Wednesday, March 31, 2010

People our biggest import as Melbourne gets squeezier

MELBOURNE is squeezing up. A record 93,500 more people poured into the city in 2008-09, the biggest population growth any Australian city has seen.

Bureau of Statistics figures have raised dramatically estimates of population growth in Melbourne and regional Victoria, with the city now estimated to have topped 4 million people by July.

Sixty per cent of last year's record growth was on the urban fringe, where 55,586 more people joined those living more than 20 kilometres from the city centre. High housing prices closer in forced buyers to the outskirts.

Wyndham, the municipality that covers Werribee, alone grew by 10,758, or 8 per cent. Fifteen years ago, that was almost as much as the whole of Victoria was growing.

Casey, in the Berwick-Cranbourne area, grew by 8430. The Melton council area, including new suburbs such as Caroline Springs, grew by 7306, and Whittlesea, in the north-east, swelled by 6537.

Pakenham, 57 kilometres from the city and right on Melbourne's official boundary, had population growth of 10 per cent in a year, from 33,710 to 37,081.

By contrast, in the settled suburbs of Melbourne, growth was all over the place.

In central Melbourne, growth actually slowed as developers scrapped plans for apartment towers. But in virtually all suburbs, population grew at its fastest in years as many more people had to fit in somewhere.

Populations grew by more than 2000 in inner-suburban Moreland, Port Phillip and Glen Eira, and in middle-suburban Brimbank, Boroondara and Monash. There was similarly strong growth outside the city's boundaries. Geelong and the Surf Coast soared by almost 4000, Ballarat and Bendigo by more than 2000 each, and towns from Mildura to Colac and Bairnsdale shared in the growth.

Nationally, the figures show the revival of serious growth in Sydney, where the population rose by 85,394 to top 4.5 million. Five years before, Sydney had fallen to fourth in growth behind Perth and Brisbane, its population rising just 23,374 as the young deserted a city where they could not afford a home.

The figures also show that the population centre of Melbourne is moving west, drawn to new suburbs there. In the past three years, the population centre has leapt the Monash Freeway and is now in someone's backyard in York Road, Glen Iris, heading for Malvern.

Premier John Brumby last night defended projections of Victoria's population growth, saying it should be seen in the context of a growing economy.

"Victoria has dealt with such population growth before . . . and emerged a more productive, sustainable and liveable state because of it like when Melbourne's population doubled in the postwar boom," he told a cities conference.

"While long-term projections are notoriously volatile, we can reasonably expect that economic growth will outstrip population growth."

Federal Treasurer Wayne Swan yesterday reiterated his support for population growth. "The answer isn't to stop growing, it's to grow differently", he told a conference in Brisbane.

The National Farmers Federation called for tax breaks to get people to move to country towns.

Inner ring (0-10 km)

1 Melbourne 3580 4.0%

2 Moreland 2861 2.0%

3 Port Phillip 2125 2.3%

TOTAL 16,286 2.0

Middle ring (10-20 km)

4 Brimbank (Sunshine) 4326 2.4%

5 Monash (Glen Waverly) 2901 1.7%

6 Boorondara (Camwell) 2288 1.4%

TOTAL 21,606 1.6%

Outer ring (more than 20 km)

7 Wyndham (Werribee) 10,758 8.1%

8 Casey (Berwick) 8430 3.5%

9 Melton 7306 7.9%

10 Whittlesea (S Morang) 6537 4.7%

11 Hume (Craigieburn) 879 3.0%

12 Cardinia (Pakenham) 4172 6.5%

TOTAL 55,586 3.3%

ALL MELBOURNE 93,478 2.4


Tuesday, March 30, 2010

Caught in the cogs of tax regime

SINCE 1987, under Labor and Liberals alike, the federal government's housing policy has worked to make housing more unaffordable. The task of policy now is to reverse that, and make housing affordable. That cannot be done by small schemes, such as those Kevin Rudd took to the 2007 election. It will require bold actions, and politically dangerous ones.

But if you want to solve the problem, and make housing affordable, these are actions you have to take. While housing is a tax shelter, more and more money will flow into it. That money will keep bidding up prices, pushing them further out of reach of aspiring home buyers.

The same is true for the foreign money that has flowed in over the past year, after the Rudd government changed the foreign investment rules. At the time, it feared a damaging property bust. Instead, it has fuelled another price boom how much, we don't know, because for all the anecdotes, the government collects no data on how many properties temporary residents are buying.

Ordinary Australians expect to be able to buy their own home. Young and lower-income Australians are fed up with policies that work against them being able to do so. The proportion of homes they can afford to buy is shrinking year by year right now, month by month.

For a bold government, there is an opportunity to cut through and make big reforms by appealing to people's sense of fairness and the need to get policy back on track.

In one swoop, it should remove the two big tax distortions of the market. End the exemption of the family home from capital gains tax. End the tax break for negative gearing or limit it to new homes built by the investor. And, at the very least, require temporary residents to report their property purchases, so we can know whether we have a problem or not.

Over time, those changes will bring down housing prices relative to income. Tax breaks for housing have inflated house prices. Phase them out, and prices will fall back into a range that ordinary people can afford.

Last week, the Tax Office reported that at least 1.2 million Australians one in every 10 taxpayers are now negatively geared landlords. On average, in 2007-08, they claimed losses of more than $200 a week on their properties. This gave them a tax break of about $5 billion that year 4 per cent of all income tax revenue. In effect, other taxpayers had to pay that $5 billion to subsidise their losses.

As public policy, this is ridiculous. But since negative gearing was restored in 1987, this tax break and the decision to halve the tax rate on capital gains have seen investors' share of finance to buy existing homes jump from 8 per cent to 40 per cent. Those squeezed out were first home buyers.

My article last week led to an interesting debate on The Age website, and later on the Business Spectator website. Not surprisingly, many landlords argue passionately that negative gearing is good for us but mainly because they misunderstand how the housing market works. Let's take those arguments, and see how they stack up to reality.

Claim 1: If tax breaks for negative gearing were limited to offsetting rental income, landlords would pull out of the market. This would create a shortage of rental housing, and drive up rents. The victims would be the renters.

Response: This is a basic misunderstanding of something that is quite simple. If a house is not sold to a landlord, it will be sold to someone buying their own home. There will be one less home for rent, and one less household looking for rental accommodation. Supply will fall by one, demand will fall by one. There will be no change in the balance of supply and demand, hence no shortage, and hence no rent rises on this score. It would be different if investors stopped building new housing. But 91 per cent of lending to investors is for purchase of existing homes. One option for reform is to restrict the tax break to construction of new homes.

Claim 2: We saw what happened when the negative gearing tax break was abolished in 1985. Investors stopped building new homes and and rents soared. That will happen again.

Response: Sorry, but that is an urban myth. Yes, construction fell, but by investors and owner-occupiers alike, and why? Because interest rates soared to 17.5 per cent for investors and 15.5 per cent for owner-occupiers. Even so, construction by investors was a higher share of GDP in those years than in 2009.

As for rents, Bureau of Statistics figures show capital city rents rose 22 per cent in the two years when the tax break was abolished, and 23 per cent in the following two years after it was restored. End of urban myth!

Claim 3: Investors in all kind of assets are allowed to write off losses against income from other sources. To restrict rental investors to writing off losses against rental income only would introduce a new distortion that would simply push investment elsewhere.

Response: This argument normally has force. But when 70 per cent of housing investors are claiming losses, we have a distortion here and now. It is sending investment into activities that clearly do no good to the economy, and harm those who want to be able to buy their own homes.

The problem is not landlords: they will always have an important social role. The problem is the tax laws, and the politicians on both sides who lack the courage to right the wrong done to younger and lower-income Australians.

We also need to build more homes, especially in inner and middle suburbs where people want to live. But that is another story, for another day.


Saturday, March 27, 2010

Negative gearing top tax break

NEGATIVE gearing by rental investors has become Australia's biggest tax break, with landlords claiming $12.75 billion of net losses in 2007-08 to reduce their tax.

Tax Office figures show a record 1.2 million investors claimed they spent more money on their rental properties than they earned in 2007-08. One in every 10 taxpayers is now a negatively geared property investor.

On average, they claimed losses of $10,640 each or $26,500 for those earning more than $250,000 a year. These reduce their taxable income, and hence tax paid.

By the time final figures are in, the cost to revenue is likely to be about $5 billion. That means, in effect, this tax break paid landlords 4 per cent of all income tax collected.

Since tax breaks on negative gearing were restored in 1987 by the Hawke-Keating government, investors' share of finance to buy existing homes has soared from 8 per cent to 40 per cent. The number of landlords has more than trebled from 538,000 to 1.73 million, with many owning two or more homes.

The huge growth in demand from investors has been one of the main factors driving up Australia's house prices. Since 1987, house prices have soared by 433 per cent while household incomes rose 195 per cent putting home ownership out of reach for many younger or lower income people.

Unlike those buying their own home, investors can use their mortgage bills to reduce the tax they pay on other income. In 2007-08, they told the Tax Office they spent almost as much paying the interest on their investment loans as they earned in rent. Rental income was $24.1 billion, mortgage bills $20.2 billion.

Treasurer Wayne Swan yesterday rebuffed calls for the government to limit negative gearing so more people can buy their own homes. "If you go back and look at my comments over the years, I have not been a critic of negative gearing."

He said he could not comment on issues relating to the Henry report on tax reform, now before cabinet. Its main author, Treasury secretary Ken Henry, said last year the negative gearing tax break meant the tax system was subsidising landlords, and the report would "have something to say" about it.

Labor restored the tax breaks in 1987, saying their removal had hurt rental investment and driven up rents. But Bureau of Statistics figures showed no impact on rents, and investment in new dwellings for rental is far lower now than in 1987.

Rising deductions for mortgage bills in 2007-08 saw negative gearing overtake dividend imputation as the biggest tax break for individual taxpayers.

The most widespread tax break of the top five is using your car for work. In 2007-08 2.77 million taxpayers claimed total deductions of $6.48 billion for using their car on the job.

TAX WHAT WE CLAIMED 10 biggest tax deductions/credits/losses

1 Negative gearing 1.20 12.75

2 Dividend imputation 3.48 11.38

3 Net capital losses* 0.62 9.37

4 Super contributions 0.23 7.39

5 Work-related cars 2.77 6.48

6 Interest/dividends 0.94 4.04

Low income tax offset 6.87 3.71

8 Partnership/trust dedns 0.48 2.99

9 Donations/gifts 4.48 2.35

10 Tax advice 5.57 1.68




Tuesday, March 23, 2010

Housing at these prices will leave us all a heavy debt to bear

SYDNEY'S Sunday Telegraph was breathless with joy. ''IT'LL BE WORTH DOUBLE'', its headline screamed. ''Sydney is on the verge of becoming a city of suburban property millionaires as house prices soar,'' it frothed, ''in many cases, doubling in value over the next 10 years.''

In Perth, The Sunday Times was euphoric over similar predictions there. Here the Sunday Herald Sun was more restrained, but its figures showed a similar result. Even in Keilor, Reservoir and Upwey, median house prices in 2020 were forecast to reach $1.1 million.

If that proves right - and these are just forecasts, done by Australian Property Monitors for the Murdoch tabloids, apparently assuming that past price trends continue for another decade - it would put home ownership out of reach for millions of younger and lower-income Australians. It would complete our transformation from a nation of home owners to one of landlords and tenants.

But it won't happen. Melbourne house prices have trebled since 1997, not because our incomes trebled, but because we paid those prices by a massive increase in debt. In the 20 years to January 2010, household debt to the banks grew 10 times over, from $118 billion to $1224 billion. As a share of our disposable income, they more than trebled, from 45 per cent of what we earn to 156 per cent.

If we want house prices to keep growing at that pace, we'll have to keep going deeper into debt at that pace - to more than $4 trillion by 2020, or more than three times our income. Any volunteers?

Yes, house prices are now soaring at double-digit rates. Agents report 87 per cent auction clearance rates, with many properties sold well above their reserve price.

But those projections are duds. We won't take on debt like that again. As I pointed out last week, it is an illusion to think that rising house prices increase our net wealth. For we buy in the same market that we sell in. Rising house prices mean we get more when we sell - but we pay more when we buy.

If you are an aspiring first home buyer, rising house prices raise the bar and put home ownership out of reach. If you are upgrading to a better home, rising house prices widen the gap between what you get and what you pay. The only people who benefit from rising house prices are people downgrading to a smaller home - and investors.

From 1995 to 2007, the Bureau of Statistics reports, home ownership among people aged 25 to 34 shrank from 52 per cent to 43 per cent. Among people aged 35 to 44, it shrank from 73 per cent to 65 per cent.

Flinders University academics Joe Flood and Emma Baker have examined these trends from census data. Between 1986 and 2006, they report, home ownership in Melbourne among people aged 25 to 44 on middle incomes fell from 68 per cent to 57 per cent. In Sydney, the fall was even steeper: from 60 per cent to 45 per cent.

House prices have soared because of a widening gap between supply and demand. The supply of new homes has barely grown in 40 years, averaging 154,500 over the '00s. Yet demand has soared, for two reasons. Population growth has doubled, to almost 500,000 a year. And 40 per cent of lending to people buying established homes now goes to investors.

It wasn't always like that. Before Labor restored the tax break for negative gearing in 1987, investors took only 8 per cent of lending for established homes. Most of their borrowing was to build new homes, such as apartment blocks. And most landlords made a profit from renting.

But not now. Tax Office figures show 1.1 million Australians declared negatively geared property investments in 2006-07. They claimed total losses of more than $10 billion, which probably cut their tax bills by about $4 billion. In effect, that $4 billion then falls on other taxpayers.

What's the point of running a rental business that loses money? Because your losses - assuming they're real - are more than offset by the capital gain when you sell the property. And thanks to John Howard, you pay only half as much tax on capital gains as you pay on the income you earn from working.

Few countries offer housing investors such a generous tax deal. In most, you can write off your losses against rental income, but not against income from other sources. That's what we need to do here, where the scale of negative gearing is now so massive that housing cannot become affordable to young and low-income buyers competing with so many richer, tax-subsided investors.

Consider this: in the 13 years to 2006-07, landlords as a group went from declaring net profits of $399 million to net losses of $6.4 billion. Those reporting profits grew by 36,000. Those reporting losses grew by 594,000.

The problem is not landlords: I've been one myself, and they will always have a vital role in supplying housing for those who lack the means to buy.

The problem is our tax laws, which have overturned the proper balance between home owners and investors and have led 1.1 million people to become landlords who make losses in order to reap the tax gains. That flood of investors has upended the balance between supply and demand, driving up prices and denying millions the chance to own their own homes.

You can see why the politicians don't want to touch it. But because it is so large, we can't make housing affordable until they do.


Tuesday, March 16, 2010

Dazzled by housing's magic rise

WHEN house prices soar, you can hear the silent cheering all around you. Most of us own homes, so rising prices increase our notional wealth. They mean someone else will have to pay us more in future to buy our homes.

Market analysts and the media bombard us with data on what are the "best-performing suburbs" meaning the suburbs where prices rose most. They see it as self-evident that rising prices are a good thing and the higher, the better for us.

Well, sorry, but they're wrong. Rising prices may be good for those of us who own homes but far less than we assume. And they are not good for "us" as a society.

Let's be blunt. No social change in recent times has done more to make younger Australians worse off than the waves of house price rises since late 1987, when Labor restored the tax break for negative gearing.

Since September 1987, the Bureau of Statistics tells us, average house prices in capital cities have risen by 433 per cent. In other words, a typical house that was an affordable $100,000 in September 1987 cost $533,000 by December 2009.

But haven't incomes risen too? Yes, they have: but by only 195 per cent. So if a typical household had a disposable income of $30,000 in September 1987, it has risen to $88,500 now. (There are no figures for median household disposable incomes, but these are in the right ball park). The cost of a typical home, in this example, used to be 3.33 years' disposable income. But now it costs six years' income.

All in favour, raise your hands.

I don't see too many younger readers raising their hands. We all know why. If rising house prices make you and me as homeowners better off, they make our kids worse off. It's a zero sum game: we win, they lose. The bar they face to buy their first home is now almost twice as high as it was in 1987.

That's the first reason why higher house prices don't work for us as a society. They raise barriers to home ownership, and make it more difficult for people with low incomes or small savings to own their own homes.

Australia has traditionally been a nation of home owners, but that is changing rapidly. In the 12 years to 2007-08, the bureau estimates, the proportion of 25 to 34-year-olds who owned their home fell from 52 per cent to 43 per cent. Among those aged 35 to 44, home ownership fell from 73 per cent to 65 per cent.

By contrast, the proportion of over-55s owning their own home fell only marginally: from 85 per cent to 83 per cent. They already owned their homes when the game began, and if they moved, it was to downsize. They were the winners.

Let's note that those were the 12 years the Liberal party was in power a party that once believed in home ownership for all. Now, like the Labor Party, it believes in tax breaks to spread home ownership by landlords.

Since Labor restored the tax break for negative gearing, tax records show, the number of landlords has trebled to more than 1.6 million, while their declared losses have multiplied to more than $10 billion a year. The tax break means about $4 billion a year is paid for them by other taxpayers.

Do you see what I mean about what is good for you and me being bad for us?

But let's note one other crucial thing: the only home owners who really win out of higher house prices are those who are selling to move down in the housing market. Higher house prices widen the gaps in the market, so downgraders pocket more money when they sell the big old home to move somewhere smaller.

By contrast, upgraders despite being home owners already are made worse off by rising prices. They now face a bigger gap between what they receive for their old home and what they must pay for their new one. They too are losers from the rising prices we keep being urged to celebrate.

Rising prices are inflation. We don't think higher petrol prices or higher fruit prices are a good idea, although they certainly make someone better off. Why do we think inflation is such a good thing when it applies to owning a home?

This is one area of policy where government intervention has made things worse for the group they say they want to help: aspiring home owners. That is clear from the sharp fall in home ownership among younger age groups (indeed, among all age groups under 55). Unless policies change radically, it will continue to fall, as Australia is slowly transformed into a society of landlords and tenants.

The first step is that we must stop cheering rises in house prices. They make the problem worse. If governments seriously want to put the broader interests of society first in housing policy, they must understand that their long-term goal is to reduce house prices significantly, relative to incomes. Let's go back to fundamentals. Housing prices rise because there is a gap between demand and supply. If more people want to buy homes in an area than there are homes to buy, prices will rise. If supply of homes rises relative to demand, prices will fall.

Isn't it obvious? Government policy, at all levels, should aim at increasing the supply of new housing. That is what will make housing affordable.

Instead, with some exceptions above all, the federal government's social housing initiative to build 19,400 affordable homes its spending and tax breaks mostly increase demand.

Young Australians have been let down by governments of both sides. It's time to right the wrong.