It’s time to tax the family home

Monday 17 September 2018

Birdseye video of a suburb.

Peter Mares says we desperately need affordable rental properties.

In summary

 

  • Analysis for The Age by Peter Mares, Adjunct Fellow, Swinburne University of Technology

 

The real estate boom has peaked, and house prices have begun to slide in Sydney and Melbourne, but the declines so far are no match for the gains of previous years. We’d better hope it stays that way, because the only thing that will really bring house prices down sharply is a deep recession and mass unemployment. Barbecue-stopping debates about whether we, or our kids, will ever be able to afford to buy a home look set to continue.

Yet this is not the real locus of our housing crisis. The real crisis is a lack of affordable rental accommodation for people on low incomes.

One in every two low-income households renting in the private market is in housing stress. That is about 600,000 households spending at least 30 per cent of their disposable income, and often much more, on rent. As a result, they may skimp on essentials such as food, heating or healthcare.

Renting today is far more than a temporary stepping stone. The private rental sector is the fastest growing segment of Australian housing. There are more people renting in middle age, more households who have been renting for longer than 10 years and more renters with young families. Yet there are not enough affordable rental properties to go around.

When Anglicare analysed the listings of more than 67,000 dwellings across Australia it found that fewer than 3 per cent of them were affordable for a single person on the minimum wage. No city properties were affordable for an unemployed person on Newstart.

Is it any wonder then that the last census counted 116,000 people as homeless? Is it any wonder that families have been camping out at the showgrounds in Hobart, where the rental vacancy rate is 0.3 per cent? Is it any wonder that some young women feel compelled to provide sexual favours in return for a place to sleep?

The solution is to build more social and affordable housing, but this is a very expensive business. We need to invest billions.

Where does the money come from? At the last election, the Treasury estimated that Labor’s promised reforms to negative gearing and capital gains tax would boost government revenue by about $5.5 billion. That is enough to build 20,000 one-bedroom apartments every year. A great start but nowhere near enough. Where does the rest of the money come from? It comes from a tax on home owners.

The flip side of housing unaffordability is housing wealth. A housing crisis for some has been a housing bonanza for others. I include myself in this category.

My wife and I bought our first house in an inner Melbourne suburb in 1990 for $137,500 in 1990. According to real estate websites, that house is now worth about $1.8 million. Even accounting for the cost of improvements, that is a windfall profit of about $1 million. We no longer own that house but have done even better from subsequent purchases. We’ve worked hard, but most of our wealth is the result of generational luck.

If we sell our home at a windfall profit, we pay no tax on the capital gain. When we pass on our homes to our children, they pay no tax either. The greatest benefits accrue to those who already have the most wealth and the highest incomes.

In 2004, the average value of the real estate owned by the wealthiest 20 per cent of Australia’s population was worth 1.3 times the average property wealth of everyone else combined. By 2016 the multiple was 1.5 times. That’s what a dozen years of real estate boom can do. A rising tide is supposed to lift all boats, but the luxury yachts ride higher than the dinghies, and those struggling in the water without a life jacket are just at greater risk of drowning.

Encouraged by the generous tax treatment of residential property, our relentless pursuit of the great Australian dream is creating an increasingly unequal society – a divide between rich home owners and poor renters. It is time for the lucky to share some of their good fortune.

The first step is to abolish stamp duty and replace it with a broad-based property tax as the Australian Capital Territory is doing.

Why? First, stamp duty is levied at the point of purchase, when buyers can least afford it, whereas a broad-based property tax spreads the costs over time. The major beneficiaries of a transition from stamp duty to property taxes would be younger Australians trying to buy their first home.

Second, the big upfront cost of stamp duty makes people less likely to shift from areas of low to high employment, or to take up new but distant jobs where their skills are most needed. Modelling by Infrastructure Australia anticipates that replacing stamp duty with a broad-based property tax could boost annual GDP by $24 billion in 20 years and lift annual federal and state tax revenues by $11 billion.

Third, shifting to a property tax could encourage more efficient use of housing. An annual property tax would encourage empty-nesters to trade a big house with spare bedrooms for something smaller and cheaper, without suffering a stamp duty penalty for downsizing.

Fourth, a property tax captures a share of unearned gains from increasing property prices. And it could be made progressive – in other words, it could be used to dampen rising inequality and raise the revenue we need to build much more social and affordable rental housing.

We can make housing fairer and more efficient. It’s time to tax the family home. It’s time for home owners to pay the rent on affordable housing.

Peter Mares is the author of No Place Like Home: Repairing Australia’s Housing Crisisjust published by Text.

Written by Peter Mares, Adjunct Professor at Swinburne University of Technology. Originally published by The Age.