Welcome to Safe as Houses, a series delving into a topic close to the heart of many Australians – property. This is not a series on where the market might be heading. Instead we aim to explore how we view property and float some alternative ideas.
Judging by media reports, a great number of us are transfixed by interest rate changes and consumed with anxiety about falling house prices. But should we be? Today, Keith Jacobs from the University of Tasmania explores who the real losers are when prices fall.
One of the most fascinating and enduring aspects of Australian politics is the cacophony of criticism directed at the federal government whenever house prices fall. The assumption made is that the value of property is a proxy for the state of the economy.
A fall in the value of property is therefore bad news and evidence that we stand to lose should prices continue to decline. We expect governments to put in place measures so that homeowners and investors can accrue wealth and buyers can return to the market.
Over the coming months, the cacophony of criticism is likely to intensify, as real estate, developer and property lobbyists demand extra government funds to boost housing market activity. According to the recent data published by RP Data-Rismark, the value of our homes has fallen by 4% in the last 12 months, with Canberra being the only capital city where prices have increased. In Brisbane there has been a 7.5% fall, while in Melbourne prices are down by 5.8%.
But is it really bad news if the value of homes starts to fall? Certainly, there are people who do stand to lose when prices decline, such as householders who plan to sell their home and move to a smaller or less expensive home and those planning to move abroad and need to sell their home.
Those who have the most to fear when house prices fall are mortgage lenders, the real estate companies and property developers. Their opportunities for generating profits are threatened by a slowdown in the housing market.
Yet there are many individuals who stand to benefit when prices fall, not least those who have been unable to gain a foothold in the owner-occupied market, householders who plan to trade-up to more expensive properties, newly arrived migrants who plan to buy and renters living in homes that might have otherwise be advertised for sale.
What is frequently overlooked is that any increase in the value of our homes accentuates an affordability crisis. In the last 20 years, Australian house prices have quadrupled in price, yet average earnings have failed to keep up, only increasing by two-fold over this period.
The cumulative impact of house price inflation has been considerable. It is estimated that there are as many as 1.25 million low-income households paying more than 30% of their income on housing related costs, that there are 250,000 people who have placed their names on public housing waiting lists and as many as 60,000 individuals who are homeless. The shortage of properties for let has enabled unscrupulous landlords to raise rents and many households have no choice but to live in homes that are in poor condition.
Yet the crisis of affordability and the conditions endured by many households is often sidelined because so much of the media reporting on housing issues is fixated on monthly changes in house prices in the suburbs of our capital cities. The barrage of house price data reported in media outlets serves to shift our gaze from the inequities that underpin the housing market and the stress endured by so many low-income Australians.
Why has this crisis of affordability not been addressed by government? A major reason is that powerful industry groupings such as the financial sectors, property developers and real estate lobby groups have been spectacularly successful in maintaining pressure on the policymakers to privilege wealthy homeowners at the expense of less well-off households.
Some fascinating research undertaken last year by Judy Yates of University of Sydney makes explicit how subsidy arrangements favour well-off homeowners. If we include inputted rent and capital gains that are not subject to taxation, total government expenditure on housing stands at just over $53 billion per year, most of which ($45 billion) is expended in the form tax relief for owner-occupiers and rental housing investors ($5 billion).
By contrast, those households living in rental accommodation are subsidised by $3.2 billion. For individual homeowners this subsidy amounts to around $8,000 per year, investors are subsidised by $4,000 while concessions to private renters amount to just $1300 per household and public housing tenants $1000 per year.
Recent analysis published by the Australian Bureau of Statistics estimates that the median net wealth of households who rent in 2009 was just $55,265 whilst householders who own their home but are paying off a mortgage had a median net wealth of $487,183. Those homeowners who own their property outright had a median net wealth of $737,394 – 13 times greater than the median wealth of those who rent.
It is an uncomfortable truth that government policies have been instrumental in maintaining housing inequality. The current taxation arrangements serve the interests of homeowners and rental investors, and politicians are reluctant to advocate reforms that might damage their electoral prospects.
Those in Australia who are fortunate enough to own their own home have become accustomed to believing the value of their home should rise and that the capital gains they accrue should be exempt from tax. The media in their role have largely failed to make explicit the societal implications of the current housing arrangements.
Our obsession with the value of our homes has, in effect, stymied the scope for a more critical coverage of the politics of housing to shed light on how resources have been distributed to those who are well housed at the expense of those who are experiencing housing stress.
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Comments (16)
Steve Bennett
(logged in via Twitter)
I hadn't realised until this series how grossly inequitable middle class welfare is. It's fairly easy to ignore the fact that the government is using your own taxes to subsidise property owners, when you imagine yourself soon being a property owner. But now that I'm questioning if that will ever happen, I realise that it hurts twice:
1) My taxes are being spent on people who don't need it (capital gains tax exemptions, first home owner grants - which go to owners, really), at the expense of those that do
2) My taxes are being spent to make housing less affordable for me. That sucks.
David Healy
Retired (logged in via email @optusnet.com.au)
In 1979, we built our place (house & land) for $50k. Today, it's valued at ten times that.
In 1979, $50k was roughly twice my annual take-home. I doubt many young blokes today earn $250k.
In 1979, my wife chose to stay home with the children, and we got by. It's a lot tougher today for a woman who wants to stay home with her children. Two incomes have become a sine qua non to own a home for the majority of young married couples.
Affordable housing for young families should be a social priority. Jane O'Sullivan's argument for "no capital gain in real terms" is compelling. We may need to do even better than that.
el don
(logged in via Twitter)
things have not improved since the 60s - when my parents and friends' parents were able to raise the deposit on their first home by selling the family car...
this merely demonstrates that home-ownership is now not about affordability but about profits. shame.
John Nightingale
(logged in via Facebook)
"Recent analysis published by the Australian Bureau of Statistics estimates that the median net wealth of households who rent in 2009 was just $55,265 whilst householders who own their home but are paying off a mortgage had a median net wealth of $487,183. Those homeowners who own their property outright had a median net wealth of $737,394 – 13 times greater than the median wealth of those who rent."
These comparisons need to be qualified by demographic standardisation, as renters will not have…
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Paul Collins
(logged in via Facebook)
When did it become the goal of an advaanced society to make the ccost of living, including house prices, dearer for the following generations?
1. CGT on the PPOR id sold within the first 10 years. (exemptions for people who have to move due to health, work babies etc)
2. NG on new builds only.
3. Death tax of 25% on the value over $1m
4. Land Tax of 0.5% (pensioners and other low income earners can accrue this debt, until the house is sold. Like a reverse mortgage, but with the benefits going to the state, not the banks.
House costs
1970 - 2 to 3 times a single wage
2010 - 6 to 8 times dual incomes.
Gavin R. Putland
(logged in via Twitter)
"Those in Australia who are fortunate enough to own their own home have become accustomed to believing the value of their home should rise and that the capital gains they accrue should be exempt from tax."
That exemption comes at a terrible price. If all capital gains on property were taxed at the top marginal rate, we wouldn't need the GST. And if the capital gains tax raised from property sales in each state were refunded to that state, infrastructure projects funded by the state would pay for themselves out of the ensuing increases in property values, without burdening any taxpayers who don't share in the benefits. The irony is that the biggest winners would be property owners, because they would get capital gains that they would not otherwise get, due to infrastructure projects that would not otherwise proceed!
Cf. http://lvrg.org.au/ .
Tim Scanlon
(Climate and Agronomic Extension at Department of Agriculture and Food - Western Australia)
The reverse of this argument has to be considered too; if you were to tax at the top rate on capital gains then no-one would buy a house for the rental market. Essentially allowing private investment in housing by the average Joe means that the government doesn't have to find more funding for housing.
I did see the breakdown on this once and it was the key reason that people were encouraged to have investment properties. Much cheaper for the government this way.
Oh, and in the interest of disclaimers, I do have two investment properties that are rented out.
Gavin R. Putland
(logged in via Twitter)
Private investment in NEW rental housing helps. Private "investment" in EXISTING housing takes homes from prospective owner-occupants who are then forced onto the rental market. Capital-gains discounting cannot be excused as an incentive to provide housing unless it is restricted to NEW housing.
Besides, expectations of capital gains would be stronger if state governments had a viable method of financing infrastructure that raises property values. That means recycling some of the capital gains.
Oh, and in the interest of disclaimers, see http://www.grputland.com/2011/11/why-renters-are-vermin.html .
Thomas Kline
(logged in via Facebook)
A problem in society today is the media and blogosphere are dominated by real estate vested interest spruikers who control the news we read and watch. It was revealed that the real industry pays spruikers and shills to post positive spin on blogs like this one to talk up the market, to post as if they're a normal person, when in fact they're part of the corrupt industry feeding us lies and propaganda. Read the blog below and watch the included video for evidence:
http://www.differenthere.com/2011…
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Bruce Moon
Bystander! (logged in via email @imap.cc)
Keith
I comment on your paragraph...
"What is frequently overlooked is that any increase in the value of our homes accentuates an affordability crisis. In the last 20 years, Australian house prices have quadrupled in price, yet average earnings have failed to keep up, only increasing by two-fold over this period."
In our growth economy, it is always going to be difficult to measure attributes when those attributes (themselves) are changing.
Residential housing is a classic example…
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Mathew Webb
(logged in via Facebook)
Why do Bruce Moon and his ilk always rabbit on about how homes have gotten larger over the last 50 years (or that the fittings are more advanced) leading to more expensive homes, but never about how more efficient manufacturing and building practises might lead to cheaper homes? Similar size and amenity differences are seen between houses built in 1900 and 1950, but somehow that led to very little difference in real price.
Bryan Kavanagh
Research Associate, Land Values Research Group (logged in via email @lvrg.org.au)
Builders have done pretty well over the last 20 years when it comes to house prices. Prices per square metre have barely kept up with the CPI. On the other hand, increases in land prices have been consisistently above 6% pa.
Matthew Hayden
Self Employed Truck Driver (logged in via email @bigpond.net.au)
The argument about homeowners and their supposed wealth always makes my blood boil. The fact that I choose to direct my income to buying and eventually owning my own home is not always about affordability but about a long term commitment to my families future and what priorities I place upon my earnings to achieve this. The government may not include my home as an asset but please don't kid yourselves that I am not paying for the privilege. Let's take a theoretical scenario such as every person deserves…
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Michael J. Biercuk
(Senior Lecturer in the School of Physics at University of Sydney)
Hi Matthew,
Your take on different treatments of property by different classes of "tenant" is not unreasonable, but the underlying assumptions are. You assume that all owners have a personal interest in their property because they live there. That's actually a fantastic scenario, but bears little resemblance to reality today.
We have a glut of property investors who are actually speculating on capital gains in their properties rather than using them for their intended purpose. Their interests…
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Bryan Kavanagh
Research Associate, Land Values Research Group (logged in via email @lvrg.org.au)
I take your point, Keith. These are a necessary downward adjustment in house prices if a measure of affordability is to be restored for our young people.
However, although they claim to be adequately capitalised, it's likely to prove disastrous for our banks--which if Europe and the US are any indication--will also prove disastrous for all Australians if we are expected to bail them out for having lent so flagrantly into this bubble.
Maybe we don't have to fall for the same three card trick played on US and European citizens as our bubble bursts?
Jane O'Sullivan
(scientist at University of Queensland)
Thanks Keith, for opening this discussion.
Whether we tax capital gain from housing or not, we should be aiming for no capital gain in real terms (so it would hardly be the revenue solution for new infrastructure - the answer to that one is to reduce population growth and thereby reduce the need for new infrastructure as well as the inflation of property values). The alternative can only be increasing housing unaffordability for each generation, which is an unconscionable pyramid scheme, committing…
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