The housing measures in the 2017 Budget present a great case study in how expectations can be mismanaged.
The government unwisely created anticipation that it would ‘solve’ housing affordability, then allowed expectations to grow. But they couldn’t be met — which someone in the government eventually figured out. After a while.
So senior ministers started downplaying expectations, while simultaneously trying to throw together policies that would go some way towards meeting the (by then) overblown anticipation.
And we ended up with the housing policy mess that is the 2017 Budget. Measures that help housing affordability are jammed up against other policies that hinder affordability. It is hard to know if we are ahead or behind as a result.
Worst of all is the big new tax on the biggest five banks, worth $6.2 billion over four years. This revenue grab, imposed without evidence, debate or sound reasoning, will flow through to higher mortgage rates, harming access to housing finance and stifling investment.
There is one decent policy in the jumble: the main funding agreement with the states, the National Affordable Housing Agreement, will be replaced by a new agreement that should persuade the states to undertake necessary reforms to increase housing supply and reform burdensome planning laws. This reform is long overdue.
There are other housing policy changes that appear beneficial, but have some downsides. In particular, the new Housing Finance and Investment Corporation (HFIC) for social housing — commonly called a ‘bond aggregator’ — could be worthwhile. However if the HFIC has government backing, this will cause many problems; including discouraging urgently-needed reforms of social housing, reducing transparency (compared to direct government funding), and increasing financial market risk.
There is a small reduction in capital gains tax (CGT) for investors in affordable housing, and regulatory changes to promote managed investments into affordable housing. These changes will help, but not significantly.
The changes to super to facilitate saving for deposits by home owners, and downsizing by retirees, will likely cause a small improvement to housing affordability, but won’t help the neediest Australians — and will make the super system even more complex.
There is also $1 billion for a National Housing Infrastructure Facility that will provide financing to “address infrastructure bottlenecks that impede development”, but this is unnecessary, as the states should undertake this investment themselves — and lose funding if they don’t.
So some measures that help, and several that may help but with big question marks.
But the ‘hinder’ side of the ledger has many entries. Tax deductions for travel to investor housing will be denied, as will some depreciation deductions for plant and equipment installed by previous owners of housing. This may appear to help with housing affordability, but it won’t. It will, in the longer term, just feed in to higher rents, because investors will not cop after-tax returns that are permanently lower. House prices may come down a tiny amount, but renters will be worse off — where’s the affordability benefit in that?
Foreign investors will pay more CGT and an extra levy on properties left vacant, while there will be added restrictions on housing purchases by foreigners. Yet again, these measures are likely to have a tiny effect on housing affordability, despite the popular perceptions about the impact of foreign investment.
This is because the government’s own Treasury department released research in late 2016 showing foreign investors have an impact on house prices that only a microscope could see. And these measures to further discourage foreign investment in one sector (housing) could cause collateral damage to investment in other sectors of the economy, when we have a major problem with a lack of investment — in fact a potential investment crisis if we don’t do anything.
In total, the 2017 Budget sends a totally mixed message about housing affordability. The measures to assist are jumbled up with others that hinder, and many that have trivial impact. The overall result is a policy shambles.
Michael Potter is a Research Fellow in the Economics Program at the Centre for Independent Studies and author of the CIS research report Reforming Social Housing: financing and tenant autonomy.
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