Housing affordability is one of the most convoluted issues on the Australian political landscape. Proposed solutions typically echo whatever various politicians were spruiking in the first place. Just go to your tried-and-true policy shelf, dust off one of your favourites, and -- voila! -- you have a cure for housing costs.
The most far-fetched example of this policy opportunism was the government's claim housing prices were inflated by the construction workers' union, and hence the ABCC would bring prices back to earth. In fact construction labour has been shrinking as a share of housing costs. And there's no connection between the costs of construction and property prices, anyway. So it shouldn't be surprising that property prices actually accelerated after the ABCC was passed in November: they've grown at an annualized rate of 17 percent since then, more than twice as fast as in the preceding period.
Multiple indicators confirm it is over-exuberant demand -- mostly from people who have no intention of living in the properties they buy -- that is driving up home prices, not the costs of supply. New loans for investors and speculators were up 20 percent year-over-year in December, while lending for owner occupiers declined in the same period.
Drunk with cheap credit, and dreaming of continued property appreciation, investors are buying homes as speculative assets, not places to live. Generous tax incentives for property investors, well out of line with international practice, throw fuel on the fire.
Drunk with cheap credit, and dreaming of continued property appreciation, investors are buying homes as speculative assets, not places to live.
It is possible for governments to interrupt this speculative logic. There are several potential points of entry whereby policy could release steam from the market, and the sooner that happens, the less the market will have to fall to restore balance.
Tax preferences for speculators could be reduced or eliminated, as Labor has proposed (on both negative gearing and capital gains). Quantity restrictions and quality controls over new loans for housing investors could be tightened.
Government could put other barriers in the way of property speculators, while simultaneously supporting home-buyers who actually plan to live in their properties. Victoria's property tax reforms (including a tax on vacant properties, and stamp duties targeted against property investors) are steps in the right direction.
Another effort to twist the property market in favour of residents (rather than investors) was implemented last year in Vancouver, Canada. The experience there has important lessons for Australia.
Vancouver's housing market is strikingly similar to Sydney's: both have a spectacular coastal setting, which pleases the eye but constrains spatial expansion. And both have experienced a significant inflow of offshore money which has fueled property inflation. Hence both cities regularly rank among the most expensive housing markets in the world, according to indices like the UBS global index and Demographia.
Last August the British Columbia provincial government imposed a new 15 percent tax on property purchases in greater Vancouver by non-residents. The tax had an immediate impact on housing prices. Since then, average home prices have fallen about 5 percent (see chart); prices for single-family houses fell even further.
In contrast, prices in other key Canadian markets (like Toronto) continued to grow -- just like Australia. So property prices in Vancouver are now about 15 percent lower than they would have been, on the reasonable assumption they would have kept growing without the tax.
Moreover, by reversing the price trend, the tax undermined the self-fulfilling expectations of speculators, and will thus suppress future price increases.
Source: From MLS Home Price Index.
Taxing 'non-residents' is an imperfect way to distinguish between speculators and those who actually live in the homes they own. Importantly, the tax is not aimed at immigrants, most of whom are exempt on the basis of their residency status; the government also plans to exempt foreign home-buyers with temporary work permits.
But Canadian investors can still speculate without limit; it is only the offshore money being penalized. This ambiguity in the tax's target muddies both its purpose and its moral legitimacy. The government would do better to specify that all non-resident investors pay the tax, whatever their nationality, when they purchase properties they have no intention of inhabiting.
The focus of housing policy should be on shifting the focus of the property industry's attention back to putting roofs over the heads of Australian households.
Despite these flaws, the Vancouver tax has been undeniably effective in cooling the inflow of hot money into the regional housing market. Meanwhile, the City of Vancouver has brought in a complementary 'Empty Houses Tax'. Owners of vacant properties must now pay an extra 1 percent of appraised value each year, further reinforcing the idea that homes should be places to live, not instruments of gambling.
Australian property prices increasingly exhibit the economic characteristics of speculative assets, rather than produced commodities. Prices are driven not by the costs of production, but by the volatile expectations of investors hoping to buy and re-sell (sometimes within weeks) for capital gain.
The focus of housing policy should therefore be on shifting the focus of the property industry's attention back to putting roofs over the heads of Australian households. The Vancouver experience shows that those measures could have powerful effect.
Over the next few weeks The Huffington Post Australia will run a series of daily blogs on housing affordability called The Great Australian Nightmare.
Everyone from senior government ministers to first-home buyers will have their say on what we at HuffPost Australia consider one of the biggest issues facing Australia.
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