Housing affordability Gratton Insititute

John Daley the CEO of the Grattan Institute talks about housing affordability

Housing Affordability – Gratton Institute

Ross Greenwood: The other big issue I want to take you to is the housing crisis. Because that also will be a centerpiece of the Federal Budget this year. Now, what Scott Morrison says is already, you’ve got a situation whereby the housing, if you like plans that the government has taken along with regulators, is starting to work, you could see that today from the Corelogic numbers that came out. Where you saw median house prices, for example, let’s take Melbourne as an example, $735,000 for a house, it was up by 0.6% in April, but apartment prices in Melbourne, in Sydney, in Brisbane, in Darwin, in Perth, in Adelaide, all fail, all fail, apartments.

Now, you’ve got a situation where house prices continue to rise. Melbourne, Sydney, Brisbane, the only aberration here is camper prices fell 3.1% during this time. There is still a problem now when house prices in Sydney have got a median price of $990,000. In Melbourne, 735,000, so if a young person is wanting to get into the Melbourne market, with a 20% deposit, they need the best part of $150,000 in cash as a deposit to get set with a bank these days. Even if you got to Perth, 499,000, one of our cheapest capitals, that still requires nearly $100,000 worth of after tax savings to put down. Where are the solutions?

One person is trying to come up with solutions because it’s okay to identify the problem, you got to have a few solutions. It’s the chief executive of the Grattan Institute, John Daley, who is on the line right now. Many thanks for your time, John.

Interview with John Daley, Gratton Institute

John Daley: It’s always a pleasure Ross.

Ross Greenwood: I did note you’re tweeting today about the solutions. You came up with four options that I really quite like. Explore them for they will take me through the four options that you believe are necessary if the government is to ‘so-called’ fix the housing prices.

John: Well, the first thing that they got to have to do is stop doing the things that are cosmetic. It make people feel good but at best, don’t help housing affordability but don’t do any damage and at worst, don’t help housing affordability by either the budget or the economy or a whole bunch of other things that we care about.

Ross Greenwood: Okay. Does that include giving some form of tax deductibility for young people trying to save for a housing deposit? Because that’s the thing that’s now being suggested as one of the panaceas for the problem.

John: The short answer is yes. That fits in this cosmetic category in which we essentially will wind up transferring money from tax payers into the hands of people who are selling the houses. Because inherently, it will push up demand for housing and last time I checked, no one suggested that there was any shortage of demand for housing. And of course, it’s going to cost the budget money. Yes, all of those things, whether they’re first time buyer schemes, whether they’re kind of a tax deductibility for money that you put in in an account, whether they’re a contribution to an account which is what the government did. Where it’s allowing you to use your super, all of this is variant on the same thing, and they all have the same fundamental problem.

First Home Buyer Grants

Ross Greenwood: That is the problem of first home buyers grants that states have given out in the past. If there’s $7,500 or $15,000, as they have been previously, it simply pushes up the price of apartments or the price of houses that the first home buyer might go into by that same amount of money. Because, let’s be honest, the sellers are not doped. They understand if a person has got an extra seven and a half grand in their pocket and they put up the house price, it’s not going to be a barrier to that person buying that house or not.

John: That’s exactly right. And more to the point, if we are the first home buyer is not a dope, they wind up essentially beating the price of houses up. You would’ve thought after 20 years of these kind of schemes and 20 years of failure, we might have learned this one. But on the other hand, it’s politically easy and so, that’s why governments like talking about.

What is the next thing that needs to happen?

Ross Greenwood: Okay. John, let’s go to the next aspect of it because this is not just one thing. There is no magic bullet, what is the next thing that needs to happen?

John: The things the government can actually do that will make a difference, they can either reduce demand or they can boost supply or they can improve infrastructure or they can try and make renting more attractive than it is at the moment. If we go through those four in order, how can they reduce demand? This is what primarily the commonwealth can do, they can reduce demand by reforming capital gains tax and negative gearing so that there’s less demand from investors.

They can include the home in the there’s more of it at the moment. We include the first $200,000 and we ignore all of the rest, which when you think about it, it’s completely the wrong way around. It’s not hard to find justification for ignoring the first 500,000 and then counting all of the rest, but we’re doing the opposite. They can put into place more macro prudential rules, although that, the effect of those will be pretty small. And of course, they can think about capital gains, tax on primary residence, that would certainly have a big effect. But it will also have a lot of big side effect that we probably don’t want to do.

Ross Greenwood: Probably the political side effect would be the biggest one. They could also do other things such as banning gearing in self managed superannuation funds. They could further clamp down on foreign buyers coming in, because all of these things would slow down the demand side that at the moment is seeing the first home buyer crowded out. And also, which is what many of the banking institutions have done, is trying to slow down interest only loans being used for owner occupier properties.

John: That’s right. Although I think all of those things like macro prudential rules and restrictions that makes the charges on foreign investors, in the scheme of things, they’re not going to make that much difference, whereas the capital gains tax negative gearing rule, because they affect so many of the buyers in the market, they would have at least an effect big enough that you could almost see it. But still not large in the scheme of things.

Our calculation is that if you went with something that looked a bit like Labour’s policy, say you drop capital gains tax discounts to 25% and you ban negative gearing, it would still only mean that housing prices were about 2% lower than they would be otherwise. On the other hand, the budget would also be $5 billion a year better off than it is otherwise. You get a double whammy since the budget and you’re at least push up prices in the right direction.

Ross Greenwood: Let’s go to the next one. You’ve got two of your four points out, what’s the third one?

John: The first one is reducing demand, the second one is around boosting supply, now this is the big leap. It’s slow but it’s the only thing that really makes the big difference in the long run. But of course, the catch is, you have to build supply in places that have got good access to job and more than half of the jobs created in Sydney and Melbourne in the last five years we’ve got data for, were created within two kilometers of the CBD.

Ross Greenwood: Okay, Sydney has there’s more high rise apartments, is that what you’re talking about, John?

John: Well, either high rise apartments or what is the limit, how much of that you can do. Or it’s about a better ring of our cities. This is what no one wants to talk about. We have lots of planning restrictions that make it very hard to build up, very hard to subdivide, and that’s because everybody agrees that more density in our middle suburbs is a good idea so long as it happens in the suburbs next to theirs. And of course, this is primarily, a state government poll. They are the ones who control the planning laws, and they’re the ones that have to fix it.

Ross Greenwood: It’s going to be fascinating to watch and see exactly. In other words, you’re almost giving them a small tip there John, because the person who owns a reasonable wage of property in those middle suburbs where they might be feeling, if you’re living on a big corner, something of that nature, it might be very well be if planning laws are changed into the future, you might be sitting on a potential development site. That would be nirvana for a lot of homeowners living now.


John: Well, yes. And ironically, one of the biggest issues that’s now turning up in a retirement poll, is that there are in fact lots of people who want to downsize but the problem is not that it’s going to get countered in the pension or they can’t add it to their super, actually, those kind of financial considerations are very small bear in the scheme of that kind of decision. The big issues is that people can’t find smaller houses to move into that are in the area they’re living in. All these people are now 60, 70, they’ve grown up in middle rings of Sydney and Melbourne, they want to move into a smaller house but they want to stay in the same area.

Ironically, precisely because those planning restrictions have been so tight. Often because those very people voted for local councils to keep them tight. There’s very little for them to move into.

Ross Greenwood: Very good. All right. What’s the next one?

Improve Infrastructure

John: Then we’ve got to look at improving infrastructure and that’s about, we’ll look to the extent that some people are living, are building on the edges of our cities where there is more land. They’ve got to be able to have good access to jobs and that’s about improving the right transport infrastructure. Of course, it’s very expensive but it’s about making the right transport decision rather than just if you have a transport decision, they’re going to help you in the next marginal seats.

Ross Greenwood: I don’t even want it very fast train John. I just want a moderately fast train, one that goes like in the UK, 200 kilometers an hour. That would do me, because that will get people from the outer ring into the suburbs into the city very, very quickly or into those hubs that you talk about where the employment is. You don’t have to go to the nth degree in trying to find a train that goes 300 kilometers an hour. There are plenty of trains go 180 to 200 kilometers an hour, you’ll be able to treat bomb off the shelf.

John: That’s correct. Although, of course, the catch is, where we have been investing most of our transport infrastructure dollars over the last 10 years is in regional New South Wales. Because that’s where the marginal seats were.

Ross Greenwood: That’s another good point. And the fourth point?

What can state governments do – Make Renting more attractive?

John: And finally, we can look at making renting more attractive. Renters are forced to move a lot more often than everyone else and often, it’s a forced move rather than one they make out of choice, and can’t even make a home about their house. Often they can’t even put a picture on the wall, they can’t have pets, all of those kinds of things. So in terms of what can state governments do about that, there’s one thing that again, no one really talks about that would make a big difference. And that is our land taxes.

So in New South Wales if you earn more than two million dollars of property, you pay land tax of 2% of the value of the land. That’s probably about 1% of the total property value. What that means is that relatively few people own lots of property. And the reason why that matters is, if you own only one property you want the tenant on only a one year lease. Because you never know when you might need the money and all the rest of it. But if you own ten properties, you’d probably want all the tenants on five year lease because any time you need liquidity one of them is bound to be moving out.

But because we have by  international standards, very few landlords with lots of properties, and that’s because of the land tax regime, we have very few tenants who can get a long term lease and so very few tenants who really invest in where they are living and make it their home rather than just the house they happen to be living in for the next six or 12 months.

Ross Greenwood: I’ll tell you what, John Daley, always great to have you on the program. He’s thought about the issue of housing affordability and come up with solutions and they are not out of the problems but also some solutions that governments, not just one government, but governments. State, federal and even local need to address if you are to get your kid or your grand-kid into a house in the future. John Daley, always great to have you here on Morning News and we appreciate your time tonight.

John: It’s a pleasure and anyone who wants to read more about this, we’ve put it up on insidestory.org.

Ross Greenwood: There you go, insidestory.org, you can get your feedback and of course we’d welcome it here on Morning News and you can get to ask via our website and we’ll take your calls after this break on 131873


Recommended – The questions asked about Housing Affordability

Mortgage and Banking FAQ

Property FAQ

How do you expect that to aid or hinder? Listen to the interview or read this transcript of John Key, Former New Zealand Prime Minister – blog title of ”John Key – Bank Levy, Budget and Housing Affordability”.

How do you improve affordability? Listen to the interview or read this transcript of Saul Eslake, Vice Chancellor and Fellow at University of Tasmania – blog title of ”Negative Gearing Reform – Saul Eslake”.

How do you retire if you don’t have a house? Listen or read the transcript of this  interview with Dr Martin Fahy, CEO ASFA under the title of ”Housing Affordability and Superannuation”.

How much cash does the Premier of New South Wales carry? Listen to the interview or read this transcript of Gladys Berejiklian, Premier NSW – blog title of ”NSW Premier Gladys Berejiklian – Housing Affordability Package”.

How much of that you can do? Listen or read the transcript of this  conversation with John Daley, CEO of the Grattan Institute under the heading of ”Housing affordability Gratton Insititute”.

How to get budgets back into balance ? Listen or read the transcript of this  interview with John Key, Former New Zealand Prime Minister under the heading of ”John Key – Bank Levy, Budget and Housing Affordability”.

What are the key factors for causing this deterioration? Listen or read the transcript of this  conversation with Helena Chang, Vice President, Moody’s Investors Services under the heading of ”Housing Affordability gets worse – Alena Chen Moody’s”.

What are you talking about here is the stamp duty ? Listen or read the transcript of this  interview with Dominic Perrottet, NSW Treasurer under the heading of ”NSW Housing Affordability Package – Dominic Perrottet”.

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