1

HOUSING POLICY – SOME THOUGHTS from Geoff Dunsford

Paper for discussion at Retired Actuaries Group Meeting 5 March 2015

The “thoughts” in this paper are essentially the author’s, although he has used

some suggested by others in researching the subject. The subject is a large one

and so it is impossible to cover all issues or any issue fully in a short paper. In

particular, issues involved with reverse mortgages and shared ownership are

not addressed.

It is suggested that, for the meeting, each reader considers the question:

What changes to government intervention are required/desirable in relation

to Housing Policy? (Any level of government – federal, state, local)

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CONTENTS Page

Human Right – Shelter – Universal Accommodation 2

Housing Policy – Suggested General Principles 3

Home Ownership/Renting – Breakdown 4

Historically High Prices 5

Taxation and Means Testing – Home Owners 6

Taxation Policy – Investment Properties 7

Private Renters – Short Term 8

Private Renters – Longer Term Renting 9

First Home Buyers 11

Public and Low Income Housing 12

Appendix 1 – Negative Gearing – Rort? 13

Appendix 2 – Capital Gains Tax 14

Appendix 3 – Land Tax and Stamp Duty 15

2

Human Right – Shelter – Universal Accommodation

Every Australian Government has attempted some form of Universal Accommodation - even

if sometimes this was little more than claiming it would “deal with homelessness”.

According to “Australians for Affordable Housing”, “On any given night, over 105,000 people

in Australia are homeless”.

In practice, the number of people wanting shelter at any time is very few. There are

however, a further number who have no fixed abode – some voluntary, others involuntary

(including a number as a result of family friction). Many of these people move between

different forms of temporary accommodation.

Still, while we all sympathise with the actual homeless and there is more to be done to assist

them, 99.5% of people in Australia are housed, so that the human right of shelter is largely

satisfied.

But the people aren’t.

Complaints seem to be more universal than the housing! Houses are too highly priced; not

close enough to public transport; or shops; too damp; too dark; always need repair; not big

enough. Young people can’t save a big enough deposit; the banks won’t lend enough; banks

are lending too much; foreign investors are pushing up prices. There aren’t enough good

rental properties. Landlords have too much power. You can’t get rid of bad tenants. The

waiting list for public housing is too long. There is too much rezoning; there is not enough

rezoning. Tax advantages to both owner occupiers and investors are too generous; tenants

get no tax advantages.

How valid are these claims? Should the individuals sort things out themselves? They have

choices. To what extent should the government intervene (further) as part of its Housing

Policy?

3

Housing Policy – Suggested General Principles

The main forms of housing in Australia comprise private purchase of property in a free

market for home ownership or renting. Finance for purchase by individuals is readily

available from a strong and competitive banking system. Fiscal policies favour owner

occupancy as this is considered to be socially desirable.

Government intervention focuses on [1] maintenance of an efficient property registration

system including rights and responsibilities of property owners [2] facilitation of

transactions to provide fair and robust markets, and [3] a reasonable balance of rights

between the contracting parties selling or leasing, and between neighbours.

These arrangements have bipartisan support and, while the detail is considered to require

review from time to time in line with the community’s cultural development, there appears

to be no reason to change the principles. Subject to the above:

*Government should consider intervention policies [1] to encourage everyone who wishes

and is able to participate in the private housing market as purchasers or renters to do so,

and [2] to ensure a suitable supply of housing to meet market needs.

*Government should pursue policies to provide for accommodation of the disadvantaged

and generally those unable to participate in the private market.

*Government should ensure that local government zoning plans and policies provide for the

potential needs of population changes on a basis which balances infrastructure adequacy

and efficiency with the rights of incumbent owners and the environment generally, and

preserves community vitality and reasonable expectations.

*Government should ensure that home building standards meet the community’s reasonable

expectations regarding safety and sustainability and the protection of the environment, but

are not so demanding as to cause unreasonable costs of building.

*In the event that the government wishes to resume property to enable infrastructure

development or other purpose, it should be prepared to purchase the property at the market

value prevailing immediately prior to the announcement.

4

Home Ownership/Renting - Breakdown

A breakdown of housing from the Australian Bureau of Statistics is shown below:

1994-5 2001-2 2011-12

Own home without

mortgage

41%

39%

36%

Own home with

mortgage

25%

26%

28%

Investment Property

Private Rental

20%

21%

22%

Public and other

Housing

14%

14%

14%

[From another source, public housing comprises 5% of the total; the remaining 9% includes Department of

Defence and other government department housing.]

The trends of increasing proportions of mortgaged properties and rentals are unsurprising

as these have received significant attention in the media. The difficulties of young people

purchasing homes would be one reason for the increase in renting (and this has led to very

low vacancy rates in Sydney and Melbourne); banks’ lending on homes for purposes other

than their purchase and permitting more interest only mortgages in the light of increasing

land values in the cities have been widely reported.

Of course the breakdown does not tell us much about the proportions of people who are in

the types of accommodation they desire. Certainly, anecdotal evidence suggests that home

ownership is the ultimate aim for the majority of people, with any mortgage paid off by

retirement; a significant proportion of the population appear to achieve this. [Inheritance

probably contributes to this outcome].

Accordingly, the picture is one of relative comfort with government policy.

But the home is such a major part of people’s lives that housing policy receives huge

attention. So what currently are the major issues? Perhaps:

Historically high prices

Taxation Policy

Renters

Assistance for first home buyers

Insufficient Public and Low Income Housing

5

Historically High Prices

From the “Australians for Affordable Housing“ website:

The majority of Australians aspire to own their own home – but it’s getting harder.

In the last ten years house prices increased by 147 per cent, while incomes in

comparison grew by 57 per cent.

The rate of home purchase among 25 to 44 year olds has declined 15 per cent in the

last 20 years.

In 1991 the median house price was five times the average income. In 2011 it is

seven times the average income.

The average first home loan has gone from three times the average annual income in

1996 to six times the average annual income in 2010.

One in four Australians aged between 24 and 35 now live with their parents. This has

been increasing over the last 20 years.

There are many reasons suggested for home prices being historically high – particularly in

the cities: increased activity on the part of investors (particularly small super funds and

foreigners); lower interest rates allowing larger loans; bigger and better quality houses;

raising of building standards; impact of first home owner grants and parents assisting with

deposits (often borrowing against their own home equity); lack of adequate transport

infrastructure leading to focus on inner city properties, rather than outer suburbs.

In addition, rezoning of land and building rules generally has not kept pace with the

population increase, so that demand exceeds supply in many areas.

It is possible that the 4th dot point above is a major signal indicating increased generosity of

bank lending practices (only temporarily reduced during the GFC). Banks favour home

lending as they require less capital for solvency compared with the same $’s of other

investment. Economists have often commented on our excessive investment in property

(rather than industry) as having a dampener on our GDP growth rate. In any case, it is not

good for the community if bank lending is driving home price rises.

It may be inevitable that property values in expanding cities like Sydney and Melbourne will

rise faster than incomes. However, it is possible that (1) failure to release land for new

housing commensurate with population growth, (2) insufficient infrastructure development

to encourage outer suburban living and (3) excessive bank lending, has exaggerated home

price rises, particularly in the inner suburbs. Serious reviews of these matters seem urgent.

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Taxation and Means Testing – Home Owners

Taxation Policy

Home owners are not taxed on the benefit of their homes (i.e. imputed rent and capital

gain), but nor do they get relief for expenses like mortgage interest, (except to the extent

that the home is partly used for generating income). Essentially the home is treated as a

possession - like a car or a boat.

Purchases are however subject to stamp duty and council rates are payable. With its

progressive scale and band thresholds unchanged for many years, stamp duty now averages

3 ½ % in Sydney and more for higher value sales.

The levying of stamp duty beyond the cost of registration of the sale is questionable. While

stamp duty is easily collected, at higher levels it acts as an inhibitor of sales. This is discussed

further in Appendix 3.

Over the last 50 years many homes have been sold for significant capital gain which has

called into question whether some tax should be levied.

It can be argued that “people have to live somewhere; consequently, on moving from one

home to another, the full capital gain must be allowed to be used to maintain the

homeowner’s equity in the market; hence the gain should not be taxed”. While this may be

accepted, it would be consistent to argue that when such a homeowner eventually moves

into a retirement home, such equity is used to offset some government funding. To some

extent this is now happening and there are intentions to formalise this process more widely.

Means Testing

Currently there are many people retiring with large value homes and claiming the Age

Pension. It is being suggested that the Means Test should include assessing the excess value

of the home over a reasonable threshold (like an average home value). It is noted that the

homeowner would have the option of taking a reverse mortgage to cover the loss of

income, rather than “trading down” which might mean their leaving a familiar community.

The possibility of accepting a charge on the property to cover retirement home costs

incurred and Age Pension benefits enjoyed is also being considered (in a similar manner to

those currently applying to cover unpaid rates and land tax).

The logic of continuing to treat the home as a possession for tax purposes seems

reasonable, but it is still a major asset, and arguably needs to be included in the means

testing of claims for government benefits.

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Taxation Policy

Investment Properties

Where a property is purchased as an income producing investment it is treated for tax

purposes like any other investment, e.g. ordinary shares.

This includes the setting off of any excess of expenses over income from the investment in a

year, against other income of the owner – commonly referred to as “negative gearing”.

When an investment property is sold the capital gain is assessed for tax – but only on 50% of

the gain after being held for at least 12 months.

Commentary is included with this note in Appendices 1 and 2, suggesting that “negative

gearing” does not of itself confer a special benefit for investment home owners, but that the

50% discount for income tax on capital gains is hard to justify.

Investment homes are also subject to annual land tax. The rate is 1.6% on land value in

excess of a threshold (currently $432,000 in NSW [2% over $2.6m]). This is a heavy impost

that arguably is ultimately paid by the renter, and is particularly savage where the investor

has more than one property but is only allowed one threshold deduction.

It appears unfair to apply land tax only on investment properties. It is essentially a wealth

tax. (See Appendix 3). As such, if it is believed desirable, it should be applied to all assets, or

at least all properties.

In practice, land tax is an inefficient tax as it is potentially difficult to collect: there is no

transaction requiring registration on which to levy it like there is say, for stamp duty.

Certainly, extension to all properties would lead to similar recalcitrant problems councils

currently have with collection of rates.

Even if a tax review recommends that the 50% capital gains tax discount should be scrapped

or reduced, it is suggested that this is only done if some ameliorative action is also taken on

land tax and stamp duty.

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Private Renters

Short Term

Again from “Australians for Affordable Housing”:

In the last five years capital city rents have risen at twice the rate of inflation.

Australia has a shortage of 493,000 rental properties that are affordable and

available to people on a low income.

Over 150,000 people in private rental are paying more that 50 per cent of their

income on housing costs, even after receiving rent assistance.

The shortage of property generally has led to low vacancy rates in the capital cities and

driven rents to historically high levels. Even so, rents in Sydney and Melbourne still average

only 3 ½ % return on home values. (This has led to early years’ mortgage interest and other

expenses exceeding rental income and the consequent “negative gearing”).

From the point of view of the investor, the property market is reasonably seen as an

alternative to the share market when seeking prospective growth. The low vacancy rates

demonstrate that this is an important part of the housing market. Accordingly the investor’s

needs must be recognised when considering possible government intervention to alleviate

renter problems.

Besides the low vacancy rates in the capital cities and the inevitable flow on to higher rent

levels commensurate with higher property values, there are other issues for renters in the

private market.

As noted in the section on Taxation of Investment Properties, land tax is assessed on them.

This can be quite savage and is a factor in depressing the desirability of investment

properties, with scarcity tending to push up rent levels.

Most leases run for up to a year. Many then operate on a month to month basis. This

provides little security of tenure for the renter who may be given only two months notice to

vacate, nor a satisfactory return for the landlord if tenants up and leave with little notice. In

addition, tenants can stop paying rent, only leaving then when they are pushed, resulting in

losses if the outstanding rent and other costs are not covered by the 2 months rent bond.

There are no tax concessions for renters. Home owners have many; why not renters? At

least there is no GST!

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Private Renters

Longer Term Renting

Many renters are understood to desire longer leases than the current norm of 6 months or

12 months. (While this statement might seem anecdotal, a survey in 2007/08 revealed that

just 11% of such renters indicated they wanted to move in the following year, which is much

lower than the 60% who had actually moved in the previous year.)

Such renters include:

Those who anticipate that renting will be necessary for a long period due to their

current and expected future economic circumstances;

Those who favour a particular area – e.g. near a school, a relative or shops.

Often these renters desire to make their accommodation into a home through various forms

of personalisation, and are unhappy with the normal restrictions on decoration, having pets,

etc., as well as the uncertainty of the length of their tenancy.

Most investors look upon their property as a longer term investment. It seems likely

therefore that some may be happy to accommodate longer leases - indeed be keen to do so

if there were adequate protections and sanctions against recalcitrant tenants.

Allowing some decorations and improvements carried out at the renter’s cost may be seen

as acceptable if the expenses and uncertainties arising with a succession of shorter leases

can be avoided.

It is not suggested that we return to “protected” tenancies which have their own issues and

have not been used for many years now – although the few outstanding ones are still

continuing and causing landlord/tenant disputes.

It is understood that private longer term leasing is quite common in some European

countries.

Government Involvement?

Bringing together owners and renters who may be interested in pursuing longer term leases

would probably need some government involvement.

There is nothing prohibiting such leases under current legislation – indeed I suspect that

there would be some currently operating. However, to achieve an outcome which would

enable renters generally to truly believe they can make the property “their home”, it may be

necessary to develop some rules in a (revised) standard agreement balancing the rights of

each party, which are supported by the industry and advisory groups.

Some promotion of longer term leases may also be desirable.

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Private Renters

Longer Term Renting

Possible conditions that might satisfy both parties

The general conditions of say a 5 year lease arrangement with rent payable monthly in

advance might include;

A bond of 6 months rent (instead of the usual 2 months for a 1 year lease), with all

interest accruing to the tenant;

Rent increases annually in line with CPI;

Landlord and tenant responsibilities for maintenance to be more detailed than for a 1

year lease;

An annual condition report and any consequent action required to be prepared and

agreed;

No eviction on sale of property, ie sale takes place with tenancy continuing;

Extension agreement (or otherwise) determined 6 months prior to termination date.

Types of decoration and alteration to the property which would be permitted at

tenant’s expense with no requirement for rectification on termination.

Rules for allowance of pets.

An objective would be to see arranged longer term leases which have similar rents to those

for 1 year leases

A bond of 6 months rent might seem excessive. However it is likely to represent only around

2% of the value of the property – significantly less than the 20% usually required from the

bank for a deposit for purchase.

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First Home Buyers

There is little doubt that first home buyers have difficulty “getting into the market”. A not

unreasonable 20% of valuation deposit is generally required by banks. (Below this, mortgage

insurance is usually required. This appears expensive, albeit not unreasonable having regard

to the risk of a fall in value being taken by the bank, when a low deposit is taken at a time

when values appear historically high.)

Today, the average minimum 20% deposit in outer suburbs of Sydney is around $120,000 –

not far short of double average income. This is not easy to save quickly while paying rent –

even for a couple. And it is certainly harder than years ago when home prices were lower.

In the light of this, some first time buyers will invest what deposit they have into a lower

value home unit, just to “get into the market”, while continuing to live in the family home.

For them, getting the first home buyers grant (which may be discontinued at any time) and

negative gearing are important in view of their limited means.

Over the years, various levels of assistance to help with paying the deposit have been

provided by government – either in the form of straight cash up to around $10,000, or an

equivalent concession on Stamp Duty payable. This has undoubtedly assisted individuals

taking advantage of the arrangement. However, some economists have questioned the

desirability of such action, suggesting that it has had the effect of pushing up home prices.

Years ago many people working in the financial services industry received assistance

through their employers providing finance up to near 100% of valuation. The equivalent

today would be the employer paying for the relevant mortgage insurance as a form of fringe

benefit. Possibly this happens in practice in some cases.

Provided that the employee is expected to be reliable with repayments, the risk for the

employer is limited to a short term price fall combined with the employee unexpectedly

needing to sell.

Arguably, this is a better approach than the cash support for the deposit. Not only does this

limit the “affordable” purchase price, but also the purchaser is responsible for repaying the

whole of the funds provided.

Of course the government could provide the mortgage guarantee on first homes, on loans

up to say 90% or even 95% of valuation, subject perhaps to a stronger than normal test of

the capacity of the home owners to repay them. This may be appropriate in some national

economic circumstances. Some might argue: like now!

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Public and Low Income Housing

According to “Australians for Affordable Housing”:

Public housing provides secure, stable and affordable housing for over 300,000 Australians.

It helps reduce pressure on the low cost end of the rental market and makes sure that people

who may never be able to buy their own home have safe, secure and appropriate housing.

There are 173,000 Australians on public housing waiting lists.

Between 1996 to 2007 the number of affordable public housing properties shrank by

32,000 while the population grew by 2.8 million people.

Australia has just 5 per cent of all housing as public and community housing. Similar

countries, like the UK, have approximately 20 per cent of their housing stock as

public and community housing.

It is debatable whether having a significant part of housing stock as public housing is

desirable, if universal accommodation can largely be achieved through the private market

system.

From the above it would appear that accommodating all those on waiting lists would

increase Australia’s proportion of public housing from 5% to 8%. Appropriately

accommodating the homeless who seek shelter could perhaps see the proportion rising to

around 10 per cent. This could still be seen to be a significantly better outcome than that

which exists in the UK and other similarly structured countries.

Introducing rules (or pursuing current rules) providing for termination of tenancies for those

whose circumstances have changed to make them ineligible for public housing, could see

this reduced.

In this regard, it is worth noting that demands for business support services (including

cleaning and other property maintenance services) often requires workers on lower

incomes. Increased provision of housing for purchase or shared purchase by those on lower

incomes would facilitate provision of such services and reduce demands for public housing.

Of course, addressing these issues is a continuing outstanding requirement of government

action – particularly where it involves the disabled and otherwise disadvantaged.

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Appendix 1

Negative Gearing – Rort?

Negative gearing arises when the expenses related to an investment in a year exceed the

income – usually as a result of a significant payment of interest on a loan (effected to assist

purchase of the investment), and these excess expenses are set off against other taxable

income of the individual.

The suspicion of “rort” arises partly because the use of the emotive expression “negative

gearing”: the (capitalist?) investor is saving tax - which the rest of us must pay for”. And

then obtains an expected capital gain on ultimate sale – which is only taxed at 50% of the

investor’s marginal tax rate.

Concern by Treasury and certain commentators is focussed on investment property. Yet the

same “negative gearing” exists in respect of investment in shares which receives no

criticism.

But it is Treasury’s narrow view of the tax system which is the main problem: if a person has

two sources of income, Treasury would like to tax each source separately. This would mean

that if one has a net loss and one a net profit, the individual is taxed on the profit, but gets

no relief for the loss (until it can be set off against a future profit from the same

investment).

In this regard, it is worth noting that the excess expenses causing the loss will have

generated income in the hands of the party (or parties) to whom the payment is made – and

these will have been subject to income tax. Consequently, Treasury has not “lost” any tax

which other taxpayers would need to replace.

It is suggested that a reasonable person would support the enthusiasm of an individual keen

to pursue more than one activity generating income (and GDP), and accept that the tax law

does too!

If there is an issue at all in this analysis, it is surely that of the concessional rate of tax on

capital gains. Comments on this aspect of housing are covered in Appendix 2.

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Appendix 2

Capital Gains Tax Currently, in the case of a capital gain on an investment realised after at least 12 months, a 50% discount is applied when including it in the investor’s taxable income. Yet when an investment is sold, the nature of the gain made is no different in terms of cash benefit to the investor from interest or dividends. What is the justification for the 50% discount? A possible defence of applying a discount is that this is some compensation for having the whole gain, which has been earned over a period of years, assessed in the year of sale - often pushing the taxpayer’s income into the top tax bracket. However a more reasonable method of taxing the gain could be to calculate the average annual gain, determine the tax payable on that in the year of assessment, and then multiply the result by the number of years over which the gain has been earned. This would then tax 100% of the gain on a basis consistent with other forms of income earned over the same period, and arguably would not represent a tax advantage or disadvantage to the investor. For example: Taxable income before Capital Gain $60,000 Tax (exc med levy) $11,047 Capital Gain $200,000, Current taxable amount $100,000 Tax 20,000 * .325 = 6500 + 80,000 * .37 = 29600 = $36,100 Capital Gain $200,000, 100% taxable amount $200,000 Tax 20,000 *.325 = 6500 + 100,000 * .37 = 37000 + 80,000 * .45 = 36,000 = $79,500 Capital Gain $200,000 earned over 10 years Annual taxable amount 200,000/10 = $20,000 Tax 20,000 * .325 = 6500 10 years tax 6500 * 10 = $65,000 It is appreciated that an immediate increase in tax on capital gains (even if only for new purchases) would be politically unpopular. Consequently any change might need to be implemented over a period of years.

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Appendix 3

Land Tax

In 1909 Winston Churchill claimed:

“Roads are made, streets are made, services are improved, electric light turns night into

day, water is brought from reservoirs a hundred miles off in the mountains – and all the

while the landlord sits still. Every one of those improvements is effected by the labor and

cost of other people and the taxpayers. To not one of those improvements does the land

monopolist, as a land monopolist, contribute, and yet by every one of them the value of his

land is enhanced. He renders no service to the community, he contributes nothing to the

general welfare, he contributes nothing to the process from which his own enrichment is

derived. … the unearned increment on the land is reaped by the land monopolist in exact

proportion, not to the service, but to the disservice done.”

This does not stand up to scrutiny today. Even in Churchill’s day, the new roads and other

infrastructure were paid for by taxpayers, which included the beneficiaries. The government

(usually) sold the land in the first place, with the price reasonably expected to include the

value of the then services to the land provided.

Certainly today, improvements to infrastructure are paid for by developers and taxpayers

through council rates and charges for utilities and fuel excise. Developers are required to

pay for roads in new estates, the cost of which is included in the land sold to the public.

If land tax is levied, how should it be used? In practice it goes into “Consolidated Revenue”,

like most other taxes. Any tax on land is therefore simply a wealth tax. As such it should be

based all wealth – not just investment property which potentially impacts renters.

However a land tax or wealth tax suffers from the difficulty of collection. It is hard enough

for councils to collect rates from recalcitrants. It would be much greater for larger amounts

levied universally. Collection from a deceased estate is still administratively messy.

It is always more efficient to collect tax on money transactions – like GST. NSW Land Tax

collections ($2.5b) could be replaced by a 2% increase in the GST rate (or less if this change

was accompanied by a broadening of the base).

Stamp Duty

A progressive scale applies; however, no change has been made to the band thresholds for

many years. This has meant that the rate for purchasing an average home in Sydney is now

around 3.5% compared with 2% which applied 50 years ago. Thus it acts as an inhibitor to

allowing the market to operate efficiently.

Stamp Duty is a major form of revenue for all State Governments. Property booms and busts

have resulted in wildly fluctuating revenue. It would be better if it was replaced by an

increase in GST – or at least reduced to more reasonable level with some increase in GST.