Charter Keck Cramer, and Precisely Property podcast respectfully acknowledge the traditional custodians of country throughout Australia. We pay our respects to their elders past, present and emerging.
Richard: Hello, and welcome to another episode of Precisely Property. I’m your host, Richard Temlett, and I’m excited to have you with us today. If you’re here for the first time, thank you for joining us. I encourage you to listen to our previous episodes where we discuss all things property with a focus on dynamic discussions with industry leaders. In this episode, we’re speaking with Brendan Coates of the Grattan Institute. So, sit back, relax and let’s get started.
Brendan is the Housing and Economic Security Program Director at the Grattan Institute, where he leads Grattan’s work on retirement incomes and superannuation, housing and macroeconomics. Brendan is a former Macro Financial Economist with the World Bank in Indonesia and consultant to the bank in Latin America. Prior to that, he worked in the Australian Treasury in areas such as tax transfer system reform and macroeconomic forecasting with a strong focus on the Chinese economy. Brendan holds a Master’s of International Development Economics from the Australian National University and a Bachelor’s of Commerce and Arts from the University of Melbourne. He sits on the Victorian State Council for the Economic Society of Australia. Welcome, Brendan.
Brendan: Thanks, Richard. I’m always reminded that I need to shorten that bio on the website every time I hear it back to me.
Richard: To be honest with you, Brendan, that’s a very, very impressive bio. I don’t think you need to shorten it at all. And even just reading through there, I can see with what we’re going to discuss today, you’re ideally placed to talk to us. So, thank you very much for coming on the show.
We were talking offline before the podcast started, and the listeners would probably be interested to know that we actually live in the same suburb. And we were introduced about a year ago through a mutual friend, and I’d always thank him for that introduction. I’ve certainly known who you are and who Grattan is for a while, and I love reading your work and collaborating with you. And we catch up probably every two or three months at a little coffee shop in Alphington, and we have debates and discussions like we’re about to have today. And I just want to say I really value the friendship and the relationship. I learn a huge amount from you, and I just wanted to thank you again for coming on the show.
Brendan: Thanks, Richard. It certainly goes the other way as well. So I appreciate the opportunity to be with you.
Richard: In terms of the agenda for today, I would like to briefly talk about your background because no doubt there are people that look up to you and would like to know how you’ve got to where you’ve got to. And I must admit, I didn’t know your full background and where you’ve previously worked. That’s incredibly impressive. So, getting a bit of a background about yourself and then who Grattan is, and then talking about the housing crisis in Australia. We all know that there’s one, but we’re going to talk about some of the causes of it. And then I’m really keen to talk to you about the tools and levers to address the housing crisis. I think you are ideally placed to talk to it. I’ve seen a lot of your research. We’ve started to quantify some of the issues, and certainly, Charter Keck Cramer has been doing the same thing in that space. And I think between you and I, we can have a very good, educated discussion on some of the issues that I see playing out in the media. And with respect to some of the commentaries and stuff that I’m seeing in the media, I think it lacks the depth and the evidence to inform what is a really, really important debate that needs to be occurring right now. So can’t wait to get into it.
And what I thought I’d do today before we get into the discussion is I’m just going to have a quote from Albert Einstein because a lot of these problems are actually not new, and they’ve been happening, or we’ve been looking at them for the last two decades. And the quote from Albert Einstein, “we can’t solve problems by using the same kind of thinking we used when we created them.” That really resonates with me because time and time again, I see when we’re coming up to a state or federal election, a lot of the same policies seem to be rehearsed, and it’s the same type of thinking that has created these problems. And I think that we need to start thinking differently. There’s a huge demographic shift occurring. Living preferences are changing. The voter base is changing, and I feel that we need a number of different policy responses that are fit for purpose both from a supply and a tax perspective to help address the housing crisis. And, certainly, that’s what I’d like to unpack with you today.
Before we get into that, though, could you please tell us a little bit more about your background, and also who Grattan is?
Brendan: Sure. Thanks, Richard. So, my background is, I started at the federal treasury, as you said before, mainly as a macro financial economist. I was looking at things like the European sovereign debt crisis, looking at financial regulation, went after the World Bank. I always thought I wanted to be working the UN system for the World Bank, IMF, those international economic organisations. And after I was there, I realised, domestic policy is actually more fun. It’s also where my family is. And so that’s when I moved back to Grattan just on nearly ten years ago now.
Grattan is an independent public policy think tank. It was founded in say 2008 explicitly to be nonpartisan. So, we are political. We go into bat for ideas, but we always play the policy and not the man or the woman. And it was founded with an endowment that came partly from the Victorian government and from what was the then Labor federal government. And the whole idea of Grattan is it’s that money was put in the endowment. You had the great and the good from both sides of politics broadly on the board. And so that we can say whatever we think is the right thing to say without that having any impact upon our ongoing funding. So that’s what sets us apart from us any other think tank in Australia. Grattan’s mission is to try to solve some of the biggest policy challenges facing Australia, to do that using data and evidence. We try not to use values as the way in which we solve or think about what the right answer is. I’ll never argue with you that we need to get rid of negative gearing because it’s quote on quote, unfair or because of changes in the distribution of income. In the same way as I’d never say when I did migration at Grattan, what the humanitarian intake should be because that’s a values-based proposition.
We focus on those questions where we think data and evidence can lead you to the right answer, and then we argue forcibly for those often, both in the press and with government and with the public service.
Richard: Fantastic. Well, I made a couple of notes as you were talking there. Certainly, I share your views about data and evidence and having an educated discussion based off evidence and data. And in terms of today, we’re certainly going to talk about all things property related, and I may well also play devil’s advocate. I do think we agree on a large majority of the issues, but I’m keen to play devil’s advocate because I genuinely feel that the whole point of this podcast is to educate everyone, and I’d like them to be aware of both views on a lot of these topics.
And so, let’s talk about the evidence. Let’s talk about the data. I know that you’ve done some fantastic research pieces, and I’ll put links both to your website and those reports where you’ve started to quantify the impact of some of these policy tools and settings. And, certainly, it resonates with me having data evidence sitting behind some of these views.
Let’s get into the housing crisis. As I said to you at the beginning of the podcast, certainly, I’ve been studying the housing market for at least the last 15 years, and this has been going on even a lot longer than I’ve been studying it for. But just very briefly or broadly, what are some of the causes of the housing crisis in Australia?
Brendan: Thanks, Richard. I think it’s worth being specific about what we think the problems are that we’re trying to solve for and then think about what are the causes of those things. So, house prices in Australia have risen much faster than incomes as they have across much of the developed world. That in and of itself has made homeownership more difficult for many people, so rates of homeownership have fallen. And they’ve fallen sharply for the poorest 40% of Australians of all ages. So to the extent that people want that security of being able to own their own home, and it’s become more difficult than it has been in the past.
A related issue but separate is the fact that housing has become more expensive. It’s become more expensive to both rent and buy. Now when we’re thinking about rental affordability, we’re particularly worried about the bottom 40%, those that struggle to have the resources to both pay the rent to keep a roof over their heads and afford anything else that they’re spending money on. And we’ve seen that housing costs for that bottom 40% have risen fastest in the last couple of decades. And then since the pandemic, then rents have just exploded. We’ve had this big increase in demand. Now a lot of that demand is not migration. That is an increase in housing demand from Australians. As a result of the pandemic, the shift to working from home and wanting to have more space. A rough rule of thumb is average household size went from 2.55 people per home to 2.48, which doesn’t sound like very much.
But that’s equivalent to 275,000 extra dwellings that we needed to meet that demand. And it’s impossible in the short term for the market to respond to that because prices and rents are set on the balance of the demand and supply of the stock of housing, and we only add 1.5% or at best 2% of the housing stock each year. So, we’ve got these slow building crises that are affecting enormously the living standards of Australians. One in $6 that households spend across the entire Australian economy, household consumption, is spent on housing. It’s enormously important. Now what’s sat behind that is overtime, we frankly haven’t built enough housing to meet the needs of a growing population. Homes per person in Australia is basically flat, if not gone slightly backward since 2000. We are one of the only countries in the world where that is true. You know, most countries have built more housing per person because as both population grows, but also we get wealthier, we demand more space.
Housing is a luxury good, and we have not built the housing that we need to keep up with that housing stock. We can get into why that is, but a lot of it we think is about how the planning system works. And then on top of that, house prices have risen because interest rates have obviously fallen structurally in Australia and elsewhere. And the tax settings, look, they play a role, but they’re a relatively small driver of overall house price trends. There’s things like negative gearing, the capital gains tax discount. Those tax settings that capture so much media attention are actually a pretty small part of the housing story in Australia.
Richard: Well, thank you for that. It’s interesting you say that your last point about what’s catching the headlines versus what the actual major tools or levers that ought to be pulled to actually shift the dial the most. And we’re going to get into both negative gearing and CGT (Capital Gains Tax) because it is very topical right now. We’re also going to talk about stamp duty and land taxes.
I just had a query, I made a comment, and I have been seeing in the stats, you said since 2000 we’ve not been building enough homes per person. And I certainly agree with you with that. When we look at the stats prior to that, it does appear that we were building more homes per person to meet that supply and demand. Obviously, there’s been an explosion in the level of population growth, but not the commensurate response from the supply side of things. In your views, you’ve done some of the forecasting and ready to educate everyone, including our politicians – How long do you think it’s going to take for us to get out of this housing crisis, assuming that some of the tools and levers that ought to be pulled are actgually pulled?
Brendan: So, before 2000, we were probably building more homes. Certainly, in the post war area, we saw huge demand for housing, and we built a lot. That was obviously easier in a world where Australia is incredibly highly urbanised. Most people live in five major cities, which makes planning more important here than elsewhere.
And in the ‘50s and ’60s, we built heaps of housing because the edge of Melbourne was only 15 kilometers from the city. Now the edge of Melbourne is 30, 40, 50 kms from the city, and so you’re needing to do more urban infill, and that’s more difficult. Now in terms of what it will take to solve the problem, our view is that supply is the number one lever we need to pull, and, thankfully, that is where the government, certainly, federally. And we’re seeing a level shift in state governments in New South Wales in particular, but also increasingly, I think, in Victoria, a recognition that supply is the main game. That’s actually, I think, quite new.
But if you take the government, the federal government has a target of 1.2 million homes over five years. It is very ambitious. It will be very hard to meet. But let’s say if they met that target, then our estimates prices and rents would probably be something like 15% lower after a decade if those targets were sustained through for a decade than if they don’t exist. And so, it’s going to take 10, 15, 20 years to genuinely solve this problem if we try to tackle it in its full form, but the alternative is that we don’t, and things probably get worse from here.
Richard: There’s something that’s been in the back of my mind for a while now. I’m going to quote some stats for you. I know you’ve got more stats than I do today. For the last fifteen years, I’ve started to see this play out. And I think over the next decade, it’s going to fundamentally shift. And it’s the issue of politics versus property. And what I’ve observed is a lot of the politicians will look at where they’re going to get their votes and how they’re going to stay in power for the next three years, whereas both property and infrastructure typically take longer than three year periods, often seven to ten years to be fully developed or fully built out. As of 2024 right now, the number of homeowners in Australia are around about 11 million. The number of investors that own one or more property, like the property investors, is 20% of Australians, apparently. I got this from the team, it’s about 2 million. So, there’s 13 million people in one camp. You’ve got 30% of people that are renting. You also, typically, each year, on average, seem to be about 100,000 people that are first home buyers. What that says to me right now is you’ve got and when you break down those stats, a lot of those homeowners that own their homes even outright are the Baby Boomers, and they’ve been the beneficiaries of a different time when they were able to get into the housing market. We’ve got the Millennials and the Gen Z that are, for the most part, priced out of the housing market. And why I’m quoting some of these stats to you is that I think right now when the politicians make decisions or announcements, whether it is negative gearing or even if it’s replacing stamp duty with land tax, things like that, they will look at where the majority of their votes are going to come from. And right now, it’s still heavily stacked in the Baby Boomers’ favour, in my view anyway. That being said, I’m convinced that the reason why the Greens are getting such publicity notwithstanding and with all due respect to them, a lot of their policies do not make financial sense, certainly when I’ve looked at them. A lot of the Millennials or the Gen Z are renters. They price out of the market, and they’re at risk of never getting that great Australian dream of owning a house and land. However, over the next decade, that’s going to fundamentally shift. A lot of those Baby Boomers are going to look to retire, maybe downsize, age in place, and a lot of those Millennials and the Gen Z are going to become the largest voter basis. And I think that over that next decade, there is going to be that shift. But I’m just interested now in what you think, especially given that we’ve got a federal election coming up, how responsive we’re going to talk about some of the tools and levers now – How responsive do you think the parties are going to be given that it’s still so heavily stacked in support of the Baby Boomers? And feel free to disagree with what I’ve said, obviously, but it’s been on my mind why some of these decisions are not being made and not being made quicker.
Brendan: Look, as John Howard used to say when he was prime minister, no one ever complained to me about the value of the house going up. And that was sort of the sentiment that I think has driven us to where we are in the sense that, as you say, Richard, there are more people who are in their own homes or have a stake in prices rising than what there are in prices falling. I think what’s changing, though, is two things.
One is as you mentioned, Millennials are becoming the largest share of the voting base. I think there are more Millennials in the electorate now than Baby Boomers. That’s actually started to shift. Because Baby Boomers are now in their 60s and 70s, and it’s just the nature of mortality. There’s a tale of people that are no longer with us who were voting in elections in the last 10 or 20 years.
And the other thing that’s changed, I think, is it’s become such an issue, particularly in Sydney. Sydney is ground zero for this. Melbourne is a bit behind but is heading the same way as Sydney. Is that it’s become such a mainstream issue that people literally can’t afford to live near where they want to work. They can’t afford to live where their parents live. And so even that older generation are looking at things and going, well, where are my kids going to go? How much am I going to have to stump up for them to get into the housing market? Are they going to be anywhere near me?
And that is what is shifting the conversation. I think there’s a real material shift. I’m actually very optimistic, certainly more optimistic than I’ve been in this game in the last decade that we’re seeing governments really grasp the nail of the serious policy options. We’re seeing it in New South Wales with the upzoning they’re doing around train stations with the transport-oriented development program. I’ve never seen a premier the way Chris Minns go full throated YIMBYism as in, “yes in my backyard”. I’ve never seen that before in my life. The Victorians are a bit not quite there yet, but it’s going in that direction. I think the conversation has shifted. The politics have shifted. And the Greens, we can talk about some of the policy options, but they’re capturing something in the frustration in the electorate.
Richard: That’s right.
Brendan: Amongst renters in particular, which includes a lot of Millennials and Gen Z, which is the largest share of the voting block than it’s ever been before, who just look at their housing options and go, this is ridiculous. This is not what a country as wealthy as Australia should be offering to young people as to how they can choose between where they can rent and where they can own a home and how they can live their lives.
Richard: Well, a couple of points to respond there. I agree with what your comments are about the Minn’s government. I actually commend them. Myself and my colleague, Brendan Woolley, we did our State of Apartment Market presentation in Sydney last week. We had a bunch of thematic maps showing these TOD zone areas and the notional supply that could potentially be unlocked. And I certainly commend the government for doing that and I certainly encourage governments around Australia to start following that because we really do need a supply response. And so, before we get into things like the taxes and charges, which as we were discussing offline are more the peripheral issues, let’s talk about supply. And particularly, you’ve got some research that I know has been carried out in Auckland and New Zealand about supply and what’s happened there. And I’ve certainly also been reading that research. I’ve spoken to some of the people involved in that research. So, let’s have a discussion there because it’s all well and good to have the media selling their newspapers talk about negative gearing and so forth. That’s not going to fundamentally shift the dial. What will shift the dial is getting supply activated, mobilised, and then delivered.
I’m in your hands in terms of your research, your views on supply, and certainly we can then weave in what’s happening in Auckland.
Brendan: Well, let’s start with the Australian work that exists. What we see is when we ask people, where would you like to live? And you ask people to internalise real world trade offs. Not everyone can live in Toorak with a six bedroom house with a tennis court and a swimming pool or in Potts Point or whatnot. They’ve actually got to make internalised real world trade offs. And when we’ve given people the options of, say, a two-bedroom apartment, a three-bedroom townhouse in the middle suburbs, or a four-bedroom house on the urban fringe, Greenfield, and given prevailing prices, what of these do you prefer? And what we find is many more people would prefer to live in denser forms of accommodation, whether that be an apartment that’s four stories and above, whether it be a walk-up three storey townhouse, than what the housing stock in Melbourne and Sydney currently delivers. And so that, to us, is evidence that there’s a shortfall of the kinds of housing that density allows close to the centers of our major cities. I think that’s backed up by the work of Peter Tulip and others, the New South Wales Productivity Commission.
They use methods that say, okay, well, how much does it cost to build an apartment building? How much does it cost to build each additional apartment? Then look at the secondary market for those kinds of apartments. We’re given an allowance for land and other infrastructure costs. Is there a difference? And there’s a huge difference between what it costs to build an apartment and what those same apartments appear to sell for in the secondary market. And that again is that those estimates from the RBA and others suggest that the impact is a price wedge compared to where we should be in a properly competitive market of somewhere between 20%, 30%, up to 40%. And so that to us, is strong evidence that the planning system in particular is the constraint. And just to speak personally in Alphington, I live on a street where 400 meters from two train stations, two schools, 600 meters from a shopping strip, and a kilometer and a half from a freeway.
It is the best-connected area I’ve found, which is why we live there. There is a single dwelling overlay on our street. You literally cannot subdivide the homes on my street. And when the neighbours see a house car for sale, they will put up signs saying we will oppose any attempt to get rid of the single dwelling overlay. They do that because, obviously, they like things how they are, and that’s a completely normal or rational position to have as a homeowner in that location.
But the impact is the people who would like to live in that area can’t. And I’ve been tempted to put up a sign that says we would support more homes in this well-located street, but my wife will not let me at this point. And these are lovely people, but it’s just the instinct around NIMBYism. So, what we see in experiments of places like Auckland is that when we’ve allowed substantial upzoning of a large share of a city, it has the kind of effects we’d hope it would have.
Richard: Brendan, just with that, to explain to our listeners, what do you mean or what is upzoning?
Brendan: Certainly. When we’re thinking of upzoning, we’re thinking colloquially of the land use planning rules determine what could be built where. So, there are height limits, the limits of how much of a block can be developed that exist across all Australian cities. Land use planning exists. Its purpose is to mediate different land uses in a way that we account for the spillover impacts on others. For example, you don’t want to put an abattoir next to a school. You probably shouldn’t build a lot of housing right next to factories that are spewing out noxious fumes. And so upzoning is basically relaxing those land use planning rules to allow more housing to be built. What we saw in Auckland, which had incredibly stringent land use planning regulations, something like 95% of the residential area of Auckland before 2013, you really were single family dwellings.
There was a council amalgamation in 2010, so they went from lots of councils to a single unitary council, which I think is really important. And then in 2016, they upzoned, essentially, rezoned a whole bunch of the city to allow anything from two to three storey townhouses through to five to seven story apartment buildings. And they upzoned something like 75% of the land area of Auckland. And what we saw was an explosion in the amount of housing that was built over the next few years. By some estimates, trying to control for other prevailing conditions to explain this as a causal effect, something like 4% boost to the housing stock in Auckland when you compare up zone to non-up zone areas and similar estimates when you look at Auckland versus other cities in New Zealand and Australia over the same period.
And so, what we’ve seen since then is rents are barely up in real terms, adjusted for inflation since 2016, whereas rents across New Zealand are up close to 20%. It’s basically a real-world example drawing out what the theory would tell us that if you build more housing, if you relax planning rules, allow more housing to build, that you’ll get the kind of increase in supply and the reduction in rents and the improvement in affordability. And what we see is that that’s what’s happened.
Richard: Great. What are some of the lessons that we can learn from that Auckland example? And I’ll start off just basically giving one of them. It occurs to me that there’s an education piece that needs to occur. Certainly, it started to occur in New Zealand, but for Australians and your example of in Alphington and people being resistant to change, I feel a lot of people actually fear change, and they think of density and they think of huge 700 apartment blocks coming next door to them and it being absolutely awful and having Airbnb and lots of garbage in the streets and things like that. That can’t be further from the truth if density is done well. So, there’s definitely an education piece. What are some of the learnings that you’ve seen from that Auckland example that could be applied to some of Australia’s cities?
Brendan: Well, I think a big one is this unitary council. If you’re in Melbourne and you’re on Yarra Council or Darebin or, in Stonnington or somewhere else, the instinct is always to say, well, why build the housing here? Why not just build it the suburb over? Then I get the benefits of a larger, more dynamic city, but my suburb itself doesn’t have to change.
And that’s been the core problem, I think, that’s driven where we’ve got to is that our governance structures that have for local governments reflect the interest of existing residents and those that would move into the area if more housing is built. They don’t get a say. So, when my neighbours put up the signs on the street, there’s no one driving over from Preston saying, hey, build more housing here, and I’ll get to live here. Those views are not represented in the political process at the level of government at which we are making these decisions.
Beyond that, I think what happened in Auckland is there was a real recognition of just how bad this has got. Auckland zoning was probably more stringent certainly than what Melbourne and Sydney’s are.
Richard: That’s incredible to hear because Sydney is almost unworkable when I speak to some of the developers. So, if Auckland was worse than that…
Brendan: Well yeah. They’ve kind of got it a bit closer to where they would like to be. And in terms of what was built, most of what was built was 2 and 3 storey townhouses and duplexes. About 30% of the additional homes were five to seven storey apartments, but a lot of it was lower density. And I think some of that lower density does already exist or is allowed in Australia. I think the other lesson from it is if you’re going to zone, you need to zone broadly. We’re doing at the moment, say, for example in Melbourne, upzoning around activity centers. Look. That’s fine. If you’re upzoning around Preston Train Station, that’s helpful. But what Auckland shows us is you need broad upzoning covering a wide range of the city that basically then allows developers to go and work out what are the best sites that you can then turn that site into a development that allows more housing to be built. And there’s some evidence that is emerging that shows that there was a boost to construction sector productivity following the upzoning in Auckland.
Because I think, if you’re only allowed to build 60% site coverage versus 80% site coverage for even for a single dwelling, that’s a lot less efficient when you’re trying to build. You’ve got fixed costs of the construction process, and you’re building less housing. The more opportunities you allow development to occur across more sites, developers, it’s a market economy. They will find the sites that are most likely to be able to be delivered housing at least cost or generate the most value. It’s that broad up zoning that’s incredibly important.
And what’s really been missing from the approaches, certainly in Melbourne, but at least now in New South Wales with things like the transport-oriented development program, we’re seeing broad up zoning as of right. You’re not having to then go through such convoluted processes. It’s clear on what extra housing you get, and it requires the state government to come in over the top of the local councils and say, no. In the interest of the community as a whole, in our state, in our city, for our housing to be affordable in our city, we need to incorporate the views of and interests of those that don’t currently live here.
Richard: It’s interesting. I have been doing with my colleagues a lot of work in New South Wales, looking at exactly what the state government is doing, and I do wonder how that’s going to play out because, certainly, you can see the local council is also pushing back, and there’s going to continue to be that tension. And New South Wales is leading the way in that regard, and I certainly hope that they’re able to push through. What I really advocate for is giving everyone choice. Diverse housing to actually meet the needs of what people want. I’ve seen your research. It was carried out, I believe it was about 2011 or 2016. I can’t remember what year it was, where you did that fantastic survey which showed what people want versus what is available. I don’t believe that we should be doing all apartments or all townhouses or all house and land in the areas, I feel that we should actually have that flexibility, let the market decide, and allow everyone choice because a lot of the suburbs that I have studied, I feel that they’re overweight with attached housing, and that stops the suburb going either through gentrification or younger people moving in or older people moving out, and it’s actually not good for the overall life cycle of the suburb. So planning, I agree with you, has a huge role to play in unlocking that supply and allowing the proper types of dwellings in the right locations to be built to house Australians across Australia.
If we could shift gear a little bit more because I know we’re running short of time and we could do a five-hour session on all of this. Let’s talk about some of the taxes and charges just because they are so topical. But I again, will remind the listeners that whilst this is so topical, it’s almost maybe 20% of the problem, whereas 80% of the problem is mobilising supply and what we’ve spoken about with streamlining and simplifying planning and making it faster and more certain. One of the things I’m convinced that is going to happen, I’m just not sure when, and it’s going to be extremely politically hard to do, is picking up what Ken Henry recommended in 2009, which is, and I do have some stats in front of me. I’m not going to quote all of them, but he did a report for the federal government back then where he advocated that stamp duty should be replaced by basically a broad-based annual land tax. And he did say that it would be very politically unpopular as it was implemented, but I can see the merits for doing it particularly, and I’m going to pan over to yourself, Brendan, to talk about stamp duty and why you feel it’s just inefficient and why it penalises certain buyers.
But, also, more importantly, my points about the Baby Boomer segment of the population entering retirement, they need their retirement and their aged care funded. I don’t know or I don’t believe that stamp duty, I think it’s going to hinder the turnover of housing, and a fairer and more efficient way would be to do an annual broad based land tax. And I appreciate right now we might not be there yet, but I feel that over the next decade with a lot of these people moving into different phases of their lives, they’re going to need a tax system that’s actually fit for purpose and that really addresses the needs of Australians. So, you’ve done some fantastic work, and I will send links around to it where you’ve spoken about replacing stamp duty with an annual land tax and how that can basically be budget neutral, which I think is very important given a lot of budgets are on deficit. Could you talk a little bit about that and what you what you found there, what your ideas are on this?
Brendan: Sure. Thanks, Richard. So, stamp duty, is a very old tax. Stamp duties have been popular for centuries because, essentially, they come from the old idea that to have a legal document recognised by the crown, by the monarch, you had to affix a stamp that you had to purchase from the crown. It was a very basic and simple form of tax collection before we had electronic property records or income taxes. It was one of the first taxes that we had.
The challenge, though, is that stamp duty is very costly in terms of it affects people’s decisions because it means that people, to avoid paying stamp duty once they bought a home, they choose to either renovate or to not move to take a job that pays them more or a house that better suits their needs. And so, economists regularly estimate that the economic cost of stamp duty, the cost to people’s well-being, is between 50 and 60¢ per dollar that you raise. By comparison, land taxes are basically the most efficient taxes that you have because they do not change incentives, because the land tax exists in any state of the world, whether you decide to turn a property into a 20 storey apartment building or whether you decide to leave it as it is or use it for industrial land, because the land tax is levied on the land which is valued at its highest and best potential use.
The challenge is that stamp duty accounts for something like $30 Billion of the state’s revenue. It’s their largest revenue source outside of payroll tax. And if you’re going to get rid of it as we should, then you need to replace it with something if you’re going to keep the schools open and the hospitals running. Land taxes are the tax that we think we should replace it with because they are more efficient, but they are a lot more salient as well. People forget that they pay $100,000 or $50,000 in stamp duty when they buy a house because it’s tied to spending $2 Million or $1 Million on a property.
Only the ACT has managed to make that transition away from stamp duty to land tax. We need to be able to do it by basically managing the revenue, dealing with the fact that some people just paid stamp duty and would be reluctant to then be hit with the land tax. And also those asset rich – income poor households, often older Australians, that don’t have a lot of liquid income, but often are on big properties. The ACT has done it by gradually phasing down stamp duty and raising land taxes. They’re kind of halfway through that transition, and that’s worked pretty well. Victoria is trying a slightly different model where they basically say after a decade, the new land tax will come into effect. So it’s a different model that potentially could work.
The long-term benefit is better use of the housing stock, so it could reduce house prices and rents by up to 6%. It boosts Australians’ incomes by, if we did it nationally, $20 Billlion and it boosts the rate of homeownership because you get more Baby Boomers downsizing. The challenge, though, is that no government will be able to do it at the state level unless the federal government chips in. So, the federal government has to basically say, we will pay for somewhere between a quarter and a third of the revenue shortfall in order for the state governments to be able to make the politics work. And that would be a reform that federal government should jump at because they will collect most of the extra revenue from a larger economy given they collect four in five tax dollars in Australia.
Richard: Gotcha. Well, I did see that there was a surplus announced today for the second year in a row, and that’s really great news given especially how bad things are in Victoria at the state level. So perhaps the government could and really should consider that. Let’s jump into negative gearing and capital gains tax reform. I must admit these ones annoy me because they get so much of the headlines. But in terms of actually shifting the dial, I feel this is just politics at play and political point scoring rather than actually going to the heart of the problem. What are your views on negative gearing and capital gains tax? Should it be abolished? Should it stay the same? Should it apply to just new dwellings? What are your views?
Brendan: Yes. So, this is one where I don’t think this is all just a political pantomime. I think there is an issue here that needs to be solved, which is that the capital gains tax discount at 50% is too generous for where an efficient tax system should be. Negative gearing, you should be able to deduct net rental losses. The question is whether you have partial deductibility only against other investment income or full deductibility against wage and salary income. And Australia is an outlier in having full deductibility. And the issue arises from the fact that you can get the 50% of your gains taxed, but you can deduct your costs in full, and that’s the issue. The things that we point to is that we should really be halving that capital gains tax discount from 50% to 25%. That’s a tax reform. That’s not about housing. That is a pure tax reform about the optimal taxation of savings. That’s the number one thing. That’s the elephant in the room. Negative gearing is the thing that a lot of people point to, but it’s actually pretty small.
We think that there is a reform that’s needed, which is that you should only be able to offset those net rental losses against other investment income. So, move from full to partial deductibility. Those things would save about $7 Billion a year. They also incidentally wouldn’t have much of an impact on house prices. Our estimate is no more than a 2% fall in house prices.
And that’s because, if you think about the total value of those concessions, $7 Billion a year that we would remove, if you capitalise them up by, say, a factor of 20%, that’s $140 Billion, $10.9 trillion dollar housing market. You know, it’s just too small to care, but it would boost homeownership. It is probably the number one way government could boost homeownership. If governments are serious about that, then it’s part of the solution. If you want more homeownership, then you need a smaller share of investors in the market. Investors are not the main driver of why homeownership has fallen, but if there are tax policies that make sense for other reasons, and they also have the effect of boosting homeownership and making housing somewhat cheaper, our position is why wouldn’t you jump at that?
Richard: Great. Thank you for that. What I thought our listeners would be very interested in is if you read the Ken Henry report, and certainly when I’ve looked at his analysis, all 400 pages of it, it is absolutely phenomenal. And he’s suggested that CGTB reduce from 50% to 40% to make it more in line with other investments. I thought that was interesting. My personal views certainly are that I don’t think right now in the property and economic cycle, we should be doing anything that would threaten new supply. I did look at some of the stats, and I got my team to pull down. And I’m interested to see that about 70% of investors are actually purchasing established housing. That was quite interesting to me, although when I reflect on it, that probably was about right.
Certainly, I would be wanting investors getting new stock because we absolutely have to get new supply mobilised. And where we are right now, we need every single tool or lever pulled to get new supply mobilised. And changing any of those triggers right now, I think, would badly disrupt the market. And so perhaps it’s a debate for another day as to whether this changes with respect to established housing, which is not adding to new supply. But certainly, for new supply, I would be advocating to do that.
I thought to close off because I know that we are running a little bit behind time. I did some research, and I can see that the countries that right now allow negative gearing are Australia and New Zealand. The ones that do not allow it are Japan, The UK, and The Netherlands. And then there are ones that have restricted forms of it, and that’s The USA, Canada, Sweden, Germany, and France. And so why I raise that is because we’re not the only country that does allow negative gearing, but we are more in the minority.
And perhaps some of these other countries we can learn from because they may have and I don’t know off the top of my head if they have made changes recently or at all, but we certainly do get more perks in that regard than a lot of the other comparable countries. And I think, again, that’s just food for thought because there is the risk that we just turn around and go, well, everyone else overseas is doing it. Why can’t we? And that actually is not the case.
Brendan: If I could just jump in on that, Richard, because there’s two points to pick up on. The first one is, you’re right. We’re not the only country that has deductibility. And I think it’s clear there’s a narrative amongst a certain class of, I would say, probably Gen Xs into the early boomers that look at what happened in February when the capital gains discount was changed to a 50% discount and saw house prices explode and go, here, we’ve got the reason why house prices exploded. But they exploded across the developed world. I think what’s actually happened is that the introduction of the reduction in the capital or the increase in the generosity of the tax treatment of capital gains combined with the fact that negative gearing is deduction of rental losses existed, meant that many more people started picking up investment properties. It substantially changed housing tenure. And I think a lot of people who from that generation saw their friends themselves buy investment properties and go, hey, well, this must have driven prices. But the impact on prices, as we say, is small, but it’s changed tenure a lot.
I think that’s what’s driven this sort of obsession amongst the class of journalists and others is that they’ve seen a lot of people start to be looking at properties, but it doesn’t take a big change in prices to price first time owners out of the market. What it’s meant is that some first-time buyers are priced out and investors are winning. If you flip it, that will probably be where you go back to. You’ll see more first home buyers. The impact on supply, we’re doing some work on this right now, but a rough rule of thumb from the RBA is every 1% increase in property prices raises long-term dwelling stock by point 0.7%, which is actually really small. The supply is really inelastic. If you are worried about supply and on rents, as the PM said the other day, the time we were recording this, I don’t think the impact on supply would be very big at all. And if you’re getting $7 Billion a year out of into government’s coffers, you could very easily spend a bunch of that boosting the stock of social housing and accelerating supply that way. Grattan recommend well, was instrumental in creating the housing Australia future fund, the social housing fund. If you tripled that from $10 Billion to $30 Billion you could get up to another 60,000 homes. You know, that’s one fifth of the shortfall between where the government’s housing targets are and where current supply projections are over the next five years.
Richard: Great. Look, I know we’re out of time, so I’ll close it off there, and I’ll just do, as I typically do, the three learnings that I’ve picked up from today.
The first one is there’s no single silver bullet, and there’s no really easy solution. The reality, though, is that we’ve come to a point now where we’re in a very deep crisis and hard decisions need to be made. I’d encourage the industry, and particularly our politicians who are elected to act in the best interest of everyone, to focus on things that are going to move the dial, which is really supply, as Brendan has very well articulated. And we need to look overseas, to see what’s happening overseas and even looking at places like Auckland where there have been things that we could follow to stimulate supply. So please keep that in mind. I know we’ll get lost in the headlines when we talk about negative gearing and so forth, but it’s supply and mobilising supply which will start to address the housing crisis.
Keep in mind also that politics versus property are quite different, and perhaps that’s the reason why some of the decisions are made that seem to be very counterintuitive or defy common sense. And it’s really starting to talk the politicians’ language, but then also understanding that regular people are really struggling with the housing crisis. And I think policies do need to be implemented to meet the needs of these people.
The final point that I’ll make is that over the next decade, I think that a number of these issues are going to come to a head. And why I say that is we’ve got the Millennials and the Gen Z generations who are locked out of the housing market, and a lot of them are renters and are, unfortunately, going to be long term renters. And there are needs and solutions that need to be provided to them both for housing security and housing tenure. On the other side of the spectrum, we’ve got a whole bunch of Baby Boomers that are asset rich, cash flow poor. And as they continue to age, they are going to need to have appropriate forms of dwellings for which they can live in. But, also, as a lot of them enter aged care, they need a tax system that’s going to be able to help fund their retirement and support them in aged care. And I have very real concerns that the current tax system does not or will not be able to cope with the demand of all these Baby Boomers moving into aged care. And I feel that we can either be proactive and start to address it now through things like tax reform, or we’re going to ultimately be reactive. And we’re hitting a tipping point where there’s a number of different segments of the population that are deeply unsatisfied with where they are in terms of housing preferences or the aged care system. And so, I certainly do be advocating for being proactive rather than reactive.
But before I close off, Brendan, is there anything else you’d like to say?
Brendan: No, Richard. I think we’ve covered a lot today, and I really appreciate the chance to come on the podcast. I think that maybe the one thing I will say is that housing is not well understood. People do not tend to have a strong framework for thinking about the impact of different policies on prices, on rents. The market for homeownership is separate from the market for investor housing. They are both affected by fundamentals like construction costs and land use planning rules. And I think that’s probably where there’s an education piece, which I think this podcast does, which is trying to get people to have a stronger understanding of how the different parts of the housing economy really fit together.
Richard: Well, again, thank you so much for coming on. I love our discussions. And, certainly, all the listeners, I hope that you have learned something more and at least are able to have a more educated discussion about some of these concepts that are being thrown around right now. Thanks very much, everyone, and have a great week.
Hi, everyone. Hope that you really enjoyed the session between myself and Brendan. I’ve reflected on it a little bit more, and I thought we’d managed to tease out a number of the really salient points that need to be discussed. But when I was reflecting on it a little bit more, I feel that we can break a lot of those findings up into two main parts. And, really, it’s the short and the longer term changes that need to occur, in the spirit of being proactive rather than being reactive, so that we can address the housing needs and then the living needs of the Baby Boomer population that are going to enter into aged care or retirement in aged care over the next 10-15 years.
The short-term items or issues that government needs to be aware of is in addition to opening up supply, right now, a lot of the stock is not financially feasible. And by that, I mean, build costs have jumped by 30 to 60% depending on whether you’re looking at apartments, townhouses, or house and land. And right now, prices have not moved commensurately, which means that things are not viable. Government in the short term needs to consider the tax wedge, which across different product types makes up 30 to 40% of the overall cost of these dwellings If they were able to defer or minimise or even remove some of those line items that add up into the tax wedge, that would start to make the costs come down, and it would also make projects viable, and developers would start to respond by delivering stock that can meet the markets. In addition to that, certainly, its incentivising investors, both foreign and local, into the new housing market, and that’s often through off the plan incentives, but also incentivising a huge pool of foreign capital that’s looking to invest into Australia, either coming into Build to Rent or even across other asset classes. It’s getting stock mobilised as quickly as possible, and that’s the short term.
The longer term and we’re going to do a further podcast on this, but I’m genuinely calling for proper structural changes to the tax system, to planning, and then also to the labour. I’ve got someone on the podcast soon, we’ll talk about labour reforms. But, really, the tax changes, in my mind, and as I said to you in my third point when I was closing off about the Baby Boomer population as well as the Millennials and the Gen Z having a tax system that’s fit for purpose, at the top of my list is certainly replacing stamp duty with an annual broad based land tax. I think that’s absolutely critical. It’ll provide a much more reliable way of raising revenue to fund different people through their lives.
I also do think that there should be a long hard look and discussion at negative gearing and stamp duty, perhaps not immediately and certainly not with its impact on new supply. But I think that having a tax system, a structurally reformed tax system that’s fit for the next 50 years is absolutely critical. We also did touch on structural reforms of planning, making it faster, more certain than this complex. I’m convinced also that would really, really help in the longer term. And as I said, we will be talking about labour and what can happen there because when I speak with the industry, it’s astounding to me to see that a lot of the costs of the dwellings, about 40% are materials, 60% is labour. And so, looking at how we can reform labour to make it more efficient, more productive, and ultimately more cost effective, I think will go a long way to helping over the next decade or more. That’s all I really wanted to say. I do hope everyone got some value out of the podcast, and please reach out to myself or Brendan if you’d like to discuss anything further. Thank you very much.
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