Federal Budget ignores housing affordability

IT’S the elephant in the room. The massive problem everyday Aussies are struggling with, but it didn’t rate a mention in the Budget and it appears there is no plan to fix it.

HOUSING affordability is one of the biggest issues facing everyday Aussies, but it didn’t rate a mention in Joe Hockey’s second Budget.

Australians are finding it increasingly difficult to buy their first home as prices continue to skyrocket in our major capital cities. People hoping to see reforms to encourage investment in new housing supply and ease prices were left practically empty-handed.

In fact, changes to foreign investment rules could actually put a handbreak on the construction of new homes.

Matt Grudnoff, senior economist at progressive think tank the Australia Institute, said that if he had to sum up the Budget in one word, it would be “lazy”.

“Housing affordability is an important area that is virtually ignored ... the Budget doesn’t attempt to address any real problems in the economy, or the deficit ... and it does nothing to stimulate the economy despite the Reserve Bank cutting interest rates to record lows,” he told news.com.au.

Mr Grudnoff said one of the simplest things the government could have done to address housing affordability and improve the Budget bottom line, would be to get rid of capital gains tax and trim back negative gearing.

“If they took these measures they could raise $7.4 billion a year, assuming that negative gearing only applied to new properties,” he said.

“Both of these things are inflating prices, distorting the market and creating an affordability crisis.”

But he said the government was stuck in an ideological hole where it didn’t believe that raising revenue was a way of solving the budget problem.

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Getting rid of capital gains tax and negative gearing could have saved $7.4 billion a year.

“There was a $90 billion revenue writedown over the forward estimates; clearly the Budget has a revenue problem, not a spending problem,” Mr Grudnoff said.

“The Treasurer appears to have taken his hands off the wheel and says he is an ‘optimist’ about the results.”

The Urban Development Institute of Australia said the budget lacked any major reforms to drive investment in new housing.

This is despite the government’s own projections for dwelling investment holding steady at 6.5 per cent in 2015-16 before decreasing to 4.5 per cent in 2016-17.

UDIA national vice-president Michael Corcoran said the introduction of a new application fee on all foreign real estate investment proposals, which the government expects to raise $735 million over four years, would actually put a handbrake on new construction.

“That was always presented to us as a cost recovery mechanism, but really it’s just a fishing expedition to raise more tax from law-abiding foreign investors,” he said. “It doesn’t do a lot for domestic or foreign developers to give them confidence to invest in housing supply.”

No incentive for developers to invest in housing supply.

In his speech, Mr Hockey took credit for bringing down the cost of living through cheaper electricity and lower mortgage payments. But lower mortgage payments are the result of a historically low interest rate due a sluggish economy. They are also having an adverse effect on first home buyers trying to break into the property market, especially in metro areas such as Sydney and Melbourne.

The amount of cheap money available for investors has led to a frenzied market which has seen enthusiastic investors snapping up homes looking for a big return down the track. This has locked out first home buyers who are facing double headwinds of rising prices and a deposit that’s barely increasing in value.

Not only were there no real measures in this year’s Budget to address affordability, the government has not even replaced the programs the 2014 Budget took an axe to.

Last year’s Budget cut the First Home Saver Account scheme, which was designed to help first home buyers save for their deposit sooner. It abolished the scheme to save $134.3 million over five years, but this has yet to pass through Parliament. The 2014 Budget also cut round five funding for the National Rental Affordability Scheme.

First homeowners have also lost access to the federal government’s First Home Owner Boost, which provided $7000 for the purchase of an existing home, although some states including NSW continue to offer a grant for new homes.

While the government has not included any new Budget measures to make housing more affordable for first home buyers, foreign investors will face stricter penalties if they break the rules when investing in residential real estate and the Australian Taxation Office will be given responsibility for enforcing this.

The government has linked dodgy foreign investments to Australia’s high house prices, but experts maintain that the effect overseas buyers have on house prices has been exaggerated.

A parliamentary inquiry into the issue last year concluded that overseas buyers actually helped to increase housing supply, which put downward pressure on house prices.

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No help in sight for first homeowners.

Meanwhile, the Housing Industry Association has welcomed the Budget’s 1.5 per cent small business tax cut, saying it would indirectly ease housing affordability by reducing the tax obligations of small developers.

“The vast majority of new home building is conducted by small- and medium-size firms who will benefit from the tax break, and that will indirectly have some positive impact on affordability in the sector,” HIA senior economist Shane Garrett said.

However, the association has questioned the rationale behind placing additional fees on foreign investors.

“Overseas investment does boost the overall supply, and it’s an important source of flow-on to the rental market, especially in Sydney and Melbourne,” he said.

Mr Garrett said the HIA’s view was that the budget was “reasonably positive”, but others were disappointed that none of the recommendations from the recent Senate inquiry into affordable housing had flowed through to the budget.

The Budget provides $1.9 billion to support state affordable housing services in 2014-15, but there was no mention of new initiatives to improve housing affordability among the wider community.

The Senate inquiry suggested that the federal government should take a lead in developing policies to improve affordability.

It also suggested that Treasury investigate the influence of negative gearing and the capital gains tax discount on housing affordability and the rental market. A scheme designed to help first home buyers save for a home deposit should also be developed.

The former CommBank chief and head of the Financial Services Inquiry, David Murray, told a lunch two months ago: “It’s hard for people to get into housing, so it’s a serious issue. It’s noticeable particularly as interest rates go lower and lower.”

The auction clearance rate in Sydney has enjoyed a string of record-smashing weekends this year, with 89.2 per cent of homes successfully auctioned on the most recent Saturday in Sydney. In Melbourne it was 79.1 per cent. Property prices in Sydney have risen 14 per cent in the first four months of this year and are expected to crack the $1 million median soon.

House prices continue to rise in Melbourne and Sydney.

The biggest change the UDIA wants to see to improve affordability is for the federal government use a “carrot and stick” approach by linking state infrastructure spending to key productivity measures such as planning certainty, taxes and levies.

“If a state or territory planning system says you can develop this type of apartment at this height, having the certainty that it can be done and will be approved quickly varies between the states,” Mr Corcoran said.

“In some it can take three or four months to get approval, others it can take 18 months. That is a major drag on productivity and investment certainty.”

Mr Corcoran said there needed to be greater consistency between the states and territories on the taxes and levies on new housing. “In some states it can cost up to $100,000 per new home or apartment, whereas in South Australia it can be $15,000,” he said. “By linking those levies with spending on infrastructure, the federal government can pull those levers.”

Putting conditions on infrastructure spending would be picking a fight with the states, but it was a fight the government needed to have, he said. “The reality is that if state government levies are so high, no development happens. It’s a false economy. Supply doesn’t lift and house prices rise.”

- With James Law and Wenlei Ma

Originally published as Federal Budget ignores housing affordability