Australian house prices

An article on the provision of housing I read recently was very interesting in relation to previous very long and bitter threads about negative gearing and capital gains tax concessions. The Howard government cops a lot of the blame for Australia's high housing price, but how much of this criticism is justified?

It was the Howard Government, after all, that made the fateful decision to halve the rate of capital gains tax (CGT) in 1999, which lead to an explosion of negatively geared investment.

Shortly after CGT was halved, loans to investors surged, growing almost exponentially over subsequent years (see below chart).
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It was the Howard Government’s halving of CGT that first put a rocket under negatively geared investment which continues to plague the housing market today, to the detriment of first home buyers. It was also his government that allowed self-managed superannuation funds to leverage into property, ramped-up immigration, and implemented a raft of first home buyer subsidies.

Of course there are other important contributing factors, including financial deregulation (reduced bank capital requirements), falling nominal interest rates, foreign investors, and the states’ increasingly restrictive land-use policies. But it was the Howard Government that first kicked this bubble off.​

Howard defends his bubble - MacroBusiness

Does this claim stand up to scrutiny? If it is Howard that caused the housing bubble in Australia, then we would expect this to be a national problem and other countries would not be experiencing housing bubbles because they don't have the CGT concession and Negative Gearing. The United Nations housing envoy, Leilani Farha has prepared paper on housing commoditisation for the UN human rights council. This paper outlines this is very much an international problem.

Today, Farha, the UN’s special rapporteur for housing, presents a paper on housing commoditisation to the UN human rights council in Geneva. It sets out how unregulated global capital has in recent years not only distorted housing markets all over the world – turbo-boosting prices and rents to a level that excludes and expels poor and middle-income families from so-called prime locations – but has also created housing precariousness on an unprecedented scale.

There are hundreds of trillions of dollars invested in residential property worldwide, the paper estimates. The effect has been to accentuate housing need: displacing poor residents (often through forced eviction), driving up wealth inequality, and creating social dead zones in the once-beating hearts of cities.​

‘Housing should be seen as a human right. Not a commodity’ | Patrick Butler

Vancouver does not have negative gearing or capital gains tax concessions like Australia, and yet:

Farha uses the phrase “residential alienation”, borrowed from a book In Defence of Housing, by David Madden and Peter Marcuse, to describe this process: “In Vancouver, people were telling me they live in neighbourhoods where this house is empty because it’s been bought as an asset, this is occupied, this one’s empty and this one’s empty. So you have no neighbours, you have schools closing down because there aren’t enough students to go to the school; so your children, if you live in one of these vacated neighbourhoods, are not going to school in your community any more. Shops are closing, restaurants are closing. You see immediately a loss of vibrancy.”​

‘Housing should be seen as a human right. Not a commodity’ | Patrick Butler

The issue of vacant housing is replicated in London, where there is no CGT or NG.

My original clients, who were 50 or 60 when we opened, were that bit older. Some of them couldn’t afford to eat out as often after the recession, but others saw what their houses were worth and decided to realise that asset. They were replaced by non-doms who didn’t live there. In some apartment blocks 20% were unoccupied – one in five of my potential client base. It makes a big difference. In the block behind the restaurant it even became easier to park. You never expect to hear that in Knightsbridge.”

Racine is the latest victim of what some have called “lights-out London” where absentee owners push up property prices without contributing to the local economy. When Racine opened in 2002 the average price of a Knightsbridge home was £745,000; now it is £3.4m. There are an estimated 22,000 empty properties in London, partly a consequence of the city’s status as what the novelist William Gibson has called “the natural home of a sometimes slightly dodgy flight capital”. As Racine’s story shows, some businesses are feeling the effects.
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‘It’s like a ghost town’: lights go out as foreign owners desert London homes

And Melbourne:

Prosper Australia has for years been conducting research into how many of Australia’s 9.8 million homes are left vacant. Its major finding is that of the 1.7 million homes in greater Melbourne alone, about 82,000 are vacant, or 4.8 per cent. That research has been cited by a recent United Nations study on the pernicious effects of the financialisation of the housing sector, and has likely been a key reason for the adoption of a vacant housing tax, and probably in Canada as well.
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Anyone home: Can one of property's most common tricks be fixed?

This is clearly an international problem, not a nation problem and it appears that the issue is more related to vacant housing than Australia's tax system.

Perhaps the answer is a tax on vacant housing not tinkering with Australia's tax system:

In this context, a tax on vacant housing can act as a dampener on speculation, as it makes more costly the speculative option of keeping property vacant. In practice, Canada’s vacant home tax will rely on declarations by owners and spot checks to ensure compliance. This is really the only way. Relying on water data would simply encourage owners to leave taps on to avoid the tax.
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Anyone home: Can one of property's most common tricks be fixed?

 

Is the problem really negative gearing and the captial gains tax concessions for some investors? It has been claimed that property investors have a bigger tax break than owner occupiers for property. This is not correct.

Under certain circumstances property investors are eligible for a 50% discount on any capital gain. Whereas an owner occupier is eligible for a 100% discount on any capital gain.

It has been claimed that the CGT concession and Negative Gearing cause property speculation and property speculation caused the housing bubble. It has been claimed that Australia is the only country to have negative gearing. If those things are true then other countries would not have property speculation and other countries would not have housing bubbles.

Think of the housing bubbles in the USA, Ireland and Japan. These countries do not have negative gearing. These countries all experienced massive housing bubbles.

If negative gearing did not cause the housing bubbles in those countries, then what did?

Will removing negative gearing really prevent property speculation in Australia? If so, is the Labor proposal the right way to do this?

Most commentators on the crisis in housing affordability correctly attribute the problem, in part, to the Howard Government’s decision in 1999 to “halve the taxation of capital gains”. But that was only one aspect of the 1999 change: the other was an end of indexation. The combined effect was to shift investors’ incentives to favour speculation in high-growth but risky assets such as housing while penalising more conservative investments. Labor proposes to reduce the discount on capital gains, from 50 per cent to 25 per cent, without restoring indexation, but this would retain some of the worst aspects of the Howard changes.​

IAN McAULEY. Capital gains taxes: Keating got it right in 1985

 

Is the problem Australia's tax system or is it a problem of excess global capital?

The Great Wall of Money has been tracking the amount of newly raised capital targeting commercial real estate globally since the onset of the financial crisis. The report monitors capital available predominantly from funds, listed companies and institutions and explores the geographies and asset types it targets.​

Great Wall of Money 2016

Demand for commercial real estate investments held strong throughout 2015. Markets across the globe will continue to transform as we move into 2016, with a record US$443 bn of capital targeting commercial real estate globally: a 3% increase on a year ago representing the highest amount recorded since our analysis started in 2009​

http://www.cushmanwakefield.com/~/media/global-reports/Great_Wall_of_Money_2016.pdf

In 2017 the total global wall of money (debt and equity) targeting direct real estate fell for the first time since 2011 to $435bn, a 2% drop over 2016. However, current levels are the second highest on record, reflecting the extraordinary rise in capital targeting the sector in this cycle.​

New Capital Heading for Global Real Estate at $435bn in 2017

It is estimated in 2016 that Australia received US$17 bn of this global capital. It's a big problem. Much bigger than negative gearing.

 

I have traced property investment policy in Australia back to Menzies in 1963.

Housing Policy
“Housing is always a pressing problem in a growing country, and it has special
financial implications in Australia, where over three-quarters of homes are owned or
in process of acquisition by the occupiers. We dealt with two of the financial
problems in my 1963 policy speech, in which we made two significant promises
which in the new Parliament were performed. The first promise related to the special
difficulty experienced by young married people, particularly in the age-group up to
thirty-five, in financing the purchase of a dwelling. We dealt with this by providing a
Commonwealth subsidy of one pound for every three (later two dollars for every six)
which a person in this age group deposits or shall have deposited over a period of at
least three years in an identifiable account at an approved institution, to be released
upon or after marriage for home-building or purchasing purposes...

The other problem to which we directed our attention was becoming a very acute one.
Many people found that, to fill the gap between available housing loans and the
buying requirement of the purchaser, it was necessary for the purchaser to borrow
money, frequently on oppressive terms. We therefore set up a system of housing-loans
insurance, the insurance to be issued by a National Housing Insurance Corporation.
The object of the scheme was to insure approved lenders against loss arising from the
making of loans for housing. With the Government guarantee involved in this scheme,
people would be able to borrow, as a single loan at a reasonable rate of interest, nearly
all of the money they needed.” R.G. Menzies, ‘New Social Services’, Measure of the
Years (1970) 128-129.​

http://www.menziesrc.org/images/Sir_Robert_Menzies/Sir Robert Menzies on Health Education and Housing Policy.pdf

But the issue is much more global than that. I believe that one key document was the The World Bank report: Housing - Enabling Markets to Work from 1993. Here is a key point:

"Reforms in the housing sector will need to be coordinated with
macroeconomic reforms. Housing finance liberalization, for
example, will need to be coordinated with the overall liberalization
of the financial sector. Similarly, privatization of housing
production should go hand in hand with the overall privatization
of public sector enterprises. In this context, the Bank will promote
mechanisms for coordinating public agencies and private
interest groups with a stake in the housing sector, which can
develop a broad view of the housing sector and its role in the
macroeconomy."​

The World Bank report

It's an interesting read nearly 25 years after publication. Basically the report sets out a blueprint for the financialisation of housing. It would be interesting to go through the report in detail to see what the ideal was and whether it has worked as intended. Perhaps there has been unintended consequences?

A recent United Nations report on the right to adequate housing identifies the financialisation of housing as an issue of global importance. It defines the financialisation of housing as:

… structural changes in housing and financial markets and global investment whereby housing is treated as a commodity, a means of accumulating wealth and often as security for financial instruments that are traded and sold on global markets.

The UN Special Rapporteur on the Right to Housing argued that treating the house as a repository for capital – rather than a place for habitation – is a human rights issue.


The financialisation of housing has been central to wealth creation in Australian households since at least the second world war. Today, it underwrites the bank of mum and dad, amateur property investors as landlords, asset-based welfare, and foreign real estate investment.​

Explainer: the financialisation of housing and what can be done about it

This article links to a book In Defense of Housing - The Politics of Crisis, which again highlights this is an international problem.

In every major city in the world there is a housing crisis. How did this happen and what can we do about it?

Everyone needs and deserves housing. But today our homes are being transformed into commodities, making the inequalities of the city ever more acute. Profit has become more important than social need. The poor are forced to pay more for worse housing. Communities are faced with the violence of displacement and gentrification. And the benefits of decent housing are only available for those who can afford it.

In Defense of Housing is the definitive statement on this crisis from leading urban planner Peter Marcuse and sociologist David Madden. They look at the causes and consequences of the housing problem and detail the need for progressive alternatives. The housing crisis cannot be solved by minor policy shifts, they argue. Rather, the housing crisis has deep political and economic roots - and therefore requires a radical response.​

Verso

 

What does all this mean?

 

There is a risk if negative gearing is abolished and owner occupiers don't take up the surplus supply that is projected to flow into the market as a result:- that this supply will be taken up by institutional investors. This already happened around the world:

The Blackstone Group, the world’s largest real estate private equity firm, managing $102 billion worth of property, spent $10 billion to purchase repossessed properties in the United States of America at courthouses and in online auctions following the 2008 financial crisis, emerging as the largest rental landlord in the country.25 Other major institutional players invested $20 billion to purchase approximately 200,000 single-family homes in the United States between 2012 and mid-2013.26 With the recovery of the United States housing market, Blackstone and other private equity firms have sought to take advantage of other buying opportunities in Europe and Asia. Cushman and Wakefield estimated that there was over €541 billion of distressed real estate debt in Europe in 2015, much of it held by public asset management companies such as the National Asset Management Agency in Ireland and the Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria (company for the management of assets proceeding from the restructuring of the banking system) in Spain. The vast majority of that debt is being purchased by giant private equity firms.​

ODS HOME PAGE

If you think it is a problem for families in Australia to deal with individual investors, imagine trying to deal with a faceless corporation? There are far reaching implications for allowing housing in Australia to be institutionalised.

Massive investment of capital into housing markets and rising prices should not be confused with the production of housing and the benefits that accrue from it. The bulk of real estate transactions of that sort do not create needed housing or long-term secure employment. When rented homes or mortgages are owned by remote investors, money mostly flows out of communities and simply creates greater global concentration of wealth. The new corporate interest in developing rental properties from homes sold in foreclosures has also raised concerns that there is a greater incentive to pursue foreclosures rather than modify a loan agreement to avoid an unnecessary eviction.​

ODS HOME PAGE

Governments are going to have to be very careful indeed that they don't create a bigger problem than the problem they are trying to fix.

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Negative gearing allows rental expenses claimed against other income source of same year, thus creating extra cashflow for that year..... which is then leveraged with the likes of IO loans to speculate further.

Rather Make rental expense claimable in future year rental profits to reduce the speculative froth.At the very least make NG limited to only new dwellings.

Like it or not gov is looking to clamp down on NG and other generous claims(like depreciation/LL travel claims etc.) not because its the right/wrong thing to do, but because its one of those low hangings, left for easy pluck, to slightly reduce the deficit hole which gets widen every year. Beside the then leader can easily spinoff as a savoir of the downtrodden.

 

Census 2016: Almost one in five homes built in Australia are unoccupied
[Kristina Clifton, economist at the Commonwealth Bank, explains:

There has been a lot of talk in the press about foreigners purchasing new apartments and then leaving them empty. The government is trying to deter this type of activity with a new vacancy tax for foreigners introduced in the latest Federal Budget in May. The Victorian Government is also introducing a similar tax. It’s been difficult to work out the extent to which this is happening. But the Census data tell us that the proportion of dwellings that are unoccupied increased by 0.5 percentage points (ppts) to 11.2% over the four years to 2016. The increase was 0.2 ppts larger than over the four years to the 2011 Census. Of the additional stock built over the four years to 2016, around 17% has been left unoccupied. One caveat however is that we don’t know the ownership split between domestic and foreigners owners for this unoccupied housing stock. But regardless of the ownership, new supply has had to increase at a faster rate than otherwise in order to keep up with demand.]

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Gov just has to mandate all local investment property owners provide proof of rental and find out which foreigners are not in the country after buying their properties and tax the **** out of them. That will return supply to the market quick smart and solve the rental crisis.

 

But given what I have posted above, will it make any difference?

 

Since when politicians did anything to really make a difference?

Regarding speculation due to NG, its already baked in the cake ie we have leveraged out that NG cash flow.

 

Negative gearing was an enabler, and a story line for the spruikers.
Its the Basel bank capital changes
(1988, mortage risk weights halved)
from 1996, the big four banks were allowed to experiment with Internal Ratings Based mortgage risk, before Basel 2 finally implemented Jan 1 2008. Macquarie got AIRB accreditation at the time. RW of the big 5 shunk to 15% by mid 2014.
Then in Mid 2014 the mortgage risk weights were increased to a 25% overall floor they gave them two years to get there. At this stage foreign capital flows had taken over the reigns.
2017: Foreign capital flows are collapsing, MRW should increase for banking system in Oz (Still waiting on final Basel3 agreement)

 

very rarely of any significant magnitude.
In oecd countries, politicians dont have that much influence- the markets including RE markets are fairly transparent and regulated by or influenced by different bodies including non government with fairly stable and established laws.
In developing countries such as BRICS counties, their politicians can have a much bigger and lasting influence on markets eg see what the recent ousting of brazils leader did to its markets, see the impact of chinas govt intervention on its currency a few years ago, see what putins actions in ukraine got him by the west and the impact its had on their treasury...
The only real exception is if the pollie is truly exceptional candidate eg JFK can they have a real impact. Australia has not produced any pollie of that calibre, and likely wont in the near future.

 

Fair point. It's just that a lot of stock has been put in Labors policy to abolish negative gearing and change the capital gains tax concession like it will really make a difference.

 

I think one of the more recent (last 10 years or so) contributing factors to house price bubbles has been the ease of accessing finance...not that long ago we saw LoDocs, IO's with 95% lends, etc...

But; if you look around Aus right now; outside of Melb and Syd - the majority of markets haven't done an enormous amount - which suggests that it is mainly supply and demand rather than just ease of finance, or any other Government scheme.

 

The APRA changes seem to have hit fairly hard though... I mean, just from looking at this forum people are suddenly hitting servicability limits. Doesn't that suggest that ease of accessing finance was/is a significant factor?

 

Yes; to a degree.

Hitting serviceability limits is a result of (not enough) cashflow, so if folks are on a mission of "acquisition" of IP's, and are trying to max out their leverage to get a bigger footprint, then the larger % lends are gunna stop them sooner than later unless they have;
a) Very high PAYE income with lots of expendable income after expenses to hold NG properties, or;
b) Very high rent returns to make the IP's Pos Geared, or at the very least; cashflow Pos - blokes like Nathan Birch and Steve McNight, etc.

 

I believe another large factor contributing to the increase in house prices overtime is the trend of households moving from single income to double income. That second income effectively allows families to purchase more expensive properties.

Also as loans have got bigger over time and the RBA has got better at managing inflation/interest rates, interest rates do not need to increase to high %s to have a big effect. So know the interest rates will never return to high tens again gives consumer more confidence to purchase with a bigger loan.

 

Ease of accessing finance is definitely a significant factor in recent booms. The point @Bayview is making is that while Sydney and Melbourne have boomed, outside of Sydney and Melbourne there has mostly been little or no growth (think Perth and regional mining towns for example).

But then up until around 2013, Sydney and Melbourne were fairly flat too. It certainly wasn't a boom. Yet at that time (pre-APRA), credit was a little easier.

This indicates to me that is not just about easy credit. Easy credit has a role but it's not a single determining factor. Underlying that, as @Bayview point out, is supply and demand.

I think the issue is prices going to far from the mean in either direction. Think about the mean price in Sydney as a straight line from 2000 to now. There was a massive boom in Sydney that ended around 2003/2004. At that time prices were dramatically above the mean. Too far. It hurt the market. Then from 2004 to 2013, the market stagnated. By 2012 prices were too far below the mean. I believe that people returning to Sydney from the mining boom, cashed up from their high wages and needing somewhere to live, triggered this boom. They saw house prices were so low and started buying. Once prices started moving everyone else jumped it. The massive overinvestment in Sydney is also due to other markets languishing, so it became the best place to invest.

The problem is that prices have gone too far over mean again. People have got into too much debt pushing prices that high. Some of this can be blamed on easy credit. The evidence is that the regulators have assessed the banks and see an unacceptable level of risk. Their first response was to limit the growth of investor loans. The next was limit the ratio of I/O loans to P&I. In between there have been many other changes.

I think there are problems when prices go too far from the mean in either direction. Probably the regulators could have stepped in sooner to tighten lending to stop prices going so far above the mean this time. I'm not sure what would have happened if they did act sooner.

 

This is an important point and I think one often overlooked by people writing about house prices in Australia. Here is one stat:

The proportion of mothers living with dependent children who were in paid work (both full and part-time work) increased from 43% in 1981 to 63% in 2009 (1).​

That is a big jump. It means a larger household income which can then afford a bigger loan which has contributed to higher house prices.

The other side is loans. I was reading about getting loans in the 60's and 70'. The types of loans we are used to today didn't exist. I have been reading a lot about the differences but can't really explain it. Maybe someone else will be able to?

(1) https://aifs.gov.au/publications/families-then-and-now-1980-2010

 

with $100+ / day for childcare + transportation and other dependent costs? If a woman with dependent children goes to work, it often means household income is decreased, or equal. Often they do it just to continue their carrier and to be in social environment.

so this factor is controversial