Housing inequality needs urgent addressing

Inequality and the divide between the rich and the poor has become a buzzword of sorts in recent years, with the likes of Occupy Wall Street (OWS) and even multinational corporation owner Rupert Murdoch using it in a Group of twenty (G20) Washington speech for the International Monetary Fund (IMF) in 2014. The host of the 2014 G20 and Australian Prime Minister Tony Abbott has been loathe to even mention the word. Hugh Jorgensen, a research associate at the G20 Studies Centre in the Lowy Institute for International Policy, made the point that “inequality” was hardly mentioned in official G20 reports while Australia was in the chair. “Of the 60-plus official meetings that have taken place under Australia’s 2014 G20 presidency, a grand total of one has managed to produce a final communique or meeting report that mentions the word ‘inequality’. To be fair, it does mention it twice: the 10-11 September declaration of G20 Labour and Employment Ministers first notes that ‘tackling inequality (is a priority) for all our economies’ and then designates it as an issue for future employment working-group discussions,” Mr Jorgensen wrote. “Yet on a purely public relations basis, the absence of more explicit references to inequality thus far seems to be oddly out of step with global momentum around the issue.” What Mr Abbott has said on it is: “in the end, we have to be a productive and competitive society and greater inequality might be inevitable.”

It is well known that Mr Abbott is a big fan of former United Kingdom (UK) Prime Minister Margaret Thatcher and has adopted many of her ideologies. One of these being the concept of trickle-down economics, this was also a central policy for former American (USA) President Ronald Reagan. I have previously written about the trickle down concept here. It is also starting to become known that the concept has failed and has created inequality and has actually negated economic growth. The Organisation for Economic Cooperation and Development (OECD) reported last December that the UK economy lost nearly ten percent of growth between 1990 and 2000 due to the rise of inequality. The OECD also reported ten percent less growth in New Zealand and Mexico, nine percent less in Finland and Norway and between six and seven percent less in the USA, Italy and Sweden. At the World Economic Forum (WEF) in January this year, Oxfam warned that the combined wealth of the richest one percent will overtake that of the other ninety-nine percent of people in 2016 if the current trend of rising inequality is left unchecked.

In Australia, fears of a housing bubble, particularly in New South Wales (NSW) have been bandied about in the mainstream media for a while now, but there has been genuine concerns recently that NSW is at least in bubble territory. The Governor of the Reserve Bank of Australia, Glenn Stevens said in February this year that affordable housing has become a “major” social issue. And just last week he was quoted as saying “Yes I am concerned about Sydney, some of what’s happening is crazy.” Treasury Secretary, John Fraser has also recently raised concerns about the amount of money being poured into the housing market with such low interest rates. “When you look at the housing price bubble evidence, it’s unequivocally the case in Sydney. Unequivocally,” Mr Fraser told a Senate committee. He also said “Frankly, whatever the data says, just casual observation can tell you it’s the case.” And that “It does worry me that the historically low level of interest rates are encouraging people to perhaps over invest in housing,” Mr Fraser said.

The Australian Institute (TAI) released their research in March this year on inequality in the housing market titled The great Australian lock out. It found amongst other things that house prices have increased faster than incomes. Incomes are fifty-seven percent higher than a decade ago but house prices have risen by sixty-nine percent. Australia has the second most expensive property market of advanced economies when measured against incomes and rent. Interestingly only Norway is more expensive and they’re having their own problems with rising house prices and fears of a housing bubble at the moment.

The TAI research also found that home ownership rates have declined for all age groups and that all age groups are renting more and holding mortgages for longer. Nineteen percent fewer Australian’s own their houses outright in 2012 than they did in 2002. This includes ten percent from lower income households, a large decrease as only a quarter owned homes to begin with. Middle class households saw a similar trend with ownership falling by ten percent and those with mortgages falling by nine percent. This reflected a drop of around a quarter of 2002 percentage levels for mortgages and a third for home ownership.

When TAI examined age groups and home ownership they found that the largest decline in outright home ownership was for those aged 40 – 69-year-olds with an average drop of sixteen percent. The proportion of people with mortgages later in life increased in 50 – 59-year-olds with a drop of fourteen percent. It’s also worth noting that fifteen percent of retirees continue to rent, and Household, Income and Labor Dynamics in Australia (HILDA) data shows that seventeen percent of retired women are more likely to rent compared to twelve percent of men. The number of older women who rent increased by three percent over the ten-year period while the proportion of older men renting dropped by two percent. This also raises concerns of a potential gender gap amongst older Australians.

Another paper from TAI titled Income and wealth inequality in Australia found that a single homeowner on the pension is sixty-seven percent above the Henderson poverty line, while a single renter is only fourteen percent. A home owning couple on the pension are fifty-four percent above the line, while a couple who rent are only sixteen percent above.

The HILDA data also shows that eighty-one percent of investors are high income earners and that the majority already own their family home. Lending to property investors and existing homeowners has also soared. Lending to housing investors in 1994 was $15bn and was roughly equal to the lending of first home buyers. It increased in 2014 to around $120bn. Government policies heavily favour investors and existing homeowners and they receive ninety percent of the benefits from policies, with renters receiving hardly benefits at all. In effect the wealthy are not only contributing to pricing others out of the market but they are also the ones benefiting the most from government policies.

For example, the negative gearing policy, it allows investors to deduct losses occurred on their investment property from their taxable income. It also reduced government tax revenue by an estimated $6bn in 2014-2015. Negative gearing also has the effect of increasing the prices of houses. The majority of investors buy established properties, placing pressure on house prices and pushing them up while also pushing out would-be first homeowners. This results in a redistribution of wealth towards those who own real estate and those that don’t.

The Capital Gains Tax (CGT) policy is another concern as it’s a fairly light taxation applied to capital gains on investment properties. Investors who have held a property for more than twelve months are entitled to a fifty percent discount on any taxes levied on capital gains when they sell. This can encourage investors into strategies that make losses in the short term but that generate long term capital gains. Homeowners also benefit from the CGT policy through the tax system with the family home exempt, making owner-occupied housing one of the most tax advantageous forms of assets. Government spending on homeowners, primarily through tax concessions is $36bn per year. The Murray Financial System Inquiry report came out in December last year and specifically argued that the federal government needs to rein in the favorable tax treatment of investors as it “tends to encourage leveraged and speculative investment in housing.”

Renters on the other hand receive very little government support. Rent assistance is available to those on welfare benefits, such as Newstart, a recent review however has found that it hasn’t kept pace with the growth in rent prices. For example, rent assistance increased by forty percent between 2001 and 2013, yet median rents for those who receive it increased by between sixty-five and one hundred percent. In regards to housing stability for renters this is quite low with residential tenancy rules heavily favouring landlords.

The 11th Annual Demographia International Housing Affordability Survey 2015 found that housing in Australia was “severely unaffordable”, while Sydney (the capital city of NSW) was rated the 3rd least affordable market across eighty-six major markets in nine countries.

In NSW stamp duty for a property that’s worth over $1m is set at $40,490 plus $5.50 for every $100 by which the value exceeds $1m. The latest figures from the NSW Office of State Revenue show that in May the government raked in a record $518m from residential transactions to bring the total so far for 2014-15 to $5.1bn. NSW Premier Mike Baird says that the state government has increased housing supply but according to Bill Randolph, the director of the City Futures research centre at the University of NSW, increasing supply is not the whole answer. “House prices are determined in the market as a whole and new housing is only about 2 per cent additions per year,” Professor Randolph said. “So you would need to flood the market with new supply to do anything about house prices.” And that “There’s been several authoritative reports internationally that show there’s no clear supply side mechanism by which you could produce enough to reduce house prices significantly,” he said. A spokesman for Mr Baird, said in the year to April, there were 55,666 dwellings approved in NSW – the strongest result since May 1995. Out of last year’s windfall tax receipts, including $4.7bn in stamp duty, only $83m was allocated to an infrastructure fund to support new housing in NSW.

New research for 2015 property intention recently conducted by Roy Morgan Research, shows that over the next year that out of 309,520 Sydney property intenders (seventy-one percent) are planning to buy an established home or apartment. And that half as many (thirty-eight percent) want to build or buy a new home.

Housing inequality needs to be looked at holistically, the policies, the supply side of things and where things are headed for renters, in particular lower- and middle-income households, and older Australians renting in their retirement. The government has a few narratives going at the moment but the one they appear to be pushing is that ending the negative gearing policy will push rent prices up in Sydney. Even though this was discounted recently on the Q&A program by John Daley, the Chief executive of the Grattan Institute. He asked the Treasurer of Australia, Joe Hockey why he hadn’t abolished negative gearing. He replied that when former Prime Minister, Bob Hawke did it in the 1980s “you saw a surge in rents and those people who were paying rents are usually – not always, but usually – people that can’t afford in many cases to buy their own homes”. Mr Daley replied that it was absolutely true that rents went up fast in Sydney, “which might have been there wasn’t a lot of housing being built in Sydney in the couple of years previously”. “But look beyond Sydney and rents were dead – barely moved in Brisbane, didn’t go up very far in Melbourne, didn’t go up very far in Adelaide. They did go up very fast in Perth which makes you suspect very strongly that the race memory we have of abolish negative gearing, that rents will go up, is a race memory built on Sydney.” Mr Daley then succinctly said rents shouldn’t go up because “by definition what happens at the auction is that the investor doesn’t win the auction but someone who wants to live in the house does. Net impact, there is one less renter and there is one less rental property. Net impact on the rental market, zero.”

Palming it off as a state and land issue is irresponsible and if things are left as they are the housing bubble will burst and fester. Inequality in all of its forms is the byproduct of the trickle-down concept, the idea that generous tax concessions and what the wealthy spend on, will trickle down a few treats to the rest of us even sounds absurd. How does investing in classical cars or jewelry for example benefit the rest of us? We need investors but it needs to be reined in so that we don’t see what has happened in the UK, happen here. Granted we don’t have the complexities of being a tax haven that they have, but at the moment the average price for London housing is over £500,000 which works out to be just over $1m Australian dollars. The median price for a Sydney property this year is $914,056, a rise of 3.6 percent over the quarter, and sixteen percent over the year. We live in a global economy and wouldn’t it be prudent to have a genuine discussion with the UK and even Norway to find solutions for housing inequality, and not cherry picked aspects of it repeated ad nauseum by mainstream media for political advantage? We are only just starting to see what inequality does to the global economy, and it means less economic growth, which is bad for everyone including the wealthy.

This article first appeared on Melanie ‘s blog Political Omniscience.