Blowing up Australia’s housing affordability bubble
Some people greet a new arrival in their neighbourhood with a casserole. Joe Hockey dobbed them in to the Foreign Investment Review Board.
“I referred one of my own neighbours for investigation and found out that, yes, they had got approval, but on pretty spurious grounds,” the treasurer said in a radio interview with 3AW on Tuesday.
“It was a kilometre down the road and they bought a property on the basis that it was meant to be a, you know, they were going to add to the housing stock by building a granny flat out the back or something, and I thought that’s ridiculous.”
He divulged this anecdote, about his wealthy suburb of Hunters Hill, while revealing the FIRB was investigating 195 cases to see if they had breached rules restricting foreign investors, with the exception of temporary residents, to purchasing new housing rather than established homes. The implication was that rich foreigners were forcing up property prices.
But of the two narratives running this week about the factors driving prices higher, the one Hockey was perpetuating is less easy to prove.
Housing Industry Association chief economist Harley Dale says there are some “wild anecdotes” about foreign buyers, but it is worth remembering that legitimate foreign investment underpins a significant amount of new housing supply. “Without these foreign investors, many projects would have insufficient pre-sales to obtain funding and so therefore would not be built at all,” he says. “Clearly something is going on, but how much is occurring at the lower to middle ranges of housing prices is hard to say. There is also a xenophobic element to this – there are ‘foreign investors’ out there at property auctions who are, in reality, second- and third-generation Australians.”
Chief executive of the Property Council of Australia Ken Morrison is uncomfortable about new fees on foreign investors, which he says are primarily a revenue-raiser. “This allows them to make a political point but it’s at the expense of the investment we’re trying to encourage,” he says. “When it comes to housing affordability, this is not the primary driver of the position we’re in. The primary drivers are the record low interest rate environment and the fact we have planning frameworks and taxation frameworks which don’t allow us to produce housing supply at a rate needed to match demand.”
What is clear is that prices have risen rapidly in Sydney. We know this not just because the two most senior economic officials have confirmed it, in unusually stark language. Reserve Bank governor Glenn Stevens this week spoke of “crazy” house prices in Sydney, reinforcing Treasury Secretary John Fraser’s warnings from last week of a “bubble” in Sydney and parts of Melbourne.
The numbers speak for themselves. Prices are up 39 per cent in the past three years in Sydney and 22 per cent in Melbourne, according to data published this week by HSBC Australia. The Sydney prices have risen almost five times the pace of wages growth. But it’s not uniform across the nation. Prices are stable or easing in some other capitals.
The other narrative that is taking hold in the debate over housing affordability pits investors, supported by tax breaks, against cash-strapped young folk wanting to buy their first home in Sydney, at a time when debt is cheap but housing supplies are limited.
It is easier to find evidence to support this narrative, for instance in the Australian Bureau of Statistics data that this week showed the surge in lending to investors who were competing with owner-occupiers for existing homes. Investors borrowed a record $11.5 billion in April to buy established properties, up 23.5 per cent over the year and eclipsing the $9.8 billion lent to owner-occupiers.
But stating this investor versus home-owner narrative so bluntly may obscure some of the nuance, in that the property investment binge has also contributed to slow growth in rental prices.
Both Labor and the Greens are investigating options for dampening investor demand but Hockey has been dismissive, arguing for instance that ending negative gearing, as proposed by the Greens, would drive up rental prices. His focus is instead on supply, including state and local governments’ role in releasing land and approving projects.
The mixed messages over whether the government is concerned by housing prices started more than a week ago when Tony Abbott, under pressure from Labor over Fraser’s declaration of a “bubble” in Sydney and parts of Melbourne, suggested rising prices were largely positive for home owners.
This apparent disregard for those who are struggling to break into the property market was compounded this week when Hockey took a cavalier attitude to concerns about high prices. “Look, if housing were unaffordable in Sydney, no one would be buying it,” said Hockey on Tuesday. He advised first-home buyers to “get a good job that pays good money”. It was a marked contrast to Fraser, who had said he found the social impacts for young people and those on low incomes to be “very worrying”.
The logic of Hockey’s statement about home buyers needing a good job may be irrefutable but it angered some with “good jobs”, such as nursing and teaching, who see home ownership in Sydney as beyond their reach, as the median house price approaches $1 million. Abbott defended Hockey the following day but reached for a more empathic tone, saying that even as a cabinet minister, he had felt mortgage stress.
With charities calling for a national housing summit and senior officials deploying stark language to describe the price rises, the issue is rapidly becoming one the government cannot shrug off.
It was Greens senator Peter Whish-Wilson who asked the question in senate estimates that prompted Fraser’s declaration of a “bubble”. When Whish-Wilson pressed Fraser further about the impact of negative gearing on price rises, he demurred, blaming instead record low interest rates and the availability of finance.
The party has been working on housing affordability ideas for some time and on Sunday released its proposal to end negative gearing, but quarantine existing investments to avoid a shock to the market. The Parliamentary Budget Office costings show savings – amounting to about $4 billion a year over the next decade – which the Greens would invest in public housing.
The Greens argue that negative gearing, which allows investors to deduct losses from their investment property from their taxable wages, distorts the market and disproportionately favours the wealthy, who can avoid higher tax rates.
“It’s very uneven if you’re going to an auction as a first-home buyer and you’re competing against somebody who has an existing property and the banks and financial advisers have said the smartest thing they can do to hide income is go buy another one, which will be concessionally taxed when they finally sell it and they can write off everything,” says Greens co-deputy leader Scott Ludlam.
Labor’s finance spokesman, Tony Burke, also refers to this dilemma, saying the opposition, through its consultation paper on housing affordability, is looking at housing supply issues but also at factors influencing demand, including stamp duty, negative gearing and capital gains tax concessions.
“All of these play into a mix which means when somebody’s going to buy a property, they’re not simply competing with other home owners, they’re competing with a disproportionately high number of investors,” he told ABC Radio.
One option under consideration by Labor is a proposal by the McKell Institute this week that negative gearing could in future be limited to new housing, rather than established homes.
Having ruled out changes to negative gearing, Hockey argues that investors help expand housing stock, keeping rental prices in check. Sectors of the property industry concur.
The Property Council’s Morrison says almost 50,000 new dwellings built in the past year went to investors. “The charge is often laid against negative gearing, that it doesn’t do anything for new housing supply,” says Morrison. “Well, that’s wrong. It’s about a quarter of new housing construction goes to property investors and a good proportion of them would be negatively geared.”
Chief economist with property forecasters BIS Shrapnel Frank Gelber says it is simplistic to blame investors for price rises as they are also part of the solution, because they are more willing to purchase apartments off-the-plan than owner-occupiers.
“You can’t build [new blocks of units] nowadays without a substantial level of pre-sales, or banks won’t lend you the money, so we needed investors to spark off building activity,” he says. “We needed the price rises to make the buildings financially feasible, though we’ve probably shot beyond those levels now. But at the end of the day, you can’t really blame investors. We needed them. The real objective is to get plenty of rental housing to keep a lid on rents. And we need investors to own the rental housing.”
Critics of investor subsidies point to the ABS data that shows about 93 per cent of investment loans go to existing dwellings as evidence that negative gearing is doing little to increase supply, with investors instead competing with other buyers for established homes. “Nobody should be arguing it’s a successful supply initiative,” says Ludlam. “It’s simply not true.”
Ludlam says the Greens are also asking the Parliamentary Budget Office to cost options for reducing or abolishing the 50 per cent capital gains tax discount on the sale of an investment property.
Negative gearing has existed in Australia for almost a century, barring two years in the 1980s when it was revoked, but it was when the CGT discount was introduced in 1999 that property investment really became attractive. Landlords had more leeway to run their properties at a loss, in the expectation of capital gains that would be concessionally taxed on sale.
Grattan Institute chief executive John Daley describes the interaction between negative gearing and the CGT discount as a “terrific lurk for those people who have got enough capital that they can start to play that game”.
Pressure is mounting for the government to review the CGT discount as part of its taxation white paper. And Daley is not the only one who argues it should be revoked. The big banks are also weighing in, as it makes property more attractive than bank deposits as an asset class.
But Morrison cautioned any change must take account of the fact the discount replaced an indexation regime. “For those who are arguing for change in this area, you need to realise it’s not fair for CGT to be charged on inflation,” he says. “It should only tax real gains. The 50 per cent discount was put in as a proxy for that.”
Amid the furore over housing prices, one old idea was resurfacing in Coalition ranks. Liberal MP Alan Tudge, parliamentary secretary to the prime minister, said he still thought proposals to allow first-home buyers to dip into their superannuation to pay for a deposit were worth exploring.
When the idea was floated by Hockey in March, Abbott said it was a “perfectly good and respectable idea”, which had been endorsed by the Liberals as far back as former leader John Hewson’s Fightback! package in 1991. That policy manifesto included the proposal that under-35s be able to access up to 75 per cent of their superannuation for a deposit and repay it over a period of 25 years.
When Hockey revived the suggestion following the release of the Intergenerational Report in March, Liberal frontbencher Malcolm Turnbull called it a “thoroughly bad idea” and former Liberal treasurer Peter Costello also warned against it.
Now the idea is again being canvassed by some Liberal MPs.
Whether it goes anywhere, Abbott and Hockey’s willingness to consider it is in sharp contrast with their reluctance to countenance policies that could reduce incentives for investors to purchase properties.
A third narrative is the one that Abbott sought to prosecute in parliament last week, but it’s based purely on political scare mongering, with no concrete or testable assumptions. “The leader of the opposition wants your house to be worth less,” the prime minister declared in question time last week. “Do not trust this man with your house price.”
The only thing this narrative reveals is that Abbott’s instinct is to reach for a political line rather than a policy response to a challenge that even some of his most senior bureaucratic advisers concede is concerning.
This article was first published in the print edition of The Saturday Paper on Jun 13, 2015 as "Blowing up the housing bubble". Subscribe here.