Housing affordability forms part of the ALP’s justification for changing 70 years of taxation law and outlawing negative gearing on all investments apart from new housing.
Most analysis has concentrated on the cost of negative gearing to the budget, and the amount of money that might be raised. Virtually no analysis has been done of whether it is a sensible way to tackle housing affordability.
We have just released analysis which shows the major issue with housing affordability is the time it takes to save a deposit, and that mortgage repayments themselves are quite affordable by the standards of the last 23 years.
We demonstrate that once a home owner buys a house the difficulties they face are no different to those of the previous generation, and so, if it were thought desirable to increase the rate of home ownership, policies directed towards shortening the time it takes to save a deposit, would be preferred to abolishing negative gearing.
Saving the equivalent of 10% of before-tax earnings on the average income it would take 12.2 years to save a 20% deposit to purchase the median house in Brisbane, or 23.8 years in Sydney. To reduce that by, say, say, 2 years in Brisbane, negative gearing would need to reduce house prices by approximately 20%.
This would create economic turmoil, and most likely throw the economy into recession, given the blow to confidence that a decrease in house prices of this level would produce.
As rent and repayments for equivalent houses are not significantly different, alternative policies bridging the deposit gap should be the preferred way to improve housing affordability rather than a change to longstanding taxation policy that would have negative, and difficult to quantify, confidence effects on the housing market and the economy.
This analysis does not look at other issues which affect housing affordability, such as supply and high immigration rates. While getting these right would also make houses more affordable by gradually lowering real prices, that would involve state and local governments altering taxation and planning laws and procedures. It would take some time to happen, if it happened at all.
The paper suggests a number of mechanisms for helping first home buyers with the deposit.
- A first home buyer deposit gap scheme funded by the government
- Giving first home buyers access to their superannuation funds for the purposes of buying their first home
- Encouraging financiers to offer deposit bridging finance
- Encouraging parents or other relatives to co-invest with first home buyers
We conclude that government’s best policy option would be access to superannuation funds. Other options could be explored by participants in the housing industry, and a housing summit might help to incubate innovative ideas.