The Australian housing market is experiencing excess demand. Part of this demand pressure comes from Commonwealth and State Government attempts to assist first home buyers through well-meaning but ill- advised grants that do nothing but add to the current housing price inflation. (Australian governments have spent $20b on assistance for first home buyers, but who has really benefited?) It is generally regarded that the prime cause of the current housing market problems is lack of supply of suitable land but there are several policy changes that, if implemented, would bring immediate and significant relief to the housing market from the demand side.
House prices and demographics make death duties an idea whose time has come (theconversation.com)
Staged removal of negative gearing tax benefits
There are 3 main components of demand for housing in Australia.
- Own occupier demand, those that wish to join the housing market or those that wish to change current housing arrangements,
- Domestic investors (often referred to as mum and dad investors)
- Speculative investment, both domestic and international
The eradication of negative gearing would impact on the last two by removing tax incentives and inducing investors to shift into more socially useful avenues (Negative gearing explained ) and induce investors to sell
Slowdown in migration numbers (https://www.theaustralian.com.au/nation/record-migrant-arrivals)-
Clearly, increases in population, beyond the capacity for the market to respond will increase levels of excess demand. The mantra that all migration is economically beneficial, an almost sacred belief of policy makers in Australia is clearly wrong. There is an optimum, level of migration, which alters as domestic economic condition change. In a period of acute housing shortage, the Australian migration program has accelerated not declined A clear case of policy misalignment. (.https://www.theaustralian.com.au/nation/record-migrant-arrivals)-
Restriction on overseas ownership of property
Internationally, countries seek to protect their domestic housing market from overseas ownership (Why More Countries Are Banning Foreigners From Buying Real Estate – Worldcrunch). Singapore requires investors to be resident for 5 years and Canada has implemented a two-year ban on non-resident foreigners. This is not the case in Australia although fees for the purchase of existing property by foreigners has been increased by three hundred per cent 300 percent (Higher foreign investment fees for housing | Treasury Ministers). While overseas ownership is not seen as a major contributor to excess demand overall its concentration on premium property facilitates a trickledown effect on the general price level of housing in Australia (https://www.afr.com/politics/federal/poor-policy-not-migrants-to-blame-for-housing-crisis)
Vacant property tax
Given the nature of speculative investment in housing, there are reports of large numbers of unoccupied units and house across Australia. Unoccupancy should be taxed. The Victorian Government is imposing a 1% of capital improved value (https://www.conveyancing.com/information-centre/everything-you-need-to-know-about-the-new-vacant-property-tax-in-victoria.) The aim of is to increase the house of available housing stock.
Restrictions on negative gearing that support Airbnb
I suggest this measure with some reluctance. In an efficient economy, owners should be allowed to use their assets in the most profitable way. However, there is growing evidence that the social costs of Airbnb are outweighing the private benefits. The stock of rental properties is being reduced for to alternative use an Airbnb with a subsequent rise in the rents on available property. Negative gearing was advanced as an incentive for the provision of more rental properties. Its use to support Airbnb properties, which effectively reduce the stock of available long- term rentals is at best a moral hazard. The solution is to change the tax laws only allowing tax deductions on properties that are used for long term rental or rented for a significant part of the year.
Conclusion
The present housing market is source of inequality and social dislocation in Australia. Lack of affordable supply is the main cause, but the issue is exacerbated by government policies such as ill-advised subsidies which have perverse effects, negative gearing for speculative and Airbnb investment, excess migration, and a failure to tax unoccupied space. While increased supply of land and housing construction is the long-term solution, these policy shifts impacting on the demand side would go a considerable way to easing demand side pressure.
3 Responses
If only we had governments that listened, and didn’t weaponise policy issues for political gain instead of working jointly to solve this sort of problem! I agree, this makes sense.
John Mangan is clearly right.
The New York Times had a good story on homelessness in the US and we are going the same way. The Greens have recognised this and are targetting renters as their new base rather than middle class environmentalists.