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The Government Thinks Australia's Crazy House Prices Are Fine

Nothing at all needs to be done about housing affordability, apparently.

28/12/2016 3:32 PM AEDT | Updated 28/12/2016 4:40 PM AEDT
Fairfax Media/Domain
This Sydney tin shed sold for $1.69 million recently. Yeah, seriously, that happened.

The Government's "genuine failure" to offer a single solution to housing affordability crisis after spending 20 months compiling a report is "complacent" and "grossly irresponsible".

That's the interpretation of thought leaders and economists, maddened by the Turnbull government's apparent inability to address a ludicrously bloated property market, after a report released in the days before Christmas failed to provide a single solution.

Decent housing in Australia has become notoriously unaffordable for young people, poor people, middle income people, older people, and basically anyone who wants to live within cooee of a city, jobs or amenities.

A 45-page report from the House of Representatives Standing Committee on Economics​​ did not contain one single recommendation to make housing more affordable. By making no recommendations, the report in essence says the housing market is operating fine and housing affordability is not an issue.

Meanwhile, literal burnt-out shells of homes are selling for more than a million dollars in Sydney.

"The Government members report is a remarkable document in that it offers no recommendations to Government," wrote the Labor members of the committee in a dissenting report published alongside the main report. Greens MP Adam Bandt, who was also on the committee, was more blunt.

"Young people are getting screwed on housing," he said.

"In 1990 an average house was 6 times a young person's income, but by 2013 it had risen to 12 times their annual average pay. Tax concessions for investors have supercharged the housing market by increasing the number of prospective buyers, pricing potential new homeowners out. The proportion of people who own their own home, particularly amongst the young, is in decline and is now at the lowest level in 60 years."

University of NSW Professor Hal Pawson, a housing policy and affordability expert, said he was baffled by the report.

"It seems like a very complacent analysis. It doesn't recognise the urgency or seriousness of the situation, but more than that, they're saying 'it's not our job.' They're saying they're not responsible for this, that it might be a problem but it's not their problem," he said.

"To me, that's grossly irresponsible... Some people might feel that was insulting to their situation."

In July, a shack in Sydney's inner-west deemed "practically uninhabitable" sold for $1.9 million.

Contained in the report were discussions of negative gearing, capital gains tax, interest rates for home loans, and general notions of affordability of housing; but no recommendations to trim back the generous tax concessions, or make changes to the home loan market. The report noted Treasury department claims of a "broadly stable level of affordability over the past 20 years" for housing, despite the Housing Industry Association claiming otherwise, and the National Affordable Housing Consortium pointing out home ownership had been "declining across all age groups other than the oldest cohort for over a decade".

The report outlined how Treasury claimed "the current price cycle is not that unusual or more exacerbated than previously", that Sydney house prices "were not showing abnormal trends for the most part", and that housing affordability "does not therefore affect the majority of Australians."

Bandt told The Huffington Post Australia that the report was "ridiculous".

"The government simply refuses to admit there's a problem, let alone take any steps to make housing more affordable," he said.

"Reading the government's report is like being transported into a parallel universe."

Meanwhile, this tin shed in Sydney recently sold for nearly $1.7 million.

Pawson told HuffPost Australia that housing affordability was a key issue that government had failed to address. He said federal politicians could easily make quick changes to make homes more affordable, including making negative gearing and capital gains tax concessions less lucrative.

"The level of property values we have in Australia is substantially the level it is because of the way the tax system distorts investment choices. It's quite rational to over-invest in housing, which is the situation we're in. That has created a very overvalued housing market, in terms of other countries," he said.

"There are some reforms the federal level should recognise are within its power, not just imply this is a problem but they can't do anything ... It's quite a genuine failure to recognise the power the federal government has on the situation we've got."

Economist Jim Stanford agreed, saying people are buying property "like crazy" because of the lucrative concessions available through negative gearing and capital gains tax.

"It's a system set up to reward speculation. In a strong housing market that's like pouring gas on a fire. Even conventional, middle of the road economists recognise this extreme favouritism is badly distorting Australia's housing market," he told HuffPost Australia.

"For the speculator who buys a house to sell rather than live in, they pay tax on only half their profits, but you and I who work for a living, we pay tax on every dollar."

However, the report recommended no changes to negative gearing, capital gains tax, or any other investment incentive that is helping drive up demand and cost for housing. Meanwhile, this is what $2.7 million gets you in Sydney these days:

Stanford said indications were that the housing bubble was probably on its way to bursting. He said Australia's economy was shrinking, interest rates were on the rise, and trouble in global financial markets would place further pressure on both those factors. In such an environment, loan repayments and lending costs would rise, leading to lower demand for housing.

"All the hoopla around the property boom is designed to make people think they should get a piece of the action too. It reminds me of the period in the 1920s, the stock market speculation, when every mom and pop thought they could get rich too. But every bubble bursts," Stanford said.

"When interest rates go up, property prices will start falling. If people had to use their own money, there's no way they would pay $2 million for a small house. It's only because of the availability of cheap credit that prices can go this high."

Pawson said it would be difficult, but slowly making negative gearing and capital gains tax less lucrative was a feasible government option.

"The only way house prices will become more affordable, the only relatively pain free way, is for prices to be suppressed or house prices to stay stable for a long time while incomes increase. It's the only way you can imagine, by taking the heat out of the market, phasing down some of those incentives to over invest," he said.

"I'm not advocating that these are removed straight away, but a plan to phase those down, ideally, would be the way to go."

The Labor Party took a similar proposal to the July election. While it was savaged by the government as an attack on homeowners, Pawson said he actually thought the idea should have been bolder.

"It was a step in the right direction, but in fact it was quite moderate proposal that wasn't about drastically changing the framework overnight. It was phasing something in that wouldn't affect people already in the market, only people who were looking to invest in future," he said.

"Most commentators said it was quite misjudged and suicidal. That didn't prove to be the case. I think public sentiment around the need to reign in these concessions has changed gradually over recent years. Restrictions on negative gearing has been something academics have talked about for 1 or 15 years, but when those calls were happening in the early 2000s, it was politically impossible and dangerous."

"But what the ALP's gamble showed, was that that isn't the case anymore."



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