Josie Jakovac

About Josie Jakovac

Josie Jakovac is studying B Commerce (Dalyell Scholars)/B Laws at the University of Sydney. With a big mouth, a passion for people and a love for current affairs, she’s never one to shy away from a lively debate. When she’s not sipping coffee, mulling over textbooks and rapidly typing up her next article, you’ll find her beach-hopping and making music.

TBS Next Gen: Revival of the Great Australian Dream

Approx Reading Time-12What does the next generation think of today’s issues? The Big Smoke’s Next Gen program publishes Australian students mentored by TBS writers. Today, Josie, 16, looks to solve Australia’s housing affordability crisis.

 

 

 

Student: Josie Jakovac

Mentor: Ugur Nedim

Topic: How to solve Australia’s housing affordability crisis.

 

Everyone has had the “Great Australian Dream” at one point or another in their lifetime. The dream of owning a suburban house with a comfortable backyard and the all-important barbecue. However, for a growing number of young Sydneysiders, the likelihood of achieving this iconic dream is dwindling – courtesy of our Housing Affordability Crisis.

Ranked by the National Values Assessment 2016 as the second-most important issue facing Australian society, housing affordability re-entered the public limelight after a group of economists, urban planners and community interest groups wrote an open letter to NSW Premier Mike Baird and Planning Minister Robert Stokes in September. The letter explained that “housing stress is now being felt not just by the very needy but also by those higher up the income scale,” urging the government to take action.

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According to the most recent Annual Demographia International Housing Affordability Survey, Hong Kong is the world’s least affordable city. Households there can expect to spend an astounding 19 times the median income for a moderately-sized home. Ranked at number two, Sydney’s average house price has surpassed $1 million, with households spending 12.2 times the median annual household income to afford an average home. This has led to a “generational divide”, where middle-aged and elderly investors are comfortably earning thousands from multiple investment properties, whilst first-home buyers remain priced out of the market.

But what factors have led to this burgeoning crisis? And more importantly, how can we fix it?

 

The Culprits

“Remember when we cried as kids and our parents said ‘I’ll give you something to cry about’? We thought they were going to hit us but instead they destroyed the housing market.”

Housing is predominantly an asset market. When prices rise, more people invest because they can see the financial benefit of owning an asset which is increasing in value. These transactions contribute to the inflation of the housing market, and the accumulation of houses as assets reduces the number available for first-home buyers.

Additionally, the government’s introduction of negative gearing (a means of tax reduction available when the net income earned from an asset is less than the cost of managing and owning the property) and the capital gains discount tax (CGT, where only half of the profit made from an investment property is taxed) actively encourages this type of investment.

Investors consequently account for approximately 60% of housing market activity. Research shows that in 2001/2002, property investors reduced their aggregate taxable income by $600 million. In 2010/2011 this net reduction reached an astounding $13.2 billion dollars.


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Treasurer Scott Morrison claims that two-thirds of those who use negative gearing are “modest income earning Australians” with a taxable income below $80,000. However, investigations by ABC’s Fact Check reveal that this $80,000 figure actually represents the average full-time male earnings, an extremely selective measure. The ABC’s inquiries suggest that, when taking into account the cash earnings of all males and females employed on a full-time and part-time basis, this figure drops to $52,000, which is closer in line with a modest or average income. Of this group which represents 59% of all taxpayers, only 4% use negative gearing.

Although these incentives were originally intended to facilitate access to the housing market for young Australians, they seem to have achieved the opposite – reducing the money in the “public purse” and stoking property demand to create an environment where unaffordable housing has become the norm.

Foreign investment has also heavily contributed to the inflation of house prices, with Chinese investment alone doubling over the past financial year. In response, the Australian Taxation Office implemented foreign investment taxes in May this year. The restrictions are expected to reduce the percentage of sales to foreign buyers from 25% in the September quarter to 20% over the following three months, though this is yet to be seen.

The Reserve Bank of Australia has also been partially responsible for our affordability crisis, due to its consistent interest rate cuts since 2011. Although these measures attempted to offset the mining downturn, they essentially increased public access to cheap credit, allowed more people to bid on houses and thereby inflating prices.

 

The Solution

As no single factor is solely responsible for unaffordable house prices, there does not appear to be a quick-fix solution. But that’s not to say that the revival of our Australian Dream is impossible. To the contrary, the following initiatives may help tackle the issue.

• We could always build more houses?

By 2055, it is predicted that Sydney’s population will grow to 8 million people. It is therefore critical that we begin to meet demand for housing before our population expands and places even greater pressure on property prices. The laws of supply and demand dictate that housing price rise in accordance with a fall in available properties. Accordingly, a logical solution might be for the government to release more land to developers in order for more properties to be built. The danger of doing so, however, is that investors may continue to out-bid first-home buyers and accumulate more and more properties.

• Introduce inclusionary zoning?

To prevent wealthy investors from doing this, a form of inclusionary zoning could be introduced in Sydney. Inclusionary zoning is currently used in cities such as New York, Amsterdam and London. It involves setting aside a percentage of properties in a newly developed area for those with low to moderate incomes. Although this will not reduce housing prices, such a measure could make the market more accessible to young Australians with limited finances.

Sydney’s average house price has surpassed $1 million, with households spending 12.2 times the median annual household income to afford an average home. This has led to middle-aged and elderly investors comfortably earning thousands from multiple investment properties, whilst first-home buyers remain priced out of the market.

Another alternative might be to require developers to set aside a specific portion of new homes for first-home buyers only.

• Gradually phase out negative gearing?

Negative gearing has undoubtedly contributed to the inflation of house prices in Sydney, and many feel it is thus an ineffective method for supporting first-home buyers. Gradually phasing out the mechanism may reduce the incentive to accumulate investment properties and thereby ultimately loosen supply. Any such measure would, of course, need to occur gradually to avoid a sudden collapse of the housing market.

If negative gearing were to be phased out, the government could use the additional revenue to increase Commonwealth Rent Assistance and improve public transport so people can comfortably live further away from the CBD.

• Tighten foreign investor protocols?

Although foreign investors are a critical part of the economy, the implementation of a national approach based on Victoria’s model may help improve affordability. As of July 2016, Victoria increased stamp duty to 7% for foreign buyers. Additionally, we might also need to consider limiting the number of Australian properties that could be owned by each foreign investor.

• Gradually increase interest rates?

The Reserve Bank of Australia could also consider increasing interest rates upon receiving signs of an improving economy, perhaps even in advance of a substantive improvement. This would limit the public’s access to cheap credit, reducing their purchasing power and overall demand for properties, potentially causing house prices to fall.

Everyone has had the Great Australian Dream, but if we want it to become a reality for Sydney’s youth we need to act now. I have no doubt that this dream can, and will, eventually be revived and look forward to the day when I too will hold a barbecue in my own backyard.

 

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