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Finance journalist and author of the latest Quarterly Essay, ‘The Great Divide on Australia’s housing mess and how to fix it’, Alan Kohler.

The moment boomers cooked the housing market

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Australia has one of the most expensive housing markets in the world, with values soaring much faster than wages.

This has altered Australian society, increased inequality and profoundly changed the relationship between generations.

So, where did things go so wrong, and can we ever go back to normal?

Today, finance journalist and author of the latest Quarterly Essay, ‘The Great Divide on Australia’s housing mess and how to fix it’, Alan Kohler.

 

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Guest: Finance journalist, Alan Kohler.

Read Transcript
[Theme Music Starts]
 
##ANGE:
From Schwartz Media, I’m Ange McCormack. This is *7am*. 
 
The price of homes in Australia are some of the highest, and most distorted, compared to the wages people earn, in the world.
 
But where exactly did things go so wrong? What were the key decisions? And can we ever go back to normal?
 
Today, finance journalist and author of the latest *Quarterly Essay* - The Great Divide, Alan Kohler, on Australia’s housing mess and how to fix it.
 
It’s Thursday, November 30.
 
[Theme Music Ends]
 
##Audio Excerpt -- Reporter:  
“And to finance now…here’s Alan Kohler.”
 
##Audio Excerpt -- Alan Kohler:  
“Well if you’re wondering why house prices are rising in 2023 and are now up 4.1 %...”
 
##ANGE:
Alan, you've been a finance reporter for a long time. People know you from the ABC's finance reports, but you've been covering the changes in the economy, in print and on TV for decades. Why do you think housing is the most important story in the Australian economy? 
 
##KOHLER:
Well, I don't think there's any more important essential service or product than shelter. It’s the most essential thing. We have to have a home. And there's always a divide between the rich and the poor and those who own a house and those who don't. But it's now because of the increase that's occurred over the past 23 years that divide is now much greater than it's ever been. That's true. And what's more, unless that increase in housing prices is reversed, that inequality will be entrenched.
 
##ANGE:
And your essay is called the Great Divide Australia's housing mess and how to fix it. We will get to some of those solutions later. But how big of a mess as you call it, are we in currently?  
 
##KOHLER:
Well, I think it's a very big mess. In the past 23 years, from the year 2000 till now, the cost of housing has doubled as a share of income. So before 2000, the median house price was about 3 to 4 times the average wage. And now it's 7 to 8 times average wage. And so from the year 2000, house prices have increased by 6% per annum. And prior to that they increased by around about the same as both incomes and GDP. So the rate of increase in house prices more or less doubled. And that's led to a shock, I guess you'd say, to the economy and to society.
 
##ANGE:
I guess for people my age, it's kind of startling how much harder it is for us to buy a house than it was for just one generation before. You know, that kind of cliff that we've fallen off into in just a generation is unprecedented. Where did it all go wrong? 
 
##KOHLER:
Well, there are many causes of the increase in house prices over the past two decades, but I think the starting point needs to be what happened in 2000.
 
##Audio Excerpt -- Reporter:  
“This is an address to the nation by the Prime Minister, the Honourable John Howard.” 
 
##Audio Excerpt -- John Howard:  
“Good evening. As Australians, we have every reason to be very optimistic about the future. No country in the world has better prospects as we enter the new century.” 
 
##KOHLER:
There was an event at the end of 1999 which caused it all, and that was the halving of capital gains tax. 
 
##Audio Excerpt -- John Howard:  
“The right decisions taken today will deliver an even stronger economy in the future. That is why Australia needs taxation reform.”
 
##KOHLER:
And in September 1999, the Howard government replaced or changed the way capital gains tax was calculated. 
 
##Audio Excerpt -- John Howard:  
“Never have I been more convinced that we are doing the right thing for Australia than I am on taxation reform” 
 
##KOHLER:
So from 1985, when the capital gains tax was introduced, the deal was that you paid tax on your capital gain as if it was income, but minus the impact of inflation. So you got to deduct the CPI change that had occurred while you held the asset. You've got to take it away from the capital gain and you paid tax on the difference. In September 1999, that was replaced by a simple 50% discount. That is to say, from that time on, you only paid tax on half of the capital gain. 
 
The idea was that firstly it would roughly equate to the inflation adjustment, perhaps be a bit more. And that it would encourage people to buy shares. That was the idea. But nobody did that. 
 
##ANGE:
Everyone bought houses. 
 
##KOHLER:
Everyone bought houses instead, because that's how people invest in Australia.
 
##Audio Excerpt -- Advertisement:  
“If you made a wish for the perfect home, would it have 4 double bedrooms, a study, huge rumpus and family room, master with full ensuite, parents retreat and walk in robe, a double garage, and more?” 
 
##KOHLER:
We're not a nation of share owning capitalists. We're a nation of house owners.
 
##Audio Excerpt -- Advertisement:  
That’s over 30 imperial squares for 89, 950 dollars, GST free, if you’re quick!
 
##KOHLER:
The thing is that the capital gains tax discount really worked as a tax dodge because of negative gearing. So negative gearing had been in place for a long time, which was that, you know, you've always been able to deduct the losses from your investments, whatever the investment might be. If you made a loss, you got to deduct that loss from your other income. So from your salary, that was already the case. But if you look at the data, nobody was really doing that much before 2000. After 2000, when the capital gains tax was reduced by half, everyone started doing negative gearing because it really is fantastic.
 
You know, you get a tax deduction while you own the property and then you only pay tax on half the game at the end of it. And because inheritance taxes were abolished in 1978, if you don't sell the property, and pass it on to your kids, they don't pay any tax at all. And so it just became a wonderful reason to own property. 
 
But then a couple of years later in 2005, so five years later, the Howard government also doubled immigration. So immigration went from 100,000 a year to 200,000 a year. There was no thought given as to whether those people could be accommodated. Immigration has fluctuated since then, but it's basically continued to average around about 200,000 and in the last 12 months it's been 500,000. So there's been a surge of immigration now to make up for the negative immigration during the pandemic. 
 
Meanwhile, supply of housing has been restricted by a number of things. One was the demise of public housing. So after the Second World War, we had a lot of public housing funded by the Commonwealth Government -  that was kind of destroyed, that ended. In addition, we've had pretty restrictive zoning and planning. So there's been a lot of NIMBYism - people have not allowed or wanted medium density housing. So there hasn't been enough supply so that the combination of boosted demand and restricted supply was explosive. 
 
##ANGE:
After the break - how Australia can fix its housing crisis.  
 
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##ANGE:
Alan, People listening to this episode might be feeling disheartened about the state of Australia's housing market. But your essay does offer solutions on how to fix it, to make buying a home easier. What needs to be done most urgently?
 
##KOHLER:
Well, I think the tax changes need to happen.
 
I mean, Bill Shorten as leader of the Labor Party in 2016 and 19 at both of those elections had as his policy that the capital gains tax discount will be reduced from 50 to 25% and that negative gearing would only apply to new properties. 
 
##Audio Excerpt – Bill Shorten:  
“Why should a pair of first home buyers, you know supported by their parents they could be in their late 20s early 30s, they go to bid for a house, they get the deposit together, they get the stamp duty together, it’s a lot more expensive than it was 20 years ago…and then what happens is they’re bidding against someone in the crowd who is getting a taxpayer subsidy in the form of negative gearing, it’s not fair.”
 
##KOHLER:
So he lost both elections. As a result of that, when Anthony Albanese replaced him, he ditched that policy entirely. 
 
##Audio Excerpt -- Reporter:  
“There are reports Labor will dump its negative gearing and capital gains tax policies which Bill Shorten took to the last two federal elections…”
 
##KOHLER:
The political, conventional wisdom is that those policies are toxic and would result in whoever had them not winning. 
 
##Audio Excerpt -- Reporter:  
“With the property market still booming, the party remains undecided on how to tackle the issue of housing affordability.”
 
##KOHLER:
But I don't believe that to be true. I think that particularly now, a few years on, we had a 21% increase in house prices in 2021, everyone's now much more upset about house prices going up so much. And I think that now there would be an appetite in Australia for doing what Bill Shorten proposed in 2016 and 2019. So I think firstly, the first thing that needs to happen is the Labor Party needs to go to the next election with those policies. 
 
##ANGE:
In your essay, you also talk a fair bit about the way we think about cities and the way that Australians live in this country, clustered in these urban centres. What solutions might there be in how we think about where we live and how we facilitate where we live in Australia compared to the major capital cities?
 
##KOHLER:
So Anthony Albanese’s new policy currently is that they're going to build 1.2 million houses in five years. But the phrase that he's used is that they'll be well-located houses. So what he's meant is they're going to be within a commuting distance from the city, which is fine. But firstly, that 1.2 million is not enough, over five years, that's simply going back to the rate of house building that occurred in the five years before the pandemic. All that would do is get back to the amount of house building that there was. So you need to build a lot of houses to achieve the sort of supply that's required. It's more houses than can be built, I think in the suburbs, you know, like everyone's got their own block. I mean, what are you going to do? you can build 2 or 3 or 4 units on a block, but you can't do that many of those. My view is that the only thing we need to do is, the only thing we can do, is to have better railway transport, so that people can viably live further out.
 
And also have regional cities that people can live in that have both jobs and amenities and hospitals and doctors and supermarkets that aren't in the centre of Melbourne.
 
##ANGE:
And none of these solutions that we're talking about are exactly easy to pull off. There's going to have to be a large amount of political will to do them. What if the answer was elsewhere and the premise of housing in Australia wasn't that buying a home is the ultimate goal? What if we were more serious about renters rights? I'm wondering what it would take to shift this thinking of home ownership as the default, I suppose, while also improving the conditions in renting. 
 
##KOHLER:
So it's interesting, everyone wants to buy a house for two reasons: one is that you're in more control of it, you don't have a landlord breathing down your neck and you don't get kicked out and you can have a dog or a cat. But the other reason is because everyone thinks that's the only way to build wealth. You have to own a house to get on the property ladder. Right?
 
Well, the only way to deal with the problem of housing affordability is to stop property being a ladder. House prices have to stop rising for a while. So we need to be in the situation where the decision between owning and renting was pretty much equal. If you're renting, you don't get an increase in wealth unless you're investing somewhere else. And we need that to apply to housing - buying a place as well that you don't get an increase in wealth because the house price isn't going up. And we need to also equalise rights. So if you're an owner of property, obviously you've got full rights about what you do on that property. Well, we need to improve the rights of tenants. There have been some laws passed in Victoria and Queensland to do that. And landlords are all complaining like mad and bailing out, you know, so they're all saying we're selling, we're not going to be landlords anymore. Okay, fine. Bugger off. I say. 
 
So my view is return the house price to income ratio to what it was. Houses are too expensive versus their income. And that needs to be back to what it used to be. If we're going to achieve anything, we have to ensure that house prices for a while increase at less than incomes, so that incomes can catch up.
 
##ANGE:
Alan, as you said at the beginning of this conversation, you know, this crisis has never been worse. And my generation is definitely feeling this crisis .And I guess we can either work to turn it back around, as you're saying, so that prices are in a much better ratio to our incomes or we do nothing and it gets worse, probably. How optimistic are you that we can do that work to turn it around?
 
##KOHLER:
I'm not in the slightest bit optimistic. 
 
##ANGE:
Oh Alan. Oh, no.
 
##KOHLER:
No, I'm not. I mean, I know what needs to be done. I don't think it'll be done. Now, the question is whether the rate of growth in house prices returns to the same rate of growth of incomes, right. So we just hold on to this level of unaffordability. Or will it get worse? Will house prices keep increasing at 6% per annum on average for the next 20 years? In which case, in 20 years time, the crisis will be a mega crisis. Will that happen? I don't know. I don't know.
 
##ANGE:
I guess we have to hope not.
 
##KOHLER:
I mean, that would be terrible. If housing became, 10 to 12 times incomes, it would be appalling. 
 
But even in my opinion, leaving it where it is, leaving the situation where it is, which is kind of likely, we’ll look back on this 23 or 25 year period as being this kind of shock, this aberration. That occurred in Australia's history when house prices stepped up, and doubled as a multiple of incomes and then stayed there again, and we all had to get used to it. And maybe that's what'll happen. I mean, I don't know. I just don't know. I hope not.
 
##ANGE:
Well, on that ambiguous and slightly depressing note, Alan, thanks so much for your time today. 
 
##KOHLER:
No worries Ange. 
 
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##ANGE:
Also in the news today,
 
Brittany Higgins has given evidence over her alleged rape during the defamation trial brought by Bruce Lerhmann against Network Ten and Lisa Wilkinson. 
 
Ms Higgins’ testimony followed Lerhmann’s evidence this week, where it was revealed that Seven West media is paying his rent for a year, in exchange for a televised interview. The total amount of rent paid could be over $100,000 by the time the agreement ends next year. 
 
Bruce Lehrmann denies the rape allegation. 
 
And
 
The UN warns that deaths from disease in Gaza could outnumber those killed in the bombings, as rates of infectious diseases and diarrhea surge up to 100 times higher than a month ago.
 
The World Health Organisation says while up to 200 aid trucks a day have been allowed to enter Gaza since the truce began, it is still a “trickle” compared to what is needed. 
 
I’m Ange McCormack, this is *7am*. We’ll be back again tomorrow.
 
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