Brick by brick: Tackling the housing affordability crisis

July/August 2017 edition

The housing affordability crisis hasn’t happened overnight. It’s been a problem that’s been building for many years. But, despite this, it seems to have crept up on those in power.

By Helen Hull

Research from the Housing Industry Association shows that it now costs almost $48,000 per year to service a typical loan on a median priced house in Sydney – so it’s not surprising that anxiety about housing affordability is at an all-time high.

“I think the NSW Government thought that if they ignored the problem for long enough, it would go away. But the problem has just continued to grow,” REINSW CEO Tim McKibbin said.

“REINSW has been monitoring housing affordability for more than 15 years. We’ve witnessed the social and economic effects of the ever-growing crisis, but despite our efforts to highlight the inadequacies of government responses there’s been little action.

“The recent moves by the NSW Government to address housing affordability are a step in the right direction, but it’s time to really get serious.

“All levels of government need to collectively address housing affordability, because one of our most basic human requirements, other than food and water, is shelter.”
Mr McKibbin believes that part of the reason governments at all levels have been so slow to act is because of the sheer magnitude of the problem.

“Some of the required measures, such as addressing the planning system, are politically unpopular – and this has stymied positive action to address housing affordability.

“It’s time to end the politics and take the steps that are needed to secure the housing market and address the ever-worsening housing affordability crisis.”
NSW Government’s response

In her maiden press conference in January 2017, Premier Gladys Berejiklian identified housing affordability as “the biggest issue people have across the state”.

“I want to make sure that every average, hard-working person in this state can aspire to own their own home,” she said. “That's something I valued and worked hard to do and I want to make sure everyone else has that opportunity as well.”

Fast-forward six months and the Premier, Treasurer Dominic Perrottet and Minister for Planning and Housing Anthony Roberts released the housing affordability package ahead of the 2017 NSW Budget.

From the 1 July 2017, the package will:

  • abolish stamp duty for first homebuyers on existing and new homes up to $650,000
  • provide stamp duty discounts for first homebuyers on existing and new homes up to $800,000
  • abolish the stamp duty charged on lenders’ mortgage insurance
  • double the foreign investor surcharge from 4 per cent to 8 percent on stamp duty, and from 0.75 per cent to 2 per cent on land tax
  • remove stamp duty concessions for investors purchasing off the plan
  • provide a $10,000 grant for builders of new homes up to $750,000 and purchasers of new homes up to $600,000
  • no longer allow investors to defer paying stamp duty on off-the-plan purchases.

The Premier said the measures focused on supporting first homebuyers “with new and better targeted grants and concessions” and will have the effect of “turbocharging housing supply to put downward pressure on prices and delivering more infrastructure to support the faster construction of new homes.”

Dr Andrew Wilson, Chief Economist at Domain Group, described the changes to stamp duty for first homebuyers as a “real reversal” from 2011, when the government took away the stamp duty concessions for established homes.

“First homebuyer activity is at record low levels in the Sydney market,” he said. “The longer-term average for first homebuyers in the market from ABS data available since 1992, is around 30,000 per year. Last year we saw just 16,000. The horse has bolted and there’s nothing we can do to get back to the first homebuyer levels we’ve previously seen in the market.

“The policy position of the NSW Government is clearly politically driven. It’s a political response to what has been a vigorous debate surrounding the housing market.”

But according to Dr Wilson, the changes aren’t going to make much of a difference at all.

“With relatively high prices in Sydney, the barriers to entry for first homebuyers remain steep, so there’s the likelihood of a moderate increase in activity at best. But increased demand levels with fixed supply will certainly continue to result in price growth, which in the longer term will only act to constrain first homebuyer activity.

“The problem will continue into the future because we don’t have enough houses. We need to start looking carefully at the supply side.”

Forgotten victims

According to Dr Andrew Wilson, renters are the forgotten victims and we’re on the verge of a rental crisis.

“In the city, rental affordability is at crisis levels – it’s never been tougher,” he said. “Rents are increasing faster than wage growth and renters in Sydney are paying 30 per cent more than those in Melbourne and Brisbane on the same income.

“We’re seeing supply issues in the rental market. We need to stop thinking of investors as the ‘bad guys’. If we want international investors – and believe me, we do want them – we need to stop trying to work within a framework driven by short-term political expediency.”

Impact on agents

Tim McKibbin said agents are also bearing the brunt of the housing affordability crisis.

“There’s very little stock and, as a result, agents are finding it hard to source property for consumers,” he said. “People don’t want to be out of the market for very long. Consumers want to buy before they sell, and the biggest problem isn’t selling their home – it’s buying the next one. And because they can’t buy, they don’t want to sell.

“All levels of government have to work on this problem. We need to take the politics out of it and see strong leadership and good economic sense,” Mr McKibbin said.

What are the options?
Both the state and federal governments have been promising action on housing affordability for years. But what policy options are available? Here are just some.

Abolish stamp duty
Study after study shows that stamp duty is one of the single biggest problems in the housing affordability equation. Stamp duty on a median-priced Sydney house is now more than $40,000. While it’s a windfall for government, it discourages people from selling.
A switch from stamp duty to a broad-based land tax would reduce the upfront cost of purchasing a property, encourage land to be put to its most productive use and help improve housing affordability over time.

Increase housing supply
Politicians of every persuasion talk endlessly about the importance of increasing the supply of housing. They are correct. We do need more housing – but it needs to be in the right places.
While the number of dwellings built in Sydney over the past five years has increased, the new supply is not all in areas of most demand. According to John Daley, the Chief Executive of the Grattan Institute, substantial demand for housing in middle-ring suburbs is not being met. He has said good planning that allows for a significant increase in housing supply in the middle-ring would be a “game changer” for housing affordability.

More public housing
In a curious twist, while investors have been piling into the market over recent years, governments have been reducing their public housing stock. Today there are 16,000 fewer public housing dwellings across the nation than there were in 2009 and there is a national waiting list approaching 200,000.

Allowing public housing providers to borrow at lower rates if they then rent to essential workers (such as teachers and nurses) would demonstrate a serious commitment to solving the housing affordability crisis.

Reduce capital gains tax
The 50 per cent capital gains tax discount was introduced by the Howard Government back in 1999 and has enhanced the appeal of property investment. But according to independent economist Saul Eslake, this preferential treatment of capital gains distorts savings and investment decisions and detracts from the overall equity of Australia’s personal income tax system.

The 2010 review of the tax system by former Treasury head Ken Henry recommended that the capital gains discount be reduced to 40 per cent – and many experts believe there’s a need to go even further. Paring back the discount would ease pressure on housing prices by making property investment less attractive and, in so doing, limit upward pressure on property values.

Cap negative gearing
Many economists have called for an end to negative gearing. They argue that if a reduction of the capital gains tax discount fails to curb excessive investor demand for housing, then changes to negative gearing could be considered.

While the Reserve Bank of Australia has said that there’s a case for reviewing negative gearing, there are also good arguments for leaving it alone. Negative gearing, by running losses in the short term, works as an investment strategy if the property eventually appreciates in value enough to overcome those losses. It’s the prospect of capital gains that are the driver for investing in property, which could be better addressed by reducing the capital gains tax discount rather than tinkering with negative gearing.

But, according to some economists, a sensible cap on the number of properties that can be negatively geared could help curb some of the worst excesses in the market.

Grants for first homebuyers
Economist Saul Eslake has noted that governments have experimented with “demand side interventions” for decades without success, including cash handouts in the form of first homebuyer grants and stamp duty exemptions and concessions. But these have failed to stop the steady decline of first homebuyers.

Mr Eslake has commented that it’s difficult to justify the continuation of a policy in the face of overwhelming evidence that it doesn’t work.

Access to superannuation
Allowing first homebuyers to use their superannuation to fund a deposit is not a new idea. But most economists decry it. The Grattan Institute’s John Daley has called it a “bad idea” and economist Saul Eslake has labelled it “fundamentally bad”.

The reason? A policy that gives a large number of potential buyers more money to spend in a competitive market is likely to push prices up. Most agree that superannuation should be left to do what it was designed to do – provide a stream of income during retirement.

Levy foreign investment
The housing market in NSW has attracted a lot of interest from foreign investors, particularly from China, in recent years – and this interest is likely to grow as China becomes more integrated into the global economy.

Research from Credit Suisse in March 2017 found that foreigners are buying 25 per cent of new housing supply in NSW, and almost 80 per cent of foreign demand is from China. According to Credit Suisse, there is good reason to expect more – not less – Chinese demand going forward.

This means higher levies on foreign investment in housing may be justified to ensure local homebuyers are not disadvantaged.
Supply is the key
Minister for Planning and Housing Anthony Roberts said supply is the key lever to be pulled when tackling housing affordability.

“The NSW Government is helping to address the challenge of housing affordability by increasing housing supply – delivering more than 70,000 approvals in NSW every year,” he said. “Low levels of new residential construction between 2006 and 2011 and strong population growth has meant that there is a pent-up demand for homes in NSW, mainly in Sydney.

“More will be done to increase housing supply and affordability. We’ll be doing this through land releases, faster housing approvals, cutting red tape, medium density houses, rezoning, and funding for local infrastructure such as roads and schools.”

According to Minister Roberts, the government is also working to ensure that there’s an adequate and diverse supply of suitable housing options for all residents.

“Currently, most new homes built in NSW tend to fall into two categories: traditional free-standing houses or apartments. What’s missing is the range of housing types that fall between these two categories: terrace houses, townhouses, manor homes, villas, and dual-occupancy homes.

“The recently released draft Medium Density Design Guide and housing code will make well-designed low-rise medium density homes a reality through Sydney’s middle-ring suburbs and beyond.

“This is a more affordable option for people looking to own their own home without missing out on space for their family to grow, have a backyard and car parking,” he said.