Housing affordability: re-imagining the Australian dream Grattan Institute Support Grattan Institute Report No. 2018-04, March 2018 Founding members Endowment Supporters This report was written by John Daley, Brendan Coates, and Trent The Myer Foundation Wiltshire. Lucy Percival and Peter Robertson provided valuable National Australia Bank research assistance and made substantial contributions to the report. Susan McKinnon Foundation The opinions in this report are those of the authors and do not necessarily represent the views of Grattan Institute’s founding Affiliate Partners members, affiliates, board and committee members, or reviewers. Any Google remaining errors or omissions are the authors’ responsibility. Medibank Private Grattan Institute is an independent think-tank focused on Australian Susan McKinnon Foundation public policy. Our work is independent, practical and rigorous. We aim to improve policy outcomes by engaging with both decision-makers and Senior Affiliates the community. Maddocks For further information on the Institute’s programs, or to join our mailing PwC list, please go to: http://www.grattan.edu.au/. McKinsey & Company This report may be cited as: Daley, J., Coates, B., and Wiltshire, T. (2018). Housing The Scanlon Foundation affordability: re-imagining the Australian dream. Grattan Institute. Wesfarmers ISBN: 978-0-6482307-4-8 All material published or otherwise created by Grattan Institute is licensed under a Affiliates Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License. Front cover photo credit: “the Commons” project – Breathe Architecture, photographer Ashurst Andrew Wuttke. Corrs Deloitte GE ANZ Jemena Urbis Westpac Woodside Grattan Institute 2018 2 Housing affordability: re-imagining the Australian dream Overview Within living memory, Australia was a place where housing costs were have been otherwise, and stem rising public anxiety about housing manageable, and people of all ages and incomes had a reasonable affordability. For that to happen, both State and Commonwealth chance to own a home with good access to jobs. But home-ownership governments must act. rates are falling among all Australians younger than 65, especially those with lower incomes. Owning a home increasingly depends To build more homes, State governments should fix planning rules to on who your parents are, a big change from 35 years ago when allow more homes to be built in inner and middle-ring suburbs of our home-ownership rates were high for all levels of income. Those on low largest cities. More small-scale urban infill projects should be allowed incomes – increasingly renters – are spending more of their income on without council planning approval. State governments should also housing. allow denser development ‘as of right’ along key transport corridors. They should swap stamp duties for general property taxes. And state Cities are not delivering the best mix of housing location and density land taxes on investment property should be flat rate with no tax-free given what people would prefer. It’s getting harder for people to threshold, to encourage more institutional investors likely to provide find housing close to the job that suits them best. Major cities are longer-term tenancies. increasingly geographically divided, so that young people with less income and education are concentrated on the fringes of capital cities. The Commonwealth Government can improve housing affordability It’s been a perfect storm of rising incomes and falling interest rates, somewhat – and immediately – by reducing demand. It should reduce rapid migration, tax and welfare settings feeding demand, and planning the capital gains tax discount to 25 per cent; abolish negative gearing; rules restricting supply. As a result, house prices more than doubled in and include owner-occupied housing in the Age Pension assets test. real terms over the past 20 years. The strains are most acute in Sydney And unless the states are prepared to reform their planning systems, and Melbourne. Since 2012, house prices have risen 50 per cent in the Commonwealth should consider tapping the brakes on Australia’s Melbourne, and 70 per cent in Sydney. migrant intake. Development in middle suburbs has increased in recent years, It took neglectful governments two decades to create the current especially in Sydney. But today’s record level of housing construction housing affordability mess. They preferred the easy choices that merely is the bare minimum needed to meet record levels of population appear to address the problem. The politics of reform are fraught be- growth driven by rapid migration. Meanwhile a decade of accumulated cause most voters own a home or an investment property, and mistrust shortages are forcing younger people to set up their own homes later in any change that might dent the price of their assets. But if governments life. keep pretending there are easy answers, housing affordability will just Building an extra 50,000 homes a year for a decade could leave get worse. Older people will not be able to downsize in the suburb Australian house prices 5 to 20 per cent lower than what they would where they live, and our children won’t be able to buy their own home. Grattan Institute 2018 3 Housing affordability: re-imagining the Australian dream Recommendations Governments should reduce the demand for housing 1. The Commonwealth Government should limit negative gearing and 3. State governments should broaden land taxes to include reduce the capital gains tax discount owner-occupied housing • Phase in a 25 per cent discount over five years by reducing the • Extend state land taxes to owner occupied housing. value of the CGT discount by 5 percentage points each year. • Alternatively, impose an additional uniform $2 levy for every $1,000 • Limit negative gearing by quarantining wage and salary income of unimproved land value used for owner-occupied housing as so that investment losses can only be written off against other recommended in Grattan Institute’s 2015 report, Property Taxes. investment income. 4. The Commonwealth Government should enforce laws covering 2. The Commonwealth Government should include more of the value of foreign investment in residential real estate high priced homes in the Age Pension assets test • Enforce properly the existing limits on foreign investors buying • Change the Age Pension assets test to include the value of a established housing. home above some threshold – such as $500,000. • Continue to raise revenue from foreign investors, but do not in- • Correspondingly, raise the value of assets that do not reduce the crease taxes by so much that foreign investment falls substantially. Age Pension to the same levels that applies to non-homeowners. • Encourage foreign (and domestic) investors to rent out their • Extend the Pension Loans Scheme so that people disqualified investment properties. from the Age Pension by their assets can borrow income up to the rate of the Age Pension against the security of their home. 5. The Commonwealth Government should develop an explicit population policy • Develop a population policy, which articulates the appropriate level of migration given evidence of the impact of migration on the well- being of the Australian community, accounting for both actual and optimal infrastructure and land use planning policies. • If planning and infrastructure policies do not improve, consider reducing Australia’s current migrant intake. Grattan Institute 2018 4 Housing affordability: re-imagining the Australian dream Governments should improve the supply of housing 6. Governments should encourage greater density in inner and middle 8. State governments need to release more greenfield land, particularly ring suburbs in Sydney • All levels of government should build the public case for increased • Maintain a long-term supply of new greenfield land for residential density. development, particularly in Sydney, notwithstanding its geo- graphic constraints. • State and local governments should change planning processes to allow more medium-density housing in established suburbs that • Reform infrastructure charges to align with the Productivity are close to jobs and transport. Commission’s general principles on infrastructure costs. – Fewer small-scale urban infill projects should not require de- 9. State and local councils should consider introducing more explicit velopment approvals and should instead be code-assessed. betterment taxes to capture the windfall gains from re-zoning of land – More dense development should be allowed ‘as of right’ • Be explicit when aiming to capture a share of windfall profits from along key transport corridors, with height limits set up front. rezoning or planning gain • The Commonwealth Government should provide incentives to the • Ensure charges are reasonable and predictable. Aim only to States to encourage them to revise planning and other policies to capture a share of the economic value added above costs and a permit greater density and increase housing supply. risk-adjusted return on capital. 7. State governments should set housing targets and make sure local 10. State governments should reform property taxes to improve governments meet them housing affordability • Use carrots and sticks to ensure councils meet housing targets • Swap stamp duties for general property taxes that align with long-term city plans. • Reform land taxes to encourage institutional investors in rental • Give independent planning panels responsibility for assessing housing, either by: flattening