Bad luck, next generation

So, this is what a decade or so of driving up house prices in a vicious little feedback loop (Howard slashes CGT and chucks in a homebuyers’ grant and prices jump, then more of those with now increased equity in their home think hey, I should invest in rental properties, pushing up prices, so more try to get in with their further increased equity, rinse, repeat), combined with half a century of signing off on housing developments further and further away from the Melbourne city centre without either building necessary transport infrastructure or even leaving space for it to be built lateronly a tiny fraction of young people in Melbourne can now afford to buy a home anywhere within reasonable commuting distance to the CBD. (And of course it’s even worse in Sydney.)

MOST Melbourne homes are too expensive for households on a median income, and only a handful of suburbs – mostly on the city’s fringe – pass the affordability test, a government report reveals.

The report shows households earning the city’s median annual income of $70,300 have few suburbs to choose from. Even the cheapest suburbs require an annual household income of between $67,000 and $90,000 to pay the mortgage and other bills.

In many inner Melbourne suburbs – which have better access to public transport and services – a household requires an income of between $120,000-$200,000 a year.

The Tandberg sums up part of it:

It’s difficult to overstate just how much long-term damage this stuff does to our society.

Could we please (a) stop encouraging the burying of investment capital in rental property, and (b) stop just giving state governments a free pass when they permit developments to be built without leaving space for necessary infrastructure? Just because the harm won’t be felt till after they’ve left office is no reason we shouldn’t be calling them on it now. Unless you’re planning not to be here in twenty years, it’s going to affect you, too.

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19 responses to “Bad luck, next generation

  1. By far the most critical factor in skyrocketing real estate prices has been urban growth constraints.

    The CGT discounts and housing grants (and loose credit) certainly added fuel to the fire, but the bubble was essentially inevitable so long as urban planners make it difficult to convert fringe land to housing and put up “growth barriers”.

    This has been quite comprehensively covered by the guys over at Macrobusiness.

  2. By far the most critical factor in skyrocketing real estate prices has been urban growth constraints.

    But we have been building new developments. The problem is they’re not being built with adequate infrastructure, or even room to build adequate infrastructure later.

    And people are still being housed – the problem is that there’s a growing gap where one generation has multiple houses, and the next has none and has to rent from them. The inflated prices are largely from all the investment money that’s been poured into existing houses instead of something constructive.

    the bubble was essentially inevitable so long as urban planners make it difficult to convert fringe land to housing and put up “growth barriers”.

    Prices rocketed well ahead of population. It’s not the lack of housing – it’s the influx of investors using their equity to price it out of reach of ordinary people. And there’s been too much fringe land converted to housing without the building of proper infrastructure. It’s not that governments don’t do enough for developers – it’s that they’ve been completely craven and incompetent in standing up to them.

  3. The problem is that Governments have _only_ really been helping developers, which has led to constrained land supply (thanks to land banking) and skyrocketing land prices.

    Almost all of the increase in real estate prices has come from the land component. In real terms, house construction prices have hardly increased at all.

    You have the symptoms right – unproductive speculative money pouring into real estate and poorly planned developments. The reason is because land supply is (ridiculously) constrained (by Councils and State Governments), so prices go through the roof – good for Governments, good for developers, terrible for normal people.

    A non-trivial driving factor is that Stamp Duty is one of the few ways State Governments have to raise revenue. Hence, they are _extremely_ biased towards rising real estate prices.

    Swap stamp duties for a land tax, ease off (significantly) on growth constraints, and the real estate bubble will evaporate.

  4. Only if they make sure they’re building proper infrastructure to these places, like new rail lines. Urban sprawl isn’t a great solution.

    Cutting stamp duty won’t help because the amount the banks will lend hasn’t changed; it’ll just be more equity for those who already own properties, and more they can borrow to outbid homebuyers.

    I reckon the solution involves taxing capital gains like actual income, getting rid of inflationary homebuyer grants, and greatly improving tenants’ rights against landlords. Make being a landlord more of a pain in the arse so speculators will look for easier investments – and in the meantime also give some peace of mind and stability and basic rights to the generation that’s been stuck renting.

    We need the investors and speculators OUT of the market, putting their money into something that actually is constructive and creates jobs etc. Make owning multiple houses unattractive and unusual.

    And stop approving developments without long-term planning and infrastructure.

  5. Only if they make sure they’re building proper infrastructure to these places, like new rail lines. Urban sprawl isn’t a great solution.

    It is for real estate prices (broadly speaking).

    (Lest you get the wrong idea, I agree there needs to be somewhat decent infrastructure there, however, but this should be funded by something like land taxes.)

    Cutting stamp duty won’t help because the amount the banks will lend hasn’t changed; it’ll just be more equity for those who already own properties, and more they can borrow to outbid homebuyers.

    The point isn’t to _cut_ stamp duty, it’s to _replace_ it with a land tax. That was a key Henry Review recommendation.

    Another major problem with stamp duty is that it impairs labour mobility. If I want to pull up stumps in, say, Sydney and move to Brisbane, it shouldn’t cost me anything meaningful to sell my house in one place and buy it in another. It’s beyond outrageous that doing this today will cost me tens of thousands of dollars just in stamp duty.

    I reckon the solution involves taxing capital gains like actual income, getting rid of inflationary homebuyer grants, and greatly improving tenants’ rights against landlords.

    I agree with most of these [0], but it still won’t help so long as land supply is constrained.

    Land should not be expensive in this country. We have truly absurd amounts of it to use [relative to our population], yet Governments and urban planners have tried to squash something like 90% of the population into 5 cities. Insanity.

    When the median multipliers start to get back around 3, where they should be, we’ll know the system is fixed.

    Like I said, the guys over at Macrobusiness – particularly “The Unconventional Economist” have covered this extensively and comprehensively. Well worth a weekend’s reading.

    [0] Personally I don’t have a huge problem with the CGT exemption for the primary place of residence. If I buy a house today and real estate values across the country increase dramatically over the subsequent couple of years, full CGT would mean I need to downgrade my quality of housing if I move (or pay a “fee” in the form of CGT to maintain the same level). The Swiss have the right idea here, where CGT is not applicable if the proceeds from a PPoR sale are not subject to CGT if used to purchase another PPoR within a set time (from memory, 6 months).

  6. Oh, I don’t particularly mind the CGT exemption for a primary residence – although it’s still not a huge problem so long as you deduct actual inflation, so the only gain you’re taxed on is an actual gain, not merely the value of money decreasing over time. But the main problem is the CGT exemption for investors, which makes shoving money into housing much more attractive than it should be, so if we have to leave it in for primary residences, so be it.

    Good point about stamp duty. But if they get rid of it WITHOUT replacing it with a land tax, then it’s just a huge hole in the budget to give extra money to those fortunate enough to already be on the property ladder.

    And if governments are going to agree to building new suburbs then they’ve got to stump up decent infrastructure for the poor sods who are going to live in it, rather than leaving them subsidising the decent infrastructure for the wealthy bastards lucky enough to live closer in.

  7. “one generation has multiple houses, and the next has none and has to rent from them”

    I’m glad you didn’t point specifically to ‘baby boomers’ here, Jeremy. As a BB, I don’t know of one single BB who has an investment property. From my circle of friends, relos and acquaintances, it’s the generations after the BBs who own the rental properties and in particular tradies who seem to be the new middle class financially.

    If a CGT is introduced on residential properties , then doesn’t that have to be followed up with tax-deductible mortgages and maintenance as is the case in the USA?

    First home grants, baby bonuses etc. are a curse and most people don’t seem to realise they add to the cost of everything. Just like increases in the Medicare rebate which are followed by doctors jacking up their consultation fee by the same amount plus a bit extra almost immediately (well, at least my doctor does).

  8. narcoticmusing

    Swap stamp duties for a land tax, ease off (significantly) on growth constraints, and the real estate bubble will evaporate.

    Ok, have you looked at the land releases? They aren’t selling. There is currently enough land released North/East/West of Melbourne for at least a decade of population growth and it isn’t selling. The solution is NOT releasing more of this land and destroying even more green space. The land is over-priced (hence not selling) without providing anything for the person who moves out there – no infrastructure, no services, failing schools. This creates an ostracized group who you wouldn’t even want to term a ‘community’ lest you imply that they actually have opportunity to interact as a community, which they don’t as there is no infrastructure/services.

    I laughed when the paper listed the average income a household would need to earn to live in the inner city ($200k pa). People will read that and think it was exaggerated up – but it is exaggerated down due to public housing. I don’t know anyone who could service an inner city mortgage with an income that LOW. Now that is sad.

  9. There is currently enough land released North/East/West of Melbourne for at least a decade of population growth and it isn’t selling

    THANK you! Why is this hardly ever mentioned? Along with the more obvious solution of suburban infill? When I first moved to Melbourne over ten years ago there were massive sites that had lain dormant for decades in the inner city. Many of them are still unused. Fill these first, developers, and then we’ll talk. The other solution, is, of course, regional revitalisation by providing infrastructure in regional towns and therefore employment and opportunity.

  10. There is currently enough land released North/East/West of Melbourne for at least a decade of population growth and it isn’t selling

    Hence easing restrictions on density being more important than rezoning the urban fringe.

    Its not supply of land that matters, its supply of land within a given commute time of employment. This means you need both a) good transport infrastructure and b) medium to high density development.

    Proper land taxation would be a huge plus, too (by far the single most important area of tax reform needed in Australia.)

  11. narcoticmusing

    And if governments are going to agree to building new suburbs then they’ve got to stump up decent infrastructure for the poor sods who are going to live in it, rather than leaving them subsidising the decent infrastructure for the wealthy bastards lucky enough to live closer in

    THAT is the issue with the land. Well said J. It has nothing to do with inadequate land release. Go drive out West/East/North to where all the land has been released and then tell me there isn’t enough land released. It is what comes with the land that makes it valuable or useable. There’s land in the middle of a desert too but no one is too keen on living there.

  12. Ok, have you looked at the land releases? They aren’t selling. There is currently enough land released North/East/West of Melbourne for at least a decade of population growth and it isn’t selling.

    Because it’s all land-banked up and priced absurdly, so for all practical purposes it hasn’t been released at all.

    Along with the more obvious solution of suburban infill? When I first moved to Melbourne over ten years ago there were massive sites that had lain dormant for decades in the inner city. Many of them are still unused.

    Because they are also priced absurdly, to say nothing of the administrative overhead in bringing them to market as, say, an apartment block development.

    Real estate in this country is expensive because supply is constrained. What’s even worse, is that driving up real estate prices drives up the costs of _everything_. The massive real estate bubble here is one of the biggest contributors to our high cost of living (and low productivity).

  13. I’m glad you didn’t point specifically to ‘baby boomers’ here, Jeremy. As a BB, I don’t know of one single BB who has an investment property. From my circle of friends, relos and acquaintances, it’s the generations after the BBs who own the rental properties and in particular tradies who seem to be the new middle class financially.

    No it’s not. Baby boomers own a bit under half of the housing stock in the country (despite comprising only about one quarter of the population).

    http://www.macrobusiness.com.au/2010/11/baby-boomers-retirement-and-asset-prices/

  14. Because they are also priced absurdly

    Then take price out of the equation, so that they are forced to be used, no matter what. Enact a “use it or lose it” law so that owners will develop it appropriately for residential use, or risk having it compulsorily acquired.

    I really don’t think that we’ll be seeing many developers waiting outside Centrelink or begging for small change on the street if laws like this are enacted. They don’t seem to be crying poor at the moment, do they?

  15. Smithy, I think you need to read up on some of the work of the Renegade Economist:

    http://www.earthsharing.org.au/campaigns/

  16. Enact a “use it or lose it” law

    With a proper ad valorem tax on the unimproved value of the land, you don’t need such a law, because “banking” land stops being profitable.

    http://en.wikipedia.org/wiki/Land_value_tax

  17. narcoticmusing

    I think at a minimum it would be nice if land that is released is required to be set at something close to market value – currently you can buy land in established suburbs for as much or less than the tiny blocks out in craigieburn et al.

  18. @JR – yes, that would work too.

  19. BTW Jeremy – I heard your response in the SW podcast to the argument that encouraging regional migration is a way of easing the burden on cities. I agree that making everyone move to the bush isn’t a panacea, but surely investing in regional infrastructure so that job security and lifestyle options are enhanced is a good use of money?

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