The first step in fixing any problem is acknowledging that there is one.
After a long period of enjoying asset wealth creation and lecturing young people on the value of hard work, most of the country is finally beginning to understand the negative economic consequences of extreme property prices.
Inner city businesses face exorbitant rents and difficulty retaining workers, while the average Australian faces record levels of household debt that limits our ability to spend disposal income back into the economy.
For those worried about their ability to ever own a house, the last few months finally have some positive signs as debate on policy controls, like negative gearing, are the centrepiece of the national conversation.
But considering at the turn of the year, median property in Sydney costs twelve times the median yearly income (in Melbourne it’s nine and a half times), something must be done to quell a problem that may cause an entire generation to be locked out of purchasing their own assets.
Negative gearing – What is it and why is it a problem?
Negative gearing in Australia functions in a basic way. When an investor purchases an investment property, whatever loss they make on that property (running costs, paying interests on the loan used to purchase it etc.) can be leveraged against their taxable income.
In a nutshell, people are limiting their tax bill by claiming losses by one source of income against another.
According to Jennifer Rayner’s book ‘Generation Less’, just under 2 million Australians declared rental income to the tax office in the 2012-13 year (most recent full figures). Only 706,000 of them declared a net profit on their rentals, meaning six in ten landlords were running properties at a loss.
On average, those landlords lessened their tax bill by an average of $21,000. It’s an issue because it’s driving investor demand, as many taking advantage of the tax write off and the halving of the capital gains tax under John Howard when flipping their properties to another buyer.
Ultimately, its wealthy investors driving demand at the expense of the first home buyer.
Does government assistance make housing affordability worse?
During the government’s election budget, some were wondering about the relief that first home owners would receive – specifically whether it would be through various government remedies. Through conversation on social media, the topic of grants came up. Australia has wound back the First Home Owners Grant, but it hasn’t stopped Queensland at state level stumping up $15,000 for first home buyers.
But the question is does government intervention in this way make the problem worse? Catherine Cashmore, a real estate and taxation expert from the non-profit think tank Prosper Australia, believes there is no doubt about the effects of grants on housing prices.
“The evidence is unequivocal, grants push house prices upwards,” she tells upstart.
Cashmore was adamant that grants drive demand, which leads to the driving up of house prices.
“It’s sort of like if gave people an interest rate cut tomorrow and then we’d be again giving them more money that when they go and buy a house in a market that is limited in supply, and it’s not that we haven’t got enough land to supply, but limited in locational supply,” she says.
“Everybody wants to live close to the city or in a certain suburb, and it just gives many average people more money to compete with. And the evidence has been proven again and again, that these grants are nothing more than a vendor grant. They don’t assist buyers – they assist sellers.”
Former ANZ Bank chief economist Saul Eslake said similar in 2011, slamming the First Home Buyers Grant policy by calling it “a complete waste of money” and “useless” despite its popularity.
Land tax – an unorthodox solution?
So if negative gearing proves too hard to defeat politically and government grants do the opposite of their intention, what can there be done to curb what is now a generational crisis?
Many states have some variation of land taxes, but they exist in a form of a yearly tax on the value of property against a certain threshold.
Cashmore is an advocate of bringing in land tax at the expense of stamp duty and other transactional taxes that have influenced demand and fuelled the property speculation that’s caused prices to skyrocket.
“If you just strap it on the land tax as an extra tax, then it doesn’t really help the economy and it wouldn’t help affordability. An argument for an increased land tax is that it’s a replacement for something else and at the moment the main argument for that has been as a replacement for stamp duty,” Cashmore says.
“Stamp duty, like all transaction taxes, tends to lock people in to housing because they imply a cost into the moving process. It reduces people’s propensity to move, so therefore it stagnates the housing market and it stops people from downsizing or upsizing into property closer where they need to work or if they need to change job.”
Cashmore’s argument is that it would work in that land would be taxed by the value of the land per square meter.
The analogy she uses is that in Albert Park, 100 square meters of land and is extremely valuable – where as if we would go out to Melton, 600 square meters of land wouldn’t be anywhere as near valuable as the 100 square meters of land in Albert Park.
Essentially, the point is that land is only valuable due to what’s around it, not the actual land itself.
“They could tax the unimproved value of land, so if they build a train station next to your house and that puts the value of your land up, that’s an ‘unearned’ value. You haven’t earned that gain,” she says.
“That gain has just come to you from what the government has chosen to spend in the area. And that’s how essentially how we would value the land, how much the land price has gone up and then you would tax that.”
The tax would ultimately apply to everything that’s been added to the property value from external sources, rather than improvements such as home renovations.
Cashmore also argues there are a range of good side effects to stop the inflation of property prices – lower mortgage debt, encourages decentralisation, higher density and less chance of property being unused.
Ultimately, there is nothing wrong with idea of promoting property ownership. You could be borrowing against it to start a business in twenty years to employ others. Maybe you’re using it to fund your retirement or passing it on to your children as an inheritance.
But solving the crisis is not only economically and socially critical, but philosophically important. As Rowan Moore in the UK Guardian points out, the current set-up has completely perverted the Thatcherist concept of ‘hard work’.
Many sit and do nothing with property are rewarded, while others who toil endlessly are completely locked out of the market. Not only is reform needed, but our values regarding property need a stark reassessment.