The Fifth Estate on Tuesday 2 May 2017 assembled some of Australia’s best economic minds to delve into the topic of housing affordability, and the ways in which the federal government can address what is becoming one of the country’s most controversial subjects.
On budget night we’ve released an edited transcript of the event.
Panellists at the Housing Affordability Flash Forum
- John Daley, Grattan Institute chief executive
- Nicki Hutley, Urbis director and chief economist
- Adrian Harrington, Folkestone head of funds management and AHURI board member
- Rob Harley, former Australian Financial Review property editor
Rob Harley: Let’s start with the thing that will get the most attention next week, which is that the government will not change negative gearing. Adrian, as I understand it, you would not be in favour, so why is that?
Adrian Harrington: Because to make one significant change to the tax system at this point in the cycle is ludicrous. I think that we need to look at the negative gearing changes over a longer term period in the context of a broader tax reform package. The second thing is that unlike the UK, the US and parts of Europe, we don’t have an institutional market providing build to rent or multi-family apartments, so at the moment the one-third of Australians who rely on rental accommodation are relying on mum and dads to provide it. Because not one super fund, not one insurance company in Australia, provides long-term rental accommodation.
So until we can work out who is going to provide that then … the negative gearing debate is just “take it off the established and leave it on the new”. My argument to that is what happens in places like Wagga? It’s a [Royal Australian Air Force] town. They have masses of rental accommodation because of the transient nature of the population. What’s going to happen in Bathurst? It’s an education town. What’s going to happen in Armidale? What’s going to happen around Westmead hospital and Randwick hospital? Everyone who is arguing about negative gearing at the moment is doing so because Sydney is a bushfire. We’re trying to put out a fire with a blanket that is covering the whole of Australia!
“Everyone who is arguing about negative gearing is doing so because Sydney is a bushfire. We’re trying to put out a fire with a blanket that is covering the whole of Australia!” – Adrian Harrington
People use negative gearing in Adelaide, Perth, all sorts of places over the countryside so to use negative gearing to take the heat out of the Sydney market – I think for those three reasons, at this point in the cycle, I’m against it. I think if you’re going to play with it a bit then you’ve got to deal with it on the capital gains tax side.
See our first reports of the event, our take on what the best housing affordability policy needs to be, what other people in the room thought, and a rhyme from a Gen X on his take on being locked out:
- A housing affordability policy for federal Treasurer, Scott Morrison
- Flash Forum: Louis Christopher on the state of the housing market
- Flash Forum: Fair Housing Australia Plan – 8 Point Plan
- News from the front desk: Issue No 337 – On our Flash Forum and one big idea to help with affordability
- Housing: Property Pickpockets – a rhyme on being locked out of the market
Rob: Let me get to that, but what you’ve touched on is what effect it will have on rents, if you cut out negative gearing, it will push rents up. But there are people like John – I suspect you think that’s not the case…
John Daley: The problem with it, is it assumes that the minute the mum and dads sell out of the property because they don’t have negative gearing – the property is going to disappear. Now it doesn’t work like that! The property stays there and by definition I find it really hard to understand why people can’t understand it’s a really basic pigeon hole principle here. If the property is not being owned by an investor, it must be owned by someone who is living in it. And if a property goes from being a rental property to being an owner occupied property by definition there is one less property to rent and there is one less person who is renting. That must be true. So the only place it makes any difference at all is in terms of building brand new properties.
Question from audience: Do you want the whole country to be renters?
Nicki Hutley: Well, can we answer that question? Because that’s fundamental to this discussion. There is an underlying assumption that the only good outcome is ownership. And that’s just not right. It is actually perfectly valid, as long as it’s affordable, to be a renter. There’s this idea that people who own more than one property are some sort of devil capitalist, you know, from some sort of Marxist mantra. What we want is people to have the opportunity to afford to live – whether it is renting or owning – in the city, where they want to be, near a job that suits them. And that is absolutely the key.
Rob: That is absolutely true Nicki. But what is your view on the proposition that when you remove negative gearing, rents scale up?
Nicki: I agree with John. It’s not logical to say that that will happen. And I think people get very confused over what happened in the late ’80s when we did have this experiment. But we were going through a market that was just going through the roof and rents would have gone up anyway. As long as you are fundamentally increasing supply – maybe moderating demand in the short term at the margins helps a little bit – but you need to increase the supply. It’s fundamental 101 economics.
“As long as you are fundamentally increasing supply – maybe moderating demand in the short term at the margins helps a little bit – but you need to increase the supply. It’s fundamental 101 economics.” – Nicki Hutley
Rob: Sorry, there are some people who disagree with you in the audience.
Robert Mellor, BIS Oxford Economics: In the short term there’s not a group of people who are buying those houses. You’ve got basically the same mix of people in the short term because at the moment first home buyers can’t get into the market, whatever happens. I mean, any first home buyer is going to take two or three years from now to get income growth, etcetera, do the saving before they can get into the market. And I’m talking about people who have been waiting on the side lines in Sydney for the last three or four years. Because they took away the stamp duty benefit, they took away the first home buyers benefit, so they are just not in a position to get into the market. So many investors basically have the expectation to capital gain.
But when the expectation of capital gain is taken away, which will happen at some point pretty soon, they will need to get a higher return in terms of rent. And they will be able to get it when there is a lack of supply out in the market, when you’ve got vacancies still in the low twos [per cent] in Sydney. So this idea that suddenly there’s going to be owner occupiers buying those dwellings – no, that is not the case.
Now in Brisbane, forget it. You are not going to get rental increases up in the Brisbane market even in Brisbane at the moment. Over time, you can guarantee there will be significant increase in rents. Because they need a higher yield. You have to!
Interjection: That’s just not how investment markets work!
Nicki Hutley: You can see now in the Sydney market rents as a percentage, rental yields are falling, and they have been falling for a long time! And people are still buying.
Audience member: My name is Tim. I live in Sydney. You can also get a higher yield by just allowing the price of the asset to fall. That by definition gives you a higher yield, if you are earning the same income but the value of the asset falls, that’s a higher return, right?
Also I’d like to address the question of regional areas because I think that’s a really interesting question, that we can’t always use blanket policies to address all areas. But when it comes to negative gearing, the highest returns in terms of rental yields tends to be in these areas. They are lowest in Sydney. So the areas that are going to be impacted most by negative gearing, changes to policy, are going to be in Sydney rather than these regions, which tend to positively geared rather than negatively geared. Unless you are looking at loss-making properties.
Adrian Harrington: You’re assuming that all mum and dad investors are rational in their investment. They’re not.
John Daley: But who’s going to own these houses? If they decide to sell, so who buys it?
Adrian Harrington: Well that’s what I’m saying.
John Daley: Well someone buys it!
Nigel Stapledon, University of NSW and MacroPlan Dimasi: Look, in markets, John, we know everything happens at the margin. The supply curves are not vertical and neither is the demand curve, so you are going to have a price signal for owner occupiers to shift from renting to buying. And we know from the studies in the US and the same – they removed negative gearing in the ’80s and you had a significant adjustment in the market. Over time, investors required a higher rate of return and the rents went up. Not so much the land component but the structural component and the signal was higher rents, lower prices and that will get people shifting their ownership mode. But to say it’s one-for-one. I’m sorry, you can’t beat people up over that. That’s not strictly correct. That’s not good economics. Things happen at the margin.
Rob: John, you have actually modelled the impact on house prices. What is the impact?
John: One of the things worth remembering it’s pretty small on the scheme of things. But one of the things I learnt at McKinsey is the back of the envelope always beats a big model. You can actually see what is going on. So let’s think about this in very simple terms: the value of both negative gearing and the capital gains tax concession is about $4-5 billion a year. Our confidence that that is right is extremely high. Now let’s think like a merchant banker at Macquarie. And we are going to apply an asset price model. What would I pay rationally for an income stream of $4 billion a year. And the answer is: I might multiple by 20, 25. Let’s say I pick 20. I multiply my $4 billion by 20 and I get about $80 billion – so that’s the asset value of that change in income. So how does that compare to the value of the housing stock? The housing stock is worth roughly $6 trillion. So across the market I have just reduced the income stream for that existing stock by … an asset value of about $80 billion divided by $6 trillion. It’s a bit more than one per cent. Maybe I’m wrong about that. Maybe it’s two per cent. But it can’t be radically different from that.
Now you could say, What about the owner occupiers? But that’s the point. When you change negative gearing rules and capital gains tax rules, by definition you have not changed the return on their assets. What happens to the extent that assets shift from being rented to being owner occupied… then of course there is no change on the return on those assets. That’s why we are very confident that, roughly speaking, the impact of changing the negative gearing capital gains tax rules will be about one or two per cent of the value of property.
Bursting the bubble?
Now that is in a rational world. It may well be that some of the current value of house prices is froth and bubble. And it may be that changing those rules would have an impact on sentiment. But of course, if a balloon bursts, it’s not the fault of the pin. It was always going to burst sooner or later. And indeed there’s a very good argument economically for saying that to the extent you have a bubble you want to burst it as quickly as possible. So yes, negative gearing changes and capital gains tax changes might have more than a two per cent impact on prices because they burst a bubble, but that was always going to happen anyway. But in the long run we expect the fundamental change to be around one or two per cent. Not a fall of two per cent but two per cent lower than they would be otherwise. And of course in a market that’s going up 14 per cent, that’s going to get lost in the wash.
“If a balloon bursts, it’s not the fault of the pin. It was always going to burst sooner or later.” – John Daley
What this illustrates is changes to negative gearing and capital gains tax will at least push housing affordability in the right direction. But they are not going to solve the problem. They are small in the scheme of things. And the real reason you’re are doing it is that $5-6 billion a year for the budget is kind of handy. That’s a lot of money (it’s more than the $4-5 billion I had earlier because it includes capital gains on things other than housing), and that’s money that’s been given to a policy purpose that no one has been able to adequately explain.
“Changes to negative gearing and capital gains tax will at least push housing affordability in the right direction. But they are not going to solve the problem.” – John Daley
Nicki: One of the things you have to worry about, you might say it’s better to burst the bubble now than later, and that is true. But what people don’t understand is that housing affordability is a two-sided coin. So for those trying to get into the market, great, house prices fell 15 per cent. But for the two-thirds of Australians who do own or part own their house – this is a wealth shock, and that has economic consequences. Very severe ones. If you’re going to muck around with housing prices in the form of a shock, you need to be careful about what the unintended consequences are.
“Housing affordability is a two-sided coin. For those trying to get into the market, great, house prices fell 15 per cent. But for the two-thirds of Australians who do own or part own their house – that is a wealth shock, and that has economic consequences.” – Nicki Hutley
John: And that’s precisely why we want to do it when prices are rising very quickly.
Adrian: Most of the country is not Sydney and that is the issue. You have to be really careful with some of these macro blanket policies. It would help Sydney, no doubt. If you could say you can’t negative gear a Sydney property – I think it would stop a lot of investors going in there, because a lot of mums and dads do it because they don’t like the share market, the tax accountant says you’ll get a tax deduction, they get some money back. That will help Sydney but what will it do for sentiment in other markets? And that’s the risk we’ll run.
Tim: Yields are higher outside of Sydney. It will affect them less.
Adrian: It’s sentiment. A lot of mum and dad investors aren’t rational. People will say I won’t buy a rental property in Adelaide or Perth or places like that because of the negative gearing implications.
Rob: When would be the best time to get rid of negative gearing. When house prices are going up fast in every single state in the country?
Adrian: You have to look at it in the broader context of how are people looking at in on an after tax basis of what they are getting back in their pocket back from the government. You’ve got to look at it and say, who is going to provide the rental accommodation? Because it might go from 35 per cent of the population renting to 25 per cent, but not everyone is going to be a homeowner.
Peter Vun, Fair Housing Australia: I’m part of a grassroots organisation of aspiring homebuyers coming together to fight for housing affordability. Question for Adrian: I pick your sense that you’d like to see controlled change around some of these policies. My question is would you support a 5-7-year transition out of negative gearing and the CGT tax perks so we have some sort of planned and well-defined transition out of those policies?
Adrian: I think over time you have to. One shock to help Sydney, what does it do to the rest of the country?
Peter: So you support a 5-7-year transition?
Adrian: Over time, so long as we have proper tax reform and a mechanism to allow institutions to come in and provide long-term leases, longer tenure. I know the community housing sector is very big on this. And I have some stats about the number of people who have to move over 10 years. We have such short-term tenure, which creates real social problems in Australia.
Rob: Nicki, do you have an idea of what abolition of negative gearing would do to prices?
Nicki: I have no reason to disbelieve what the Grattan Institute has said to us. What you don’t know though is… people aren’t necessarily rational with their responses and that’s the trouble with economics. Our theories tell us one thing but then people go and behave in a different way. Given you are not changing the net stock of properties there’s no reason to believe it’s going to have a massive impact. It is more a budgetary issue.
Julie Brook, Senior Planner, Mackay Regional Council: I was interested in Nicki’s view on the impact of negative gearing and CGT over a long period of time. It’s taken us a long time to get this far. And picking up on statements that it is the mums and dads who fuel this investments, and also this gentleman’s comments on rental increases and returns. If there were changes to the tax and CGT regimes, wouldn’t those mums and dads be given advice to invest in things other than the property market, which would help reduce that demand that fuels those price increases because of those investor demands.
Nicki: Yes, that is the point. Most people are saying get rid of negative gearing and the CGT benefit because it will reduce demand. That’s the problem. Too many, particularly mums and dads with self-managed super funds, are thinking of this as their way to retire. We’ve become more sophisticated investors than we were 20 years ago but we still believe when it comes down to it, particularly post-GFC, that bricks and mortar – I’m sure everyone in this room that can name someone who just thinks, “I’m not going to invest in anything that I can’t touch!” That equities are too wobbly. So we could change it but don’t forget there’s also the same benefit that applies to equities and other types of investments. So if negative gearing goes on housing, you can’t just do it on housing alone. You would have to do it on all those asset classes.
Comment from audience: Why can’t you isolate where you put negative gearing?
Nicki: Because everyone would jump out of the property market. You would have a massive fall and everyone would go into equity.
Negative gearing on other asset classes infinitesimally small
John: Can I just point out as someone who used to run the margin lending unit for ANZ – don’t worry! Why not? Because the number of people who are negatively geared on any asset class other than housing is infinitesimally small. Now why is that? Because in order to be negatively geared you have to be two things. 1) you have to borrow quite a lot relative to the value of the asset – 75-80 per cent and you have to have, ironically, quite a low income yield. So if you try to negatively gear shares – the average yield on the Australian share market is about 4.5 per cent, grossed up for franking credits it’s about six per cent – so that’s much higher than the net yield on housing. The other thing is, you can theoretically negatively gear a share portfolio at 75 per cent, but very few investors do. The vast majority of people who are borrowing against shares in the Australian equity market do not borrow more than about 50 per cent of their assets, as they perceive it as too risky. So the number of people negatively gearing against any asset other than housing is tiny.
Adrian: This gets then into broader picture of financial planning and regulation around advice people get. We’re a property fund manager. If I go put a residential development into a fund and bring investors in, I’ve got to put atogether, I’m regulated by ASIC, I’ve got all disclosures. If I’m a real estate agent and get a bunch of people together and go and do a development – that’s not regulated. The thing that’s missing in terms of this whole issue about people’s investment decisions longer term and self-managed super funds… while housing is not a big part of self-managed super funds at the moment – it’s only a four per cent allocation, commercial property is 11 per cent, but it’s growing. Part of the reason is – a lot of smaller super fund pools went to their accountant who said, “I can get commissions from developers of six per cent to put you into a residential development, and I’ll start a self-managed super fund for you and off we go.” Anyone who’s advising on real estate as an investment should be licensed under ASIC, just like any other investment asset class. I’m concerned there’s a bunch of people who have started self-managed super funds for the wrong reasons and have got poor advice because it’s non-regulated and there’s been commissions involved. That’s why they cut commissions on equity funds and mortgage funds after the GFC. Because advisors were not looking after their clients’ best interests.
Andrew Cocks, Richardson & Wrench Group: Question to John: At the start of your discussion, you talked about a desire to reduce prices. Is that a desire to reduce prices across the market or is it something that should be targeted to the markets that are very buoyant – Sydney and Melbourne – where I think there probably does need to be some room for moderation? If so, what do you perceive to be the impact on regional areas such as Caboolture in Queensland, where you’ve already had a net decline in overall property prices in last 6-7 years. What additional price reduction in the Caboolture market would you expect to see?
John: It depends to the extent any of the property in Caboolture has been negatively geared. If the answer is not very much, the rule change will have almost no impact.
Why you can’t geographically target tax reform
Rob: Is it possible to draw a circle around a place?
John: No it’s probably actually not possible. The Commonwealth government is not allowed to make tax laws by reference to geography. It can’t discriminate between states or part of a state. People are always asking for the Commonwealth to set up special tax zones. It’s actually very difficult to do constitutionally.
To come back to regional properties – if you look at the ratio of dwelling prices to incomes, now they are higher in Sydney than in regional NSW. It would be pretty weird if they weren’t. But interestingly they have increased substantially both in Sydney and in regional NSW and that story is also true in regional Queensland and Victoria and so on. Of course, you can always find places with steep declines in house prices, usually when fewer people want to live there – net absolute population loss, but it’s quite unusual. It’s clearly something we have seen in a number of mining towns. To Nigel’s point: demand curves for housing and supply curves for housing may not be vertical, but they are pretty bloody close, particularly supply curves. Essentially you get same amount of supply, irrespective of what people are paying for it. So if you do get absolute population decline, particularly in a mining town, then you see really big price falls.
If we look at regional Australia, essentially, at least at the last Census, there is no town of more than 20,000 people that was losing population. None. There were some not growing fast. However, there are lots of small hamlets losing population. What we are seeing in regional Australia in general is a lot of true rural areas and small towns that are essentially depopulating and moving to the local town, partly because transport is getting better, partly because the farms are being operated in a more professional way by professional managers who drive to the farm. Then of course you’re getting much faster regional growth along the coast and within about 1.5 hours’ drive of Melbourne, Sydney and Brisbane. Of course you are always going to find individual exceptions, but that’s what we find across the data. You’ll always get hot spots. But we are not seeing a lot of growth in regional towns that are not on coast or near Sydney and Melbourne.
Robert Mellor: Negative gearing is not going to change this cycle. We’re close to the end of the cycle. Negative gearing, the benefits in terms of affordability is down the track. So if you are to make changes it should be over a period of time. The worst thing you can do … you don’t do things at the end of the cycle. You just totally stuff up the cycle. That’s what governments do time and time again.
Housing as a human right
Kylie Chu, Fair Housing Australia: Nicki, you made a good point about the GFC. Right now negative gearing and capital gains tax concessions is incentivising mum and dad investors in the wrong way. They now have the belief that house prices will only ever go up, and as John said before the only way they can negatively gear is to buy something at an inflated price, get a huge loan and then not make much rental income. And I don’t that tax payers should be subsidising bad investments. So by removing this distortion, it will actually encourage mum and dad investors to deleverage off risky investments and start looking for things that are a little bit safer. The other part of the equation that housing, unlike shares and equity, is a human right and you can’t live in shares and you can’t live in equity, but everybody needs shelter. So it’s looking at things in the wrong way to keep distorting prices in that way and to make it something that people look at in a moneymaking vehicle, instead of what it’s supposed to be – which is shelter.
“Housing, unlike shares and equity, is a human right and you can’t live in shares and you can’t live in equity, but everybody needs shelter.” – Kylie Chu, Fair Housing Australia
And as Tim was saying, if negative gearing and capital gains tax is removed, and people are incentivised to no longer make these bad investments, they will start looking to make good investments, so they will start looking at regional areas, where you get higher yields. So I can’t see why removing negative gearing across the board would make regional areas suffer in that respect. It may actually improve things.
What’s the impact of increased supply?
John Brockhoff, Planning Institute of Australia: How sensitive are house prices to supply? And are the sorts of planning intervention to free up supply in the middle ring for instance needing to be so great to actually have an impact?
Adrian: I have some slides to show you … Just to remind people, this graph indexes back to 2000.
The Sydney line is way below the Melbourne line. Because Sydney had very little price growth between 2004 and 2013, and then it took off like a rocket. So we actually do have cycles, and we’re in a very big cycle at the moment. But people just need to remember that Melbourne’s prices over that period have grown much faster than Sydney’s.
I call this one the Bob Carr graph.
Remember the famous quote when Bob Carr said “Sydney’s full”? Look at the approvals. In a couple of periods we got down to below 30,000 approvals. If you go back to 1973, we had 28,000 approvals. In 2009 we had 28,000. Look at the size of the population between ’73 and 2009. Back in ’94 we were up at 57,000 approvals.
Look at Melbourne.
Melbourne kept releasing land. It was a bit up and down, but the trajectory has been up, which leads me to the next slide. Land sales and lot prices.
Houses on the fringe are usually the cheapest accommodation because they are the furthest away from the city. If that’s your starting price for a block of land, then you put a house on it, that sets the base level of what housing is in the city, and then everything goes up from there.
Melbourne is the complete opposite because when we do land subdivisions in both towns. it’s a hell of a lot easier to do land subdivisions in Melbourne. And yes there’s a geography thing in Sydney, but I’m talking about dealing with councils, getting definitive time frames for when things are going to be released.
Nicki: To answer your question more precisely – how sensitive? It’s a very good question because numerous things drive house prices. It’s not supply alone. And to do some sort of hedonic modelling that says, “This is just what supply is on.” I’ve actually been looking for that in the last couple of days and I can’t find anything for Australia that says that. You can look at those numbers and say, “When we have undersupplied and prices are going up faster.” And it’s obvious. It’s a basic economic equation. But to know exactly the extent to which supply is having an influence over other factors in the cycle – how much is supply driven? How much is demand driven? – There is no precise model that tells you at one time, but you know that you have to produce. If supply undershoots demand there will be higher prices, but how quickly that happens and how sentiment changes quickly is unknown.
Increases in supply met by massive increase in demand
John Daley: You’ve got to remember what you are comparing here. So in terms of prices in the market, it’s a consequence of the stock. How many people are there trying to live in a house? And how many houses are there? When we talk about supply what we’re often talking about is the flow of new building. And the flow is very small compared to the stock. So we’re currently running at record levels of dwelling construction at 200,000 a year, which is, at best, two per cent of the existing stock. So it’s pretty small in the scheme of things.
To add to Adrian’s charts, what you can see here in the orange is essentially the rate of flow of dwelling construction. And essentially between about 1990 to 2012, it mucked around a bit but basically sat at 150,000 and it’s gone up to about 200,000 in just the last three years. So that, if you like, is the change to the stock of supply.
What happened to the change in the stock of demand? The change in population of Australia sat at around 250,000 a year for about every year from 1990 to 2004-2005, and then net overseas migration really went up big time as part of the mining boom. And we essentially went up to about 400,000 a year and we’ve been more or less there ever since. So if you want to understand what has happened in the Australian market, why we have an issue with prices, the short answer is we’ve had a really big increase in the number of people living in Australia. Over a one-year period that doesn’t make a big difference. But if you’re increasing your population by 2-3 per cent every year for 10 years then all of a sudden you have a 20 or 30 per cent population increase and that really does muck with your supply–demand imbalance, particularly when you haven’t had much in the way of an increase in supply.
One of the things people are saying is you’ve had a big increase in construction in Sydney in past 12 months but nothing’s happened to prices. Well I’m not surprised. You’ve got an overhang of 8-10 years of very high migration growth. One year of slightly higher supply is not going to change that imbalance. You need quite substantial increase in supply for a number of years before you deal with this overhang.
“You need quite substantial increase in supply for a number of years before you deal with this [high migration growth] overhang.” – John Daley, Grattan Institute
Adrian: And supply where it’s actually needed, rather than concentrated in certain pockets because that’s the best place to get a high-rise through quickly through development. We’ve got a concentration down in Zetland, where there is poor public transport other than the train line. But if you live 2km either side you can’t drive to the station to park. And buses? Where do you see buses in Alexandria. Very rare.
Nicki: If you live in Alexandria you can walk everywhere. What about all the poor people out in Western Sydney.
Adrian: We still haven’t put enough density out around major transport nodes through the rest of the city.
Leonie Dean, Community Action Alliance: Another aspect to supply that has not been referred to here, and why the first buyer is locked out, is because back in 2008 and then implemented in 2009, the developer lobby pulled off the sting. Instead of selling 50 per cent of new homes to foreign buyers, they got a good deal. They were able to sell up to 100 per cent of new homes to foreign buyers. This is through the [Foreign Investment Review Board] ruling change. So it appears to me that the FIRB is somewhat leaky.
It’s been reported that only 11 per cent of new homes are bought by foreign buyers. But that does not add up because we have the entry of the “daigou” – that is, the onshore proxy buyer here in Australia. And they can buy new and established homes. Then you add in the Turnbull Government’s Big Australia policy. You’ve got high immigration, then you have the visas – 1.3 million who are visa holders in Australia currently. You have the guardian visa which allows a child as young as six to buy one, two or more new homes or an established home, and the same deal applies to the guardian. The question is, why have first home buyers been locked out? And I guess I’m actually explaining why they’ve been locked out.
Adrian: There’s no question that we made it too easy for developers to run offshore and get 100 per cent presales from China. They went to their local banks in Australia and they said, “Yes, you’ve got your presales. Here’s your finance.”
Leonie: But there’s a bit more to it. It looks like foreign buyers only rate 11 per cent of purchases. But here in Australia you have the onshore proxy, the daigou.
Adrian: NSW is doing it. They’ve put a [foreign investment] tax. Victoria has done it. There’s speculation that the federal government is looking at this whole issue as well.
Leonie: But if it’s an established resident here, they’re not foreign.
Adrian: If they’re an established resident here, then you have to be a bit careful about that.
Leonie: No. They’re a daigou buying for someone overseas – a foreign buyer. Then they can stitch it up and it looks like the local person is buying the property, and that’s why we need anti money laundering legislation to be introduced immediately to apply to professionals in the property sector – the same standard that applies to banks to sort this out.
Adrian: That gets back to my point about regulation. Running property funds – if you want to invest in one of my property funds you have to fill out a 20-page application form, you have to send your trust deeds in, we want to know how many kids are part of your trusts. There’s no doubt that anti money laundering rules should be tightened around residential real estate. I totally agree with you. I think also that the banks have gout caught out, and have recognised that they’ve let loans go through that probably didn’t have the right documentation. [The Australian Prudential Regulation Authority] is all over the banks at the moment, and that is one macroprudential thing I think is going to help. It won’t solve it.
Leonie: Well it has to apply to the property professionals. The lawyers, the accountants, the real estate agents, the conveyancers – all those dealing in the sales should be working to the same standards as the banks. Otherwise it’s just so leaky.
Adrian: The Treasurer has already – under Labor they didn’t stop one resale. Now they are up to over 100 resales of properties that have been illegally acquired in Australia.
Rob: To what degree do you think the Sydney and Melbourne property problem is to do with almost offshore investment?
Nicki: We mapped this a while ago and it has obviously increased significantly in the last couple of years. But it is not the whole story. It’s an element of it. All of these things, I think with housing affordability, one of the things I was looking forward tonight was not getting bogged down in one thing like negative gearing but actually looking at the bigger picture. All the drivers of demand, all the drivers of supply, and looking at it in a holistic way because there is not one silver bullet. It’s not going to be solved overnight and lots of different pieces of the puzzle need to be moved together. Yes, there has been a significant increase in foreign investment in the past couple of years. Yes there are people getting around guidelines, although those guidelines have been tightened up since the FIRB was under review. Yes, there will always be people who get around the system but they are a relatively small proportion of the population. And the only thing we can say about that, is that if there’s development going on that is precluding other development going on … If new development is being funded by Chinese and occupied by Chinese, it is not affecting the net impact on Australia. It’s only if that is stopping additional supply coming onto the market – though given that the construction industry is at capacity then there is good reason to suggest that that is in fact the case.
“It’s not going to be solved overnight and lots of different pieces of the puzzle need to be moved together.” – Nicki Hutley
John: I’ll break this problem into three questions: Who’s living there? And to what extent is that a consequence of migration?
Who’s buying them? And to what extent are they migrants or are they people from overseas who are not here?
And what can government do about it?
On the first question, there is no question that the substantial increase in immigration has had an impact on demand. Total population growth peaked at 450,000, and is now running at 350,000. Of that, about 150,000 is natural population increase. Births exceeding deaths. The remainder, 200,000, is essentially net overseas migration. Then you have to ask, do we like that migration? Well obviously it makes the economy bigger, which is great if you’re a bank or a business. In terms of its impact on our income per person, the answer is, well, in the long run it’s almost certainly positive. Because so much of that migration is essentially skilled migrants and/or overseas students who then stay. It’s very disproportionately young and highly educated. And by definition migrants have a lot of get up and go because, by definition, they have got up and left already. So the history of the last 150 years, by and large societies with more migrants end up being more dynamic. And I would suggest that Australia is a poster child for that proposition, and indeed the places that keep state police most awake at night are not those with the most migrants; it’s the ones with low incomes and no migrants. That tends to be a social area in big trouble. If you want to run migration like that, that’s fine, but you then have to make sure you have the supply that goes behind it, and clearly we didn’t.
“The places that keep state police most awake at night are not those with the most migrants; it’s the ones with low incomes and no migrants. That tends to be a social area in big trouble.” – John Daley
The second question is, Who’s owning these places? And the answer is, sure, we’ve seen an increase in buyers of people not born in Australia. We also have an increasing number of people living in Australia who weren’t born here. So not surprisingly they want to buy property and it would be very difficult and indeed arguably very unfair to kick them out of the property market.
And when people say, “All these buildings have been bought by Chinese developers and then Chinese students are living in them,” and I say, “And the problem would be?” Now those Chinese students have to live somewhere. Now if they choose to live somewhere that their parents own rather than somewhere that I own, I’m not that fussed. The bottom line is someone’s built it, someone owns it and someone who has a perfectly good right to be in Australia is living in it.
What we are worried about is people who are living overseas, and who buy a place in Australia, and who leave it vacant. The issue is when you go looking for hard evidence of exactly how much of that there is – it’s not that large in the scheme of things and then trying to find rules to prevent it is very difficult. Vancouver obviously has a vacant property tax. The Victorian Government has brought one in. So far those things have tended to produce very little revenue. Why? Because you have to have an exemption for anyone who comes in and uses it on a regular basis. You have to have an exemption if they let it out on a regular basis. And the number of properties that don’t fall into one of those categories is pretty small.
So how much impact is government regulation around this stuff – whether it’s higher application fee for overseas buyers, or bigger stamp duties, or bigger vacant property taxes… None of those things are really bad policy, but they’re also not going to make that much of a difference, because in the scheme of the overall market not that many people are going to be affected so it won’t have much impact on price.
Adrian: The only thing I would say on price issue is that the wealth that is coming out of China – they tend to be reasonably wealthy, not all of them – and the prices that they are prepared to pay to get title, to get a foothold in Australia whether it be from the [Significant Investor Visa] or other things, they are prepared to pay a premium to get into this city, particularly Sydney and Melbourne.
Nicki: But there was some research about 18 months ago that showed that these sorts of people are buying into an area of the market that is not competing with the first home buyers. They are buying much more expensive properties.
Much more supply needed
Steve Mann, UDIA: I just want to build a bit on Adrian’s comments on supply. So for four years we had supply at around Adelaide’s levels. And because of the lead time in property, that’s caused this huge spike. Currently NSW Finance would suggest there’s a 100,000+ backlog of unsatisfied demand in this market. So the sense that the supply side of the equation has already been tapped – it hasn’t happened. The Greater Sydney Commission would suggest that we need to currently supply between 36,000-42,000 new units and lots in Sydney, and we just supplied 33,000 last year. So the big growth rates are off that Bob Carr period of four years of Adelaide’s supply. If you look at Adrian’s graph there, Sydney’s lot price is more than double that of Melbourne’s lot price. It is very difficult to compare those directly, but look at how quickly it happened. It happened in that period where we didn’t have supply. If you were to do an average supply period on new housing in Western Sydney at the moment, it would be about five years to put a key in a door. And if it was unzoned it would be 7-15 years. So the planning system is broken in this city. So the focus [on supply] would have a huge impact.
The cost of land
Nicki: Can I just say we have just done some work with the NSW government putting together the cost of construction right through from the purchase of land. And you’re absolutely right. Land is the biggest factor in Sydney compared to other jurisdictions. There’s a little bit on the cost of construction, stamp duty is not that much, a lot of the developer fees aren’t that much. But then when, on that high price of land, you are paying GST and other taxes, and then your holding costs, it obviously escalates more. But in looking at the difference in average times … I know a lot of developers say, “It’s crippling us. It takes a long time.” And yes, Sydney’s planning system is not great, but the actual time differential to get things approved between Sydney and Melbourne, in terms of the holding cost, it’s a very small per cent of the overall cost driver that differential between the two.
What is far more problematic for Sydney in the way I see regulations being “broken” if you like, is that we have this terrible NIMBYism that John alluded to earlier. People like me sit around and say, “It’s terrible my kids can’t afford a home,” and then in the next breath say , “How dare you put that block of flats up in the street next door.” And until we have a Premier that is able to communicate to Sydneysiders that we have population growth – we have a whole lot more of it down the pipeline – even if you cut back on immigration, you’re not stopping people having babies, so we need to supply more houses. And that to me is the crux of this problem. There are some short term issues, but it’s about getting more supply in the inner rings where we have the transport and getting past some of those planning hurdles that are really affecting our ability to meet the market.
Leonie: Mr Daley, what if the housing supply cannot meet the foreign demand? The FIRB rule is still current with the 100 per cent sell off overseas. So I just dispute what you’ve all been saying. I challenge you. That’s why we have first home buyers locked out of the Sydney market. These people are professionals and they cannot raise a deposit for a home. It’s outrageous.
Interjection: If you think our market’s on fire, go to Canada. In Toronto how much do you think house prices have risen in the past 12 months? Thirty-three per cent! So Australia is not unique. They introduced a 15 per cent tax, if you are a foreign investor. It had a little bit of an effect on prices but prices have started creeping up again. It’s an experiment that’s happening. And Vancouver had huge increases well ahead of Toronto. Initially the prices dipped a bit but then rose again. So it’s very difficult to get empirical evidence but I’d suggest taxing foreign buyers is not the simple answer that we would like. Politically, of course, foreign owners can’t vote, so they’re easy to bash. We always want to blame people who vote.
Jobs drive property prices
Piers Kennard, Property HQ: I recognise that we are talking about some things here on the perimeter – capital gains tax, negative gearing and some other bits and pieces which could help deflate the problem. I think the horse has bolted. We can’t just take these things away then that will fix the problem. Of course Australia is not just Sydney and Melbourne, or Victoria and NSW. It’s made up of many states and cities. And those cities themselves are desperate for workers and they can’t get those workers without jobs. And jobs are the real drivers of property prices. And if we have jobs going to places like Brisbane and Perth, then that will support those markets and take the heat out of the Sydney and Melbourne markets, which have been overinflated by the influx – that interstate migration, which we’ve received in the last several years on the back of the mining disruption. If we take those drastic steps of negative gearing and CGT it will destroy value and will destroy small families that are out there.
Audience interjection: On that point on Vancouver, the fact that prices stabilised briefly to me says that the foreign investment is significant and when you introduce a measure you can have influence. And lastly, I’d like to make an observation. For me, it’s telling to come to a forum like this and no one suggests that there should be some overarching housing policy objective set for Australia. No one is suggesting that there actually be an overarching objective.
Nicki: Well, I think the overarching objective is to improve affordable housing. This has accepted that it’s a crisis and we’re trying to work out ways to improve affordability.
It’s also about affordable rental housing
Adrian: You’re absolutely right, because there’s two types of affordability in terms of what we are seeing in Sydney and Melbourne. And then low income households around the country who, for a variety of reasons – marital break-up, mental health or disability – are struggling to afford houses. Forty-seven per cent of low-income households are paying more than 30 per cent of their income in the form of housing, whether it be rent or mortgages. The federal government is paying out a huge amount in rental assistance. The National Housing Agreement that all the states signed up to under Rudd has five key benchmarks. Not one of those benchmarks in relation to social housing or community housing has actually been met.
Half of what I wanted to talk about was community and social housing. And while I’m his representative on the AHURI board, Scott Morrison gave a speech to AHURI two weeks ago and half the speech was talking about social housing and community housing. While all the headlines are about Sydney and Melbourne housing, there is a housing crisis in other parts of the country, and if we don’t sort out the social system and get housing right in these lower socio economic areas and people have a roof over their head, have tenure whether they be renting or ownership and feel that they can work reasonably close to a job, live close to childcare – there’s a whole bunch of these housing affordability issues that we haven’t addressed tonight and we need to.
Sydney’s a bushfire, Melbourne’s got a fire but there are other little fires around the country that are getting lost because Sydney is taking all the headlines.
“Sydney’s a bushfire, Melbourne’s got a fire but there are other little fires around the country that are getting lost because Sydney is taking all the headlines.” Adrian Harrington
There’s a whole bunch of things are being worked on at the federal level and the state government level in terms of community housing, inclusionary zoning, developers partnering with community housing providers. Can we actually put in an aggregator model in which community housing groups aggregate their debt and go and borrow in the capital market to get cheap debt to provide affordable housing?
James Woodall, National Australia Bank: John, I had a question for you particularly related to stamp duty – the abolition of stamp duty and the replacement of stamp duty with a broad-based land tax, and what impact you think that might have on values of properties.
And Nicki just in relation to work you have done recently. I was thinking back to the GFC particularly in relation to Texas and California, and the two different experiences they had in those states. One which had very tight planning issues, which is similar to NSW, and one which was very laissez-faire. And when that bubble finally burst the devastation in California was so much worse than in Texas. Do you think that might have a reflection in what might happen here later on?
John: So the reasons you might replace stamp duty with a broad-based land tax are primarily not about housing affordability. Assuming those taxes raise about the same amount of money, you would expect that the net impact on house prices would be pretty close to zero. One of the proposals kicking around at the moment is that you only do that for houses that get sold. Until then you continue not to pay the general property tax and when you sell the house there will be no stamp duty. Now by definition that means that state government revenues will be less, the question is who is paying less tax. It’s quite a difficult question. But in terms of housing affordability: not that large.
Why would you do it? At the moment stamp duty is a big disincentive to moving. I decide not to take a job on the far side of town because it means I have to sell.
Audience interjection: And for retirees downsizing.
John: For retirees it’s much smaller. The issues for retirees are by and large not financial, they are much more emotional. It’s more an issue for people who are working who are thinking about moving to a new job. And the economic evidence is it’s a very big lever.
The other reason you would do it is at the moment state government revenues are extremely volatile. It’s really happy days for Victoria and NSW – very rapid turnover of houses at really high prices, and basically they are rolling in money. One of the catches with stamp duty is you get a double whammy when markets turn down. First, you get less revenue because the prices are lower, and you get less revenue because the turnover drops at the same time. So state governments would wind up with much less volatile revenues if they moved to a general land tax. And that’s exactly what the ACT has done over time.
Of all the revenue neutral tax reforms you can identify, that is far and away the biggest prize on offer. That said, stamp duty gets paid by people when they’re feeling happy and they’ve bought a house and cash flow isn’t a problem because the bank is giving them the money anyway, whereas if you have to pay land tax every year that’s harder.
The argument against property being overtaxed
The other argument you get is that property is already paying its fair share of tax. That I think is a fundamentally mistaken argument. The rational amount to tax property is really, really high because when you tax property in a general way, with a general property tax, it has very, very little impact on behaviour. Because the one thing you cannot do with land is get rid of it. Someone is always going to use it and therefore if you tax it more highly it doesn’t have a distortionary effect in the way that it does if you tax people working, because then they choose not to work, or selling, because then they choose not to sell.
Rob: Is there one big idea that would help affordability, Nicki, John and Adrian?
Nicki: Sure, I think we need to change the planning regimes to allow for greater density in inner and middle ring.
John: I agree with Nicki and the question is how do we get there? We all agree that’s a good idea, but not in my suburb. I think there’s an interesting new constituency for this. So the obvious constituency is, well, my child can’t afford to buy a house because I’ve locked up the planning scheme. There is a new constituency, which is the one constituency that has always got its way over the last 30 years, and that’s the baby boomers. Why? Because they’ve all turned 65 and they’ve decided that they do want to downsize. But when they downsize they’re really clear that they want to stay in the same location. And there is a certain poetic justice to the fact that they can’t downsize to their current location because they have very systematically locked up the planning laws over the last 30 years so that there is no medium density planning in the place where they are living.
Now I’m going to try to move over my schadenfreude because I have written extensively about intergenerational equity, and instead say we need to start talking about that, to the extent that people want to downsize and stay in the same location, that’s a really good idea. There’s any number of social reasons why that’s a good outcome. But in order to make that happen we do need to create a lot more medium density – not necessarily 15-storey apartments – essentially two-bedroom townhouses in a whole series of established suburbs. And if those people aged 65 want to do that then they better start thinking about how they are going to, ironically, pressure their local council to make that happen. This is the one cohort in Australia that has actually got its way on public policy change over the last 30 years, and it’s time we enlisted them!
Adrian: I agree with John. We’ve just bought a retirement village in Castle Cove – 58 residents and 55 have come from within a 10km radius. It’s two-storey, medium density, and it’s blended into the neighbourhood really well. And if you drive up through Castle Cove you wouldn’t even know it’s a retirement village. So it can be done and it must be done. And it’s not just retirement. It’s child care, it’s all these services, it’s schools. We’ve got a massive shortage of all of these things in these inner areas because the planners all thought everyone would either go up north, sea change or they’d go out and live on the boundaries. And it’s not the case. So totally agree with that.
Ultimately, we need government, the community and social housing sector and the property industry to work together, because one can’t do it on its own. You need the built product. That’s the property industry. You need the community housing groups to work with parts of the community that need that assistance. And you need the federal government working with state governments to make it easier to facilitate supply into the markets in a rational and efficient way.
Unfortunately, we have both sides of politics just politicking to the point where it’s “he said, she said” and no one wants to get into the room together, bang heads and sort this out. And it’s unfortunate. And ultimately that would be a great outcome if the Feds, the states and the local councils and industry got together and put together an action plan.
The Property Council has one. The Community Housing Association has got a great action plan. I’m from the property industry and I’ve ticked the majority of their suggestions. We just need to get over this hump of all tribes fighting each other. We have to have these discussions, we’ve got to have good research coming out, and we’ve got to have these debates in a public forum, so people can realise we can’t solve it overnight. And anyone who thinks we can is kidding themselves.
This is not going to be solved in this cycle but we’ve got a country that is going to continue to grow for another 100-plus years. We’ve got to get our infrastructure right, our planning right, and we know this country is going to continue to grow and prosper. And as a lucky country, we have a safety net for those who need it and an entrepreneurial spirit for those who get up and go.
Rob: That’s a very good place to end.