“Not only are Canberra home buyers paying more than double for a median priced house since the introduction of the tax reform regime but commensurately more in stamp duty as well.” JON STANHOPE & KHALID AHMED continue their exposure of the ACT government’s failings in housing policy.
WE have previously noted the potential barriers the ACT will face in delivering the land required to meet the Commonwealth Government’s undertaking to construct an additional one million homes in Australia over five years from 2024.
We pointed out that the ACT government’s supernormal profits on land extracted through its monopoly on supply, and the Budget’s increasing reliance on land profits will be a major disincentive to increasing land supply. As we noted, it suits the ACT government’s (narrow) financial objectives to constrain supply while ignoring the resulting social and economic costs.
However, in addition to land supply, funding and financing are the other necessary elements in the delivery of housing stock. Dwelling investment nationally and in the ACT, assuming a proportionate allocation across all jurisdictions of the one million target, will need to at least double every year from 2024 onwards, above current levels.
To put this in perspective, according to the ABS national accounts, in 2021-22, dwelling investment across Australia was $122 billion, with the ACT share being about $2.5 billion, in current prices.
This begs the question whether it is envisaged that dwelling investment in the ACT will increase to $5 billion, adjusted for inflation, by 2024 and be sustained at that level, or alternatively, that it will gradually increase from its current level to $7.5 billion in 2028? In any event, both scenarios raise questions about the capacity of the ACT economy, in respect to the supply of labour and materials, to realise the required level of investment.
It is also notable that of the one million dwellings target, the Commonwealth has made a specific funding commitment, by way of availability payments, in effect subsidies designed to encourage investment, in respect of only 1 per cent or 10,000 dwellings. A further 1 per cent (10,000 dwellings) are to be delivered by the states and territories, through mechanisms that are yet to be agreed.
The remaining 98 per cent of the promised housing, ie 980,000 dwellings, are to be delivered through investment by superannuation funds and institutional investors. In effect, therefore, almost all the additional one million dwellings are to be delivered by the market.
We have discussed previously, as indeed have many others, that rental yields alone are not enough to attract investment, by either individuals or institutions in housing. It is a combination of capital gains and rental yields, which equate to investment returns, coupled with negative gearing, ie subsidies in the form of tax breaks, which make the investment feasible. In fact, some leaders in the superannuation industry insist that returns of 8 per cent and even up to 11 per cent are required to justify any investment by them on behalf of their members.
It is widely accepted that the lack of affordable housing in Australia is due to market failure. Therefore, it seems to us somewhat strange and indeed problematic to rely on existing market mechanisms as the basis of the corrective policy – namely the solution is dependent on the continuation and perpetuation of the problem.
For this reason, we believe the ACT government’s much spruiked “build-to-rent” scheme is unlikely to have a meaningful impact on affordability and appears to be little more than a convenient device for “managing” community concerns, a role previously delegated to the taxation reform program.
As has been oft reported, Chief Minister and Treasurer Andrew Barr regularly referred to taxation reform (abolition of conveyance duty) as the signature policy for improving affordability.
We have previously commented on the impact of tax reform on households. Suffice to note for present purposes that revenue from conveyance duty increased from $239 million in 2011-12 to $433 million in 2021-22. Not only are Canberra home buyers paying more than double for a median priced house since the introduction of the tax reform regime but commensurately more in stamp duty as well.
Under the tax reform plan, the government had agreed in principle to abolish land tax on rental dwelling stock in recognition of the fact that it is inequitable and impacts negatively on affordability.
In what we regard as perhaps one of the most misguided taxation policies ever enacted in the ACT, the government at the behest of the Greens increased, rather than abolished this tax, apparently in the mistaken belief that the owners of rental properties would sell up and hence free up stock for homebuyers.
However, what has happened is that in a supply constrained market, landlords have not only held on to their stock, but have passed on the increases in land tax to renters. Revenue from land tax on residential dwellings has increased from $71 million in 2012-13 to $158 million in 2021-22.
The ACT now has the highest median rents in Australia and just last week the Rental Affordability Index report revealed that the ACT is the most unaffordable location to rent for nearly all categories of people on low incomes including single pensioners, pensioner couples, people on Jobseeker, single part-time worker parents on benefits, single full-time working parents, students, couples on the minimum wage and hospitality workers. The ACT was second least affordable for single-income couples with children and dual-income couples with children.
Our comments above are not intended to be critical of the Commonwealth Government’s announcement. Far from it, we believe the federal government has provided invaluable leadership in at least setting the right economic framework – that supply is the core problem. How that problem is addressed critically depends on matters that are partly beyond the federal government’s direct control.
Jon Stanhope is a former chief minister of the ACT and Dr Khalid Ahmed a former senior ACT Treasury official.
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