|Australian Treasurer Scott Morrison|
Australia’s housing crisisFirst – the scale of the problem: the thirteenth annual international house price survey by Demographia recently ranked Sydney’s home prices behind only Hong Kong, ahead of London and New York. It concluded:
“Hong Kong is the least affordable, with a Median Multiple of 18.1, down from 19.0 last year. Sydney is again second, at 12.2 (the same Median Multiple as last year). Vancouver is third least affordable, at 11.8, where house prices rose the equivalent of a full year’s household income in only a year. Auckland is fourth least affordable, at 10.0 and San Jose has a Median Multiple of 9.6.”
Whether or not you believe these exact statistics, there is no doubt that there is a supply crisis.
And, as with London, while the obvious solution may be to build more homes, the important shorter-term questions need answering of who owns the homes – occupiers or investors – and whether they are “affordable” or premium. The longer-term solution is: who builds them?
In a tight market, the more homes are owned by investors, the fewer can be owned by occupiers. This simple arithmetic is at the heart of the debate raging in Sydney, which Scott Morrison continues to dodge by refusing to admit that ending negative gearing might be a solution.
Negative gearingNegative gearing allows property investors who make a loss to reduce the tax they pay on other income. According to ABC there are over two million landlords in Australia, over 60 per cent of whom claimed they made a loss (averaging about $10,000) in 2013-14, and so benefited from this.
Ending negative gearing – critics like Morrison’s own Liberal Party colleagues say – would reduce the incentive for investors to buy properties, easing the supply.
The Capital Gains Tax discount has also been blamed for the housing crisis. This was introduced by the Howard Government and generally results in half the profits from the sale of an investment property escaping tax.
Since being introduced in 1999 buying property as investment has increased substantially.
Whom does negative gearing benefit? Research by the Grattan Institute has revealed that the top 10 per cent of income earners, before negative gearing, get almost half the benefits.
The research body has dispelled the myths propounded by the pro-negative gearing lobby here and here.
The property industry argues that tax incentives for investment housing encourage more homes to be built. But more than 93% of property lending is for existing housing.
The Labor Party has proposed restricting negative gearing to new homes from July 2017, and halving the CGT discount to 25 per cent.
Speaking in London, Mr Morrison said this would not work and that changing negative gearing would make it harder to save for a house, because it would put rents up.
Fact-checking MorrisonIs this true?
No. In fact the opposite is true. While rents rose a little in Sydney and Perth when the Hawke government restricted negative gearing in 1985 they were stable in Melbourne and fell in Adelaide and Brisbane.
The Grattan Institute puts the rise in Sydney and Perth down to population growth and insufficient residential construction due to high borrowing rates and competition from the stock market for funds.
This week in London, Morrison was also quoted as saying: “What’s interesting in the UK is they’ve never had negative gearing. Yet they have the same and worse affordability problems than Australia has.”
That’s not quite true either, because landlords have had other kinds of tax relief. These were curbed in 2015 by the British government, with the then Chancellor George Osborne saying they gave investors buying homes to let a “huge advantage in the market” over people buying homes to occupy themselves.
Morrison also said on Sunday: “They have an even bigger problem than we do here, people pay more of their income in rents there, and they pay more of their incomes on their mortgages than they do in Australia”.
Is this true? According to the Resolution Foundation British high-earners with mortgages pay 20 per cent of their income toward their mortgage, while low-earners pay 28 per cent – and those on benefits are losing more than half their income. (These figures are a year old.)
In Australia, the most recent official data is even older – from 2013-14 – and doesn’t distinguish between high and low earners. It records that on average home owners spent 16% of their gross weekly income on their mortgage (down from 18% in 2011–12), while the figure for renters was 20%.
So Morrison may be right.
How do other countries compare in terms of housing supply and demand? According to the ANZ Bank Australia currently lacks around a quarter of a million homes, or 2.6% of its current housing stock (9.6 million). In the UK, house building is at around half the rate it should be.
In the social sector, there is a severe shortfall. The figure below compares the indexed number of households on social housing waiting lists, the number of vacant dwellings and the social housing shortfall as a percentage of the total social housing stock, from 2010 to 2015 in England alone:
England is not therefore exactly a success story wen it comes to housing. Does this make you wonder if Morrison might be looking for a solution to his problem in the wrong place?
What policies might work better?In a paper published this month in the journal Housing Studies, the authors, from the universities of Adelaide and South Australia, conclude that “Australian governments need to adopt more effective housing policies if they are to meet the needs of the 700 000 to 1 million households who live in unaffordable housing”.
No surprise there. But what should they be? Morrison favours social bonds as a way of letting investors buy into the provision of affordable housing.
Does this work? In the UK most social housing is provided by housing associations which have charitable status. Most of these do issue bonds to raise finance. Here is a link to a list of the current issues and their returns.
Yet despite this, social renting is in long term decline compared to private renting, according to official statistics. And in the private sector, rents are 50% higher: private renters spend a greater share of their income on housing (30 per cent) than mortgage owners (23 per cent) or social renters (20 per cent) according to the Resolution Foundation.
Bonds may be part of the answer. But it’s more complicated than that.
The Joseph Rowntree Trust in the UK specialises in research into inequality and poverty, including housing and affordability. In 2013 it conducted a major study into how to finance the supply of new affordable housing which Morrison would do well to read.
Analysing innovative policies from the UK and abroad that help to increase the supply of below-market-price housing:
- It found that a general shift upmarket, lowering subsidies and trying to encourage affordable rather than social housing doesn’t work: it results in higher rents and more limited security of tenure.
- It cautioned against the use of state-backed guarantees in a climate of low interest rates.
- And it came out in favour of competition among providers (both for profit and non-profit) because it encourages efficiency and innovation and lowers subsidy costs.
What else works?Like Morrison, the left-wing think tank the Institute for Public Policy Research (IPPR) (Hull and Cooke, 2012) supports the idea of local authority pension funds investing in housing newbuilds – but unlike Morrison it also supports grants for new home buyers.
But probably the most comprehensive review ever of different funding mechanisms, by the Cambridge Centre for Housing and Planning Research (CCHPR) Funding future homes: an evidence base, found that no one approach wins out. Instead, all the models have strengths and weaknesses.
It also cautioned against importing solutions from one place into another, saying that “any serious cross-national application of innovative models needs to be placed into a suitable context”.
The Rowntree Trust also agrees that you can’t just take a single policy from one country and apply it in another – because conditions are so different.
Morrison therefore needs to take great care if he wants to transplant a policy from the UK to Sydney.
If there is any other single unanimous conclusion it is that the CCHPR and the Rowntree Trust both also feel that the local government level is the one best suited for identifying and driving the most appropriate mechanisms to deliver affordable housing.
“Local fiscal incentives and local institutional structures for mobilising savings or capital set against the local regulatory context for affordable and social housing are important general success factors”, says the CCHPR’s report on page 32.
Perhaps Morrison would have been better off staying at home after all.
PS: Although Morrison himself does not declare any homes he owns for renting out, the Coalition’s MPs own collectively 331, more than double the Labor Party MPs. Turnbull himself owns 4. I wonder how many of them benefit from negative gearing?
David Thorpe is the author of a number of books on energy and sustainability. See my website here.