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Opinion Editorial: Common-wealth?

Fixing housing affordability

The Australian dream is to own our own home. Home ownership is now at its lowest level in sixty years and is projected to sit below 50% in less than a decade. We have a housing affordability crisis.

Housing is our biggest asset class, valued at over $7 trillion. It has historically served as the barometer for how well our ‘Commonwealth’ is fairing. Simply put, the greater the level of homeownership the truer the claim that we are in fact the Commonwealth of Australia.

The Australian Financial Review page 4: 9 March 2020

The endless lowering of the prime rate to stimulate the economy unfortunately produces heat and volatility in the housing market. This is bad for affordability and places many homeowners and investors in a high state of vulnerability.

The critical question that needs answering is: How can we have a fair and stable housing market as the RBA reduces interest rates? In the current climate of heightened economic uncertainty, the unfairness and top heaviness of our housing market is particularly concerning.

Alarming evidence from the Parliamentary inquiry I recently initiated and chaired was that low interest rates empowered investors to dominate the housing market to the exclusion of first home buyers, resulting in what was termed ‘investor driven housing inflation’.

While he was Secretary of the Treasury, Ian Frazer described our housing sector as a bubble. Professor Birrell of Monash University agreed that our housing sector had all the components of a Ponzi scheme.

Surely these concerns would have lifted this issue above politics, yet when the opposition declared they would scrap negative gearing the government responded by saying they would not touch it.

Negative gearing provides the investor an advantage over the home buyer in the marketplace when normal interest rates are in play, now with interest rates often below rental returns a whole new world of advantage and inducement tempts the naïve property investor.

The three components of a Ponzi scheme are essentially:

  1. The promise of a return to induce investors.
  2. No real underlying value.
  3. Dependence on new investors to keep the scheme going.

There is now blind faith in the “fact” that house prices will always go up. The intoxicating rate of appreciation in recent years further entrenches this belief, driving a lust for property ownership by even more investors.

The inversion of rental returns over interest rates has dangerously converted our housing sector into a virtual Ponzi scheme.

It is true to describe the RBA’s only mechanism to control inflation, the setting of the prime rate of interest, as a blunt tool.  

This blunt tool needs a highly adjustable counterbalance mechanism to offset prime rate settings to protect Australian’s homes and property investments.

Previously, when interest rates were higher, the investor was limited in their accumulation of properties by their capacity to fund their negatively geared losses.  

With interest rates now at historic lows, neutral and even positive gearing is possible, allowing potentially no limit to the number of properties one can invest in. This drives housing unaffordability for home buyers.   

My policy proposal to address this volatile and grossly unfair situation is to install an ‘economic lever’ that would set the percentage of tax deductibility allowable for new housing investment purchases. The setting would be adjusted regularly, in response to the property market. This is the same concept by which the RBA controls inflation, by setting the prime rate of interest reviewed each month. The allowable deductibility at purchase would remain for the duration of ownership.

The setting and review on a regular basis would send very clear messages to the investor as to when it is best for them to invest. It would cool the investor in a hot market and activate the investor in a flat market. This would allow the homebuyer greater access to a more stable and sustainable market, while not impacting those already in the market.

The ‘Lever’ would immediately address volatility, have a target housing inflation band, with the long-term aim of boosting wage earner market participation, and returning house prices to a justifiable ratio with wages. Currently in the Sydney market the ratio is an unacceptable 13.2 years of wages to buy a home.

This ratio is clear evidence that factors other than a fair market of wage earner versus wage earner have driven prices to perilously unstable heights.

There are those who advocate that the market should not be interfered with and it must be free to do its magic, the reality is that the market is currently distorted and is not free nor fair. The prime responsibility of Government is to protect their constituents and their assets.

Too rarely our leaders put aside politics to work together on issues of national importance.

Politicians have unforgivably played politics with housing for too long. Polarised and entrenched politics may have us all paying a terrible toll.

It’s time to place this issue above politics, and for us to serve the people of Australia in the way we were elected to do.