Views Of Housing Affordability
The discussion of housing affordability is often flavoured by the vision from the position where one stands. The real solution is to step back and consider all the facts and that often is sadly what does not happen. I came across a paper on this subject and I will post it here BUT first I will remind us all of some important facts:
- Real estates have a vested interest in the price as the higher the price the higher the commission, as well the turnover of property is vital to commissions.
- Bank loan personnel have an interest as they are paid a commission on the sizeof the loan.
- Governments have an interest as it has been used as a measure of the economic growth.
I will make some comments in Orange to demonstrate my alternative view!
Housing affordability in Australia
Last Updated Jun 5, 2017 · Written by Philippa Land
Housing in Australia has become a prominent topic in political and everyday conversation, with property both to buy and rent having had a steady incline in cost over the last 20 years, which is greater than the rise in income. Particularly in major cities, it seems almost unachievable for first home buyers and low income earners to get on the property ladder, with the high cost of rent making it hard to save a large deposit. Currently the average price of a house in Sydney is now at $1.1 million, which has increased dramatically from 1997 when it was around $233,250. On May 9th the federal government proposed some policy updates to assist in making property more accessible. We asked over 346,440 people* whether they think these changes will help, and if not what they feel will help.
Graph – House prices for major cities in Australia from 1987
“The house prices are on the increase while salaries remain the same, allowing buyers to access 30k from super is all well and good but they still need to put the money back in for their retirement. Have more options available for affordable housing for first time buyers, not everyone wants a tiny box with a tiny amount of land, have more family friendly options for purchasing and if people really need it, have a rent to own scheme.”
When this happens this is a demonstration of the inflation rate – that is the value of the currency decreasing – Inflation is where the prices rise and the gap between the wages and the cost of living expands; in this case the gap between the price of housing and the wages expand very dramatically. The above scheme is a patch up for a problem that offers no long term or real solution as the cost of housing will not be brought under control by this plan and so it ought to be discarded completely.
Background and the federal budget
Essentially houses have become more expensive as demand has skyrocketed and supply dwindled, with several contributing factors to the boom. Property prices have increased for many reasons including: popularity of living close to city centres; the centralisation of city centres containing most available jobs; the Australian dollar being favorable for foreign investment; the significantly reduced interest rates compared to 30 years ago; banks approving huge loans in comparison to salary. On top of this there are also introduced features such as negative gearing for investors to claim losses through their tax return, relaxed rules and no capital gains tax for foreign investors, and perhaps the first home buyers grant giving people actually more money to spend. The federal budget announced on 9th May included some changes to help curb the rising affordability issue:
The author here raises the question about the demand having skyrocketed but does not address the real reasons in any meaningful way so let us look carefully at the issue at hand. The need to live close to the cities is because of the failure to create effective and fast infrastructure by successive governments so that most jobs are bound up close to the heart of the city. – Solution – Must include high speed transport (VFT) between decentralized centres at some distance from the cities; Incentives for business to decentralise into these newly created and VFT connected communities. Foreign investment – The capacity of the foreign investors to purchase Australian land will always put high pressure of demand as well cashed up people will drag prices out of the reach of the Australian buyer. Solution – Must include restriction on foreign persons purchasing Australian land. The land currently owned by foreign people must be disposed of within a prescribed time frame so as to manage the pricing structure. Bank approvals – Bank loans must be be reasonably affordable for the buyer and the fudging of the amount of the loan capacity will always be fraught with bankruptcy potentials. If the banks cannot manage this then the whole of the commission bases of loan contracts may have to be regulated by government. Negative gearing – in itself is not a problem as a person in the business of renting out real estate must be able to obtain a tax deduction for all reasonable expenditure for the running of his business. The taxes permitted must be reasonable necessary expenses for the running of his business and no more than that. More money for first home buyers – This is a very poor suggestion as the problem is the amount of money in the market that pushes the prices up and most Real Estate people love this suggestion to give more money to first home buyers, as it increases their commission as a higher price is obtained for each sale. That is essentially a large part of the problem. In my view assistance given to first home buyers must be done in away not to affect the purchase price in either the long or the short term.
First home buyers
First home buyers will now be able to make voluntary contributions towards their superannuation to save for a house deposit and benefit from the less tax on their take home pay. People saving for a first home deposit will be able to take some funds (to a maximum of $30,000) from their superannuation towards the deposit, with the voluntarily contribution capped at $15,000 each year. Couples will be able to both access this.
This I suggest is a bad idea as it is a compromise and not a fix to the problem. The real estate like it as it puts more money into the housing market and therefore more dollars in commissions. Historically the governments over the years destroyed the aged pension by dipping into the pool of resources and putting pension payments on to the current accounts; that is why the assets and income test apply to all pensioners, whereas it was designed for all people over 65 years of age.
Foreign investors will be charged extra tax on vacant properties and an increase in application fees. Foreign investors will now have to pay capital gains tax when selling their main residence (previously exempt), and the ownership of foreigners on new developments will be capped at 50%.
Foreign Ownership of Australian real estate only increases the price of housing and locks Australians out of housing and is one of the most significant issues causing house prices to rise astronomically. Solution – No further foreign ownership of Australian real estate; and all property currently owned by foreign persons will need to be divested within 10 years with increasing penalties for all vacant residential dwellings.
Property investors are being encouraged to support affordable housing schemes through a variation on tax, with the capital gains tax discount on affordable housing to move from 50 to 60%. Currently investors have been able to claim on tax any expenses on travelling to and from properties in different states – this has now been scrapped (saving half a billion in revenue).
Affordable housing should be in the hands of the councils via the state government so a better accountability of the occupancy and the state of repair of the housing. As well inducements (carefully managed) to private investors who build affordable housing for the disadvantaged in the communities.
There is also a little help for older people wanting to downsize their home. The proposal allows a pouring of up to $300,000 into a super fund, allowing to not be hit so hard by reductions to pension. This may also help to free up family sized homes.
The pension system needs urgent repair so that is is well funded outside of current accounts and so that pensioners are not so poorly funded. While I am not convinced of the wisdom of the putting of funds from the sale of the family home into super funds; if it will allow people to retain their pension at some level, rather than lose it, then it is better than nothing. The situation that a sale of the family home or even the transfer into the hands of a near relative can deprive a person of their pension is unacceptable under any circumstances as far as I am concerned. The original pension was paid by all to be available to all over the age of 65 – It is strange that the very generous parliamentary pension is not affected by the earning or assets of retired and qualified former members of Parliament. This needs a full and thorough examination to create a real and fair balance.
“I think the new access to superannuation law should be abolished… it’s going to create an issue in the future. I think investing money in infrastructure connecting major cities, such as the Melbourne-Sydney link is a great idea. It will create satellite cities along the way and create jobs with new suburbs that will be modern and affordable. Also businesses will be encouraged out of the cbd and into new areas which will be beneficial to all of us.”
I agree that there will most surely be unexpected issues in the future with the access to superannuation to purchase a first home and should be abolished. The VFT transport is by far overdue and I would suggest that connections to regional centres be the primary focus rather than the Melbourne and Sydney connection that is suggested, as this will enable decentralization better that the Melbourne Sydney option.
Will these policies have an impact on affordability?
We asked over 346,440 people how they feel about housing affordability and the federal budget. Respondents were asked “On a scale of 1-10 how do you feel about what the government has announced as part of the federal budget 2017 to address housing affordability?” With 0 being housing affordability is not being addressed, 5 neutral and 10 being I feel great about housing affordability. The majority feel neutral about the proposed updates.
“More incentive for first home buyers, along with taking into account what is being contributed on a weekly basis for renters to be put towards the reflection on owning a mortgage.”
I am concerned about incentives that are pre-purchase incentives as they will increase prices but assistance after in case difficulties arise will assist in the retaining of the purchase after the fact. The funds not used in the incentive scheme can be granted to the first home buyer after about 5 years.
What could help
“What do you think could be introduced, increased or abolished to overcome this affordability problem?”. In response to this there were a range of ideas highlighting the complexity of the issue. In particular down the small end of percentages: Less than 1% said nothing should be done or it’s not an issue; 4.3% think accessing superannuation is a good idea; and 4.5% of respondents said young people need to save more.
While it is true that more needs to be saved we must also look at the debt that a degree leaves a person with as well as the manufacturing being shut down make a barrier difficult for most to climb over and so these must be dealt with in a decisive manner.
These figures suggest that generally housing affordability is recognised as an issue, and that cutting down on avocado toast and lattes probably won’t help to save for a massive deposit. In terms of what could be introduced thoughts were spread, but typically some consistent ideas were raised including: 20.4% of people said stamp duty should be reduced or abolished; 17% said there should be more control on foreign investment; 12.2% think negative gearing needs to be either reduced or abolished.
“Reduce the amount of stamp duty. Here in South Australia it’s pretty high and that money could be better spent elsewhere.”
The stamp duty is a burdensome tax and should be done away with as soon as possible, as well the foreign investment into (code for foreign ownership of Australian properties must be stopped immediately. The attack on negative gearing is because it is a demonised business expense – When it is understood and used correctly it is only about a legitimate business deduction that is applied to the business of owning a business that owns rental property.
Also mentioned in the survey were ideas for developing regional areas to be more accessible, build better connected railways to outer suburbs and high speed rail between cities, developing satellite cities. To develop jobs outside of the cities and decentralise business centres. Banks to be controlled over how much they can loan borrowers. A cap on the price of property. Rental history to be counted as savings for a home loan. More land to be released. Increases to the first home buyers grant. Housing releases for first home buyers only. Reductions in auctions. An introduction of packages similar to United Kingdom and parts of Europe where people can enter a shared ownership with local government, which has benefits for both parties in terms of equity.
The responses both on the street and in our survey begs the question – Are the right measures being looked at to truly address and have an impact of the housing affordability?
“Too late. Interest rates are the only tool to bring housing affordability in line. Increasing rates will only cause massive heartache to all homeowners. This should have been done a decade ago, too many people are mortgaged up so changing interest rates today will create a crisis.”
*This data is based on a survey of people subscribed to hipages newsletters.
Graph data sources: http://www.econ.mq.edu.au/Econ_docs/research_papers2/2004_research_papers/Abelson_9_04.pdfhttp://www.abcdiamond.com/australia/median-house-prices-in-australia/