Australian housing policy favours the wealthy

The Grattan Institute has released a new report entitled Renovating Housing Policy, which argues that Australian housing policy wrongly favours the wealthy over the poor and is in bad need of reform. Below are some key extracts:

Housing policy in Australia is overdue for a major renovation.

Government tax and welfare policies, by favouring home owners and property investors over people who rent, are worsening the divide between Australians who own housing and those who do not. The divide is income-based and it is generational. While overall home ownership rates are stable or declining slightly, declines are much sharper among those with low-incomes or aged under 45…

Government subsidy of home ownership and property investment is skewed in favour of high-income households. They gain far more than others from tax concessions such as the land tax exemption on the family home, negative gearing and the capital gains tax discount. Much more government assistance is provided to buy investment properties than to buy a first home.

Current policies are not producing more home owners. Because supply has been constrained, first home buyer assistance has not only failed to increase ownership levels but may have pushed up prices, benefitting sellers and making it harder for many households to own their first home. Policies that favour investors, such as negative gearing, increase demand for property and push up prices while doing little to increase supply.

Combined with rules that restrict development in established suburbs, higher prices force many households to buy on the city fringes, with poorer access to transport and jobs. This reduces opportunities for individuals and makes it harder for businesses to access skilled workers. It’s a rising form of inequality that damages productivity and the fair go…

Tax changes have also increased housing demand by making investment property more attractive. The combination of capital gains tax rule changes in 1999 and negative gearing has strongly increased the demand for investment properties. Investors compete directly with potential homebuyers, particularly for established houses. This makes it harder for first home buyers to secure a property…

Meanwhile, more people – one in four households – are renting, and renting for longer periods of time. The lack of encouragement for longer leases in Australian residential tenancy rules undermines stability for renters, many of whom have to move much more frequently than they would like…

At present, home owners profit from government outlays worth about $36 billion a year. Yet home ownership brings such benefits people would do it anyway…

As Figure 4.3 shows, the capital gains tax and land tax exemptions on the family home as well as the non-taxation of net imputed rent delivers $8,000 per year to households in the top income quintile, compared to only $2,800 per year to those in the bottom quintile.

Tax concessions for residential property investors are worth $9,200 per year for households in the highest income quintile compared to $3,600 per week for the lowest income quintile.

Favourable treatment of owner occupied housing under the pension assets test does not follow this trend. Fewer higher wealth households receive full or part pensions since these households are more likely to exceed the financial assets test, even with their family home exempted. However.., around 40 per cent of expenditure on the age pension goes to households with more than $500,000 in net wealth…

Households that rent privately benefit least from the policies we costed… Those who do not own their home are excluded from the tax concessions and benefits provided to owners and investors. Unlike owner-occupiers, renters cannot access a highly tax effective vehicle for wealth creation – the owner-occupied family home.

Perhaps the greatest disadvantage renters face comes from the pension asset test. Take, for example, two retired couples that seek the age pension. The first owns their home, which is valued at $800,000. They have $50,000 cash in the bank and no other assets or income stream. This couple is eligible for the full pension – currently $1,133 per fortnight. The second couple rents, preferring the flexibility. They have $800,000 saved in an investment portfolio and $50,000 cash in the bank. Despite having an asset portfolio of exactly the same value as the first couple, the second couple is ineligible for the full or part age pension…

What does it all add up to? Expenditure on housing policy most benefits households that already own a home, followed by households that invest in residential property. Within both groups, higher income households receive the greatest subsidies…

It is also clear that housing policies increase the benefits of owning a home compared to renting, since renters cannot access any of the subsidies available to home owners. In addition, policies benefitting those who already own have, at the same time, made home ownership less attainable…

Winding back negative gearing and the capital gains discount would stop the artificial inflation of demand for investment properties and enable more people to buy their first home. Repealing stamp duty in favour of an annual property tax would greatly lower the cost of moving, making it easier to relocate for job opportunities, or to a more suitable home. It would also encourage the more productive use of land in our cities…

Reform won’t – and shouldn’t – happen overnight. But we need to start the debate now…

Overall, the Grattan Institute report nicely summarises many of the policy distortions afflicting Australian housing, and closely follows Saul Eslake’s 50 Years of Housing Policy Failure presentation in September.

My main issue with both presentations is that, while they correctly identify housing supply restrictions in established areas, they ignore policy restrictions that have been implemented on the fringe, such as urban growth boundaries, up-front infrastructure charges, slow planning approval processes, etc.

As shown by the below charts, fringe lot values have skyrocketed in price despite shrinking in size, which has acted to inflate housing values both in outer suburban locations, as well as across the various urban areas:

As noted earlier today and previously, supply restrictions on the fringe tend to have particularly pernicious impacts on lower socio-economic groups. As such, it is surprising that the Grattan Institute report has ignored these policies altogether.

In my view, the most important solution to Australia’s housing woes is to deregulate the supply system, so that it can more easily adjust to changes in demand, rather than expecting taxation changes to do the heavy lifting.

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