A bit more on housing

I expanded my post on housing affordability into a piece for the Fin, published yesterday. The suggestion of replacing stamp duty with land tax produced a letter from someone whose argument (if I got it right) was that homeowners would be better off if stamp taxes were abolished and not replaced with anything. True, and while we’re at it, free expresso and ponies all around would be nice.

With an election only months away, it’s not surprising that house prices are a hot political topic. It’s also not surprising to hear plenty of hypocrisy, on the topic.

The crucial problem is that, while it’s politically obligatory to favour affordable housing, the majority of the voting population already own (or are paying off) their houses, and stand to gain if prices rise. As John Howard reportedly said in 2004 ‘”I haven’t met anybody yet who’s stopped me in the street and shaken their fist and said: ‘Howard, I’m angry with you, my house has got more valuable’

In 2004, house prices had been rising strongly for years, and interest rates were at historically low levels. If it had been possible to slow down the increase in prices of the preceding few years, no one, except perhaps some overgeared investors, would have actually been worse off. Existing home owners would have foregone some unrealised capital gains, but would still be well ahead, and new buyers would have benefitted from lower prices.

The conflict is more acute this time around. In some areas, particularly in parts of Sydney prices have declined in real terms at the same time as interest rates of risen. The result, for those who entered the market at high prices is not pretty. Interest payments are consuming as much as 30 per cent of household income, yet the payoff of large capital gains, seemingly guaranteed by all historical experience, looks to be a long way off.

Moreover, given the spread of aggressive lending practices in this period, many buyers started with low levels of equity, often below 20 per cent of the purchase price, and have made only marginal progress in paying off the debt. It would take only a modest further decline in prices to push many into negative equity.

Yet prices are still unaffordably high for many would-be homebuyers. At this point, the best policy advice would seem to be that of the Irish farmer, when asked for directions who said “Well first off, I wouldn’t start from here’.

Suppose though, that governments really wanted to make housing more affordable. What policy measures could they take.

The speculative boom in prices was ignited by the government’s decision, back in 1999, to halve the rate of capital gains tax. On grounds of tax neutrality alone, it would be desirable to reverse this change. However, assets bought under the current rules would have to be grandfathered, and expectations of capital gains are now fairly moderate, so it is unlikely that this would have much immediate effect.

The Treasurer has argued that the big problem is the failure of state governments to release more land on urban fringes. But shortages of new land are not the main problem.

Urban housing prices follow a gradient, reflecting the value of time and convenience. Houses and land close to the city are more valuable than similar houses further out. Go far enough out, and the price is determined by the cost of converting land from farming or other uses into house blocks.

If house prices were being driven by a shortage of new land on the outskirts, the price gradient should be getting flatter. In fact, as the Productivity Commission has shown, the gradient became steeper between 1994 and 2002, and it has become even steeper since then. The outer suburbs, were the last to boom, and the first to slump, most notably in Sydney.

A much more plausible candidate for reform is the way residential land and housing services taxed. On standard tax principles, the flow of services from land should be taxed on an annual basis, just like other income. Indeed, land taxes are generally considered the most efficient available to government. On the other hand, transactions taxes like stamp duties are highly inefficient.

If stamp duties were abolished, along with the current exemption from land tax enjoyed by owner-occupies, the price of houses would not change much, since the present value of their services would remain the same. But the cash costs faced by new home buyers would decline drastically. On the other hand, existing home owners would face a new annual charge.

The experience of the NSW government, which tried to cap the land tax exemption at $1 million shows that such a shift in the tax burden would be politically suicidal. We may like our leaders to talk about making housing more affordable for young families, but, as a community, we have been unwilling to do anything serious about it.

John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland.

29 thoughts on “A bit more on housing

  1. Living in inner melbourne and having developed two sites, I’m not too fussed about paying for the new services such as electricity, sewerage, etc. However what is annoying is the fact that any one can object to any development – worst case someone who lived three blocks away (and the individual was a town planner, although not working for the relevant council) launched objections that were unreasonable from the beginning and eventually were found to be so. But then the whole site was slapped with a heritage protection notice, although there was none. Indeed the wjhole suburb is now under heritage protection although during our appeal we demonstrated that that could not possibly be so. So to ease the supply question remove all the building constraints and restore some semblance of property righs. The only type of planning required should be whether the area is industril, commercial or residential. If a developer wants to build multiple floor buildings, then so be it. If no one wants to buy these then the developer cops the loss.
    On the interest rate side of teh equation, my question is whether the housing has been given the correct weighing when calculating the CPI which is one of the determinants of interest rates. Has the Reserve Bank done their homework?

  2. Generally speaking, the housing affordability crisis is one symptom of a much broader malaise, namely the income tax dinosaur, as John Foster points out. The abandonment of income tax, for a reliance on carbon and resource taxing (which necessarily requires a land use resource tax) would end our unhealthy preference for investment in RE and large Tuscan boxes. Reliance on carbon and resource taxing would also negate the need for mandatory controls on energy/water use in housing design, leaving those rational decisions to incentivised individuals. As well, zero income tax means savers can pay tax when they spend their savings and interest, rather than pay as they earn now. Indeed they pay tax on nominal rather than real interest, which is why deferred capital gain is so attractive. We all know it’s the tax system creating the distortions, but noone really wants to unwind it all, although with CO2 climate change, perhaps now is the catalyst for serious socioeconomic change. Spare us the Kyoto/plastic shopping bag bans/mandatory rainwater tanks/yad, yada quantity control freakonomics.

    With a nil income tax regime, much of the speculative demand for RE would disappear, leaving room for some sensible demand measures, to aid basic housing affordability. That’s where I think a ‘life grant’ for all would be sensible. An adolescent finishes Year 10 and gets a credit account (life grant) consisting of all post YR10 education spending now, the FHOS grant, etc, to be spent in one of 2 ways over their lifetime. Firstly for any post Year 10 approved ed and training, or to be used to purchase a home. As well compulsory super could be paid into their mortgage to increase affordability, up to a sensible maxm. All such life grant/super payments would be quarantined upon sale of the house and rolled over into another home or back into the ed life grant. It’s that simple really and it’s clearly time. Needs some real bipartisan statesmanship though, rather than gabfests and more public servants monitoring the price of bananas.

  3. PML Says:

    Finally, we can actually look at values and legitimacy; governments do not have even our implied consent for social democracy style service provision, and the whole lack of moral basis for it has been addressed over and over in history (see Article 38 of the Church of England). Learned helplessness and manufacture do not create any legitimacy, ever.

    Blind faith, be it in some form of libertarianism/anarchism or in a particular document written by the heirarchy of some church in 1571 is rarely a good presciption for public policy. This sort of stuff is simply not helpful in the reality based community.

    There has been quite a large number of elections in various countries in the 20th century in which express consent was given to “social democracy style service provision”.

    Maybe you were just having a hard night on the single malt, or something.

  4. SJ, you aren’t reading my stuff the right way round. I’m not making a policy prescription just there, I’m going into the underlying ethics. Ethics do not date.

    What is more, there has never, ever been any election, in any time or place, ‘in which express consent was given to “social democracy style service provisionâ€?’. That is because of the maxim that you cannot give what you do not have. Elections can only work within an ethical framework, not create one. It’s connected with the old debate over Ius dicere or Ius dare – whether you are determining what is right in the sense of working it out and saying it, or actually making it so. But no electorate owns me or any part of me, or has any moral right to make wrong right any more than it can make black white.

    On the other hand, if you are asking about what works or about what is necessary – lifeboat ethics – then you were picking on the wrong target. I dealt with those areas elsewhere, not in the part you quoted.

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