Buying cheap and selling dear

STONE the crows! When it comes to property why do we expect to succeed on the swings and make a motza on the roundabouts but still want the kids to be able to buy flash digs cheap?

Ask any Deborah Cameron listener (although they generally don’t wait to be asked) and they will tell you socially responsible people want to pay more tax – but watch out if you suggest ending the capital gains tax concession for family home sales, which pushes up property prices.

If you are really in the mood for a blue, advocate an inheritance tax on the houses offspring expect to acquire when their aged parents pop off, which makes the family home an especially effective investment. And if you are suitably suicidal suggest tax-deductible negative gearing on investments, particularly on property, is inefficient, what with one in ten taxpayers claiming losses on real estate they rent out.[i]

Perhaps this is why the government has mislaid the Henry Tax Review which argued, “the existing tax system is also likely to encourage excessive leveraging in pursuit of tax-preferred income. Where capital inflow is used to finance less productive assets, this can also affect long-term macroeconomic stability.’’ [ii]

But ask Deb’s devotees (although tweeting a sensible question is not easy) about the problem with property and they will tell you that people with a vested interest in a permanently rising market and a tax break while they wait for a capital gain on their rental properties are not making it harder for their children to buy a socially acceptable home.

Instead, they blame (what a surprise) “the market’’. One woman on Cameron’s program last week banged on about how unfair it is that children can’t afford addresses in the suburbs where they grew up.

Their offspring agree, announcing that it is outright immoral that they cannot live where they like without a thumping great mortgage. According to the Sydney Morning Herald, online activists are proposing a “buyers strike” until prices come down, “calling it ‘economically irresponsible’ for young adults to be expected to spend thirty years under heavy debt to achieve home ownership.”[iii]

It’s an excellent idea, apart from one teeny problem. It will not work.

For a start, property where people like to live is always priced at a premium. Since WWII, Australians have bought where they can afford – here’s a question for the gilded youth, did their great grandparents build fibro houses in the Sutherland Shire and Blacktown after WWII because they were fashionable?

As for the weight of mortgages, generations of Australians have slaved to pay them. Some 70 per cent of households either own or are purchasing their home, a rate that has stayed stable for 40 years.[iv] And, while the OECD argues there is a decline in home ownership, some of it could be caused by the increase in single parent households.[v] Reserve Bank Deputy Governor Ric Battelino also suggests that members of the typical first home-owner cohort, people under 35, could be delaying getting into the market because they are staying in education longer and forming households later.[vi]

Then there is the overall price of property – who knows if prices are too high? The Economist argues Australia has the most over valued market in the world. [vii] The magazine should not be ignored, it was warning about property bubbles in the US, UK, and Ireland, (as well as one here, which admittedly eight years on is yet to burst) before anybody much else noticed.[viii] But while the ratio of house prices to income is at a 20-year high, Mr Battelino argues this is because low interest rates have allowed households to take on bigger loans, thus pushing up prices. [ix]

Rather than blaming “the market”, there are specific problems with housing prices that government and individuals can do something about. For a start, Australia is not building enough dwellings.

According to the National Housing Supply Council, by the end of the decade the cumulative demand for dwellings will exceed provision by a scary 430,000. This, in large part, is a problem of state and local government making. The Council notes:

Increased housing supply (including within existing urban areas) would be assisted by reform of planning governance, clarity and consistency in the basis of developer charges and mechanisms to ensure the implementation of urban strategic plans including the delivery of infrastructure.[x]

It need not be like this. As demographer Bernard Salt points out, Melbourne’s western fringe increased its population by 18,000 people in the year to June 2009, demonstrating what developers can do. [xi]

But while people (who like established suburbs the way they are) protest, urban in-fill there will be a shortfall of accommodation in the flash inner city. For as long as local government dithers on development approval, inadequate construction will push up outer urban prices. According to the NHSC, it takes six years for greenfield sites to become suburbs, at best.[xii]

What we expect in our digs also increases costs. Over the past three decades new Australian homes have grown by 70 per cent. [xiii]

When it comes to houses people advocating a “buyers strike” to reduce property prices know what they want and where they want it – they just don’t want to pay for it. At least until they inherit their parents’ property – tax free of course.


[i] Tim Colebatch, “Negative gearing top tax break,” The Age, March 27 2010

[ii] Ken Henry et al Australia’s Future Tax System: report to the Treasurer (Commonwealth of Australia, 2010) p74 @ www.taxreview.treasury.gov.au/content/ recovered on April 1

[iii] Chris Zappone, “Online campaign targets high cost of housing”, Sydney Morning Herald, March 30

[iv] Tony Kryger, “Home ownership in Australia: data and trends,” Parliament of Australia, Parliamentary Library, February 11 2009 @ www.aph.gov.au/library/pubs/rp/2008-09/09rp21.htm recovered on April 2

[v] Dan Andrews and Aida Caldera Sanchez, “Drivers of homeownership rates in selected OECD countries,” OECD March 18 2011

@ www.oecd-ilibrary.org/economics/ recovered on April 2

[vi] Ric Battelino, “Housing and the economy,” Reserve Bank of Australia @ www.rba.gov.au/speeches recovered on April 2

[vii] “Floor to ceiling: global house prices,” The Economist, October 20 2010, “Hong Kong phew-whee,” The Economist March 3 2011

[viii] “Hot property: the higher climb, the further they will fall,” The Economist, September 11 2003

[ix] Battelino, ibid

[x] National Housing Supply Council, “2010 state of supply report” @ www.nhsc.org.au recovered on April 3

[xi] Bernard Salt, “Sea change city of the north loses to Melbourne’s west,” The Australian, October 14 2010

[xii] NHSC, op cit

[xiii] Tim Redway, “Housing density and design,” June 2008 @ www.planning.org.au/documents/item/1752 recovered on April 3