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Solving the affordable housing issue

With the recent surge of property prices across Australia, home ownership has become a hotly debated issue. Price increases benefit the 70% of Australians that are owner occupiers or investors, but does put great pressure on those still waiting to get their first property
Solving the affordable housing issue

With the recent surge of property prices across Australia, home ownership has become a hotly debated issue.  Price increases benefit the 70% of Australians that are owner occupiers or investors, but does put great pressure on those still waiting to get their first property or need to improve their current living requirements.

The Liberal Party extended its low deposit purchase scheme in the recent Budget and I think this is a great solution of helping many onto the property ladder.

The Labour Party has just announced its strategy in their official campaign launch in Perth on Sunday 1st May.  I find it extremely disappointing, as they are proposing to contribute cash of up to 30% of the purchase price on established property and 40% on new property for middle income earners (A$90-120,000 per annum earnings) that don’t own other property.  There are caps for the maximum property values depending on which State or region the property is located, and the property must be used as your primary residence.

This cash would be treated as Government Equity in the property, which would be repaid on sale with share of capital gains or repaid by the owner over time.  It is a poor option for use of Government funds, and will only help 10,000 lucky people a year which is simply not enough.

Any time any Government offers subsidy rather than support, we have always seen the cost of the purchase escalate to absorb this, so to me this is just another wasted opportunity.

This was clearly evident in the recent Building Boost offered by the Liberal Government as a Covid recovery stimulant, which has helped push up the cost of building to absorb the value of the incentive.

The fix for “affordable housing” is far easier than either party seem to realise and focused on a few key policies of long term permanent solution.  These include:

Increase Supply
The only genuine way to slow price growth and create affordable housing is to increase the supply of medium to high density living apartments or building blocks in reasonable locations close to quality transport links (road & rail) or new job zones.

There are plenty of State & Federal Government sites that could be identified and fast tracked by Government self-development or joint venture to release significant new stock for either ownership programs or affordable rental accommodation.

Importantly, this needs to have high regulation to prevent small, undesirable living units, as the key to make these wanted is to ensure they offer a minimum size and standard of accommodation.  No less than 50sqm internal for 1 beds, 70 sqm for 2 bed and 100 sqm for 3 bed apartments or units would ensure this, meaning that prospective buyers could have a good standard of living with good proximity to transit options to work.

This wouldn’t provide immediate relief as the time to identify, plan and construct new apartments or land estates is lengthy, but the wheels need to start sooner than later as the problem keeps building.

More sensible planning approval processes need to also be strongly considered to allow the private sector to be able bring more quality living options into the market sooner as well.

Remove the Double Dip Stamp Duty
The key to bringing in new supply is to ensure it is also affordable.  New Supply is critical to expand the housing stock to cope with increased population and changing living requirements, such as divorce which puts great pressure on the market as one household becomes 2 overnight!

Unfortunately, there is a significant cost impediment to bringing on new supply, GST.

Many people simply don’t realise that in every new property, land or building, there is a significant cost of 10% GST being charged, but often hidden in the asking price.  This makes new builds very expensive compared with the established property market which is exempt from GST (and rightly so).

When you consider that it is the State Governments that ultimately receive GST, even though it is collected by the Federal Government, then this a clear double dip because the States also receive Stamp Duty on the transaction to the tune of 4-6% (except separated building contracts) and that makes the purchase of a new property extremely expensive.

A simple option here is to remove GST from new residential property and land, which would instantly drop the prices by 5-7% by the saving in GST that developers currently get charged when they sell a property.

Not only does new construction create more housing stock for ownership or rental, but it is also a significant economic boost and job creator, so this reduction has social and economic advantage and would likely not have a real cost to State Governments.

Reduce Stamp Duty to Reflect Increased Price points
Stamp Duty bracket creep is the most traumatic cost to property ownership and no one seems to be discussing it with the energy the issue deserves.

State Government Stamp Duty Rates could effectively be halved right now as prices have almost doubled over the past 10-15 years.

In doing so, State Governments would not be adversely impacted as the level of revenue from the higher values and increased level of activity would be similar to, or higher than, traditional revenue from this category.

The current entry costs of 5-6% of the purchase price are massively excessive for just recording the change of ownership of a property.

Current First Home Buyer concessions can be maintained or expanded to help this important sector as well.

This reduction could be instant and provide immediate benefit to buyers.  A reduction should be made across the board, however if there are concerns on financial impact, it could be phased in by immediately reducing for owner occupiers and keeping investor purchases at the higher level for a year or two before reducing.  

Review Foreign Investor Cost Barriers
State Governments over the past few years have brought in an additional Foreign Buyer Stamp Duty of between 7-8% of the purchase price, as well as additional levies on Land Tax .

Foreign Investors have often got the blame for pushing prices up, falsely in my mind.  Most people do not realise that a foreign investor in Australia can only buy brand new property, so they simply can’t turn up at an established property auction and buy that.  Heavy rules and penalties protect these laws.

Many “new Australians” that have legally migrated to Australia have been labelled as Foreign Investors to start the rumours of a foreign property investor push, incorrectly so.

Fact is that Australia needs a sensible level of foreign investment, traditionally between 5-10,000 properties a year, as that supports new supply, creates rental pool stock and brings large economic stimulus to the property sector and general economy.

Given the rental shortage, it could well be time to review the cost disincentives currently being imposed on foreign buyer activity, including the current difficulty they have in obtaining finance, so we can look for some increased activity to release pressure on the rental pool and soften the increasing cost of rents due to over demand.

Superannuation Access
I been a strong advocate of home ownership my entire career and strongly believe it is far better to be in the property market rather than have a large superannuation balance.  My rationale for this is that if you come to retirement and don’t own your home (with or without a mortgage) then you are in serious financial jeopardy as your rent may consume the vast majority of you pension income and give you a compromised lifestyle.

As such, if you can get on the property ladder early, then the likelihood of a better retirement becomes more assured.

If the rules allowed any first home buyer under 40 years old to use up to 35% of their Superannuation fund balance towards a deposit on their first home, then this would allow them to enter the market and still have over 20 years of work and contribution to build up further retirement funds.

If the property is sold, then the Superannuation fund can be repaid from the sale proceeds plus a interest cost of say 3%pa.  Hopefully the growth in the property and savings on rent make it that there is enough left over for the next home purchase, but if not, special requests could be allowed to let the funds rollover to the next purchase, for at least 1 more time.

Income & Capital Gains Tax Changes
Much has been debated over the years about the current tax structures around property investment.

Fact is that the current setting are fine and need little change.  The reason I state this is that you will always need some level of investment in the property market to provide increasing rental stock and economic activity.

To disincentivise investors is the wrong option, whereas incentivising ownership makes more sense.

So, if you were going to look at changes to the tax system, perhaps this only thing I think should be considered would be to allow First Home Buyers to claim the interest on their home loan as a tax deduction for the first 5 years they own the property.  A maximum claim cap could be introduced of say A$20,000 per year deduction, and this claim would help them in the tough first few years when they are likely spending to improve the property and build equity to stabilise their overall financial position.

This would be far more sensible and affordable than cash handouts and could also be allowed on a retrospective manner to help past buyers cope with living expenses and potential rate rises, so if you bought 2 years prior to the change, you could claim the remaining 3 years as a deduction of the total 5 now offered.

All of the above elements would make a big difference, at a low cost, to remedy the housing affordability situation in Australia in the short and long term, with fairness and equity to buyers, the government and the general market.

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