The housing affordability challenge: start with the tax system

By David Donaldson

October 21, 2015

Julian Disney
Julian Disney

Australia’s tax setup is the primary driver of housing inaffordability, giving us the highest household debt and housing costs relative to income in the world.

That’s the conundrum facing policymakers according to Professor Julian Disney, director of the Social Justice Project at the University of New South Wales, who told an Institute of Public Administration Australia event last week that “firstly and overwhelmingly the most important [point] in my view is to reduce the tax-driven inflation of house prices and household debt”.

“In both of those two respects, we are at the top of the world tree, we’re the worst. If you’re looking for statistical outliers where we’re a freak in Australia, those two we’re very high on the list — very high levels of housing costs relative to income,” he said, adding Australia now has the highest levels of household debt in the world.

While there’s a focus on public debt in politics and the media, “that is really a much less important issue than the massive level of household debt we have — and that is driven overwhelmingly by housing costs and borrowing for housing costs, and particularly negative gearing, because of course negative gearing doesn’t work unless you borrow”.

All other policy interventions in housing “frankly will be like swimming against the stream unless we get some of that reduced”.

Dealing with house prices is not merely a question of ensuring housing affordability — although this is in dire straits, with Disney arguing Australia is beginning to see, for the first time in its history, housing inaffordability as a driver of homelessness — but that it has wider economic impacts. Expensive housing makes it difficult to lower labour costs, vital to global competitiveness, and ties up capital that could be spent on more productive uses.

“If you’re looking for statistical outliers where we’re a freak in Australia …”

The second area of importance for policymakers, he claimed, is mass transit to regional hubs, both within large cities and outside them.

“Transport and housing of course are crucially intertwined. Some of the problems of people having to live out on the fringes of cities or in regional areas because they can’t afford to be closer are reduced at least if the transit is very good, fast and cheap,” he pointed out.

It’s also important to expand non-profit housing and “strengthen” public housing, he argued: “We’ve made some progress in that direction — it’s often called community housing — but we need to be careful we don’t worship it. It can contribute, but not the whole lot.”

Making significant progress would hinge on reforms to housing policy governance, he said. One way to do this would be to have “something like a minister for housing and residential development” at both state and Commonwealth levels.

It may be that the new minister for cities, announced by Prime Minister Malcolm Turnbull a month ago, will develop in that direction, he thinks, “but we need to lift housing into a broader context, but also a higher status within governmental circles”.

Disney says the creation of a body similar to the Economic Planning and Advisory Council (seen during the Bob Hawke and Paul Keating years) could assist in tackling the problem. The EPAC included not only representatives of unions, business and welfare organisations — as did the Prime Minister’s recent reform summit — but, crucially, state premiers.

“I think that kind of body, and bringing in state premiers as well, would have a lot of virtues, but one of them is to address this issue, which I regard as right at the top of social and economic priorities for Australia,” said Disney.

‘Virtually no institutional investment’

Another way in which Australia is a “freak” is that, compared to other countries, we have “virtually no” investment in rental housing by superannuation funds, banks and other institutional investors. Disney, who chaired the process leading to the creation of the National Rental Affordability Scheme and the National Affordable Housing Agreement, was critical of the way the former has been implemented.

“NRAS was not implemented in the way that we recommended at all. In particular it didn’t focus on the importance of attracting institutional investment, and it was administered too much as if it were a welfare-type thing where people would be queuing up to come and get assistance from it, whereas it’s crucial that if we’re to make a change here that we get institutional investors involved,” he said.

“They will only become involved if there are huge tranches of subsidies available for them.”

He thinks there’s a much larger appetite now for institutional investment in housing than there was five years ago when the scheme was brought in. “That’s why it’s a real pity that rather than adjusting the scheme, it’s at the moment I think really in fairness been put on abeyance,” he added.

He also argues the NAHA in its current form is inadequate.

“States should be allowed to do quite a lot of what they want.”

“The National Affordable Housing Agreement we pushed for with a few key characteristics. One was that we thought it should be inclusive of virtually all forms of co-operative housing assistance between the Commonwealth and states,” Disney said.

“States should be allowed to do quite a lot of what they want. But to the extent that there was co-operation, those things should be dealt with in the one place, not having Commonwealth rent assistance totally separate from the Commonwealth-state housing agreement, which provided capital grants, and totally separate from decisions about tax for example, [they] should be brought together into the one agreement.

“The preamble to the agreement is wonderful, it says all the right things about being inclusive, about being outcomes-focused, which was a key element of ours and still is — a focus on outcomes for residents, not on being obsessed with who provides them or what funding source it comes from — that it should specify to some extent specific outcomes for residents and then monitor them.

“And it didn’t do any of that. It says it does it, but it doesn’t do any of the things that it said it would. It’s nice to step back from the old agreement. The concept is still right and needs to be the central framework for discussion for Commonwealth-state cooperation in this area I think going forward.”

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