Inability to purchase housing is creeping into the middle class as well as increasing among low income earners and the young — and nothing will change unless politicians are prepared to take difficult decisions to address tax breaks, NIMBYism and poor quality building.
It is driving growing wealth inequality in Australia, entrenching wealth, and acting as a significant handbrake on productivity as the economy continues to develop service and knowledge-based industries that benefit from clustering.
They’re the conclusions offered last night by Brendan Coates of the Grattan Institute in an excellent speech that elevates him to the esteemed company of Saul Eslake as one of the great truthtellers of Australia’s housing disaster.
Coates doesn’t use the word “disaster” but he repeatedly refers to the nightmare that housing affordability has become for many Australians — no longer just for the young but for the middle-aged and an increasing number of retirees.
The failures of housing policy in Australia are regularly traversed by commentators and economists, but few have done so as well as Coates, who also provides an overview of how economists have looked at land throughout history and how it fell out of the economic spotlight in the 20th century. He argues that the rise of knowledge-based service industries has once again put a premium on land as businesses cluster in major cities to secure the benefits of interaction internally and externally — even if the pandemic has enabled a greater degree of remote working.
What has driven rising house prices in Australia, however, has been a toxic combination of factors: the long-term decline in interest rates that has given buyers more firepower, and the failure of the housing market to respond effectively to the increase in immigration after 2000.
Until then, Australia’s housing markets had handled increases in immigration without surging house prices — most notably after World War II. That’s now changed, and the result is fewer people being able to afford housing and much higher rents for those unable to buy.
The main culprit, Coates argues, is land use planning laws that enable local residents to block and restrict medium and high-density developments, while the potential beneficiaries of that housing, other than the developer concerned, have no say. He suggests many planning restrictions are worthwhile, but heritage restrictions appear to have unclear benefits compared to the costs of higher housing and rents they contribute to.
Coates wants significantly stronger building codes, so that residents are assured they’ll be living next to quality, long-term housing if development applications are approved, and he wants governments to follow the ACT model and do much more to capture the windfall benefits of zoning changes so that the community, as well as developers, enjoy the benefits of regulatory change. And he suggests the Commonwealth offer incentive payments to the states to accelerate the level of dwelling construction (as well as driving more social housing construction, as the Albanese government plans to do).
The “nightmare” has significant social and economic impacts. For overall wealth, rather than just income, we have become significantly more unequal between 2003 and 2020 — income after housing costs for the lowest quintile of income earners has increased by less than a third of the rate of increase for the highest quintile. Coates argues that much of the growth in the capital share of income at the expense of the labour share of income has been riven by rising housing costs. And inevitably, rising housing costs entrench wealth and privilege — wealthier families pass on more assets to their children and relatives.
Moreover, the biggest falls in home ownership across all age groups have occurred in middle-income brackets — housing affordability is increasingly a problem for the Australian middle class.
Coates also details how it has stifled productivity. Higher land prices make it harder for businesses and workers to move easily, and increase the cost of locating to the most economically efficient locations. Long commutes reduce (usually female) workforce participation. And carrying a large mortgage makes people less inclined to change careers or jobs, or take risks such as establishing a new business.
In addition to the necessary abolition of negative gearing and reducing the capital gains tax discount, Coates suggests making renting more attractive (particularly through longer leases) as well as lifting rent assistance payments and the Commonwealth bringing an end to many years of state government dodging of their responsibilities for social housing, by making Commonwealth social housing funding conditional on matching funding by the states.
Many of these proposals have been heard before, as has much of the housing debate itself. We’re at the stage where politicians are paying lip service to the fact that housing policy in Australia is a disaster, but unwilling to take serious action for fear of upsetting vested interests. Only a steady focus on the profound damage it is doing to Australian society is likely to push the level of community outrage to the level where politicians will be forced to move beyond lip service. Coates’ speech is another step.
Have you been affected by the housing affordability crisis? What do you think of Coates’ proposals? Let us know your thoughts by writing to letters@crikey.com.au. Please include your full name to be considered for publication. We reserve the right to edit for length and clarity.
The money shot in Coates’ speech:
That is completely the wrong way round of course. If we don’t have the excessive immigration, we don’t need to overly stress about supply of housing.
Sustained low wages over many years for ordinary working people in Australia has led to increasing numbers of them being unable to afford to rent or buy a house as their wage is insufficient. Instances of people living in cars, tents, caravans in parkland on the fringes of cities and towns is on the rise. The film Nomad Land in the US drew attention to this issue, that is happening now in places like Bendigo in Victoria, as reported in the news recently
There is a win-win for business and money in this matter. A large mortgage (or a lack of rental properties) makes it difficult and risky for anyone to advocate against their employer, blow the whistle, or join a union. It’s now more than just being sacked or bullied out. And when unemployment levels rise again, it will be a question of how far you sink into the pit if you raise your voice.
Certainly the rules and by laws on what you can build and where in country areas are very much guided by the real estate lobby, who seek to maximise demand (and profits).
I have a 5 acre property, 3 K’s from a town with zero spare rental availability, but am prevented from building a second dwelling by by-laws that limit the building of additional accommodation.
What can be built also has to be minimal in floor space and adjacent to the existing dwelling.
The by-laws appear to protect the commercial accommodation suppliers such as caravan parks and the rental operators in a town with no plans to expand or dilute the rental market. Useless paddocks are carved up by “developers” who retain any block large enough to allow second dwellings and sell off the waterless barren small holdings to those desperate to be able to build.
I have two questions – do landlords pay tax on rent received on their properties, and if not, why not? Secondly, if renters are able to pay weekly rents of $450.00 plus, why can they not be given a mortgage by lenders – same amount each week but paying off their own morgage rather than someone elses? It is well past time the renters were given a fair go.
Re 1 – Yes of course they do. But most people who discussion the evils of negative gearing conveniently overlook that aspect. Plus any capital gains on sale of the property.
Re 2 – rent is the equivalent of interest only – it doesn’t pay off the principal of the mortgage.
All income received by a landlord is taxable however because said income is taxable, the expenses such as mortgage interest, repairs and maintenance etc are tax-deductible. In some cases the rent exceeds expenses (positive gearing), rentals are lower than expenses (negative gearing).
As to renters borrowing, it’s not all about cash flow. Lenders will most certainly lend to renters however the renters have to actually have funds to pay at least 10% to 20% of the purchase price as a Deposit. No 100% finance for homes.
I have had the recent experience of being refused a home loan, despite having a 25% deposit, and a year of paying more per fortnight on rent than the loan would be (even with higher interest rates into account). Why? No permanent job. Possibly- because I’m single too. I think that’s what the OP was getting at – it’s profoundly unfair that renters who DO pay more than what the mortgage would cost in rent, are unable to get a loan. Single? Insecure work? Of course it’s women who are going to suffer here. I’d like to see more innovative shared equity models that DONT involve bank funding at all.
Landlords use rental properties to decrease the overall tax they pay on their income. They do this by claiming deductions against their income for repairs and maintenance on the property, borrowing costs, etc.
I guess the question could be asked, why should the government subsidise them to do this at the expense of tax revenues raised for important services?
I thin it’s fair to characterise it as the public purse subsidising private wealth.
They also pay tax on the rental income and on any capital gains they make on sale as well as State Land Tax (which owner occupiers don’t pay).
For the 2019/20 financial year, landlords were net tax PAYERS to the extent of about $3 billion.
That’s $3 billion more than owner occupiers paid.
You often pop up to defend negative gearing which prompts the question “how many of these tax payer funded rorts do you own?”
None as it turns out.
Of course not.
You defend the indefensible purely as an intellectual exercise
Yep.
You keep writing this as if that $3b would otherwise have disappeared in little puffs of smoke.
And as if owner occupiers don’t pay any tax at all (when in fact they pay a substantial fraction of it).
And $3b sounds like a lot, until you realise that it’s 0.5% – a rounding error – of the $500b total tax take for 2019-20.
But that’s the point, it would have disappeared in a puff of smoke because OO’s don’t pay land tax and don’t pay any gains when they sell their house.
Whether $3b is a lot or not, it still debunks the repeated drivel that landlords are being subsidised by other taxpayers.
A lot of renters are in insecure work and/or lack the ~10-15 years worth of savings necessary for a deposit.
Also, thanks to the property bubble – and especially with rates heading upwards – rent payments generally won’t cover a mortgage large enough to buy the property (which, itself, demonstrates how broken things are).
Eg: a $450/week payment will only allow borrowing about $400k at the moment.