Once again the housing policies leading into a federal election are a disappointment – Realty.com.au Blog
Cameron Kusher
There’s another Federal election and there has been a number of housing policy announcements from both major parties that largely address more demand rather than supply constraints.
Sunday was the day for big housing policy announcements from Labor and the Coalition and boy was it a major let down but why should we be surprised?
Given they are the government of the day, let’s assess what the Labor Party announced first.
- An expansion of the Home Guarantee Scheme which will allow first home buyers the ability to purchase their first home with just a 5% deposit (which they can already do) whilst avoiding lenders’ mortgage insurance (LMI) (which they can’t avoid if they have less than 20% equity). The scheme which was originally introduced by the Coalition will no longer have income caps or limits on availability but there will be limits on the value of the home that can be purchased.
- Labor committed to spending $10 billion over eight years to build 100,000 new homes which would only be available to first home buyers. The $10 billion owuld be split between $2 billion in grants and $8 billion in zero-interest loans or equity investments mostly to state and local councils but also potentially community housing providers. The plan is to work with lower council levels to find government land and fast-track development approvals.
So what are the Coalition offering?
- First home buyers will be allowed to deduct interest costs on the first $650,000 of their mortgage for five years. While the purchase price is uncapped, it will be means tested and is only available to first home buyers purchasing a new home.
- The Coalition had previously announced a $5 billion investment in funding water, power and sewerage upgrades which they say would unlock 500,000 new homes.
- The Coalition had already announced that they would allow first home buyers to access up to $50,000 of their superannuation to be used as a first home deposit with the amount required to be repaid upon sale of the home.
Both Labor and the Coalition have announced plans to have a two-year ban on foreign investors and temporary residents buying existing properties (which is something they are already supposed to be banned from).
These announcements are clearly good politics but they are very bad policy.
For once, there is some focus on increasing housing supply via Labor’s $10 billion investment in homes for first home buyers and the Coalition’s $5 billion investment in water, sewerage and power upgrades but the detail on these schemes remains very light on. However, the remaining policies equate to taxpayer handouts to first home buyers that are extremely likely to increase demand for housing and subsequently make housing more expensive. As a result, we will likely have to see even larger handouts in the future to enable the next generation of fist time buyers enter the market.
The problem for housing in Australia isn’t one whereby we don’t have enough demand for housing, there’s ample demand, the problem is that the cost of housing is too high. These policies, coupled with the likelihood of at least 100 basis points of interest rate cuts this year, will make housing even more expensive.
Neither of the major political parties even have a policy to make housing more affordable. Late last year the Federal Housing Minister said in an interview that they don’t have a policy to lower property prices and earlier this week the Opposition Leader said essentially the same thing. Both major parties have policies that maintain and even increase property prices while attempting to help people to enter the housing market at these inflated prices.
The problem with this is that affordability does not improve. Theoretically if wages grew for a sustained period at a faster pace than property prices affordability would improve but there’s two major problems with this policy. It would take a very long time to improve housing affordability in this way and wages haven’t grow at a fast pace for a very long time.
Another issue with making housing more affordable is that the vast majority of people don’t want this to be the case so it is politically untenable. More people own a home than rent and more than half of our household wealth, much more if you exclude superannuation, is held in residential housing. Given this, when property prices rise households feel wealthier. Of course there is an issue with this too because yes your home may be worth more but any home you may wish to purchase is also likely to cost more. It a zero-sum game.
Housing won’t truly become more affordable unless property prices fall and no politician wants prices lower on their watch because most of the electorate don’t want that to occur. This also encourages people to invest more in housing and less into things like businesses or other asset classes because they know the politics is such that even when property prices should see a sustained fall the government is likely to introduce measures to support the market. Even the RBA is likely to have to cut interest rates quicker and deeper due to the slowing economic conditions which then supports higher housing prices.
So how could the government and alternate government better assist the housing market rather than just providing more demand-side stimulus?
The focus should be on how can we increase supply. There’s been a lot of discussion about relaxing zoning laws and increasing density which is important but only one part of the equation.
New housing development is a risky venture how can we reduce the risk around new development in order to increase supply should be the question that government is asking.
Allowing greater density and therefore a higher yield from development sites is one way to do this which is getting most of the focus currently. I think this would lead to an increase in supply of new housing initially I’ve always been somewhat sceptical as to how that persists over time. This is mainly because with more development potential site costs increase and you end up in the same position that we’re in today with projects not being feasible. Nevertheless, more inner city areas with development potential and more outer areas of our cities designated for residential development is imperative.
What we really need though is to lower the overall cost of undertaking development. We can’t really do much about material costs which have surged but we can incentivise state and local governments to reduce the cost of development applications, the time it takes to receive an approval and the costs associated with a development approval such as infrastructure and other charges. These costs all contribute, along with GST on new housing but not existing housing, to make new homes more expensive and somewhat less desirable for many, than existing homes. Lowering the cost of developing and selling new homes is imperative if we’re going to increase supply because most new housing projects in Australia only go ahead once there are sufficient presales and finance in place.
Lowering the cost of financing new development is another area in which the government could investigate. Interest rates are at highs not seen in more than a decade making finance more expensive and making fewer new housing projects viable. Making finance cheaper and easier to access could certainly deliver greater housing supply. The alternative is government either gets in the business of developing properties themselves or they start undertaking partnerships with private developers and provide cheaper finance and wave or significantly reduce the fees associated with new developments.
Finally, the big one is overhauling the taxation system. Some will say we should remove negative gearing and the capital gains tax discount, others will say we should remove stamp duty and replace it with land tax (I am a big advocate of this) but realistically we need a complete review of the tax system and specifically taxes relating to property. I can’t see either side of politics being bold enough to go there but this is desperately needed.
I am particularly fond of removing stamp duty and replacing it with land tax for several reasons. Firstly, taxing land Is one of the most efficient ways to tax and it is extremely difficult to avoid. Secondly, it can change behaviour, have a huge house that costs a lot in tax each year, downsize into something smaller than incurs less tax. Thirdly from a development perspective it discourages land-banking because the land tax could be increased once development approvals are in place so it could encourage more building sooner. From a state government perspective there is also the benefit that it provides a guaranteed revenue stream and the way to grow that revenue is to grow the supply of land. I would caution we should have tight restrictions around a land tax as to how much the rate can be increased each year.
There are plenty of other good housing ideas out there which I would implore the government and the alternate government to investigate but it’s clear that ongoing demand side incentives are just kicking the can down the road and leaving us with higher property prices, in more debt and to-date have done nothing to arrest the ongoing decline in home ownership rates.
Let me know your thought.
