In the lead up to last year’s Federal Election, negative gearing yet again became a political ‘hot potato’ as politicians tried to understand the continued strength of the Sydney and Melbourne housing markets. Unfortunately again, property investors are unfairly front and centre of this current housing affordability debate – with negative gearing and capital gains tax concessions unduly charged for contributing to current concerns around recent price growth and affordability concerns.
Those that fully understand the fundamentals and mechanisms of Australia’s property markets know that there a number of factors behind recent strong price movements. Banking on continued price growth and suffering losses year after year (well until rent growth and debt reduction results in a neutral or positively geared asset), is not the main culprit! In fact, to single out negative gearing (the ability of claiming losses against income – which has been in the Australian taxation system since 1936) and Capital Gains Tax (CGT) concessions, is ill informed and simply wrong.
We’ve heard everything ranging from abolishing negative gearing completely, limiting negative gearing to new property only, capping claimable losses and abolishing or limiting CGT concessions. Yes, removing negative gearing and or reducing the CGT concessions in isolation will result in a decline in house prices in some segments of the market but it will not necessarily improve housing affordability. Falling property prices will erode consumer confidence in the general economy given over 51% of Australia’s wealth is in residential real estate. As houses prices fall, stamp duty revenue falls, capital gains revenue falls, industries will contract, unemployment rises, wages decline. Less jobs and lower incomes doesn’t translate to making housing more affordable.
So to look at these so called ‘evils’ in isolation without a broader discussion and wholesale changes to our taxation system, our planning policies and our immigration policy is fraught with danger in the least, economic suicide in the extreme. Particularly at a time when our economy is still adjusting to life post mining boom and which, has largely been propped up by a construction boom.
What is not getting discussed in the mainstream media is that our affordability concerns, mainly within our two major cities mind you, has more to do 4 overarching considerations:
Population growth: our continued strong population growth (one of the highest in the OECD);
Land supply constraints: a chronic shortage of appropriate housing, government policies, taxes and charges enormously increasing the delays and cost of producing new homes;
Money supply: all time low interest rates, rising dual income households and increased debt, increased foreign investment in the construction cycle; and
Poor regional development: and an undue focus on developing our capital cities.
Demand v Supply
Australia’s population is growing at 1.4% per annum, nearly five times the average for industrialised nations and one of the highest in the OECD. Over the last 10 years, Australia has averaged a 1.6% p.a population growth rate compared to 1.2% p.a for the 10 years prior. More than 50% of our growth occurred form overseas migration, whom create immediate housing demand. It is no coincidence that net overseas migration is highest in Sydney and Melbourne and where both cities have a chronic undersupply of appropriate housing.
On the supply side, restrictive planning policies have locked up a lot of inner to middle ring suburbs from appropriate medium density development skewing our construction pipeline to high-rise development in our CBDs, inner city fringe and house and land packages on the urban fringe. Many of these are not meeting the needs of 70% of the market – the owner-occupier market. Another issue rarely reported in the mainstream media is that owner occupiers – the ‘next time’ home-buyers – make up the largest proportion of the established residential market – not investor’s!
Housing price growth is largely driven by owner-occupiers looking to upgrade the family home or are cashed-up “downsizers”. They are generally financially secure, highly motivated and will often pay whatever it takes to secure the property they want because they have invested in it emotionally. They are the ones driving the market, not investors.
Investors, on the other hand, are all about financial returns. An investment purchase must make financial sense and be supported by key fundamentals and at the moment the fundamentals do not make sense for investors in the Melbourne and Sydney markets with all time low interest rates and yields – it is a speculative market in some segments.
If you look at Melbourne and Sydney, where all the media attention is focussed due to strong capital growth over the past 5 years, there is a real disconnect with the current new dwelling supply, strong overseas migration and what ‘home’ homebuyers are looking for. The priority for a large portion of this ‘next time’ home buying sector is a well-located 3 or 4 bedroom property on manageable (sub 600sqm) of land in an area with good infrastructure and amenity, preferably with a short commute by car or public transport to the CBD.
However, there are few suitable alternatives in these established suburbs, with subdivided villas/duplexes/townhouses and small-scale apartment buildings effectively restricted to only small pockets or not permitted at all. This is resulting in a lack of suitable housing development, with home-buyers having no alternative but to pay inflated prices for existing stock meeting their needs, further reducing affordability.
I touched on this point 3 years ago http://performanceproperty.com.au/2014/09/plan-melbourne-2050/ when the then Victorian Liberal government introduced new residential planning reforms. In that article, I illustrated that 7 of 18 key inner & middle municipalities had essentially ‘locked up’ 70%+ of their respective municipalities from development by applying the most restrictive residential zoning under the new reforms. It is no surprise that these municipalities have had some of the highest price rises in the state over the past 3 to 4 years.
Over the past week, the Victorian Government has announced a number of schemes to address the increasingly reported housing affordability problem. It is with great interest that at the time of writing this, the Andrew’s government has announced changes to Victoria’s most restrictive residential zone, the neighbourhood residential zone, scrapping the limit of two dwellings per block. Whilst this will no doubt raise the ire of the NIMBY brigade, provided our Council’s permit suitable designs to maintain or compliment streetscape character then we should see some supply side relief within the inner and middle ring suburbs of Melbourne.
The Andrews government also ‘attempted’ to address the supply side issues by releasing 17 new suburbs.
At the same time they have implemented a direct demand side stimulus by abolishing stamp duty for first home buyers (FHB’s) for purchases below $600,000 and discounting stamp duty for purchases between $600,000 to $750,000, for new and existing property. This follows the announcement to double the FHB grant for new builds in regional Victoria, taking the grant from $10,000 to $20,000 from 1st July 2017.
We expect that these demand side initiatives will do nothing but make housing less affordable as we see prices in outer Melbourne suburbs and regional centers under $750,000 increase as was the case when the FHB grant was first introduced in July 2000 and when it was doubled in 2008. Both occasions saw a spike in buyer activity and corresponding sharp increases in housing prices. Investors will be prominent in this window of opportunity prior to July 1.
Another key component why Australia’s housing is some of the most costly in the world is high construction costs (labour costs and unions being a key issue) and the amount of taxation, fees and charges levied from all 3 forms of government. All of these combined, coupled with antiquated and cumbersome planning policies add significant costs to produce new housing. Many developers and builders pass these increased costs onto buyers. It is no wonder the ABS has found the cost to build a new house has increased fourfold over the past 20 years with most of the escalation coming in the last 10 years.
If all forms of government had the political will they could make new dwellings considerably cheaper – and then grants and concessions such as those proposed by the Andrew’s government in Victoria wouldn’t be so necessary.
Australia’s money supply has been rapidly expanding because of the mining boom, falling interest rates, the rise of dual income households and growing overseas investment in residential property. Australia’s major capital cities are also no longer local markets; they are international markets. Our markets are highly desirable to foreigners, especially the Chinese, who have been major investors in our off-the-plan market in recent years.
Over the past 10 years foreign investment in residential Australian real estate has averaged around $18b, we saw this spike to an incredible $61b in the 2015 calendar year. This tripling of foreign investment has been a factor in the Melbourne and Sydney surge in house prices which received over 80% of the total national foreign investment. This ‘injection’ of capital has filtered through all sector’s of the local economies increasing wealth and consumer confidence.
Poor regional development has also played a role in inflating prices in our capital cities. Slow land release in regional areas is a significant impediment to the supply of land for new housing and coupled with the mismatch between buyer demand and the type of land released, this has been especially problematic.
How do we address affordability?
Let’s stop attacking investor’s and look at broad range of measures to fix this complicated issue. Negative gearing is an important concession that helps the supply of housing, tinkering with it now without looking at other corresponding measures is fraught with economic danger.
To improve housing affordability there needs to be action from all forms of government: