Australia enjoyed a mining boom over the last ten years but now faces a fall-off in capital expenditure on new projects as commodity prices fall. The RBA, eyeing the coming slow-down with some trepidation, is hoping that housing construction recovers to fill the void. So far the housing market has failed to respond to lower interest rates.
The reason that the housing market has not reacted to lower rates is partly attributable to housing affordability, with household debt in the last 20 years having trebled as a ratio to disposable income.
The uncertain financial climate has also contributed, with households repaying debt rather than looking for new homes.
Further cuts in interest rates will not help. Encouraging home buyers to enter the market at unsustainably low interest rates would exacerbate the housing bubble and cause further hardship when rates rise. Rather than monetary policy, we need changes at federal, state and local government level to increase the availability of land for housing.
- Abolish transfer duties
Abolishing transfer duties on property would encourage home-owners to re-size as their needs change, releasing more housing stock into the market. Abolishing transfer duties would also remove state support for higher property prices. Under a transfer duty, higher prices boost state revenues, encouraging support for property developers who land-bank large tracts of land and restrict their release to maintain high prices. - Replace with a land tax
Replacing transfer duties with a land tax, based on the value of the land, would also discourage land-banking by property developers. Restricted release of land is the primary cause of unaffordable housing in both Australia and the UK. - Overcome zoning issues
Zoning issues at state and regional level may also contribute to the slow release of new land for development. - Reduce infrastructure costs
Costs of new infrastructure development are another reason local government tends to restrict release of new land for housing development. Establishment of municipal utility districts (“MUDs”) within a local government area would help to overcome this. Leith van Onselen describes how MUDs in Texas, ranging in size from 200 to 5000 hectares, charge home-buyers a monthly infrastructure levy rather than requiring up-front payment for establishment of new services — which is then folded into the purchase price. The MUD levy expires when bonds used to finance the services have been amortized, or residents can decide to continue the levy to upgrade public amenities such as parks, swimming pools and other facilities.
Increased availability of land would drive down new house prices and encourage the establishment of new households. This would boost not only housing construction, building materials and general construction — through establishment of roads and services — but the retail sector as well, because every new home needs to be furnished. New jobs in these sectors would lift general consumption and the broader economy, helping Australia to avoid the approaching mining cliff.
Colin you are spot on, but the chances of reform are zero. Look what happened to the Henry Tax Review. Sadly the Australian political and media are complacently entrenched and will not achieve the changes needed to avoid the coming slump.
Neither labor nor liberal politicians seem to think this is a serious issue. It’s barely mentioned in campaigns. In the recent WA election I voted for anyone but the two main parties in protest. That is the only thing I can think of doing that might send a message to our “leaders”.
Bang on Colin. Keep plugging away with the message. The problem’s not going to go away anytime soon and is compounded by the Federal division of GST issue.
Couldn’t agree more with your comments here! The housing market is deliberately rigged and supply has been deliberately restricted for far too long. This has caused the obvious distortions that we suffer. Stamp Duty is just plain wrong in so many ways. It effectively slows down the free flow of properties being bought and sold. The stamp duty on my last home was almost a years salary. For what? It’s not as if the money goes anywhere specific or is actually a reflection of the cost of the service. The cash just goes into general revenue. It’s a excessive tax that penalises those who would like to move more often. Take stamp duty away and it makes it so much easier for people to move closer to work, family, medical facilities, etc, etc. It could even possibly reduce traffic congestion. I agree with replacing it with a Land Tax. I’ve heard it said before that people don’t like new taxes but a Land Tax makes a lot of sense to me. Bring it on I say. btw, wasn’t stamp duty supposed to be abolished with the introduction of the GST?
Unfortunately as you and others have pointed out there are a number of parties that want to keep the status quo. The federal government generates extra demand for the existing supply through high immigration rates. The state government benefits through higher revenues from stamp duty. The local governments are loath to increase housing supply due to vocal opposition groups and a general NIMBY mindset. The banks don’t want to see increased supply either lest it would flow on to lower prices and lower consumer debt. And many people don’t actually realise that having the value of your home go down can actually be a good thing. For example if you only own one home and are looking at upgrading the price difference is actually reduced making the upgrade more financially accessible.
In a country where we have one of the largest usable land to population ratios there is no excuse for prices being where they are today.
I am a land developer and have been for 30 years. I am giving up and moving to other things as I am presently selling land at a loss. Between the GST, land tax, stamp duty, bank rorts, local , state & federal red tape & road blocks, contributions, engineers on $400 /hour there is nothing in it any more. When we all get out prices will only go up because of a shortage. I understand that around 40% of the price of a land, house package is government charges, taxs etc.
“I understand that around 40% of the price of a land, house package is government charges, taxs etc.”
Add mortgage interest to that and you will understand why housing is unaffordable.
How do I go about getting into a fund which specializes in Australian land?
If you can’t beat them, join them? Rather get into government — they’re the real winners.
Is it that simple though? Wont a drop in housing prices make our big 4 insolvent? Even if they dont they’ll be seen as higher risk which will increase interest rates on short term debt which needs to be rolled over. If we were to rely on the RBA to print us out of trouble terms of trade might get ugly in a commodities downturn.
It would have an impact, but not as direct as you imagine. A fall in land prices on the periphery may cause only a minor dip in more centrally located, higher-priced property. Then banks are buffered by:
So overall impact would be manageable.
After expanding Melbourne’s Urban Growth Boundary by 97,000 hectares (enough housing for 2.1 million) developers currently have 20.4 years of land supply http://www.prosper.org.au/2013/03/12/listed-developer-englobo-holdings/ .
There are also 90,000 empty homes in Melbourne (many which could be subdivided). http://www.earthsharing.org.au/2012/06/20/over-90000-empty-houses-amidst-housing-crisis/
In the 80’s investors constituted 12% of all housing loans, but as per this weeks Housing Finance figures (5609), investors now account for 35.9%. Land Tax is a simple way to incentivise use over hoarding. At present, an average priced block of land in Melbourne pays just $440 p.a in Land Tax plus about $800 in council rates. Replacing Stamp Duty with Land Tax is a necessity to reduce pressure on what the Chinese call the ‘housing slavery’ generation. With SMSF’s now allowing tax free capital gains for residential, this is simply the latest tool to pump housing up post GFC.
Good post.
Agreed with most of what you say Colin. My one reservation is with the gargantuan size our major cities are becoming and the enormous pressure that is putting on resources and may I say living standards, with more and more time (a resource which tends to be undervalued by economists) spent in cars travelling. European cities have expanded upwards rather than outwards as opposed to the American and Australian ideas of city housing. Outer suburban living is more and more at a disadvantage compared to inner city dwellers. There needs to be limits to the expansion of major cities for both economic and non economic reasons.
In addition to proposing land taxes, I would advocate differential land taxes which would discriminate in taxing low level low density inner suburban housing at a higher level. Even on equity grounds, inner city dwellers occupying low level and low density housing are receiving much higher benefits from government spending on infrastructure financed by all the population.
If nothing else the opening up of discussion about different ways of taxation is a welcome relief from the stale debates we have been suffering for so long. Nobody likes wasteful government expenditure (although what constitutes wasteful expenditure may raise some heated debates), however there is room for debate about methods of funding governnent. In addition it is time we had some debate about acheiving some desirable social outcomes by differential taxation. Communism is long discredited and I don’t believe that acheiving commonly perceived desirable social outcomes needs to be compared to old outdated ideologies.
You have a point about urban sprawl, but there are negative health consequences of high-density housing, both physical and mental, especially for children. While apartment living may be suitable for retirees, I suspect raising children in such an environment would lead to higher obesity rates and more social issues. There is a lot to be said for the old quarter-acre block with a picket fence. Maybe cutting immigration would slow urban sprawl, otherwise establishing new development nodes outside the major cities. This is really the ambit of urban planners but there may be ways to integrate urban development with the natural environment.
Be careful of differential tax rates in order to achieve social outcomes. This is inefficient and largely inequitable. The wrong people often benefit. Rather levy taxes at flat rates and then use the proceeds to achieve social outcomes. As to what social outcomes should be addressed is another debate.
There is always room for different viewpoints and I take your point about the benefits of the quarter acre block, I’ve enjoyed that way of living myself, now thankfully away from our gargantuan cities. However at what point does the urban spread create more problems than the alternatives? I’m not aware of Aussie children being more obese than European children, in many cases the lack of the back garden is offset by the availabilty of local parks. I think that much chilhood obesity is caused more by children sitting in front of computers instead of old fashioned play, whether with siblings or playmates in the back yard or in parks with siblings and playmates.
I don’t say that my idea is neccessarily “the right answer”, however I’m getting frustrated that any sort of intiative is almost inevitably discounted and we seem to be drifting into lifestyles that are becoming unsatisfactory because of inertia. I like the idea that you are promoting of using land tax, however I do believe that developing more suburbs around our major cities is itself a recipe for more problems in the future, both social and economic.
What I see is kids playing in the street rather than in the backyard as kids did with quarter-acre blocks. Australia has one of the lowest occupancy rates per residence and encouraging retirees to down-size would free up more housing stock. Developing new nodes would not add to existing cities but create new towns/cities. We have enough land. What is needed is the transport infrastructure to make this possible.
I cannot see government allowing that to happen .That is, stopping charges /fees .Money is wasted willynilly as they please ,then they go for another grab ,eg the latest is “stealing” money from any type of savings people have, that has not been moved for 3 years.
But getting back to the stamp duty subject ,I believe it is wrong for it to be charged on purchases of private residential property at least.Also get this , I am purchasing a warehouse
for investment ,with GST on it, the stamp duty on purchase, is on full amount with GST included
on top so 340,000 +34,000 is 374,000 so stamp duty I am told is 13,680 .What a rort.
Ian
Perth WA
A small step in the right direction
http://www.smh.com.au/nsw/170000-new-homes-for-sydney-20130316-2g7b3.html
As well as the current high transfer duties discouraging home owners re-sizing, it also prohibits many workers from re locating closer to their place of work. The old “job for life” has gone and by not being able to move, commuting costs and times and road congestion increase.
Transfer duties are also an obstacle for laid-off workers moving to other areas (WA or Northern Queensland) to look for work.
Taxing land is one of the more efficient and effective way of raising tax revenue. So it is a matter of how to collect tax from land ownership, and I’m leaning towards council rates. So all land related taxes that state governments wants to charge should be added and collect via ones council rates, and then local governments passes this up to the respective state governments.
Access to land where people want to live usually means loosing productive farming land or native vegetation. Its only the increasing of density where land containing already established housing is reused for higher density unit development. The other scenario that happens is the changing industrial landscape where such land near where people live is converted usually to higher density housing.
The other tax issue in Australia regarding to property pricing is the negative gearing aspect that allow owners to offset losses from rental properties onto one’s other income producing activity namely salary and wages. This should be restricted as to where one can offset these looses but not abolished.
Good article; couldn’t agree more. The housing situation in WA, where I live, is becoming more acute on a daily basis. However, there is not the political will at any level of government to really address this problem. The general consensus in the West, unfortunately, is a boom town mentality and damn the social consequences
Indeed the high land prices are a huge problem and one not so easily solved. On the one hand Australia is hardly short of land, even in near city locations, but think about it for a minute. The release of large tracts of land for housing will depress prices right across a city. Councils make their income from rates, if the land prices drop, so will rate income especially in those councils which are not part of the land release. In addition, bank mortgages will be affected by the loss of value as will the assets of property investors. So, those making money out of high land and property prices (a great proportion of which is the value of the land on which the property sits) will win the day with any government body wanting to, say, release crown land for urban development…..at the expense of those wishing to buy a first home, in particular.
You raise some interesting points:
The problem with any proposed change is vested interests. Allowing affected parties sufficient time to mitigate their losses would help to ease the transition.