The esteemed Grattan Institute yesterday released its much-awaited reporting on housing policy and the need for major reform. The central recommendations focused on a re-think of investor-focused incentives like negative gearing.
BY SHANNON MOLLOY
Whenever property markets begin to recover after an extended lull or downturn, a number of pundits reemerge to express their concern about a so-called and looming affordability crisis.
House prices are getting too high, they claim. Young people have no chance of paying a mortgage, it’s often said. There’s a bubble forming that’ll pop and swallow the world, doomsayers cry.
You look at cities like Sydney or Melbourne that experience a several per cent increase in their median house prices in the space of a year and those alarmists’ dire warnings seem pretty compelling.
I mean, you only need to flick open a newspaper on a Monday and read about weekend auction clearance rates to probably agree that things are a bit crazy at the moment.
But let’s look at the facts, contained in the Grattan Institute’s Renovating housing policy report that was released yesterday.
Firstly, there’s the issue of housing affordability and the argument by many that rapidly rising house prices are locking out the younger generation, who’ll never be able to afford buy their own home.
Of course, that assertion is rubbish and the report essentially confirms as much, with the finding that the proportion of household income required to service a mortgage today has barely changed over time. It says: “…mortgage repayments as a proportion of disposable income are relatively low compared to the last decade and are comparable to previous periods in the (past) 30 years.”
Instead, I believe the major impediment these days is access to finance. Banks tightened their lending belts in the wake of the GFC and began demanding larger deposits as a safety measure against negative equity. It was a pretty smart and responsible move, sure, but the modern day value of housing means a 20 per cent deposit is a fair whack of cash, especially in the trendy inner urban suburbs where young people are keen to put down roots the first time around.
In the 1980s, a homebuyer needed to save around the equivalent of one year’s average income to use as a deposit to secure a loan. These days it’s closer to four times’ the average income. Yes, that’s due in part to rising house prices, but also due to tightening lending criteria. In addition, I think it’s because 20-somethings 30 years ago were largely more realistic about their first home and bought within their means in up and coming areas that didn’t carry a price premium.
Secondly, it’s often said that investors get the lion’s share of incentives and tax exemptions – think negative gearing and capital gains tax discounts. Affordability alarmists argue that in addition to being a massive waste of money, it’s unfair. Landlords are greedy enough as it is, it’s usually implied.
The report again concludes that support for residential property investors costs about $6.8 billion per year, which sounds mammoth. That is until you compare it to the government expenditure directed at homeowners, run of the mill owner-occupiers, which totals a staggering $36 billion per year.
Contrary to claims of commentators who seem to have a mix of resentment and bitterness towards property investors, the government isn’t splashing cash primarily on investors, but on homeowners.
Thirdly, those who push the affordability argument often point to slowly falling rates of homeownership, particularly among younger people, as proof that the next generation simply can’t get into housing. As this report alludes to, that could possibly be more closely tied to social changes – similar to young couples delaying getting married and starting a family until later in life.
Whether you’re comfortable with the idea of wealth creation via property or think landlords are evil, blood-sucking capitalist monsters, we can all agree on one thing – it’s time for a rethink of housing policy. In fact, to coincide with the recent Federal Election, I proposed some ideas of my own that might be more effective than attacking property investors.
As the Grattan Institute’s report points out, there’s really no one at any level of government focusing on housing. Sure, there are housing ministers at various levels, but their primary concern is with the provision of social housing… but that’s it. In the grand scheme of things, that’s a fairly small area to be devoting all of the attention to.
No one is looking at strategies to make it less of a hassle to get into your first home. Governments are ignoring the need to ease the rental pressure on tenants who face the risk of being stuck paying someone else’s mortgage. There’s no attention paid to supporting those Australians for whom the cost of housing is exponential and places stress on their already limited means.
The days of governments putting their respective heads in the sand and throwing good money after bad need to come to an end. And while the Grattan Institute’s Renovating housing policy report contains some very solid points, suggestions that negative gearing and capital gains tax discounts be scaled back are counterproductive in my view.
The suggestions are fairly similar to what pundits have been saying for years – scrap the incentives aimed at investors. But this report concludes that an immediate and reactionary withdrawal of those sorts of incentives would be the wrong approach. Any changes should be a gradual transition instead, it says.
But still, I think sustainably growing property markets benefit everyone – individuals trying to build wealth, families and the economy. It’s dangerous to treat investors as the big bad wolf. But that’s a whole other argument for another time.
Shannon Molloy is the deputy editor of Australian Property Investor magazine, www.apimagazine.com.au