The 10 steps needed to fix housing affordability

LIMITING foreign investment will not fix housing affordability, says one group of experts. This is what Australia must be willing to do instead.

A GROUP of experts believe they have the answer to fixing housing affordability in Australia, and it could be as easy as following 10 steps.

Housing expert Hal Pawson is one of seven academics who have put forward a national plan that he hopes will receive support from governments and the public.

While much of the debate has centred on foreign ownership, Prof Pawson said this had only a marginal impact on house prices.

Prof Pawson also does not support the Abbott Government’s comments that it was up to the states to increase housing supply, which distances the Commonwealth from taking action on the issue.

“As the Senate inquiry demonstrated beyond doubt, an increasingly dysfunctional housing system is exacting a growing toll on national welfare,” Prof Pawson said.

“This is a policy area crying out for responsible bipartisan reform.

Affordable housing has been a huge topic of debate.

“I think the RBA (Reserve Bank of Australia) and the head of the government’s own Treasury department only recently expressed concern over the heated market, and this could pose a big problem for the state of the economy. If the state of the economy is not the responsibility of the Federal Government, then I’m not sure what is.”

The group has proposed 10 priority actions for Commonwealth, state and territory governments acting in concert:

1. Phase out tax incentives that favour investors, including negative gearing and capital gains tax

Prof Pawson said negative gearing and capital gains tax created an unjustifiable distortion of the market and an unlevel playing field.

“They provide an undue advantage for those investing in rental housing rather than other things, they don’t discriminate at all when it comes to the type of housing invested in,” he said.

He said negative gearing pushed up house prices because the tax incentive could be applied to all housing, not just new properties. When house prices were higher, people rented for longer to save money for a deposit and this pushed up demand for rental housing. This meant negative gearing had a “neutral” affect on rental prices and did not actually keep prices down, as some have suggested.

“Negative gearing alone amounts to about $5 billion a year that Treasury is not receiving,” he said.

“The main beneficiaries are existing homeowners, who see the value of their property pushed higher, not lower-income people, which the tax system should be designed to support.”

He said, if anything, negative gearing should only be available for new housing, for affordable housing or as a measure that could be used by institutions such as superannuation funds, because they would be more likely to assist in the supply of rental housing.

2. Support affordable rental housing and offer incentives for lower-income homebuyers

Prof Pawson said money collected from property-related tax concessions should go towards supporting rental housing for low- to moderate-income groups, which comprise about 80 per cent of the working population. This includes people doing essential jobs, such as police officers or nurses, who have to pay more than 30 per cent of their income in rent or mortgage payments.

3. Encourage super funds and other institutional players to invest in rental housing

This would not require government spending but could involve providing a guarantee or government-backed bonds, to support institutions such as super funds or not-for-profits to borrow money at lower interest rates. Prof Pawson said this had been done, particularly in the UK, to build new affordable housing or to invest in rental housing.

“There is a strong argument that rental housing would be better provided by institutional investors, rather than mum and dad investors, because they are probably more likely to focus on long-term gains, rather than short-term speculative gains,” he said.

“It’s better for a renter to be renting from an institution because there is less chance that the property would be sold out from under you ... from someone capitalising on the rising values in a topsy-turvy housing market.”

Encourage super funds to invest in property.

4. Replace stamp duty with a property tax

“Stamp duty (which is paid when you buy a property) is an inefficient tax because it discourages people from buying and selling housing,” Prof Pawson said.

This means older owner-occupiers were reluctant to downsize and so were under-occupying their properties and they were not being used to their full potential.

He said states relied on the funds collected from stamp duty so if it was removed it would need to be replaced with another revenue raising measure. There was some debate that the GST could be increased but Prof Pawson said it would be better to replace stamp duty with a land tax.

“Because it’s a way of making the housing system more efficient as it discourages speculation and the under-utilisation of land,” he said.

He said land taxes were levied every year, instead of in a big lump sum like stamp duty, which is something that hit first-home owners particularly hard.

“You could set it at a higher level for certain kinds of property,” he said.

If it was set according to value, someone who owned a piece of vacant land would be encouraged to develop it or sell it to someone who would be willing to develop it because this would generate income to offset the effects of the land tax.

The ACT is already in the process of switching from stamp duty to land tax and the measure was also recommended in the Henry Tax Review published in 2010.

5. Offer people the chance to buy part of a property

This involves expanding the availability of “partial ownership” tenures, where people could potentially own 50 per cent of a property, with the other half owned by a not-for-profit organisation or developer.

The potential owner would pay half the mortgage cost, as well as rental on the 50 per cent of the property they don’t own. If the property is sold they would receive half the profits, and benefit from any capital gain, which could then be used to buy another property if they wanted. They could also “staircase” their ownership until they could buy 100 per cent of the property.

“This provides the same level of security of tenure you would get as an owner occupier, which is one of the main attractions of home ownership,” Prof Pawson said.

It would also help to widen slightly the range of the population who can become homeowners.

6. Improve affordability for low income renters

Each year, rent assistance for low income earners is increased in line with CPI (consumer price index), not by how much the cost of rent had grown.

“Rents have been rising considerably above CPI for decades and rent assistance has become more and more inadequate,” Prof Pawson said.

This was particularly an issue in capital cities and the Henry Tax Review also recommended this be changed.

Prof Pawson said indexing rent assistance to the rate of rental growth was a way of improving affordability, instead of introducing rent controls.

7. Improve public transport infrastructure and encourage regional development

The modern hi-tech economy has seen jobs growth again concentrate around city CBDs, whereas jobs in the industrial sector used to employ people in the middle and outer suburbs.

“The new economy is a knowledge economy and this hi-tech economy is going back to the historic concentration of jobs in the centre of cities so travel time has become more important again, and will continue to be in the future,” Prof Pawson said.

“This will impact the value of properties that are a long travel time away from the CBD.”

Improve public transport so people can live further away from the CBD.

8. Simplify planning processes

Prof Pawson said the planning system should be made as straightforward as possible for housing development as it could be more complex than it needs to be.

“It unjustifiably slows down development and makes it more expensive,” he said.

“Ideally it should be made simpler, we’re on the side of developers that the planning system shouldn’t just be a charter for NIMBYs [Not In My Back Yards].”

9. Allow local councils to place affordable housing targets on private developments

Councils should be required to assess local housing needs and be given the power to ask private developers of major projects to provide a certain amount of affordable housing.

Prof Pawson said this had already happened on a small scale on some Sydney developments but should be more widely adopted.

10. Upgrade public housing

A costed and funded plan to upgrade existing public housing to a decent standard should be developed.

“It’s been neglected for 20 years or more, and they’ve turned a blind eye to the gradual deterioration,” Prof Pawson said. “Letting it deteriorate further is only putting off the problem, which makes it more difficult to solve in the future.”

Prof Pawson, who is the associate director of the University of NSW City Futures Research Centre, said the 10 suggested steps were underpinned by a decade’s research in this area.

“While not every interest group would endorse all of our proposals, most are widely supported by policymakers, academics and advocacy communities, as well as throughout the affordable housing industry,” he said.

“We think all the recommendations we are putting forward are quite moderate, they are not calling for enormous spending from government ... where there are major changes we think they should be brought in gradually. No one wants drastic change that’s going to destabilise the market.”