The headline says it all:
Rental houses pushing boom
INVESTORS are driving Victoria’s real estate market, taking out almost half of new lending in May to buy existing homes.
…thereby locking out potential homebuyers and forcing them to rent instead. Creating a future where fewer people own their own home, with the associated social problems.
Yup, it’s only getting worse.
But it doesn’t have to be this way! It could be solved tomorrow by taxing capital gains at a rate comparable with income tax (why should income earned by working hard be taxed more than income “earned” by sitting on property?) with a full exemption for a person’s primary residence. And by increasing renters’ rights.
Sure, the people who’ve been profiteering off the misery of young Australians since Howard slashed the CGT will kick up a stink – but haven’t we given them their way long enough?
UPDATE: Those who think the young are just being precious, we sucked it up in our day, if you didn’t spend so much on eating out etc etc: even according to News Ltd, Australian first-home buyers face 4.5 year savings wait to buy property. Is that how long any previous generation had to save – for a bloody ten percent deposit?
Moved On 
Having just achieved a tidy capital gain on a property that was bought derelict and restored to a really schmick condition, I question this notion that property gains are necessarily the result of sitting around and doing nothing. An awful lot of sweat, investment and hard work goes into that sort of thing. We made a profit and a property that was barely habitable was sold to a young couple to start a family. I think this is a win-win.
You might need to have some kind of inflation adjustment if you don’t have the 50% discount. And that gets tendentious, because consumer inflation may not be the same as asset inflation.
Increasing renters’ rights sounds good (disclaimer: I rent). I’d love for renting norms in some other countries – like 5-year leases – to take effect here.
Capital gains (although a misnomer) should be an equal rate to other taxation. Differential rates are a big distorter of the economy.
Those two together, however, won’t “solve” the problem. The supply of housing is incredibly restricted (estimated shortfall – 200,000 residences, with the possibility of tripling in 20 years).
Also, on the “associated social problems”, I understand the theory, but how do you account for the empirical lack in places like Netherlands (50% homeownership), Germany (42%), Switzerland ( 35%)?
“You might need to have some kind of inflation adjustment if you don’t have the 50% discount. And that gets tendentious, because consumer inflation may not be the same as asset inflation.”
That’s a good point, but since the point is to slow down asset inflation, I’m happy with it being CPI.
“Also, on the “associated social problems”, I understand the theory, but how do you account for the empirical lack in places like Netherlands (50% homeownership), Germany (42%), Switzerland ( 35%)?”
I don’t know – cultural factors?
I think the data linking home ownership and reduced crime rates is fairly well established, though. But I don’t have any links.
consumer inflation may not be the same as asset inflation
This is actually the point – to curb the price inflation of residential property assets. If residential property inflation exceeds the CPI, why would you want to carve out those particular inflationary gains from the tax?
Dont worry deflation will sort this all out.
The increased capital value of the unimproved land derives from its capacity to extract economic rent – this should be heavily taxed, a.l.a. Georgism, since unimproved land is basically a scarce resource that no one has any good prior claim to, just like the minerals our government recently decided to tax more heavily.
The increased capital value of the improvements on the land is a result of the owners’ work – say renovating it – or the foresight of their investment – say in choosing to sit on a near vacant apartment complex in anticipation of a new train station opening in the area soon.
These and indeed all other capital gains should be taxed at same rate as income; the easiest way to do this in the framework of the current system would be to set CGT the same as the top marginal rate of income tax, but also grant the amount paid as a deduction, so that individuals effectively pay tax on Income + Capital Gains.
Capping rents (or indeed nearly anything) at CPI is an extremely bad idea. What if the price of concrete or bricks goes through the roof? The cost of building new housing would get expensive much more quickly than the CPI basket of goods; only sales prices and not rents would be able to adjust, so current investment properties would be dumped en mass into the market. Those renters able to access enough capital would be able to snap them up, those without such access would miss out. New homes would only be sold to resident owners, not investors, and apartment complexes would probably stop getting built altogether. Banks would profit immensely from all the new mortgages, and those unable to obtain home loans would simply go homeless.
i like how the Hun calls them “investors”
buying a property, losing money on it, and hoping to make a profit in the future isn’t “investing”, its speculating
“The tax statistics show that one in 10 taxpayers is now a negatively geared investor.”
1 in 10! when the music stops, imagine how many people wont have a chair to sit on
shabadootwo – there should be a deduction for capital improvements, of course. The main problem is people sitting on land and profiting off the increase in land prices, for which, of course, they do nothing.
jordan – your doomsday hypothesis could easily be averted by the government providing more incentives to build – eg, in your scenario, a grant to cover the increased cost of building materials. That way new houses get built AND we don’t make people homeless because housing becomes less and less affordable all the time (which is what rent increasing faster than CPI means).
“jordan – your doomsday hypothesis could easily be averted by the government providing more incentives to build – eg, in your scenario, a grant to cover the increased cost of building materials.”
Why is the government taxing my income to redistribute it to the building industry? What if I prefer to live on a houseboat, or in a caravan park?
If the other suggested changes were made, taxing away most of the economic rent extracted by increasing land prices, and aligning the taxation of land improvements with other forms of capital gains and with income, then any rationale for the CPI cap disappears.
I certainly don’t object to governments placing restrictions on markets when it can be justified (public goods, natural monopolies, environmental externalities, etc.) If the government is going to start putting price caps on essentially arbitrary goods or services, though, there needs to be a solid reason for it.
Why not put such a CPI cap on the price of fresh vegetables, or staple foods, or electricity, or schoolbooks, or clothing, or fuel? The affordability of all of these and more can be a just as serious an issue for the less well-off. As a general rule it makes by far the most economic sense to adopt a single solution that works for the entire economy: tax the wealthy, give the proceeds to the less wealthy, and let them decide for themselves how best to spend the money.
“….housing becomes less and less affordable all the time (which is what rent increasing faster than CPI means).”
Not really – rent increasing faster than real wages means housing is becoming less affordable. Rent increasing faster than CPI can simply be the result of people electing to spend proportionally more on better housing than on other things, particularly those things that happen to be in the basket of goods.
Jeremy: “people sitting on land and profiting off the increase in land prices, for which, of course, they do nothing.”
Economic illiteracy alert. Investors actually provide capital, management, repairs and maintenance. Your statement has a political purpose, but it is totally wrong.
“Why is the government taxing my income to redistribute it to the building industry?”
You mean, why is the government encouraging the building of new homes? So it can house its citizens, duh.
“If the other suggested changes were made, taxing away most of the economic rent extracted by increasing land prices, and aligning the taxation of land improvements with other forms of capital gains and with income, then any rationale for the CPI cap disappears. “
In that it might not be necessary because rent wouldn’t increase above CPI anyway?
Well, if that happens, sure.
“Why not put such a CPI cap on the price of fresh vegetables, or staple foods, or electricity, or schoolbooks, or clothing, or fuel? “
Housing’s more basic than most of those. If the price of food was increasing at the pace of rent, though, government certainly should look at stepping in.
“Rent increasing faster than CPI can simply be the result of people electing to spend proportionally more on better housing than on other things, particularly those things that happen to be in the basket of goods.”
True, CPI is an imperfect measure – but we need some means of measuring inflation. (Tax thresholds should be adjusted automatically with inflation, too.) If not CPI, what do you suggest?
SB –
“Economic illiteracy alert. Investors actually provide capital, management, repairs and maintenance. Your statement has a political purpose, but it is totally wrong.”
Good for them. And workers produce most of the goods we enjoy. Whilst paying tax.
“You mean, why is the government encouraging the building of new homes? So it can house its citizens, duh.”
You haven’t made any compelling argument why housing should be provided by the state instead of the market, except that “its expensive”. Well, so are a lot of things.
If lots of people decide they want to move into a suburb for some reason, and rents aren’t free to adjust, there will be more demand than supply for rental accommodation, and the only real choice then is rationing – i.e. “get in the queue, and maybe in a year you can move into this street.”
“In that it might not be necessary because rent wouldn’t increase above CPI anyway?”
No, it might not be necessary because the incentives to invest time and money in property, as opposed to other productive uses for labour and capital, would not be distorted.
To contain price increases we would also need some combination of higher density housing on existing land, more land to be released for housing, or reduced population growth; I am strongly in favour of the former, personally, on moral and environmental grounds.
“True, CPI is an imperfect measure – but we need some means of measuring inflation.”
The GDP deflator is a more accurate but less practical measure of inflation, but this is completely besides the point, because inflation is irrelevant to the discussion of rents.
Inflation-adjusted rents are going up, because demand outstrips supply. This isn’t a big deal for workers unless inflation-adjusted rent growth outstrips inflation-adjusted wage growth. Regardless, the solution to a housing affordability problem is to let the amount of housing adjust to match the number of people who want housing; capping prices won’t solve the fundamental people of too much demand for too little supply.