Housing Strategy
Overview
Housing in Australia is a discussion that is fraught with strong emotions and established ideas, but fundamentally the past few decades of housing policy have only ramped things up and up. The government cannot keep subsidising access to housing in a country where the design of the housing market ensures that things always get worse. So, we must begin to think about housing in a different way.
First, these are some fundamental truths about housing:
Housing efficiency is how well people’s houses are aligned with their needs. Single people in large houses, and families in tiny flats, are both burdened with additional costs and challenges - and this has a large impact across a whole economy.
Being able to choose suitable houses that are close to workplaces, family, or relevant community groups increases people’s free time. This improves people’s productivity, health outcomes, and overall financial position.
The simple conclusion that can be drawn from this (keeping in mind the mechanics of prosperity) is that there is a benefit to both society, and the economy, if people are able to voluntarily find the most efficient housing options for their individual needs.
Barriers to Efficiency
So what’s stopping people?
Transaction costs. The Australian housing market is full of transaction costs. Stamp Duty, Capital Gains Tax, broker fees, conveyancer fees, lending fees, realtor commissions, loan title office fees, title search fees, inspection costs, and moving costs are all things which can add time and expense to the process of moving to a new house - and that’s before considering time off work, extra childcare, and other more individual costs.
The poorer people are, the more they are penalised by the effects of innefficient housing, and the greater the barrier to being able to move into more efficient housing. So, fundamentally, it is necessary to reduce transaction costs to improve the housing situation.
A Change of Paradigm
It is time to stop thinking of the house you live in as an asset of stored value (it never has been anyway) and start thinking of it as a maintainable standard of living. An investment property is an asset, but the house you live in is a liability - so there’s no reason that you should be living in a liability that you cannot afford.
Consider, you get offered a new job in a different city. The pay is very good for the city that the job is in, but it’s not actually much better than your current job, because the city you live in is expensive.
You would expect to achieve a higher standard of living by moving, but consider the costs. In your current expensive city:
Your property may have substantial CGT waiting to be paid.
Time spent not working, and other costs for finding, remotely inspecting, and moving, are very high.
There are many amenities that you have ready access to - which is why your current city is expensive.
In your destination city:
There are fewer amenities, so these costs are included in houses with additional features.
Stamp Duty is proportionally high compared to living expenses.
Your partner has to find new work and will have a loss of income.
The net effect of this is that even if you own 100% of your original property, you will likely have to take out a loan to move to this new home just to be able to afford a house with the same standard of living.
Moving hasn’t transferred your wealth from one location to another - you’ve sacrificed tens or hundreds of thousands of dollars on taxes, duties, fees, and income. All on the hope that the new salary compared to the new costs of living pans out.
For many, many, people, these costs are simply unaffordable.
…and the more house prices rise - the more this problem grows.
But transaction costs are historically the main barrier that slows down or prevents the formation of housing monopolies, so what then?
An Efficient Mindset
To make the housing market work for us, we need to restructure it so that most people only own one home.
In a market with minimal transaction costs - people will seek out the most suitable housing for their needs.
In a market where owning real estate as an investment is restricted or unprofitable - housing demand will better reflect actual needs.
Therefore, the goals of this strategy are:
To make it easy for people to retain wealth when moving houses, and
To remove the option of profiting from speculative investment in multiple houses.
Solutions Index
Management Structures
Tax Reform Package
Transition Support Framework
Additional Content:
Market Security Regulations
Disaster Contingency Plan
FAQ & Impact Assessment Table
Management Structures
Strategic Housing Body
Proposal: The Australian Government must legislate a strategic body of review, panelled solely with qualified, housing-related, welfare and economic experts and funded by a defined income stream. The remit of this strategic group is to maintain and advance a national affordable housing development strategy. If implemented this national housing strategy group must:
be governed by a charter containing terms of reference, defined targets, and principles to abide by.
have the capacity to review, approve, challenge or reject new legislation (either directly or through the high court) which would seek to directly affect the housing market.
be responsible for regularly reviewing and updating the national housing strategy in accordance with (1).
be able to make recommendations to parliament on legislation indirectly affecting the housing market.
maintain and publish an audit of housing supply and demand for each Local Government Area (LGA) based on populations living and working in the LGA and their household income.
consider housing costs, quality of housing, access to services and commute times in formulating its recommendations.
Initially this strategy should contain the elements herein.
Justification: This ensures that housing - which is a situation lasting multiple terms of government - has a strategy that is responsive, but not radically prone to change.
ABS Housing Statistics Division
Proposal: Empower the Australian Bureau of Statistics to maintain a division dedicated specifically to housing. The role of this division would be to establish and maintain the processes needed to effectively capture all housing statistics data in an ongoing capacity, rather than just what can be gleaned from the census snapshots. Initially this would include:
Land zoned for residential use that is undeveloped or underdeveloped.
Residences which are vacant in an ongoing capacity.
(Initial attempts to do this have used electricity and water consumption data for selective and localised estimates.)Residences that do not comply with current building standards or are in disrepair.
Justification: Housing efficiency has a large impact on the economy. As our population grows, climate changes, and building technology changes, it is critical that we are able to accurately assess the state of the housing situation in real terms of reference.
Tax Reform Package
Incentivised Land Tax
Proposal: Conventionally, land tax in Australia is something which is considered most appropriately managed by the states. This paradigm is still held to be correct, but a federal legislation is required here to ensure a degree of standardisation and equitability, and to accommodate for certain constitutional requirements around taxation regarding the states.
To faciliate this, the federal government implements legislation to adopt a nationally consistent land valuation system (to be administered by the states) for all properties and move to charging a yearly land tax to all property owners equivalent to 3% (suggested) of the value of the property, with the following discounts:
A 90% discount on that rate (to be 0.3%) for either; the principal place of residence, or the first property owned so long as both a) the owner lives in a property they do not own, and b) the property is occupied.
A 0% discount on that rate for the second property owned, so long as the owner lives in one of their owned properties.
Now this might seem odd but it has a purpose (and note 2. also accommodates for the Negative Gearing Reform.) Conventionally legislation put in place at the federal level automatically supersedes state legislation. However this is not actually a requirement of federal legislation. In contravention of the federal over state convention, federal legislation can be subordinate to state legislation if it specifies itself to be as such.
Therefore, to both ensure the consistency of method required to address the housing issue and also preserve the suitable management of the land tax by the states, the legislation shall specify that it would be superseded by state legislation that differed only by the applied numbers not by the structure or conditions of the federal legislation. Additionally, it would include provision that it is superseded only with the condition that the market for residential property had no other transaction costs applied to it at the state level. (i.e. stamp duty)
(Note: The above means that an empty property will incur the full land tax, or incur it pro-rata if unoccupied for part of a financial year, with an allowance of 1 month for facilitating a change in tenants. The above also means that house on a $1million dollar plot of land would incur $3k land tax per year, or $30k if undiscounted.)
Justification: A market exists for the exchange of goods. Stamp duties are a barrier to that exchange, and contribute to the problem of housing affordability by making it more difficult for people in borderline or negative equity situations (where they cannot afford to sell their property) to transition to a residence that is more sustainable for them. It’s not a very good market if it is actively restricting exchange. (This also ties into CGT Reform.)
Stamp duties range from around 1-3%, commonly averaging around 1.5%. Average holding time for a property is around 10 years nationally(link), so some value of land tax which would equate to double the stamp-duty value, averaged over 10 years is a suggested starting point. (Remembering the discount on principal place of residence). However, these numbers should be reviewed by applicable experts and are ultimately up to the states. The requirement is that the states must adopt this structure to have some control over it’s application, the numbers they use within it are up to them.
This model incentivises States to take charge of their land tax in a nationally consistent way, so that they can directly manage the revenue stream rather than ceding that control to the federal government.
CGT Reform
Proposal: Get rid of all capital gains tax on residential properties for properties in states that have adopted a land tax compliant with the model proposed. No exceptions. (Accrued land tax may need paying pro-rata on sale.)
(Note: In the event that there is difficulty getting the land tax step adopted effectively, a potentially better solution would be to remove the CGT discount on houses, and tie CGT rate per state to be inversely proportional to the effectiveness of the state land tax. This is expected to be a considerable incentive, and an effective alternative that would push states towards adopting a land tax sufficient to make CGT trend to 0. — While more administratively complicated, this does have the advantage of adding a robust and stable mechanism to maintain that incentive into the future.)
(Note also: It is imperative that this reform comes into effect at the same time or later than the others, not before.)
Justification: As before: a market exists for the exchange of goods. CGT is a barrier to that exchange, and contributes to the problem of housing affordability by making it undesirable for many to sell their investment properties. This is a feature which actively restricts exchange.
Additionally, with an ongoing land tax that is variable with the value of the property, the capital gain on a property is already being paid by the owner in an incremental fashion. As in the rest of our system, and according to standard taxation doctrine, income should not be taxed twice. Therefore charging CGT on a property subject to a land tax would be inappropriate.
In conjunction with the Land Tax. Investors will find that if their property is not being lived in, it will absolutely be in their interest to sell it. Increasing housing availability, without penalising people currently in the situation of holding various properties only because the CGT loss would have negated the relative value of the sale. This also leads onto Negative Gearing Reform.
Negative Gearing Reform
Proposal: Change negative gearing so that only one residential property per investor unit comprising natural people (i.e. sole owner, married couple, co-ownership agreement) may be negatively geared. This includes houses, units and apartments in the definition of ‘property’.
Justification: Many advocate for complete annihilation of negative gearing; however, a complete and sudden removal of it would be intensely disruptive. Furthermore, those benefiting the least from it, would likely be the hardest hit - the “mom and pop” investors with only a single investment property.
Additionally, a moderate proportion of people may always be seeking to rent as a minimally complicated housing solution for various stages in life. Despite claims made by the Real Estate industry when it was abolished 1985-1987, rents did not rise precipitously and they are unlikely to now. However, rental availability would likely decline significantly with complete removal of negative gearing and it is impossible to tell exactly what the steady state point will be at this stage. As such there is some benefit to retaining it, at least in part, to cushion the change.
Combined with the above proposals, the relative point-in-time impact to the majority of existing property owners should be small, but the overall effect should be deflationary to the market, in addition to promoting long-term stability to both prices and availability.
Notes:
In combination this tax package plan has the effect of taxing properties that are left deliberately untenanted. Owners are consequently encouraged to rent them out or sell them.
Additionally, it may be reasonable for the land tax applied to the sole property that an investor unit may negatively gear to be discounted somewhat. This is accommodated for in the structure of the tax and would be a matter to be determined by the states through suitable inquiries into the material effects on the rental market after initial shocks have been seen and assessed for long-term impact.
Transition Support Framework
Block Superannuation Investment
Proposal: Exactly what it says on the tin. Prevent people from investing superannuation into real estate, and block super funds from using real estate as an investment option. This would go into effect immediately, before any other steps.
Justification: It's dangerous to allow people to put their retirement savings into real estate in the middle of a housing market adjustment of this magnitude.
FHB Compensation Fund
Proposal: Create a First Home Buyers Compensation Fund if there is a serious correction in the price of housing in Australia that puts first home buyers under water with their mortgages. This Fund will be utilised to provide financial relief to keep people in their homes where First Home Buyers are facing their property being foreclosed on. These interest only relief loans will not have to be repaid until either the home is sold, or it is transferred to a non-related third party.
Justification: Prevent homelessness, prevent housing crash induced recession.
Raise and Index Rent Assistance
Proposal: Welfare recipients of any variety, residing in rental accommodation, shall submit the value of rent they pay as part of their application. Rent Assistance shall then be provided automatically, equal to 50% of the value of their rental payments. No minimums or maximums shall apply.
At present the following considerations may change your rent assistance payments:
the rent you pay increases or decreases
you move house
your income increases or decreases
your family circumstances change, for example you separate from your partner, or the number of children in your care changes.
So long as you do, for whatever reason, continue to qualify for the welfare payment you are receiving, the consideration “your income increases or decreases” shall be removed.
Justification: Rent assistance payments are unnecessarily complex and non-responsive to people’s situations. They’re also typically inadequate on account of also being non-responsive to the conditions of the housing market.
We should have a less punitive welfare system that provides better support and is more understanding of people's individual circumstances. The system also should not be a nightmare to interact with, nor should it be a poverty trap for people receiving benefits for being disabled, aged or similar - whose expenses may be so personalised and variable as to be impossible for the system to rightly accommodate for with multiple different moving parts (i.e. balancing rent assist, with the welfare payment, with NDIS, international pensions or other support payments etc.) Multivariable systems like the current one will inherently penalise some people just for living.
Fixing the proportional value of Rent Assistance brings much needed stability to the system.
Additional Content
Extra information is available for further reading:
An original google document version of this strategy has been previously circulated, but is not maintained and therefore not listed here.
(The original document version is out-of-date, this website published version should be considered authoritative in all cases.)