Why tax policies could create a great housing divide
Published in the Australian Financial Review, 21 October 2013
About seven in 10 Australian households own their homes. The figure has remained stable for 50 years and has long been seen as the mark of an egalitarian society. But underneath the surface, troubling change is underway. In the 1970s home ownership rates were very similar in all household income categories. That is no longer the case. Today there are 25 per cent more homeowners in the top income quintile than there are in the bottom quintile.
Home ownership levels are declining slightly overall, but more sharply among people with low incomes and those aged younger than 45. The risk is that over time Australians will cleave into two groups: those who own housing and those who do not.
Government tax and welfare policies, by favouring home owners and property investors over those who rent, are increasing the risk of that divide. It is just one consequence of Australia’s failure to come up with an integrated housing policy.
Grattan Institute’s new report, Renovating housing policy, looks at our complex housing system as a whole. It quantifies major government outlays on the private housing system to reveal the cumulative – if often unintended — impact of tax and welfare policies on housing, economic productivity and inequality in our cities.
Through a raft of rules and concessions, – including exemptions for the family home from land and capital gains taxes and the assessment of eligibility for the aged pension —governments now provide benefits to homeowners worth $36 billion a year, or$6100 on average for each homeowner household.
Through negative gearing rules and the capital gains discount introduced in 1999, the Commonwealth provides residential property investors with nearly $7 billion a year, or $4500 for each property investor. Much more government assistance is provided to buy investment properties than to buy a first home.
Private renters, by contrast, receive very little support through the tax and welfare system, even though they make up nearly one in four households.
By increasing demand for residential property, these policies help to push up prices and lock many potential home buyers out of the market. Combined with rules that restrict development in established suburbs, higher prices force many households to buy on the city fringe, further from transport and jobs. Individuals in these suburbs have fewer opportunities. Businesses, especially those clustered in and around the CBD, may struggle to access enough skilled workers. It’s a rising form of inequality that damages productivity and the fair go.
Government policies also make it harder for households to move to homes that suit them. The costs of buying and selling property in Australia are among the highest in the OECD. As a result, both land and the existing housing stock are not used as well as they should be, making it harder for people to find homes and areas that suit them.
Older Australians are particularly trapped. They often face large financial obstacles to selling the family home in favour of a smaller, safer dwelling. Moving house incurs the high cost of stamp duty, and a sale may endanger access to the age pension if it frees up too much cash. In addition, development restrictions in established suburbs limit the supply of housing that would enable older people to stay in their communities.
As house prices rise, so does the amount households need to save for a deposit. Many younger households struggle to find the cash, at least without parental assistance. Again, current policies reproduce inequality. With six times the wealth of the average non-home owner household, homeowners are generally much better able to help their adult children find the cash to buy.
Many people are happy to rent, preferring its flexibility. But others want the greater stability and freedom that comes with owning a home. If long-term renting becomes their only option, we need to give more thought to how they can still make a rental property feel like their home.
Renting is often thought of as short-term option, yet more than half of Australia’s renters rent for five years or more. Current tenancy laws give them little security. In many cases leases can end with 30 days’ notice. Renters are also prevented from doing many things homeowners take for granted, such as putting up pictures and keeping pets. A number of overseas countries have found a way to give renters a secure, satisfying experience without undermining returns to landlords.
What is to be done? State governments could start by scrapping stamp duty, which makes it harder to move, and replacing it with a broad-based annual property tax. In order to reduce the crowding out of first home buyers and low-income households, the Commonwealth should rein in the tax advantages enjoyed by property investors through negative gearing and the capital gains tax discount.
As with any renovation, improving housing policy will take time and good plans.We need a public conversation about who wins and loses from current policy and how the playing field can be made fairer. If governments want more home ownership and a better deal for renters, they should reject policies that reward those who already own homes while making life harder for those who don’t.
Jane-Frances Kelly is cities program director at Grattan Institute.