The 2015 Budget shows the language used in the last federal election – words like ‘crisis’ and ‘emergency’ – to be nothing but the over-the-top rhetoric that we’ve come to expect from our politicians. Economists all over the country have lamented this impoverished use of language and distortion of fact.
The real ‘budget crisis’ revolves around Australian household budgets, specifically the cost of housing. Much of the recent discussion on housing affordability has focused on property prices, but the ‘crisis & emergency’ concerns disadvantaged people, unlikely to ever afford their own home.
The Abbott Government has done a good job of convincing people that, after ‘the mess Labor left behind,’ tough decisions need to be made to get Australia’s fiscal position back in order. However, after releasing the 2014 Budget they found, seemingly to their surprise, that the public – not to mention a number of representatives in the Senate – would not accept any proposals deemed unfair.
The most recent budget was crafted to ensure the government could deflect accusations of unfairness, while still continuing their objective of, eventually, getting the books back into the black. The latest data from Newspoll indicates they have done the job – certainly better than the last budget anyway. But has the government missed an opportunity to address the difficult, but extremely important, issue of housing affordability?
At the end of last year that old chestnut, the negative gearing debate, found its way back into the media cycle. It culminated in a showdown on an episode of Q&A between Joe Hockey and the Grattan Institute CEO John Daley, which was characterised by the Sydney Morning Herald and others as Hockey being ‘outclassed by an economist’ (despite Daley never having studied economics formally).
Hockey trotted out the usual argument against abolishing negative gearing: if investment in the property market is discouraged, then rents go up. If this is true, he has a point.
Sure, getting rid of artificial demand – which critics argue is created by negative gearing – might slow down growth in property prices, but it would also mean that people without the means to purchase their own home are made worse off. Removing negative gearing would improve affordability for potential buyers, but would lead to higher rents.
Daley countered by arguing that rents would not rise if the policy was changed. According to Daley, the ‘rise in rents’ argument is based on the fact that when the Hawke Government abolished negative gearing – 30 years ago – rents rose in Sydney and Perth, yet crucially they hardly moved in other major cities.
He also pointed out that economic theory shows abolishing negative gearing to be sound policy. Since investors at auctions are competing with other potential buyers, who are often renters, then one less house bought for investment means one less person who needs a rental property. This would imply no impact on the rental market.
Both arguments have merit. Yet the current debate rests on a false dichotomy between abolishing negative gearing altogether or keeping the status quo – there are better alternatives.
Negative gearing is a hot topic because it is perceived to be inequitable. The policy gives rich investors tax exemptions. As a result, Commonwealth tax revenues are reduced, and public resources for programs that benefit the poor are diminished.
Recent research by The Australia Institute (TAI) shows this view to be well founded. According to TAI the majority of people utilising negative gearing are average income earners. Yet this majority only receives a small share of the 3.7 billion dollars the tax break is worth annually. Only one fifth of this amount flows to the poorer 50 per cent of households. On the other hand over half of the benefit goes to the richest 20 per cent of households.
The capital gains tax (CGT) discount tells a similar story. The tax break is worth 4 billion dollars a year. Of this, 82 per cent flows up to the top 20 per cent of households, but only 7 per cent benefits the bottom 50 per cent.
The first implication of these figures is that many people that benefit from negative gearing are not on high incomes. Also the benefit gained by the majority of ‘negative gearers’ is fairly modest. Trimming the excessive benefits accrued by high income earners may be better policy than abolishing negative gearing.
The second implication is that the CGT discount is the bigger contributor to inequity. If people want a more equitable tax system then the CGT discount makes a more potent target for abolition.
A potent problem is that Australia has one of the highest homeownership rates in the world. This is likely why politicians are reluctant to alter negative gearing and CGT arrangements. Even modest proposals for change that affect only few, tend to alarm the large numbers of property owning constituents.
Some commentators point out that targeting the demand-side of the market with national policy changes to negative gearing and the CGT discount misses the problem. Instead the problem comes from the supply-side. Rising house prices in Melbourne and Sydney are cause for concern, but aren’t so bad in the rest of the country. Inadequate and overly constrictive planning policy is to blame for restricting potential housing supply in these large cities. If this is the case, local councils rather than the Commonwealth are the level of government to be held responsible.
Yet it would be dangerous for Federal policymakers to use this argument to back away from the problem. Most Australians live in capital cities, and the trend towards urbanisation will continue. Also, even though property prices are stable outside of capital cities, over the last few decades the gap between house prices and income has widened, as well as the gap between household debt and income. Of course there are many factors that affect these ratios. Some of them, such as monetary policy, are out of the government’s control. But there aspects of the housing affordability problem that the government can affect.
The statistics above make clear that there is no quick fix to the problem. Unfortunately many people will never afford their own home and will have to rent for the rest of their lives.
Taking this into account, as well as the earlier observation that property owners hold electoral power over those without property, rental affordability should be an immediate policy focus for the Commonwealth.
The creation of the National Rental Affordability Scheme in 2008 indicates that the federal government at that time recognised the imperative. But a report by Anglicare last month revealed shocking statistics that shows much more needs to be done.
Anglicare calculated that of the 65,614 rental properties listed nation-wide, only 1 per cent were suitable for a single person on government payments, and only 2.3 per cent for a single person on minimum wage. While 23.8 per cent of the dwellings were suitable for a couple living on minimum wage with two children, only 0.9 per cent were suitable for the same family composition on a Newstart allowance.
The common benchmark measures affordable rent as being no more than 30 per cent of a household’s income. Some might argue this is too ambitious. Yet figures from the ABS show that before 1988 low income households spent less than 30 per cent of their income on rent. Single persons spent well under 30 per cent of their income on rent. Middle and high income households spent less than 20 per cent of their income on rent, with the exception of single parents.
Surely people that can’t afford to rent privately can access affordable state-owned housing? The statistics tell another unfortunate story.
According to a factsheet by National Shelter, from 2008 to 2013 the amount of people on a waiting list for social housing increased by nearly 9 per cent, to over 200,000 people. There were just over 400,000 social housing dwellings in Australia. The 2011 Census counted the total amount of dwellings at about 9.1 million. This means that social housing accounts for an unbelievably small fraction of the total housing stock in Australia – less than 5 per cent.
These figures shouldn’t be particularly surprising.
According to the ABS, there has been a steady decline in construction undertaken by the public sector since the early 1990s. Public housing construction was 7 per cent of total housing construction in 1992, but by 2002 had fallen to just 2 per cent of total housing construction. This was accompanied by an increase in government housing assistance such as Commonwealth Rent Assistance.
In September last year, NSW Minister for Family and Community Services, Gabrielle Upton conceded that an increase in waiting times – the current average is 4 years but can reach 10 or more years in certain locations – was a sign that the social housing system needed reforming. She also said that one explanation for the increase is a lack of affordability in the private system for people on low incomes.
Housing affordability is a complex issue, but there is a simple solution which addresses all of the problems highlighted in this article.
The approach apparently decided on by policymakers to move away from social housing provision and instead concentrate on enabling low income earners to enter the private rental market has failed. Providing financial assistance to people who want to rent a home privately but are unable to does make sense, but it also means that landlords can charge higher rents, in the knowledge that taxpayer money makes up a portion of the income needed to cover rent increases.
There are better ways to improve housing affordability.
If governments increased the supply of social housing, there would be less demand in the low end of the private rental market. This would likely lower rents, reducing expenses for low income households, as well as expenses for the government departments responsible for providing financial assistance.
As shown above, a significant portion of money forgone under the current tax arrangements regarding negative gearing and capital gains is unnecessarily going to high income households. These arrangements should be altered so that money which investors in this demographic currently receive can instead be directed towards building more social housing.
This would improve affordability for those on low incomes and also increase accessibility for thousands of homeless people. At the same time it would mean decreased demand by investors in the mid-to-high end of the private rental market, where investors on high incomes are more likely to invest.
The effect of this, all other things equal, would be less upward pressure on property prices, since there will be fewer wealthy investors at auction sites who are able to outbid home buyers. Lower property prices means a greater incentive to buy a home instead of renting and therefore reduced demand in the rental market, pushing down prices there as well.
Understandably, the political difficulties surrounding this issue made the current government reluctant to make changes such as those proposed here in their first two budgets. But political capital can be gained here if policymakers are brave.
Doing something about housing affordability doesn’t just go to addressing that ever-present concern for voters of cost-of-living, it also addresses other issues that in the last few years have rightfully begun to gain more exposure.
Particularly since the Global Financial Crisis in 2008, wealth and income inequality appears to have become a greater concern for the public. Research conducted last year by Oxfam found that 79 per cent of Australians surveyed believed the gap between the richest and poorest members of society has widened over the previous decade, and 64 per cent said this has made Australia a worse place to live.
On the first count it is safe to say that they are correct. Despite Australia experiencing record long economic growth, inequality has not only been rising, it is actually worse than people realise. The issues raised in this article have been exacerbated due to governments failing to address this problem, but they are part of the cause of the problem as well.
Domestic abuse is also intertwined with housing affordability. There is increased pressure on the federal government to address the failure of the current system to prevent violent abuse of women by their partners. Some experts claim that the situation is endemic and that financial insecurity is an important part of the problem. Concerns about housing affordability contribute to victims of abusive relationships feeling like they have no escape and possibly even losing their lives as a result.
It is unfortunate that the Abbott Government didn’t take advantage of the opportunity to use these arguments in a budget released under the banner of ‘fairness’. But a recent Senate committee report on the issue which included members of all three major parties is encouraging. It made some 40 recommendations – looking at both demand and supply problems – and called for more leadership from the federal government, suggesting they develop and implement a plan for a national approach to housing affordability.
A recent commitment by the ALP to cut superannuation tax concessions also indicates they have identified that political ground can be made in the area of equity in the tax system. With the Coalition largely relying on tax bracket creep to reduce the deficit at the moment, it’s looking increasingly likely that they will have to consider widening or increasing the GST. Bracket creep and the GST hit middle and low income people hardest, so failing to address the issues raised in this article increases the risk of losing further ground in the equity battle.
However, the real costs of inaction are much more important than the politics. The impact of limited affordable housing on the livelihoods of Australians, particularly those on low incomes, has become a serious problem. In some cases it may even be costing lives. There is no doubt that this is the ‘budget crisis’ that deserves to be in the news.