Housing affordability: Australia’s unwanted leadership

Summary of my piece in the AFR today

Out of 86 cities across the world with over a million people house prices relative to incomes in Sydney and Melbourne were the third and sixth most expensive.  That’s the findings of the latest annual survey of house prices released this week by Demographia. 

Australia’s regulatory induced scarcity of land increases the cost of a fully serviced housing block complete with telecom, water, energy and road infrastructure from less than $100,000 to $300,000 or $400,000.  And on top of this there are special taxes on development – at least $36,000 per block in the case of Sydney.

Back in 1983, according to data from the Housing Industry Association, the land component cost of a new house on a standard sized block comprised 40 per cent of the total house/land package in Sydney and 30 per cent in Melbourne.  This year the land component cost in the two cities was 72 per cent and 70 per cent respectively.  The same pattern is seen throughout Australia since planning authorities have adopted similar restraints on land availability. 

Unlike elsewhere, Australian house price rises barely paused in the recession. This chart by Demographia sums up the affordability situation around Australia.

Australian housing affordability trend

The Financial System Inquiry Chaired by David Murray suggested that negative gearing and the capital gains tax regime were a cause of Australia’s price increases. But negative gearing opportunities for investors in housing have always been with us and many other countries have similar tax laws. Moreover, negative gearing is available to all investments and excluding housing from it brings distortions by treating investments differently.  In any event, a ready antidote to demand-induced housing price increases is to permit more land to be used for this activity. 

The people disadvantaged by unaffordability of housing are those who have not bought a house. In Australia, young people are the most vulnerable to the high prices, and are showing a much increased interest in owning their own place.  

Mission Australia conducts an annual survey of youth which offers insights into young people’s aspirations and concerns.  The past four years have seen marked changes in attitudes.

In the 2014 survey 72 per cent of young people think it important to own their own home and a similar number expected to be able to do so.  However, home ownership by younger people is declining.  Amongst 25 to 34 year-olds those owning their home has fallen from 56 per cent in 1991 to 47 per cent in 2011.

It is regulatory scarcity has driven Australian house prices to stratospheric levels of unaffordability.  And smashing the constraints is the only means to bringing house prices within range of younger people’s incomes. 

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55 Responses to Housing affordability: Australia’s unwanted leadership

  1. Driftforge

    Why does regulatory scarcity occur? In this instance, as in many others, it is simply because the underlying market drives outcomes other than those which the community wants to see. And so planners and councils act in ways intended to mitigate those outcomes, generally with unintended consequences and the process iterates, layering regulation on regulation so that the ‘preferred’ outcome occurs.

    It would of course be simpler to fix the problem at the root and reduce or eliminate the dyscivic driver causing the problems. But that requires a pretty major transition and changes in the way we think about land ownership.

    Feedback is a wonderful thing. Arrange things so that councils earn more by reducing regulation than by increasing it. Once regulation starts hurting their own budget…

  2. Gleambright

    Yes, yes and yes although I am despondent at the prospect for change. As with any artificially inflated asset, there are too many vested interests who need to need to keep prices high. These include the voting public who don’t want to take a loss on house prices, and the political forces who benefit from the voting public. We are looking at the prospect of permanently high prices and agents who are determined, even desperate, to keep it that way. The well being of anyone who missed out be damned.

  3. rebel with cause

    Not to mention there are many other interventions (such as government funded maternity leave and subsidised childcare) that would be largely unnecessary if housing prices were more realistic. For many low and middle income families they face the unenviable choice between having kids (or more kids) and purchasing a home. That’s detrimental not just to our economy, but to society.

    Any path back to an economy with fewer interventions and a lower government burden must include measures to increase the supply of housing. The rising cost of housing is a chief driver of the ‘cost of living’ pressures that have been used so successfully to justify additional interventions and welfare.

  4. Bruce of Newcastle

    The Financial System Inquiry Chaired by David Murray suggested that negative gearing and the capital gains tax regime were a cause of Australia’s price increases.

    House prices are only one of three key parameters. The other two are rent and household disposable income. Household disposable income combined with (falling) mortgage interest rates define what house price a family can afford. If they can afford a bigger mortgage they can buy a flasher house, thereby bidding up house prices.

    If negative gearing is abolished rents will rise because even fewer houses and units will be built and investors will look for increased returns to offset the loss of tax deductibility.

    If capital gains are imposed on the family home and increased for investment properties then fewer houses will be sold, thereby further exacerbating supply in the short term (because people alarmed by the tax bill will hold on to their houses for longer before being forced to sell). So demand will see even less supply and both prices and rents will go up.

    That is exactly opposite of what Murray intended by those recommendations, but is easily worked out by simple logic applied to how humans behave.

    Thirdly the banking inquiry recommendations are such that banks will be even more reluctant to lend to developers, meaning fewer subdivisions will be done and fewer residential tower blocks built (not helped by articles like this one last Thursday). So that is yet another driver towards higher prices.

    Lefty economists always put their heads in the sand when faced with government failure. It is clear as crystal that regulations have to be scythed and state ambit taxes erased. Adding more regulation will just do the opposite of what they want.

  5. steve

    My house is my retirement fund. Don’t you dare lower prices

  6. Richard

    “It is regulatory scarcity has driven Australian house prices to stratospheric levels of unaffordability. And smashing the constraints is the only means to bringing house prices within range of younger people’s incomes.”

    Cutting high immigration levels wouldn’t have the same affect?

    Anyway with some 80% of private savings in the form of real estate in Oz don’t expect any party to do anything to reduce prices. The market might though.

  7. Monterey Jack

    Housing is quite a bit more affordable in country Victoria, for example, however there are insufficient employment options out there to be able to sustain such a move. The reason why places like Melbourne and Sydney are in demand is because that is where the jobs are. In a state like WA, Perth is only real place where employment can be found outside of the mining sector. So while we have country towns in dire need of new residents, with plenty of land at reasonable prices, there are no sustainable economic reasons for people to move out into the regions. So we find potential homeowners competing for scarce land in the vicinity of the metro areas.

  8. Bruce of Newcastle said… “If negative gearing is abolished rents will rise because even fewer houses and units will be built and investors will look for increased returns to offset the loss of tax deductibility.”

    Limiting negative gearing to new builds would encourage more development, while reducing the speculation on established dwellings which doesn’t bring new supply to market.

    Rents don’t have to rise as a result of investors wanting a greater return (it depends on whether the rental market can handle the increase) & the return on a property being sold (to attract investors) can be improved through rising rents &/OR falling prices.

  9. Leo G

    And our various governments’ approach to what Demographia says is Australia’s severely unaffordable housing (index 5.5), is in one sense to merge it with the Hong Kong housing market (index 17).
    Housing unaffordability is a golden goose for state and local governments across the country- so much so that it is in the interest of those governments to distort the pattern of urban development in Australia’s cities to maximise tax revenues.

  10. Token

    So while we have country towns in dire need of new residents, with plenty of land at reasonable prices, there are no sustainable economic reasons for people to move out into the regions. So we find potential homeowners competing for scarce land in the vicinity of the metro areas.

    Good news that the voters keep putting politicians in power that raise the cost of running a business (regulation, wages, energy costs, speed to import) to the point where businesses move offshore as quickly as possible.

    Do you think the market of jobs doesn’t reflect how the people of Shepparton sacrificed so much to keep a small number of high cost jobs in a fruit processing plant?

  11. Fibro

    Houses are expensive in Sydney, yes, but they are affordable if you don’t want to be in the latte set.

    Yes Gen Y, buying the dream home is unaffordable in Balmain, Glebe and Chatswood, and so it probably was for your parents at the time. There is affordable housing in Sydney, but like your folks who bought in the sticks when they first bought, so can you and then move closer when you can afford it.

    Yes, you have to travel and yes, it might be hotter/colder, and yes you might want to purchase ugg boots to match or is the age of entitlement now part of the housing market.

  12. Natural Instinct

    It is regulatory scarcity has driven Australian house prices to stratospheric levels of unaffordability. And smashing the constraints is the only means to bringing house prices within range of younger people’s incomes.

    And why was this not spelled out as a priority by Tony, Joe and Co (and the Liberal state Premiers)?
    .
    because they don’t have core Liberal values – just skills in managing the spin and news cycle.

  13. Jeremy

    A substantial problem is that as soon as one state makes genuine efforts to reduce housing costs, an avalanche of people will descend on them. The ABS says the birth rate in Australia has been below replacement rate since 1974. If birth rate is below replacement rate then the population is shrinking, which would imply a shrinking economy and reducing house prices. The main reason for any new housing being required is our very high immigration rate. It is true that development constraints are excessive, but immigration is the main demand driver. Reduce that, as both parties promised 2 elections ago, and the problem would be solved.

  14. Jim

    Alan

    A good post. But I think there is a lot more driving costs beyond regulatory scarcity and tax structures, although they are certainly drivers.

    I read a study on land availability in South East Queensland a few months ago. The bottom line was that local government had already approved land use change for approximately 10-15 years of supply, but developers had only released less than one year of supply. Clearly the tradeoff between holding costs and restricting available supply on the market favours developers restricting supply themselves. I’m sure the same occurs across the capital cities. Much of the regulatory scarcity and subsequent high land process is effectively a myth.

    Also a lot of the scarcity is simply due to geography and demographics. Undeveloped land is generally pretty scarce nearer employment hubs and places where people would actually prefer to live. This simply creates significant increases in housing prices in preferred locations (usually existing stock). I’m not sure what governments can do about that apart from making renewal to higher density in built up areas easier. I think most are around transport hubs. Although what tends to happen is that expensive houses are simple replaced with high-end apartments as this is the profit maximising strategy for developers. This does little for housing affordability.

    A lot of the headworks charges on new land are simply to cover the capital cost of water, sewage, storm water and local transport infrastructure for new developments. Historically these capital costs were typically covered by the broader general rate base (but rates were higher than they would have to be under existing arrangements). The new system simply incorporates the capital cost of infrastructure into land prices. Nothing particularly wrong with that. Land prices now better reflect the bundle on infrastructure that underpins new housing. Effectively the current approach substitutes a higher capital cost (bundle of land and infrastructure) for a lower ongoing cost of land ownership (lower rates).

    Finally, the size and quality of new builds is fundamentally different to previous generations. For example, the average size of new houses in South East Queensland is 240 m2 compared to 175 m2 30 years ago (according to the ABS). The quality of the build is also much better (2nd or 3rd toilet, media room, stainless steel appliances, ceramic tiles anyone??). This is purely consumer preferences. At an average build cost of $2,000/m2, this is another $130K increase in the cost of the average new build attributable to changes in consumer preferences. No market failure here.

    The point I’m trying to make is that simply blaming regulatory scarcity is a bit misleading.

  15. pete m

    Your home should not be your retirement fund!

    Kids these days likely will need mum and dad to cark it to afford a new place.

    fun times.

  16. Gilas

    I routinely drive past empty houses and apartment blocks which are <50% occupied (built in the early 2000s). The house – on a real quarter-acre block – behind mine has been maintained AND unoccupied for the last 13 years, after being rented for a decade prior to that. And there are at least 2 others (that I know of) in nearby blocks. This is in Sydney's Western Suburbs, not the outback.

    Hoarding of property by those innocent and struggling mums-and-dads investors, not scarcity, has been the problem for years. Listening to those concerned, selfless chaps at the HIA pontificating on this is simply insulting to one's intelligence.

    Introduce REAL financial dis-incentives to owning multiple properties and watch the problem disappear. Of course, that might involve an overall loss to Govt. revenue from exorbitant stamp-duties, developer levies, political donations etc..

    So, keep dreaming!

  17. Yohan

    Good points Alan except for this

    Moreover, negative gearing is available to all investments and excluding housing from it brings distortions by treating investments differently.

    Residential housing is a consumption good, not a capital good, i.e residential housing does not add to the accumulative capital stock and raise the productivity of the economy. Considering this basic economic fact, why is it bad to distort the negative gearing rules so that investment money flows into real business and capital goods that actually add to the wealth of this country?

    Negative gearing should be for investing in real business, factories, shares of companies, infrastructure e.t.c not bidding up the stock of residential housing.

  18. thefrollickingmole

    Token.
    Good news that the voters keep putting politicians in power that raise the cost of running a business (regulation, wages, energy costs, speed to import) to the point where businesses move offshore as quickly as possible.

    Got it, plus all that money flowing into housing is precisely because its seen as the last/only risk free investment you can make.
    Government/councils hate small businesses, theyd rather deal with one or 2 huge ones than piddle around with people turning over less than a million a year. If they set fire to “Australian standards” and burned every “thou shalt not” book of regulations lodged in council offices and replaced it with a stated objective of assisting and encouraging every startup by leaving it alone a lot of pressure would come off housing.

  19. David from Canberra

    the cost of a fully serviced housing block complete with telecom, water, energy and road infrastructure … $300,000 or $400,000

    Are any of these components are delivered by the private sector? Even telecom (ie laying cable for NBN) is a government enterprise. How much cheaper would these services be if they were delivered by the private sector, with genuine competition? Would it make a difference?

    And to Jim (12:00pm) – your penultimate paragraph re the increasing size of houses is not relevant. The main article points to the increasing cost and proportion of the “land” part of the “land+house” package. Your other points are excellent, however, and most interesting.

  20. Streetcred

    Planners in academia have a lot to answer for … if their aim was to keep people impoverished they have succeeded beyond their wildest dreams, home ownership is out of the reach of many nowadays. Home ownership is a step to freedom from the government teat.

    Wendell Cox was right !

  21. ChrisPer

    An endogenous demographic driver of high demand is declining household size. Many bigger 4-bedroom, 2 or 3 bathroom houses are occupied by only 2 or three people. In the past a family of six would have only a 2 or three bedroom home while the kids were small.

    And as they grow up and (if you are lucky) move out, the family home is often where the parents want to stay; even if one of the next generation takes the house over the family will likely be several members smaller. My home and my suburb are obvious examples; family of six, now three adult kids sometimes at home, plus two empty potential bedrooms, and if they all were gone I am blowed if I would want to move out.

    Also, a lot of ‘downsizing’ is at a hair-raising cost so people end up with a newer, smaller home but no better financially.

  22. rebel with cause

    Jim – in practice headworks charges have increased significantly and so have general rates. Councils charge more and deliver less and less.

    Let’s not forget the additional costs that regulation has imposed on new builds either. Be that minimum NatHERS raitings, OH&S compliance for builders, or building standard requirements for fire proofing.

  23. john of gaunt

    The cost of a newly developed block of land with a 4 x 2 home (4 beds, 2 Bathrooms) sets the base cost for housing in a city. A better location, a bigger house increases the value of the property.

    Project houses are quite cheap, you can get a good one for $200,000 and gradually make improvements over a period of time. So it’s the cost of the land.

    Now I’ll make the casual observation that many of the more exclusive suburbs in Sydney still don’t have kerb and gutter. Nor do they have artificial lakes with cycleways around them. Nor did these suburbs have the ‘benefit’ of numerous town planners assuring that things were done to a minimum standard. Developers opened up the land at minimum costs.

    I know of old blokes who set up tents on their properties in the 1960s and then built their own houses. Those houses are still standing. Federation houses were often built on foundations of a few bricks placed on their sides in a trench. Those houses are not only still standing but often have heritage orders placed on them. By Council planning officers.

    Regulation costs are constantly increasing the costs of buildings and land, silly bureaucratic nanny statism. Leave suburban development in the hands of developers and let the market determine the price. It worked well in heritage areas like Glebe, Paddington and Haberfield in Sydney.

  24. maurie

    On a side note, when witnessing subsequent earthworks one time as first gas – then sewerage & finally water crowds, (all unproductive government employees) disrupted street occupants, each time with road repairs after excavations of crossings, I was informed that some countries, (without periodic cancerous self serving union controlled governments) simply provided a single excavation with all services installed separately & each accessible for repairs in the single tunnel. I suppose we must accept the unproductive system in Australia where councils have discovered a short term bonus by squeezing more rate payers per square foot in order to fund their mobile phones & cars with unlimited fuel cards. We already must suffer the indignation of watching councillors rushing to a neighbouring suburb hotel with a wide screen TV to watch events whenever the Greens caused bushfires encroach on their own suburbs.

  25. rickw

    That graph is an indictment of both the Liberals and Labor:

    – To have such high housing prices in a country that is so sparsely populated is absurd.
    – To have high proportions of income dedicated to paying for a house is a disaster waiting to happen.

  26. Petros

    Baby boomers screw over other generations. Bizarrely it’s their own kids that will suffer most out of the current generations. Nice people.

  27. rickw

    If they set fire to “Australian standards” and burned every “thou shalt not” book of regulations lodged in council offices and replaced it with a stated objective of assisting and encouraging every startup by leaving it alone a lot of pressure would come off housing.

    The Australian Standards and Building Code of Australia do not add much cost to houses. They are also not something new, they pre-date the spike in housing costs, in most cases they simply capture “normal” practice, eg. the minimum size for a doorway, the minimum height for a ceiling, offsets from a boundary etc. Most Victorian and Federation buildings pass almost all of the BCA right now.

    The fact that we generally have good and sensible building codes should actually be our excuse for getting rid of the entire “Planning” and building approval circus. What do they do except inject some 3rd rate beaur0crats opinion into your project?

    I had to get a “shadowing overlay” completed for a single story dwelling with offsets as per Australian Standards. FFS, we have already decided which boundary offsets are OK through the standards, so why am I having to personally pay for a study to reinforce that they are OK??

  28. I am the Walras

    I don’t think it’s ‘unwanted leadership’.

    65% of the population want higher and higher house prices, and they vote accordingly.

    Just watch the Keynesian panic at the Reserve Bank when house prices start to fall. Wall-to-wall bowel evacuation before they run the printing presses at full tilt.

  29. I am the Walras

    Good on you for writing about this Alan.

    It’s something the political classes and the stuffed shirts at Treasury and the Bank refuse to discuss.

  30. Alex Davidson

    Jim (12.00pm) has obviously never attempted to develop undeveloped land on the fringes of a major Australian city. Probably never tried to alter his house either.

    There are so many rules and regulations – each maintained with an iron fist, including, in NSW at least, a special superior court – that it is nonsense to use the word “market” when discussing housing affordability in Australia. It is Soviet-era central planning on steroids, and not at all misleading to blame it as the major cause of stratospheric land prices.

    On the contrary, to suggest that regulation isn’t the major factor driving up land prices is nonsense. No Australian city is geographically-restricted like Hong Kong for instance. Every city is surrounded by thousands of hectares of undeveloped land within reasonable commuting distance of job centres, but which has been quarantined from development simply because the government says no! It has a massive effect on prices.

    To those who drag out the red herrings of negative gearing, land banking, capital gains exemptions, overseas investors, etc, etc: if draconian restrictions upon the use of land aren’t much of a factor, then why do we need them at all, and why are governments so resolute in maintaining them? When one attempts to reason with the politicians and bureaucrats responsible, as I have done for years, one is met with a wall of nonsense and illogic. There are obviously powerful forces at play, determined to maintain the planning protection racket as long as they have the power to do so.

    And please let’s not hear any more talk that we need these oppressive regulations because it’s “what the community wants”. Only unhampered markets truly show what the community wants.

    Finally, we should all remember that wealth is created when economic resources are put to uses that individuals value more highly. Turning undeveloped scrubland into housing does increase wealth, and is a very productive activity.

  31. Craig Mc

    60% of the population wants to live in one of five cities. Price pressures are inevitable.

  32. notafan

    What about Melbourne’s stupid “green wedges” ?
    Load of nonsense.

  33. Luke

    No Walrus, they’ll just do what they have already started and throw out the rules about foreign ownership. Australian housing has become the temporary bank for much of the wealthy from economically uncertain countries. Expect these countries, like China, to exercising more and more influence on internal Australian policy in the future.

  34. thefrollickingmole

    in most cases they simply capture “normal” practice,

    Council jobsworth (2 of): “Your public toilet in the 40 year old public building you are re-opening after it has been derelict for the last 10 years is 1.5cm too small, cant you just push the wall out a bit”?
    Me: Are you insane?
    Jobsworth: “Australian standards”….

    Nope I wasnt referring to AS impacting on house prices directly (although Im sure it does) but it does make setting up and running a business (a traditional means of investing your money) a shitty alternative to the housing ponzi scheme.

    How about a vets (2 vets, set up in an appropriately zoned area) having to spend $500,000 on fire fighting equipment (pumps/tanks etc) in what used to be a suburban house (Australian standards!)

    Or the engineering firm bloke who wanted to construct an open sided lean to on his industrial shed being told because it went over “Australian standards” he would have to fork out the same $500,000 or so to install fire system in his shed?

    Australian standards is a cancer on business and is used in a negative way to prevent things happening, and increase costs, not just to “capture whats going on”..

    Oh and if you want a copy of the standard so you can comply… guess who owns it and will charge ($400 or so) you to access it? Australian standards.

  35. Fisky

    I don’t think it’s ‘unwanted leadership’.

    65% of the population want higher and higher house prices, and they vote accordingly.

    Just watch the Keynesian panic at the Reserve Bank when house prices start to fall. Wall-to-wall bowel evacuation before they run the printing presses at full tilt.

    I don’t know why politicians even bother talking about “housing affordability” (i.e. falling prices). They should shut up at once. They have no intention of allowing house prices to fall.

  36. Farmer Gez

    What interest does a concil have in lowering land charges when rates are levied as a percentage of CIV?
    What councillor or staffer would want to reduce the base and lower income?
    Re-jig the rating structure and you may have some hope.

  37. Driftforge

    My house is my retirement fund. Don’t you dare lower prices

    And there is the problem in two sentences. Houses are depreciating assets. Land as currently structured is a parasitic asset, drawing changes in value near exclusively from the efforts of others. Thus the first component is economically deficient and the second morally deficient, yet we expect others to act in order to preserve our capacity and expectation of value accrual.

    It doesn’t have to be that way, but getting out of our current bind is going to be costly.

  38. Driftforge

    They should shut up at once. They have no intention of allowing house prices to fall.

    The Swiss had no intention of breaking their peg to the Euro either. Same result pending?

  39. rickw

    Council jobsworth (2 of): “Your public toilet in the 40 year old public building you are re-opening after it has been derelict for the last 10 years is 1.5cm too small, cant you just push the wall out a bit”?
    Me: Are you insane?
    Jobsworth: “Australian standards”….

    The Australian Standards are generally not retroactive, so application to existing structures that substantially meet the intent should not be an issue.

    That being said, there could be a substantial trimming back of requirements, a lot of is there does not make sense from a risk perspective / cost benefit analysis. I have particular knowledge of AS requirements with respect to fuel storage. Fire fighting requirements are absurd, the cost of fire protection often exceeds the value of the asset you are trying to protect and the efficacy of approved fire protection systems in extinguishing fires is very questionable.

    The vast majority of fuel storage fires are not “put out”, they burn out. To get the fire out buncefield out, they had to utilize every drop of AFF foam available in the UK, plus some from Europe, plus a very significant proportion of available fire fighting equipment (BTW, they now have a groundwater contamination issue thanks to the AFF foam).

    More than one oil company has in its standards “do not install fire protection unless mandated by regulations” – oil storage tank fires are very rare, and once started they usually prove impossible to put out, you just have to wait for them to burn out.

  40. thefrollickingmole

    The Australian Standards are generally not retroactive, so application to existing structures that substantially meet the intent should not be an issue.

    Nope, not quite, according to council jobsworths ANY application which changes the use of a property triggers a necessity to upgrade to latest AS.
    Therefore my 40 ear old building must comply, but the refurbishment (but not to Standards) of the multi million dollar shopping complex doesnt.

    Its corruption, where existing property/business owners profit by legislative barriers to competition. Big business loves AS because it employs 2 people full time to fill in paperwork, a tiny expense to them, compared to a competitor opening up. (where the barrier for entry is 2 full time compliance salaries before they earn anything else).

    Id say AS has a bigger impact on the day to day pricing of goods and services than the GST, just much more pervasive and invisible.

  41. Fisky

    It doesn’t have to be that way, but getting out of our current bind is going to be costly

    Unwinding this is gonna be great! I hope it happens soon. Just make sure you don’t have anything in the bank, anything in property, or anything denominated in AUD.

  42. Yohan

    I am sure that both sides of politics, and most commentators, have underestimated just how much our 1996-2008 economic boom was driven by the rise in house prices rather than a sustainable economic growth.

    Now that personal household debt has reached 150% of GDP we have hit some kind of upper bound, with debt levels only rising in line with inflation rather than fast outpacing it like before.

  43. mundi

    To many vested interests for it to ever chance.

    If it was fixed, we would end up with a poor generation, stuck having paid 200% more because of government regulation.

  44. Bruce of Newcastle

    Limiting negative gearing to new builds would encourage more development, while reducing the speculation on established dwellings which doesn’t bring new supply to market.

    BB – You are ignoring the time dimension. It takes maybe 5 years to do a development project – possibly even as much as 10 years. There are several such development projects in the suburbs around where I live and two of the five have actually started some work recently after a decade or more of sitting stagnant.

    So if you stop negative gearing today you do give a signal to the market that new build is better NPV than established housing. But since new build is delayed you will get a rent spike for maybe 10 years because existing investors will push harder to increase the returns they lost to the revised legislation. (Recall that often investors are offsetting other income streams, therefore aren’t necessarily chasing rental yield as hard as they could…but that would change overnight). Secondly because investors would not get the tax deductibility they could sell out, thereby transferring ownership to owner occupiers. House prices might be flat for a while as more houses come onto the market from investors, but as owner-occupiers pick them up due to the incentive of higher market rents and lower interest rates the amount of available rental stock will fall.

    So rents will rise in your scenario.

    You are right that eventually it might lower rents, but domestic rents are sticky. So the lower pressure on rents in a decade’s time will only be after a rapid rise to plateau. The rent as a percentage of income will thus probably be higher than if you didn’t remove negative gearing on exiting investment property.

  45. I am the Walras

    Fisky
    #1574897, posted on January 19, 2015 at 4:39 pm
    It doesn’t have to be that way, but getting out of our current bind is going to be costly

    Unwinding this is gonna be great! I hope it happens soon. Just make sure you don’t have anything in the bank, anything in property, or anything denominated in AUD.

    Driftforge, Fisky, like both of you I reckon we are in for the dooziest of all doozies when the Australian financial system comes unhinged, under the weight of its own accumulated bullshit.

    As you suggest, Fisky, I’ve diversified accordingly. I’ve also stashed lotsa popcorn in the cupboard, and I’m ready for the entertainment extravaganza of the century to commence.

    150% of GDP, in debt mostly borrowed offshore, all tied up in an unproductive asset which is now priced three standard deviations – get that, THREE! – above its long term average. This is going to be massive.

  46. .

    steve
    #1574641, posted on January 19, 2015 at 11:37 am
    My house is my retirement fund. Don’t you dare lower prices

    Then you ought to buy all of the undeveloped land and lock it up.

    You have no right to demand competition goes away because you have chosen not to diversify.

  47. .

    This is sick.

    The whole financial system has potentially catastrophic contagion from a policy regime of high taxes and regressive regulation.

  48. Just make sure you don’t have anything in the bank, anything in property, or anything denominated in AUD.

    Pretty much in that state already. Got that all sorted a few years back and given the teetering pile hasn’t fallen yet, seen no reason to unwind.

    It could still stay up for a while though.

  49. JC

    Out of 86 cities across the world with over a million people house prices relative to incomes in Sydney and Melbourne were the third and sixth most expensive. That’s the findings of the latest annual survey of house prices released this week by Demographia.

    But that’s totally understandable, as we have a land shortage.

  50. I am the Walras

    .
    #1575245, posted on January 19, 2015 at 11:19 pm
    This is sick.

    The whole financial system has potentially catastrophic contagion from a policy regime of high taxes and regressive regulation.

    It’s sick, it’s inexcusable, and it’s baked in the cake.

    Nothing you or anyone else can do about it now.

    Clear the area.

  51. Fisky

    As you suggest, Fisky, I’ve diversified accordingly. I’ve also stashed lotsa popcorn in the cupboard, and I’m ready for the entertainment extravaganza of the century to commence.

    I have nothing, zero (=0) denominated in AUD, or remotely attached to Australia and everything bet against AUD. My only concern is that when this does go down and I am looking to pick up cheap property in Australia (say in 5-10 years time), whether the only option then will be 100% upfront. That will require being a Scottish Jew and cutting down on entertainment, especially booze, for longer than I’m ready.

  52. Fisky

    steve
    #1574641, posted on January 19, 2015 at 11:37 am
    My house is my retirement fund. Don’t you dare lower prices

    Lump it, Stevie, lower prices you will get (and lower prices I will gladly take!).

  53. Fisky

    So when Prime Minister Boobs Shorten passes the Pension Cancellation and Medicare Annulment Act (2017) in the face of a $200 billion budget deficit, do you think the ABC will be screaming about austerity or nag Australians to tighten up?

    Place your bets!

  54. struth

    Australia has no excuse.
    Has there ever been a dumber country?
    To start this country with the gift of democracy and the resources and space available to be the envy of the world and indeed a super power ,we instead wallow in our own lethargic, bureaucratically induced, over regulated , shit.
    The housing situation shows clearly our regulatory impediments and cost , measurable quite clearly with the rest of the world.
    Generally, Australian home owners are not moving as they can’t get the price needed for their property they paid too much for, and are just locked in, trying to pay the difference down.
    The young give up.
    The effects on society are enormous.
    Australia’s political lethargy is really starting to come back and bite it on the arse.
    There may be worse places to live, but that is not the point.
    Australia should have been a beacon, instead
    it will suffer an ignorant , lazy and corrupt , Hi Vis suicide.

  55. .

    Fisk the private equity and junk bond baron.

    I like it.

    A plutocrat to bankroll libertarian causes.

    The thing is, what if Shorten also forgives all debt?

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