Tax reform alone won’t solve the housing affordability crisis
Presentation to the National Housing Conference, Sydney, 30 November 2017
Within living memory, Australia was a place where housing costs were manageable, and people of all ages and incomes had a reasonable chance to own a home close to jobs. But now, home ownership rates are falling among the young and the poor. Owning a home increasingly depends on who your parents are, a big change from 35 years ago when home ownership rates were similar for all income groups.
Many commentators argue that reducing tax breaks for housing will reduce demand, particularly from investors, thereby making housing much more affordable. But in this presentation to the National Housing Conference, Grattan Institute’s Australian Perspectives Fellow Brendan Coates shows that although housing tax reforms will help, they will not solve Australia’s housing affordability crisis.
Reducing the capital gains tax discount and abolishing negative gearing would improve housing affordability a little, but it would improve the budget bottom line and boost the economy a lot. Including the value of the family home in the Age Pension assets test would make our retirement incomes system fairer, but few extra seniors would be likely to downsize. Meanwhile, reforming progressive state land taxes could improve tenure security for renters by encouraging institutional investors into residential housing.
But if governments are serious about making housing more affordable, they need to do more to boost supply. Until recently, the supply of new homes did not kept pace with demand. Planning rules and practices made it reasonably easy to build apartments in the CBD and to develop new housing estates on the city fringe. But they made it relatively difficult to redevelop the inner and middle-ring suburbs of our major cities, where many would prefer to live because they would have better access to jobs.
Development has increased in recent years in Sydney’s middle suburbs. But development at today’s record rates is the bare minimum needed to meet the estimated 725,000 additional homes required in Sydney over the next 20 years, given projected population growth.
It took neglectful governments two decades to create the current housing affordability crisis. They can’t fix it overnight. But to make meaningful progress, they will have to act on both housing demand and supply.