtful article does not mention our growing overpopulation exacerbated by high immigration numbers and our high birth rate.

  2. benj18-12-2013

    I’m afraid that Demographia study is your typical neo-classical propaganda. Location values, according to them, do not exist naturally. They are only the symptom of government regulation.

    In their comparisons between high and low median multiple cities in America, they neglect to factor in one very important control.

    Tax.

    When you do that, you get a 0.56 correlation for the whole of the USA.

    This means, even in a Country as large and as varied as the US, taxation explains the majority of difference in affordability.

    What other factors are there? We know that compared to cities in Texas(highest property taxes in the US) and Nevada, those on the East and West coasts are going to be naturally supply constrained. By the sea, and topographical reasons inland.

    More importantly, these areas are “established” and have denser population. Re-cycling of land is obviously going to be many more times slower here than other parts of the Country.

    In these areas people are wealthier too. This means a) people tend to spend more % of their income on housing b) more asset rich/income poor households c) more retired people and second homes.

    Also it should go without saying, these coast locations are some of the most desirable in the World. For example, in Texas you are more likely to put extra weight on a car, holidays etc. In California you will be more willing to sacrifice these for location.

    All the above increase the Median Multiple in these areas, without recourse to planning policy as a reason.

    Planning may well be a factor, but it is very low as an explanation of affordability differences.

    If we take just one state, New Jersey and look at affordability there, tax correlates to 0.9.

    There is your answer right there. Tax. Planning has very, very little to do with it.

    There is one question that needs to be asked. Why do we need planning regulations?

    We need it because we fail to regulate the land monopoly via taxation. This means location values, can be capitalised. Remember this has no costs of product to the landowner ie a huge subsidy.

    Monopolies, as well as transferring wealth, also cause inefficiency and mis-allocation. Land being no different. Quite simply, without landowners paying the market value for the on going benefits they receive, there is no incentive for then to act efficiently.

    So, we get under usage of business and residential property, vacant sites, unproductive business taking up the most productive sites, and most importantly a slower re-cycling rate.

    This adds up to outward pressure of a cities boundaries, instead of upward and denser usage in the centre. Sprawl in other words.

    Somewhere like Dallas in Texas takes up to tens times more space than cities like London in the UK.

    Not only does this impact the environment, it is economically and socially harmful.

    Americans do not celebrate sprawl. It is a major concern to them.

    Get rid of planning, and affordability will change very little except at the margins.

    Implement a 100% land tax, and the need for such constraints will be much diminished. Relaxing planning without doing this first would be counter productive.

    Monopolies need regulation, not de-regulation.

  3. THEO25-12-2013

    Too littile too late. But then again when did politicians stop to think of the long term welfare of all Australians especially when they are financially backed by the corrupt banking/real estate industry and with the complete support of many voters to grant approval for all this.

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