How to solve housing (un)affordability - Part 3 - "De-Investify" housing
What if our houses were just our homes?
Apologies for my neglect. Since my last post, I have fathered the most beautiful baby girl who has cured me of my need to express myself - very liberating! I’m also down about 30 IQ points (also very liberating). She's 19 months old now, and I'd hate for her to get so old that she is capable of understanding that I'm using her as an excuse for not writing - so here I am, significantly diminished and better late than never.
This article is the final part of a three-part series of policy proposals entitled How to solve housing (un)affordability. Parts 1 and 2 are focused on increasing the supply of housing, with this final article focused on reducing the demand for housing - bringing the series to a much-needed close.
Everything in this series is intended as a response to the problems identified in my initial article on this topic, Australian housing culture is incompatible with rapid urbanisation. So if you haven't read that yet, please go and do that now. It sounds dry, but it’s actually a fun read!
Housing affordability is a Wicked Problem
When I embarked on writing this housing affordability series after being “activated” by the vampire-ridden process of buying a house, I thought to myself, "Enough is enough, I'm gonna get to bottom of this". The arrogance! I planned to handle it in a single brilliant article, that has since turned into three rather tedious articles over two years. I've also managed to raise more questions than I've answered. This is because the housing crisis is a Wicked Problem ©.
What do I mean by Wicked Problem? Why is the W and P capitalised? Well, when I'm out in the world, I get the sense that people think housing affordability is like the Death Star - where all you have to do is shoot your Bill Shorten Laser at the Negative Gearing Reactor and the whole thing explodes in exactly the way you want it to. Ewoks rejoice. Medallions are issued. Credits Roll. Working class Australians once again languish in the inner suburban estates of our forebears.
In reality, the housing crisis is much more like a malignant tumour wrapped around Australia's throat, with its veins and tendrils reaching into all our major organs and delicate areas. It requires bold, multi-pronged and heavy-handed solutions to even make a dent in what is an incredibly annoying issue.
The housing crisis is a Wicked Problem, because the solution is not just one thing. The issue needs to be attacked from every angle to fundamentally change the way the Australian economy is structured, and make it stronger in long term.
And in our long term, there really is no choice - because these problems are becoming worse, not better. Beyond a yet-to-be-determined tipping point, house prices cannot completely be decoupled from wage growth, without frog-boiling towards a kind of neo-feudal hellscape where housing becomes an increasingly unbearable burden that diminishes all other aspects of our lives.
A house is more than just a home
The problem with housing is that it isn't just how Australians stay out of the rain, it's also how we fund retirement and grow our wealth. Housing has this deviously interdependent nature where it's simultaneously:
The repository of the entire nation's collective wealth;
The largest user of land in our cities; and,
How we stay out of the rain and experience serenity.
The resulting incentive structure creates the self-perpetuating anti-social doom loop we’ve come to know and love.
Increasing supply is not enough -
we need to “De-Investify” housing to reduce demand
The Australian economy is laden with incentives that artificially boost the demand for housing.
Consider the fact that housing is the only kind of asset that banks will let you finance on 30 year terms with incredibly low interest and no margin calls. Add in the ability to dip into super for deposits, land tax exemptions, government grants, negative gearing, capital gains tax discounts - the game is rigged as they say. The board is tilted in such a way that the wealth of the nation cannot help but pour itself into the housing market.
Under this paradigm, increasing the supply of housing alone is not be enough to stabilise house prices. More supply in isolation will just result in more slop in the trough for those who are financially and politically positioned to invest.
My central claim here is that these artificial demand drivers must be surgically cut out of the economy, so that less of Australia's wealth is lured into property via these incentives. I want Australian property to be closer to its real value and not its speculative value.
So! I want to coin a somewhat silly new term that I think best describes what I'm trying to say here:
We need to "De-Investify" housing in order to extract the artificial demand from the market.
Not to be confused with the more radical idea of Decommodification which as far as I can tell, is shorthand for things like land reform, community land trusts and rent control (Communism?).
Instead, this article is me brainstorming ways to get closer to a world where we buy houses more because they are a place to live, and less so as the main way to fund retirement.
Disclaimer:
Housing will always to some extent function as a speculative asset because of the scarcity of land vs population growth vs inflation. But that doesn’t mean the growth rate can’t be stabilised, so that over time we get closer to that real value.
So! Brace yourself for my least-informed article yet. I am quite frankly out of my depth here - where I am wrong, please tell me why. I want to learn.
How to De-Investify housing
To define my silly new term:
To De-Investify (verb) Housing, is to remove or weaken the policies and
incentives that artificially boost housing's desirability as an investment asset.
Here's a bunch of ideas on what that could involve:
Don’t redline low interest rates for a decade
This is a big one. YIMBYs like myself love to go on about how housing supply is the crux of the issue, but there is perhaps no greater factor contributing to the housing crisis than the monetary policy of the post-GFC through COVID era.
We are only now embarking on the brutal hangover that follows more than a decade of bingeing on artificially cheap credit, quantitative easing and COVID-driven money printing in the form of overpriced housing, inflation and the strong chance of a global recession.
According to CoreLogic, during the pandemic, Australia’s residential market surged from just over $7 trillion to $9.7 trillion - meaning our housing market is worth significantly more than the entire GDP of Germany ($6 trillion AUD). So all of the productive capacity of 83 million Germans, working all year long, is worth way less than 11 million Australian houses, just sitting there doing nothing.
Lacking any formal training, I am a vibes-based economist - and when I try to hold that idea in my mind - the vibes are clearly off.
The RBA's recent increases in the cash rate alone have managed to cool the market significantly, which is likely to correct some of the utter insanity we saw in 2021-2022. If the cash rate sits at 5-7% for an extended period of time, as they did throughout the late 90s and early 00's, the housing market will look very different.
Axe government handouts to property investors
Our economy is rife with government handouts and subsidies for property investors in the form of negative gearing, land tax exemptions, capital gains discounts. At the macro scale, it results in a multi-billion dollar wealth transfer from taxpayers to property investors.
According to the Parliamentary Budget Office, the cost of negative gearing will skyrocket as interest rates rise, reaching $97 billion over the next decade. Meanwhile, the cost of capital gains tax discounts will reach $60 billion over the next 10 years, bringing the total cost for both tax concessions to $157 billion - 57% of which will benefit the nation's top income earners.
Now contrast that $157 billion in handouts with the $10 billion budget of the Housing Australia Future Fund, or the Housing Investment Fund’s $2 billion budget. Tell me your budget and I’ll tell you your priorities.
Make renting great again
Renting has many notable benefits, it's so much more flexible, you can live wherever you want - and if your neighbour is a maniac, you can remove yourself from the situation with dignity before A Current Affair gets involved.
The problem with renting is that some people want the freedom to paint a wall, put up some pictures and get a horse-sized dog without having to prostrate yourself before a landlord. I say this without hyperbole - to deal with the typical property manager is to deal with a blood-soaked demon from hell. I can't think of a more perverted incentive structure than that of the relationship between a property manager versus the tenant.
Meanwhile, the housing crisis is forcing more Australians to rent for longer. As a bare minimum, we need to make it more humane to be a long term renter and eliminate the demand for home ownership that is generated via the awfulness of renting.
This means better rights for renters, long term leases and enshrining the right to own pets and make cosmetic changes to properties. This will likely make investment properties less attractive as an investment - and yes, that is the point.
Shared equity schemes will not work
A worrying trend of late has been some governments developing shared equity schemes, where the government will contribute a percentage of the purchase price of a property in exchange for an equivalent stake in the property.
What could be bad about the government stepping in to help single parents and key workers afford overpriced housing? Do you hate the battlers?
In short, shared equity schemes are a band-aid. The long-bemoaned adage of politicians "kicking the can down the road" gets thrown around a lot, but shared equity schemes are about as horrifyingly-clean an execution of the metaphor as you can get.
Shared equity schemes pour taxpayer money into the housing market, increasing demand for housing and artificially propping up the current state of crisis. While it’s great for those fortunate few (6,000 people in the NSW scheme instance) who benefit from the scheme, the net result is an increase in the aggregate value of the housing market.
The goal should not be to help working class people afford housing in the current overpriced paradigm. The goal should be to break this crisis and stabilise property values, so that housing is more affordable across the board.
And perhaps the most important point of all: It is a catastrophically bad idea to give the government a financial stake in the property market. By doing so, governments would have an even greater incentive to enact policies that prop up house prices with taxpayer money, lest it devalue its own portfolio. If it were scaled, it would essentially turn the government itself into a NIMBY activist group.
It really is hard to imagine a more poorly-considered policy than this, but it’s comforting to know that things can always be worse.
Cap the amount of investment properties
There are 3,261,500 investment properties in Australia, with 638,000 people owning two or more investment properties - that’s just shy of 1.7 million homes or 16% of all dwellings in Australia. There are even 11,200 feudal land barons out there, with seven (or more!) investment properties.
Before you read on, please ensure that you are seated and have your smelling salts at hand. Are you ready? Here it comes... My palms moisten as I type these heretical words… What if you could only own one investment property?
Here, breathe into this bag. It's over now. Shhhhhhh.
Only in Australia is this an extreme question to ask. I’ve gone and put myself on an ASIO watchlist for the sake of this worthless article.
Anyway - if investment properties could be iteratively released into the market, this would unlock trillions in capital to be invested in assets that are actually productive, while freeing up supply for those who need a place to live
Dearest landlord friends, I'll even meet you halfway - how about you can own as many investment properties as you want, but they have to be new builds. This way at least all that capital can be directed towards creating new stock, rather than hoarding existing supply.
Change the pension asset test to consider housing
The 2020 Retirement Income Review revealed that around 15% of age pensioners own a home worth over $1 million. Under the current rules, pensioners with incredibly valuable homes still qualify for a full pension. Pensioners are incentivised to hang on to large family homes much longer than they otherwise would, because if they sold and moved their pension would decrease.
Changing the age pension asset test to include the value of the home will encourage downsizing, free up supply and spare the taxpayer from having to subsidise the retirements of multi-millionaires.
Tax vacant houses in expensive cities
While I find Airbnb cops an outsized share of the blame for the housing crisis - we are talking bold, multilateral and heavy-handed solutions here at The Emergent City, so a vacancy tax should be a part of the response.
I couldn't find a credible source for the amount of vacant dwellings in Australia - I suspect it's a bit of a known unknown. But to whatever extent it's happening, we should be negating the financial benefit of siting on an empty home through a vacancy tax - particularly in expensive cities.
Align immigration policy with housing supply data
I've no idea whether we already do this or not, but I sure do hope that one of the factors informing our immigration policy is whether there's enough wiggle room in the housing market to accommodate the intake numbers we are talking.
There is a delicate balance to be struck, because as mentioned in a previous article, we are heavily dependent on immigration to drive demand in our economy more broadly because of our low birth rates and lack of economic complexity. As we saw during COVID, cutting off immigration is pretty devastating across the board, so until the day comes where we increase our birthrates and actually produce something of value beyond mineral exports, immigration driven demand is here to stay.
Teach Australians other ways to invest their money
You do not have to buy an investment property.
I repeat: You do not have to buy an investment property.
There are so many other ways to invest your money. My favourite alternative is exchange traded funds (ETFs) and listed investment companies (LICs). To oversimplify, these are kind of like a superannuation fund that you can access whenever you want without financial penalties for early withdrawal. These also allow you to enjoy a passive income (dividends) while you're invested. No property maintenance! No tenants! No Council rates! No interest costs! No bank fees! No real estate commissions!
I have found that most Australians are simply not aware of this and eye you with suspicion when you bring it up. This is a failure of our education system and is a direct result of our complacency when it comes to funding retirement. I sure as hell wish my school taught me the fundamentals of investing instead of bloody long division.
You might think (as I once did) that you are too dumb to understand it, but I promise you, it’s far easier to comprehend than mental backflips you have to do to understand why Lenders Mortgage Insurance exists.
More miscellaneous policies
Here's a bunch of other ideas that I couldn't be arsed elaborating on:
Ban, or at least cap foreign ownership of Australian housing
Switch from stamp duty to land value tax
Betterment tax
Bleak epilogue
It wouldn't be right to end this series on the housing crisis without my trademark Disheartening Final Word (DFW).
The housing crisis isn't going anywhere any time soon, and things will get worse before they get better.
Most of the required policy responses outlined in this series are incredibly difficult to communicate and are accurately considered to be political suicide. It will at least require a brand of political leadership that we haven’t seen in some time. Remember how Bill Shorten dared to even utter the words negative gearing before being immediately black-bagged and thrown in a van? Labor promptly learnt their lesson and dropped the policy.
So while we patiently wait for the crisis point, we will see more band-aids, scapegoating, can-kicking and frog-boiling until the problem is so pronounced that the politics will shift from the ground up. Hey friend, that’s Democracy! Terrible outcomes are inherently valid. May include guillotines.
Onwards to simpler things
This is my last article on housing affordability for a while. I started this blog for the ever-elusive and unattainable Career Satisfaction. I do this for an admittedly-sad type of fun in my free time - and being the masochistic little piggy that I am, within the span of three articles, I had already managed to turn this into a job.
“You promised me this would be fulfilling” I complained to myself, “Where is the enrichment? Where is the gratification?”. You know what me? You’re right. I want to write more articles like my first housing affordability article where I complain about things without burdening myself with the quest for a solution. Above all else, I certainly do not want to have to learn things. Yuck!
In the immediate future, my articles will be focused on topics that can be discussed more succinctly. Though, I do have some ideas about other Wicked Problems I want to tackle in the future.
If you've stuck with me through this journey - thank you! And… What is wrong with you?
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Riley,
Great stuff, it's a complex problem and certainly one approach won't fit all.
It's all very depressing, but starting the conversation is something. Perhaps the term 'Affordable Housing' is part of the problem, it seems to have negative connotations for many which increases the NiMBY risk. Separately, if done properly townhouses are better designed than c**p off the plan developer houses.
Good stuff. I generally agree though we did just fine with much lower immigration until John Howard turned on the tap to pump the economy and destroy the unions, so I would say that reducing immigration must be part of the policy solution. Great series of articles anyhow—well done.