The Great Housing Debacle | Tjay Ratnawardana
Housing has been a hot topic for many decades in Australia and is something that closely resonates with everyone that lives here. Afterall, it is the primary place where we live – the family home, the great big Australian Dream, or is it? Lets face it, housing affordability or the basic human right to live in a suitable location is all but a pipe dream for most people in this country. It is a puzzle that many economists, policy analysists and our most favored “politicians” all cannot seem to solve. Where, did we all go wrong? Why is this something that cannot be tackled and solved for the benefit of our generation and future generations? What is the future of housing affordability in Australia?
If we look back in time, things took a turn for the bad in 1999 where Capital Gains Tax discounts (50%) were applied for assets (financial and real) that were sold after holding for a continuous period of 12 months. This was a genius policy to encourage investors to hold on to assets for a period of longer than a year as you get a generous tax concession for doing so. This also meant a bit more stability in financial markets as well as housing markets, as it was going to reduce the speculative need to profit in the short term. Unbeholden to politicians and policy makers alike at the time was the snowballing effects this would create on the existing housing stock through the forces of supply and demand. If you have taken any basic finance/business class, you know that the prices of goods & services are measured by the market forces of supply and demand. If demand increases over supply this results in higher prices. Conversely, if supply is greater than demand, this results in lower prices. And thus, the pricing mechanism of the housing market kept humming along over the decades. Consequently, given the 50% discount for capital gains is too generous, it was open for abuse and crowded out first home buyers.
Whilst all of this was at play, another ‘carrot’ was thrown at Australians via our generous policy makers – “Negative Gearing”. This is where the expenses or the cost of running your property for investment purposes exceeds any income in the form of rent. This cost was then deductible against other assessable income such as salary and wages to reduce the tax assessment eventually resulting in a tax return (i.e. the ATO pays you!). Thus, the yearly recycling of negative gearing against other income was born and it continuous to benefit roughly two million landlords to this day. Moreover, the ATO kept providing generous tax returns to investors, as under income tax law any expense incurred in the generation of assessable income is tax deductible. So, in theory, you are negating tax, however I see it as an ingenuous way to ‘avoid’ tax. These expenses incurred by the ATO is thus a lost opportunity cost to fund other projects or social security needs for millions of people that genuinely need it.
However, it is all but simple for the folk that run our country to state that this is a ‘supply’ issue and that is why it is so expensive to own a piece of real estate. Whilst from an economic principle this holds true, the reasons for this supply shortages are never addressed. In fact, it is all but avoided as if it is a fault of poor old “GOD” that we are in this mess. Supply is definitely the issue that we are facing, but why is nothing done about it, one might ask? Just ask your local member of parliament or call your local council and they will say it is the ‘red tape’ associated with zoning and the release of land. This process is extremely laborious and political, beyond the scope of this article, however, has deep ramifications for everyone. This is purely a political game with builders and wealthy property investors. The controlled release of land available to build upon is causing supply constraints which are clearly not keeping up with yearly demand. Given land is abundant in this country, we cannot seem to release enough land for builders to release new developments to the public. State planning authorities argue that there is more to it and that there must first be adequate infrastructure such as roads and sewerage in place prior to releasing agricultural or pastoral land for residential use. However, I see no valid argument as to why the process is being so tedious considering each transaction between buyer and seller is filling up state government coffers in the form of stamp duty, which is another unequitable mechanism set in place to squeeze every penny from taxpayers. Its systemic and abhorrent.
Moreover, since it is the great Australian dream to own your own house, this desire will never fade away. Most recently with the ‘Covid Crash’ we saw property prices pick up dramatically in June 2020 driven by ‘FOMO’ of keen young first home buyers. This too was aided by the lowering of interest rates which attracted many investors into the market. This cycle may continue for as long as cheap debt is circling around the economy. Also, technology is enabling auctions to be done online now without even inspecting the place in person. Moreover, every single medium is used to buy and sell houses, which is unprecedented for what it is – ‘bricks and mortar’.
So, where do we go from here? If all the above continues, the RBA or the prudential regulator (APRA) will step in to artificially curb restrictions on lending. However, given low supply in housing stock, prices will continue to skyrocket. More and more landlords are hoarding on to their housing stock waiting for poor buyers to outbid each other prior to selling. Some properties are selling so fast that they do not even hit the market and are even sold over the phone. Also, it is highly likely that the median house price nationally will reach $1 Million by the end of the decade. This is a significant increase in price for most people and the difficulty with keeping up with an ever growing deposit will also further fuel the fire to get in quick into home ownership.
Therefore, Governments will have to do more to curb this calamity. This will not only cause financial ruin for many, but also cascade into social & political problems. More needs to be done to speed up the releasing of land stock for the purpose of residential building. Extra taxpayer funds and resources need to be directed to make the process more efficient and all forms of red tape should be abolished. Oversupply temporarily may stabilize prices in the short to medium term whilst policies at curbing other incentives as highlighted in this article can be addressed to bring a more holistic approach in tackling this fiasco. Being one of the most expensive countries to live and raise a family is not something that we should be proud of. It is a result of poor oversight and policy mismanagement.
Our insatiable appetite to own property along with political red tape in releasing new livable land is driving up property prices to monumental heights. Even though we live in the world’s largest island, owning land is akin to winning the lottery. For investors/homeowners that were quick to purchase properties recently, a dire warning remains, once interest rates go up and lenders start passing on much of the rate rises to consumers for their own benefit (interest margin), if unable to meet these steepening repayments, foreclosure and a world of pain awaits. Whist owning a piece of land and having a home to raise a family is basic human right, the reality of this eventuating is truly a dream for many.