Debate on housing and intergenerational equity is just beginning

Australia’s housing crisis cannot be solved without confronting the trade-offs between affordability, wealth and intergenerational equity, writes Professor David Orsmond.

LAST WEEK’S Budget kicked off a welcome and overdue conversation about intergenerational equality, particularly young people’s access to homeownership.

However, a recent survey Wolf and Smith Shows less than a third of 18-34 year olds believe in the Budget restrictions The 50 per cent capital gains tax cut and negative guidance will be positive for young people; many see housing affordability as distant as ever.

The challenges facing young people today reflect the fact that housing in Australia has historically served two functions simultaneously: providing shelter and enabling households to build lifelong wealth. For decades we have talked about the root of the housing crisis as if it were motivated by the former, and until recently we acted to preserve the latter.

Housing is a need that can be met either through renting or home ownership. While life leases are a feature of many countries in Europe, home ownership in Australia is persistently seen not only as a safe place to live, but also as a way to “get on the property ladder” and “build wealth like your parents did” through tax-supported capital gains.

But this motivation means that while each successive generation grumbles about the entry price for a first home purchase, when they finally put together the deposit (often with the help of parents), each generation’s incentives are reversed. Yesterday’s advocates of more supply and lower home prices have little incentive today to support a housing policy aimed at slowing or eliminating future capital gains.

In fact, housing tax and subsidy policies have also provided strong incentives for the purchase of investor properties, which are now owned by around 10% of Australians.

Ways to limit new supply are stacked in favor of first-time and long-term homeowners. Local councils, which control zoning decisions, are elected by current residents, not future residents. Existing property owners may point to immediate and visible costs from new developments, such as construction noise, traffic, and changing neighborhood character.

No wonder local election candidates and their leaflets promise to oppose development in their neighborhoods if elected. And state governments’ revenue growth depends on ever-increasing stamp duty collections.

But ultimately, these incentives shared by all stakeholders push prices to a point where they are no longer viable for the average, let alone the new buyer. Property has quadrupled in the last 25 years (twice the rate of wage growth) and the average price of a house in Sydney is now around ten times the average wage.

The key question of intergenerational equity is which of two housing goals should now take priority: building significantly more housing to stabilize prices, or maintaining the status quo so that capital gains continue to be the main means of building lifetime wealth for those lucky enough to buy housing?

The reality we face is that the younger generation can no longer have it both ways; This is an uncomfortable truth in the debate about how to address intergenerational equity.

Another stakeholder affected by new housing policies is tenants. Rental yields on Sydney properties are around 4-5%, well below the cost of mortgage finance. Investors were prepared to accept low returns given their ability to negatively impact properties as an entry price to expected strong capital gains, thus effectively subsidizing today’s rents.

However, rents will need to increase significantly if the investor tax changes announced in the budget significantly limit their size going forward. While some tenants will be able to benefit from easier access to first home ownership, many will not have this capacity. This will be particularly challenging for low-income households and families in crisis.

Government policies are beginning to address historical housing imbalances. Alongside recent tax changes to make owning an investor’s home less attractive, the Federal Government directly funds local government housing-related infrastructure and social housing. NSW and other state governments are taking steps to reduce barriers for local governments to increase housing supply.

But the jury is out on what will ultimately be achieved and accepted by voters. Housing starts fall short of the Federal Government’s target to build 1.2 million homes by mid-2029; There is virtually no increase in the stock of social and low-rent housing and if this target is to be achieved, additional actions that will strengthen this commitment and protect low-income tenants are urgently needed.

Given the current cost and other challenges in the private construction sector, these actions may need to include the use of government borrowing capacity to finance housing development.

Overall, we are not starting from a good place to implement reform. The housing problem has persisted not because we do not know how to build medium- and high-density housing (the sky is abundant and free), but because of a series of rigidities in which new and established property owners benefit financially from the artificial scarcity created.

Until we engage in a broad and honest debate and act boldly on homeownership incentives, challenges will remain and young aspiring buyers, in particular, will continue to feel left out. The steps taken in the budget should be the beginning, not the end, of an honest conversation with young people about the housing trade-offs we currently face.

Professor David Orsmond has extensive experience in policy advice and research in a variety of countries relating to macroeconomics, housing markets, financial markets and regulations, the mining sector and emerging economies.

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