Labor’s two-pronged housing affordability package has them rowing the same boat in both directions, expending a lot of taxpayer dollars and going nowhere.
The first prong doubles the capital gains tax on all investments, to the second highest in the OECD, penalising real estate and share investors alike, and immediately decreasing the value of all retirement savings.
It then violates the principle that losses are deductible against expenses in the same entity, removing the ability of many investors to deduct current losses against current income.
Labor ludicrously claims these are affordability measures while claiming they won’t reduce house prices.
In fact, in the medium term they will increase prices.
Short term they will decrease prices as investors desert the market, and this is already happening, most noticeably in Sydney and Melbourne.
Labor might have thought that owner-occupiers would pick up the slack, but there aren’t enough with large enough deposits, so price falls have some way to go yet.
That leads to less activity, less development, tightening rental vacancies, higher rents, and then prices go up, leaving just a brief window of increased affordability.
So now we get prong number two. Labor has decided it needs to insulate the market against rent increases. It proposes to spend $6.6 billion over the next 10 years paying an $8,500 a year subsidy per dwelling to investors who will develop 250,000 for rent at 20 per cent less than the market rate to people on average to low wages.
Having decided that the problem with housing affordability is that there are too many investors who are being “subsidised” through negative gearing deductions, Labor has decided that the answer to housing affordability is more subsidised investors. Go figure.
Bill Shorten claims that the reduction in rent for the average tenant will be $4,784 per year, so the subsidy to the investor is $3,716, making up the total $8,500.
On the other side of the ledger, by abolishing the tax offset for negative gearing, Labor will gain $2,158.89 per annum from the average investor, on the average property, geared to the hilt.
Meaning that to arrive at the same place it would be cheaper for them to retain the current negative gearing policy and pay the new subsidy to the tenants.
We know the scheme is likely to fail because it has already been tried. Rudd’s National Rental Affordability Scheme gave investors a $6,000 tax credit over 10 years, and aimed to build 100,000 properties.
That scheme, used by many high rise developers to underwrite projects, was a failure with approximately 37,000 of the proposed 100,000 being built between 2008 and now, no measurable impact on affordability, and large numbers of subsidised apartments occupied by wealthy fee-paying foreign students.
Shorten’s scheme is 250 per cent larger, and envisages 32,857 dwellings a year being built in each of the final seven years of the program.
Currently Australia has around 110,000 housing starts a year, so 30 per cent of the new dwelling market is expected to be subject to this arrangement after 2022.
If the housing market does not expand, then first homebuyers and investors in average to expensive new property will be frozen out.
Labor presumably thinks the new housing market will expand. If they are right, then house prices will dive across the board, as tenants are sucked out of existing housing.
But the market won’t expand that much.
We’re already building at close to record levels, so the labour and materials are not available to scale up 25 per cent without depleting other industries and sending the price of labour and materials through the roof.
Schemes like this also bring a lot of administrative overhead and inefficiency.
Who is to determine what 20 per cent of the average rent is, and how is this to be defined? Like for like, geographical location for geographical location? Or will developers in 20 per cent below average locations just pocket the government incentive for no extra effort?
There will have to be means testing of tenants and monitoring of income tax returns, and who will check I’m not rorting the system by renting out spare rooms for cash?
Inevitably there will be mismatches between supply and demand with the wrong sort of dwellings being built in the wrong places.
It will also produce two classes of poor people – those in subsidised accommodation and those on the waiting list, with the latter often being the most in need. How is this a “Fair Go”?
But then, some of the potential “clients” aren’t poor, being “nurses, police and teachers”, who can’t “afford to live closer to work”. This appears to be code for “live in Sydney”, Australia’s least affordable city.
There is a simple solution to rental affordability, and it has served this country well – ensure there is a plentiful supply of serviced land, and then let individual developers, investors and tenants work it out for themselves.
If there is a need for a subsidy, then pay it to all renters who need it, rather than making it contingent on renting government financed properties.
If you can’t afford to rent close to work then that is a signal that either you are not paid enough and should demand more, or that you should move to a city where rent and wages more closely align.
Subsidising people to rent in expensive locations increases the rents for everyone else, and leads to more over-crowding and inconvenience, plus higher house prices.
Housing affordability is not an issue that can be micromanaged from Canberra. The responsible bodies are the states, and their different policies and circumstances are reflected in the relative affordability of their real estate.
Sydney is suffering from stultifying planning regulations, slow land releases by LandCom and previously anti-development state governments. Brisbane and Melbourne have pro-development state governments and relatively relaxed planning regulations, plus lots of fringe urban land.
In sum, the only people who will benefit from Labor’s “affordability” policies will be the bureaucrats, developers, and social housing cooperatives who will do the deals with government on the housing.
It’s a sure fire way to make money for rent seekers. Indeed, it was developing and building such schemes that gave Donald J Trump his first leg-up in the property world. Seems he has apprentices all over the world.
Bad luck for small housing investors, purchasers and tenants.
Graham Young is Executive Director of the Australian Institute for Progress.
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