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.