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Why The Government Isn't Interested In Making Housing Affordable

Too many of their voters are getting rich as a result of the property boom.

21/09/2017 9:52 AM AEST | Updated 22/09/2017 9:39 AM AEST
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"The reason for the inaction is that established home owners and investors -- all of whom have reaped phenomenal wealth gains in recent years -- outnumber young Australians desirous of home ownership."

Forget the smashed avocados, young Australians are "smashed" by unaffordable housing -- so unaffordable, in fact, that those under 35 in Sydney, Melbourne and outer metropolitan areas are now all but precluded from ever owning a home.

In a recent survey by Demographia based upon a city's price to income ratio, Sydney was second only to Hong Kong for housing unaffordability. In Hong Kong, the price to income ratio was 18.1, in Sydney it was 12.2, and in Melbourne it was 9.5.

To put these figures into further context, Sydney ranked above every U.S. city including San Jose (Silicon Valley), and even topped Vancouver -- long renowned for its spectacular unaffordability.

How did we get ourselves into such a mess?

At the root of the problem is the attitude that housing is a tradable commodity, rather than a special class of asset designed to facilitate the greater social and economic good. Housing has come to be seen not for its use value, but rather its exchange value.

The consequence of this mindset is a society which, for young Australians, is teetering on the brink of systemic failure.

As housing prices soar -- in some cases doubling in just eight years -- young Sydneysiders and Melbournians are living with parents and in-laws in droves. Young renters struggle (often in vain) to save for a home deposit. Those brave enough to embark upon home ownership are forced to take on mortgage liabilities which approach the absurd.

Driving all of this is a national debt binge. According to the Reserve Bank, the household debt to income ratio is now at record levels. This means that if interest rates were to rise just two or three percentage points from their current record lows, swathes of home owners would inevitably buckle under the ruthless financial discipline required to stave off mortgage default. There would be a sell-off and corresponding devaluation of housing. Those who most recently entered the market could be left with negative equity and an increased risk of bankruptcy.

While we await the inevitable "readjustment", the warnings of a housing bubble are plentiful and go largely unheeded. Take Willem Buiter, for example, Citigroup's chief economist. Just recently he has suggested that Australia is experiencing a "spectacular housing bubble".

The Paris based Organisation for Economic Co-operation and Development (OECD) has similarly observed:

"[A] fall in house prices and or demand could have significant macroeconomic implications. Specifically, the market may not ease gently but develop into a rout on prices and demand with significant macroeconomic implications".

The Swiss based UBS Global Real Estate Bubble Index has rated Sydney at fourth on its 2016 risk index.

Before this, Lindsay David and Philip Soos, who have written numerous reports and articles on Australian housing, have cautioned that "contrary to the analyses of the vested interests, the data clearly establishes Australia is in the midst of the largest housing bubble on record".

Government action is required to ensure that young Australians can afford a home. Tax policy which heavily incentivises housing investment -- creating property portfolios for some, and rental serfdom for others -- must be curtailed.

Bernie Fraser, a former Reserve Bank governor, has observed that tax incentives such as negative gearing:

"[A]ccentuate short term fluctuations in house prices and sustain long term increases in house prices which far outstrip increases in the earnings of most Australians; this last-mentioned consequence, plus the fact that the benefits of the concessions flow disproportionately to people on higher incomes, make the current measures manifestly unfair".

Philip Cronican, the ex-chief of ANZ, has similarly noted that "[g]overnments might want to look at whether the current extent of negative gearing tax breaks are fostering an unhealthy focus on housing as an investment vehicle, thereby compounding affordability issues".

Saul Eslake, the ex-chief economist of ANZ, has argued that "negative gearing contributes to upward pressure on the prices of established dwellings, and thus diminishes housing affordability for would-be home buyers."

Eslake has also suggested that the effect of negative gearing has been "to encourage Australians to take on more debt than they would have done otherwise; and to undermine, at a substantial cost in terms of revenue foregone, the efficiency and equity of the Australian tax system".

If the problem is so obvious, why hasn't something been done?

The reason for the inaction is that established home owners and investors -- all of whom have reaped phenomenal wealth gains in recent years -- outnumber young Australians desirous of home ownership. If the Coalition were to modify existing tax policy, for example, by quarantining negative gearing to new housing stock and reducing capital gains tax concessions, median house prices would fall. The backlash from the Coalition's predominantly older voting base would be swift. Politics -- not prudent policy -- is driving decision-making.

Action on housing affordability can no longer be postponed. It is unacceptable that entire generations of hardworking young Australians should be required to forgo home ownership in Sydney, Melbourne and outer metropolitan areas. Measured reforms to negative gearing and capital gains tax concessions offer a clear path forward.

Young Australians deserve a fair go when it comes to housing affordability.

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