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Written by Hudson Adviser Phillip McGann
Housing affordability has become the topic of conversation again.
Every few years this old chestnut gets wheeled out and the pundits and politicians alike take to the issue that afflicts our nation. Housing affordability has been an issue in Australia for it seems like forever. Everyone has an opinion but not many have realistic solutions.
Housing affordability has come to a head of late during the current boom market conditions in our largest cities of Sydney and Melbourne and the topic is front and centre for the population around the water cooler and the dinner party.
And so the solutions are wheeled out again with a lot of the same ideas but occasionally a new one.
However the fundamental problem impacting housing affordability is the lack of affordable supply of property to new entrants into the market i.e. first home buyers.
Our capital cities are at their limits under current infrastructure and the more desirable locations in the inner areas (where all the infrastructure has already been built) is constrained by supply. The excess demand from people wanting to live in these areas is fuelled by historically low interest rates allowing buyers to leverage up higher and higher to buy into these areas
In the last few months there has been a lot of talk about potential solutions but mainly focused on the Demand side not the more important Supply side including;
Adjusting negative gearing/capital gains tax
What pundits are talking about here is that negative gearing and the reduced CGT regime that exists in Australian tax law favours investors over first home buyers, thus making housing unaffordable as the investor has tax advantages that increase their ability to overbid first home buyers for property.
There is some merit in this issue.
However what can and should be done in this area? More importantly what would adjusting negative gearing and CGT rules actually do to address the issue of housing affordability?
You could abolish negative gearing altogether or you could adjust it to make it only available for one property or only available for new property.
Likewise you could reinstate capital gains tax on the full gain from an investment rather than the discounted method that applies now that after 12 months only 50% of the gain is assessed.
Either way you are curbing the ability of investors to borrow more money and likewise the incentive for investors to enter into more property investing. The downside for this of course relates to the supply of property that is provided by investors for the rental market.
If you adjust negative gearing in any way there are consequences and we may well find that the consequences are lower supply of rental property that leads to a rental crisis greater than what we have now.
Also the fundamental issue of being able to claim a deduction for legitimate expenses relating to an investment whether they be interest or depreciation of the asset extends far beyond housing but to other investment mediums as well, thereby opening up a whole Pandora’s Box of tax consequences that arise out of these changes.
Stamp duty relief
In the last few weeks Victoria became the latest state to provide further stamp duty relief for first home buyers. On face value this seems a reasonable scenario but all it really does is to add to the vendors price.
Presently the State government receives stamp duty from home purchases with some relief for first home buyers but the proposal looks to extend this relief further to $600K. When this occurs the likely outcome will be an increase in vendor’s prices.
Likewise another idea doing the rounds is to give stamp duty relief for older Australians who are downsizing their home and have a fear of paying inflated stamp duty when they rebuy into the market in a lower-cost, smaller dwelling. The idea is that you provide stamp duty relief for these people but this will likely just flow through to higher prices with state government giving up stamp duty that is passed onto vendors as higher prices.
Again on face value these appear reasonable ideas but in practical terms they are just adding more to the demand side and not to the supply side.
Under this idea first home buyers could access their Super balances to provide a deposit for their first home. This is a crazy idea and has very little merit to it. This is purely a spur for extra demand in a heated market and will have no supply whatsoever.
In addition it contravenes the sole purpose test of Superannuation that it is there to provide retirement benefits to members in their retirement. This is one of those ideas that gets trotted out from time to time but has not been very well thought through.
Now this is a better idea and worth further consideration as it adds to the supply side of the equation.
Under this proposal State governments would free up cheaper land in the far reaches of the capital cities of Melbourne, Sydney and Brisbane and make them attractive to first-time buyers by dramatically improving the infrastructure available in those areas.
This would include mass transportation, hospitals and schools and this would make the move to these areas more attractive for first home buyers.
The big issue is how to fund all this new infrastructure?
Well interest rates are historically low and state governments can borrow money to do this with the cost of borrowings arguably cheaper than the cost of providing additional infrastructure in the heavily congested and expensive inner areas where acquiring land to build new schools to house the larger population is already proving problematic.
The Federal government could step in and alter taxation legislation to make infrastructure bond issuance more attractive for institutional and Superannuation investors by offering favourable tax advantages on the interest income that flows from these bonds.
This is an area the federal government could lead in as it is a taxation issue whilst joining with their state counterparts who have the land accessibility. It is workable solution as it addresses a fundamental issue of a lack of supply in the housing area.
So will any or some or all of the above come to pass? Wait and watch in the upcoming Federal and State budgets and have you talking points ready around the water cooler