Tag: housing

Housing Boom or Blame Boom?

There’s talk again of the house price boom (or even bubble). I know people who are looking to buy at the moment, and I feel so lucky that I’m not having to find a first home in the current market.

However, stories I read in the media suggest to me that we’re also in the midst of a blame game, where various bogeymen are out there pushing up prices to the detriment of everyone else. If you believe everything you read, we can blame:

  • First-home buyers – whose free cash from the government in the form of the FHOG (First Home Owners Grant) is making it hard for others to compete.
  • Overseas investors – who are apparently making the most of relaxed rules from the FIRB (Foreign Investment Review Board) to invest in Australia when other international markets are looking shaky and depressed.
  • Local investors (in particular Baby Boomers and Gen X) – whose access to the tax deduction of negative gearing enables them to sustain larger holding costs of property than non-investors.
  • Developers – who have been slowly releasing lots from their land banks rather than supplying enough to the market to meet the demand
  • Immigrants – who have been coming here in increasing numbers because it has a promising way of life but are now competing with the locals for somewhere to stay.
  • Governments – for allowing all of the above to occur.

Is there anyone left?

What is good in this debate is the recognition that it is supply and demand that is driving the prices in the market. However, the purpose of this finger-pointing seems to be to blame everybody else for the problem. I’m not convinced that any of the above factors are at the heart of the matter:

  • First-home buyers – the demand from these guys doesn’t explain why an unrenovated house in Richmond sells for more than $2m (as I read in yesterday’s paper). The whole market is booming, not just the cheaper end.
  • Overseas investors – although they are active, they are still a minority. I don’t think they could underpin the entire boom.
  • Local investors – negative gearing also results in lower rents than would otherwise occur, which should in turn reduce the demand for home ownership.
  • Developers – their land is generally at the fringe, and there is heavy demand in the centre.
  • Immigrants – these are a net benefit to a society, since they generate taxes and jobs, but have always been an easy target.
  • Governments – there is some truth to the saying that in a democracy, we get the government that we deserve. If governments continue to follow policies that we don’t agree with, we can only blame ourselves for voting them in.

On the other hand, a factor that I don’t think has gotten enough attention is our culture. In particular, the “Australia dream” of owning a house on a block of land.

I worry that it is the pursuit of this goal, more than any single segment of society, that is driving the demand for houses in the suburbs of our capital cities. We need to give up on this dream if we are to achieve sufficient densities in the inner ring of suburbs where most people wish to live.

Rather than blaming other people, I can fess-up to being as guilty as everybody else on this one. A couple of years back, Kate and I bought a house together that would’ve housed a family of five when it was designed and built around 1900 in Kensington. This is a typical, gentrified, ex-working-class neighborhood of Melbourne that probably has lower densities now than when it was new. We moved out after we had our first child, because it was too small for us (!).

In the same way that governments around the world have influenced the cultural desires for a certain family size, it ought to be possible to embark on a campaign to change our cultural expectations and change this demand factor. Make living in high-density accommodation the trendy option. Guilt people out of their large houses with empty rooms and private back yards. (Other countries have a higher density of living than us, hence why many immigrants are willing to live in apartment blocks that locals would avoid; another reason why immigrants aren’t contributing as much to the problem.)

At the same time, there needs to be more direct incentive to motivate people to embark on such a change. Make subdivision easier. Make building apartments on new land easier. Ensure that apartment blocks are built well (good climate control and sound/smell proofing) and there is provision for common outdoor areas.

I’ve spent most of my years since I left home living in higher density accommodation such as apartments and townhouses. Although I’m currently living in a house, I think I’d be willing to share walls again.

Why negative gearing is not going away

Attacking the practice of negative gearing appears to have become a bit of a sport lately. On the 14th March, an article in the Herald Sun stated the government “should look at ways to overhaul an extremely generous system of negative gearing”, and on the 20th March, The Age ran an opinion piece entitled “It’s time to apply the brakes to negative gearing”.

I could speculate that the attention property investors (and their tax deductions) is due to the combination of increasing rents (driven by low vacancy rates) and high property prices (driven by a long stint of housing affordability). However, the cause is not important, and what is important is understanding why negative gearing is an effective housing subsidy.

In the Taxation Statistics  2005-06 publication from the ATO, we can see that:

  • There were 1,561,630 people who declared rental income on their personal tax returns.
  • 66.5% of those had a taxable loss (net return income less than zero) from their rental properties.
  • There were 2,146,685 property schedules completed for those tax returns (note: where multiple people own a property, multiple schedules may be completed for those properties).

And in the Census 2006 QuickStats for Australia from the ABS, we can see that:

  • 27.2% of occupied private dwellings were rented, which corresponds to 2,063,947 dwellings. (Pretty close to the 2,146,685 figure above.)

While in the Australian Social Trends 2007 from the ABS:

  • There were 394,000 first home buyers in 2003-04.

So, from that barrage of stats, it should be clear that the number of renters outnumbers the first home buyers (in any one year) by over five to one, and the number of renters combined with the property investors outnumbers them over nine to one. Why compare with the first home buyers? Because they are really the only housing segment that is disadvantaged by negative gearing. Beneficiaries include renters, existing home owners, investors and the state governments (through higher land tax and stamp duty fees).

Renters have their rent subsided by the ATO, though the tax deduction on costs provided to their landlords. What other business but property rental is regularly undertaken at a loss? It should be admitted the “obvious” effect of removing the deduction – rising rents – is unproven.

I would expect it to be likely that rents would rise, both from scarcity due to fewer landlords willing to operate without such a deduction, and from those willing to be landlords increasing their rents to maintain their investment yields. However, back in 2003, the ANZ’s Saul Eslake analysed the last time negative gearing was removed (by Paul Keating, between 1985 and 1987) and commented that:

It’s true, according to Real Estate Institute data, that rents went up in Sydney and Perth. But the same data doesn’t show any discernable increase in the other State capitals. I would say that, if negative gearing had been responsible for a surge in rents, then you should have observed it everywhere, not just two capitals.

So history is inconclusive. And, rents aside, although you might think that renters would benefit from being able to escape the rental market, many of them don’t want to. A survey by AAMI published on the 3rd April indicated that 39% of renters are “happy to rent and have no plans to have a mortgage.”

Existing home owners benefit from rising house prices since while prices go up, their morgage does not. Although when they come to buy another house, they will need to pay higher prices, they will typically sell their old house into the same market. Also, at some point, they will exit the housing market, and benefit from selling their house without having to buy one.

And that brings us to the conclusion. The group of people able to remove negative gearing are democratically-elected politicians. It’s highly unlikely that such a person will remove a policy that benefits so many, particularly when it’s a Labor government and renters are one of groups that benefit. True, it was a Labor government that removed it last time, but that also means they will clearly remember the embarrassment of having to reinstate it.

That’s not a Housing Affordability Crisis

I won’t draw any conclusions here, but I will draw your attention to the following points:

  • There are 7.9 million households in Australia, and on average each household owns $298,000 in residential property, e.g. their own house and other rental properties (from ABS Household Wealth and Wealth Distribution, Australia, 2005-06).
  • This puts a total value on all residential property in Australia of something like $2,400 billion. However, the market cap for the entire Australian stock market is currently about $1,600 billion (from ASX Historical market statistics).
  • Australia is the “fourth-largest retirement savings market in the world” (from the Eureka Report) while superannuation funds are prevented from borrowing any money to buy assets, which is the main way that residential property is bought in Australia.
  • When it comes to shares though, the ATO has softened its stance on some types of gearing. Contracts for Difference (CFDs), when bought with cash, are apparently alright (in Interpretive Decision 2007/56), even though CFDs behave very much like borrowing to purchase a share.
  • Westpac has bought 441 houses from Defence Housing Australia (according to The Australian and a DHA media release) with the intent of launching Australia’s first residential real-estate investment trust.
  • House prices are driven by supply and demand. The superannuation industry has the potential to add a little bit of demand…