Friday, November 6, 2009
Selling homelessness: the housing affordability crisis in Australia
More than 105,000 people are homeless in Australia on any given night, but the true number is likely to be higher. Homelessness is not confined to those sleeping rough – it includes anyone in insecure, substandard accommodation. Homeless people may be ‘couch surfers’ who alternate between different friends’ houses; those living in temporary accommodation such as a refuge, emergency shelter or motel; or those living somewhere that is physically or emotionally unsafe because of a lack of alternatives.
Rather than focusing on the homeless themselves and the personal reasons for their predicament, I’m interested in the role of housing affordability and availability, both for those who rent and those who own, in contributing to homelessness. Until the government considers these issues its efforts to reduce homelessness will be in vain.
Of course, the global financial crisis has probably increased homelessness and housing stress in Australia. The rise in unemployment and the government’s stubborn refusal to increase Australia’s clearly inadequate dole payments have probably left more people sleeping in their cars or living in cramped conditions with relatives, something that has become widespread in the US.
But housing affordability was a problem before the GFC. The International Housing Affordability Survey found that housing affordability in Australian cities was among the worst in the world. The report rated seven of the eight major housing markets in Australia as severely unaffordable. While there was a slowing in the growth of house prices following the crash, Australia’s ‘housing bubble’ looks set to get worse despite the fact that unemployment is still rising. The Age reported on 3 October 2009 that 'the median price of a Melbourne home in September 2009 was $520,000, compared to $488,944 for the previous month', a jump of 6.4 per cent. Meanwhile a report released in October predicted that house prices in Australia would rise by 20 per cent in the next three years.
Meanwhile, the rental market is mean, lean and ruthless. In Melbourne, for example, only 9.1 per cent of dwellings rented out in the June quarter were affordable to lower income households, a huge reduction from four years earlier, when 29.4 per cent of homes were affordable for this group.
One reason for the blowout in housing costs – but not the major one – is unbridled immigration without the necessary planning. Last year Australia’s population grew by 1.9 per cent, one of the highest rates in the world and ‘unprecedented among developed nations’. It is forecast to surge from 22 million to 35 million in 40 years. There is simply not enough housing stock (let alone natural resources) to bear such an increase.*
Other reasons for housing unaffordability are the deregulation of the loan market, making loans easier to get by those who might not be able to afford them; low interest rates; the self-reinforcing effect of speculative booms; and government grants for first homeowners. But these reasons are themselves underpinned by the main cause of Australia’s lack of affordable housing – the government’s generous tax treatment of home owners and property investors.
Labor promises to reduce homelessness
When the Labor government came into office, Kevin Rudd made a personal commitment to tackle the problem of homelessness, labelling it a ‘national obscenity’. The Road Home, the government’s White Paper on homelessness, was released on 21 December 2008.
The White Paper outlines the government’s National Affordable Housing Strategy. The strategy includes an ambitious commitment to halve homelessness by 2020 and ‘offer supported accommodation to all rough sleepers who need it by 2020’. It promises $6.1 billion over the five years from 2008–09 for measures such as ‘social housing, assistance to people in the private rental market, support and accommodation for people who are homeless or at risk of homelessness, and assistance with home purchasing’.
The strategy involves agreements with the states and territories, which are required to provide some funding and are responsible for improvements in services that they run or administer. The White Paper includes interim targets and also accountability measures that the states and territories are required to report on annually.
However, even a quick look at the targets reveals an interesting contradiction. While Australia’s population is set to explode in the next 40 years, it seems that the government is only interested in reducing homelessness as a proportion of the total population. The White Paper states, as an interim target, that:
By 2013, the rate of homeless persons will need to be around 40 homeless persons per 10,000 population or better if we are to achieve our 2020 goal.
Other interim targets for 2013 include:
• The number of people engaged in employment and/or education/training after presenting at specialist homelessness services is increased by 50 per cent
• The number of people exiting care and custodial settings into homelessness is reduced by 25 per cent
• The number of families who maintain or secure safe and sustainable housing following domestic or family violence is increased by 20 per cent.
But some of the targets – and they are very specific – deal with absolute numbers, for example, ‘by 2013, a decrease of 7 per cent in the number of Australians who are homeless to less [sic] than 97,350 people’ and ‘the number of people released from [care and custodial settings] into homelessness is reduced by 25 per cent (3,552) by 2013’. It seems there is a fundamental confusion about the ambitions of the White Paper – does it aim simply to reduce homelessness proportionally, or to reduce the absolute number of homeless people?
Our worsening housing shortage
Australia already has a significant housing shortage. According to the Business Spectator of 26 August 2009, BIS Shrapnel estimated that ‘Australia’s dwelling stock deficiency … will peak at 160,000 properties by 2010’.
And it’s the disadvantaged who are missing out. The same article quotes the National Housing Supply Council, which released a report in March 2009. The report estimated that back in June 2008, 85,000 new homes were required to address ‘homelessness and low vacancy rates in the private rental market’.
The rental markets in Australia’s major cities have been constricted for years now. In Melbourne, for example, the trend metropolitan vacancy rate for the June quarter 2009 was only 1.3 per cent, compared with 3.6 per cent for the period from 2000 to 2005.
Given that the government plans to drastically increase Australia’s population in an already tight housing market, it seems inevitable that the total number of homeless will continue to increase. And ironically, one of the underlying reasons for homelessness – excessive immigration – will provide justification for the government’s failure to reduce the total numbers.
The Housing Industry Assocation acknowledges this problem. Citing the projected population increases, it warns: ‘already Australia has a substantial gap between the supply of dwellings and the underlying demand for dwellings. The gap is set to widen further with obvious consequences for house prices, rents and affordability.
‘Not only will there be a greatly increased demand for accommodation, Australia is faced with further strains on urban infrastructure, health and education to meet expected increases in population.’
If that’s the case it says something very important about us as a society. While refugees and family reunions – the most legitimate targets for immigration – account for some of the intake, roughly two-thirds of Australia’s permanent immigrants are skilled migrants. These people can afford to pay hefty application fees and have skills Australia needs, and so are not likely to be among the most disadvantaged when they arrive. But given the lack of housing stock, and the inadequate supplies of new social housing even with the government’s targets, market forces will mean that the wealth needed to access what housing there is, whether by renting or owning, will increase. As the population increases, more disadvantaged people who are currently at the bottom of the housing ladder will fall off it entirely.
Just as job seekers sometimes give up on the labour market, would-be renters become discouraged if they are repeatedly unsuccessful in finding somewhere to live, leading to overcrowding as they outstay their welcome with relatives. Alternatively, they may pay huge proportions of their income on rent in overcrowded share houses with what was once living space becoming makeshift bedrooms. Meanwhile the slum is making a comeback.
As a society,we seem to be accepting that excessive skilled immigration will bring greater housing disadvantage to a number of Australian citizens. These citizens may include newly arrived refugees, the mentally ill, the old, the unemployed, the physically disabled, the addicted, and the sick. This is the unspoken trade-off the government is willing to make.
Yet the government will be able to claim success if a lower proportion of people in a grossly inflated population are homeless!
Regardless, the housing strategy is already running into problems. The Age reported on 28 August that, due to a ‘$1.5 billion cost blow-out’ on the schools infrastructure program, the government would be cutting $750 million from its $6 billion plan to build 20,000 new public housing units. While most of that cut was due to lower than anticipated costs, the number of new homes built was to be cut to 19,200.
Tax benefits for the rich at the expense of the poor
But the main reason for the housing affordability crisis in Australia is government tax policies that favour owners and property investors, resulting in the loss of literally billions in tax revenues – billions that could be used to build affordable housing. The main culprits are the capital gains tax exemption and the land tax exemption for owner-occupied housing; negative gearing for investment properties; and the discount on capital gains for investor properties.**
These tax benefits result in an obscene government subsidy to wealthy home owners at the expense of the poor. The Senate Select Committee on Housing Affordability, reporting in June 2008, estimated that these concessions came to a whopping $50 billion per year. If you add the exemption of owner-occupied housing from the asset test for the age pension, that’s another $10 billion. Compare that with the paltry figures the government has promised to combat homelessness; now imagine what would happen to the texture of Australian society, its cohesiveness and degree of income equality, if only half that huge amount were spent on social housing!
As commentators quoted by the Senate committee point out, such figures may reward existing home owners but they do nothing for the institution of home ownership itself.
Small investors welcome the housing bubble because they are making more money, and owner-occupiers also welcome the rise in their property prices. But those with children must watch them struggle to find a decent rental property, struggle to get into the housing market, and then struggle to maintain huge mortgage payments.
The problem of negative gearing
Negative gearing occurs when an investor borrows money to buy a property, but the interest payable on the loan is higher than the income gained from the property. The investor is able to claim the loss against taxable income. (Investors also get a discount on the capital gains they derive from the property.)
Negative gearing has been slammed by many in the welfare sector because it gives favourable tax treatment to those who already have a first home and are investing in a second one, as compared with those who are buying their first home.
The Senate Select Committee on Housing Affordability admitted that negative gearing was encouraging investors at the expense of home ownership, reporting that ‘investors now account for about a third of new home loans’.
But trying to get rid of this tax has proved electorally unpopular, and it is a truism that it increases investment in private rental properties and therefore the amount of rental stock available. This comforting idea is illusory. Most of the investment fuelled by taxpayer-funded negative gearing goes into existing housing stock – it’s not being used to buy new houses.
The tax benefits available to property investors – negative gearing and capital gains discount – are supposedly needed to make the investment worthwhile because the properties are so expensive to buy in the first place. But because these benefits have increased demand for investment properties, negative gearing is itself partly responsible for that expense.
In September 2009, the Brotherhood of St Laurence released a report it had developed jointly with the Australian Housing and Urban Research Institute. The report confirmed that the government’s tax policies made housing more expensive for disadvantaged Australians. And it found that for households in the top 20% of incomes, the average annual benefit of the exemption from capital gains tax on owner-occupied housing was worth $8,000 – almost seven times the average of $1,200 in subsidies for housing expenses that the government pays households in the lowest 20 per cent of incomes. It offers the following example:
Wealthy negatively geared property investors in the top 20% of incomes are getting around $4,500 from tax benefits in relation to investment properties. However, people from the poorest households who receive the top rate of Commonwealth Rental Assistance gain an average subsidy of just $2420.
Another reason that the capital gains and land tax exemptions are wasteful is that they also encourage people to invest extensively in their homes as a form of saving; for example, building a larger home than they actually need.
Reforming the housing market
In order to increase housing affordability and accessibility for the most disadvantaged, and to favour first home buyers over property investors, the Brotherhood has called for the following changes:
Remove the capital gains tax exemption on homes worth more than $1.1 million.
Combine the introduction of taxation of imputed rent and capital gains with mortgage interest deductibility [to benefit first home buyers].
State governments should consider removing the exemption from land tax for very expensive owner-occupied dwellings while at the same time removing or reducing stamp duty on lower-priced homes.
Any resulting revenue gain should fund measures to make housing more affordable for those in need, including providing more public and non-profit housing and more generous support for those on rent assistance.
Give pensioners in large houses tax breaks so they could let out part of their houses without being penalised.
The government needs to:
immediately double its commitment to new social housing and reinstate the urgency with which it originally seemed to be tackling the housing crisis, expediting the implementation of its National Affordable Housing Strategy and putting pressure on the states to prioritise this area
conduct an inquiry into immigration policy that takes account of Australia’s housing availability, its already overstretched infrastructure, the limits of its natural resources such as water, and the implications for the disadvantaged of excessive immigration
use negative gearing solely to encourage the building of new housing stock for rental purposes
increase its commitment to providing adequate skills and training in needed areas, which would also reduce unemployment.
Improving the rental market
Change tenancy laws to encourage European-style long-term tenancies as an alternative to owning.
Immediately outlaw rent auctions.
Make it mandatory for landlords to make their own decisions about who lets the property, rather than property managers who are often young and prejudiced.
Coordinate tenancy laws across the states so that blatantly unfair practices, such as the requirement in Queensland that all renters go on six-monthly leases, be abolished.
Places caps on rent increases, abolishing increases based purely on market forces.
A fairer go in the housing market
Putting the 'fair go' back into the housing market would not benefit the disadvantaged alone. Everyone, even the richest, gains from the social cohesion, lower crime rate and stronger community spirit that a more equal society offers. Bring it on!
* I fully acknowledge that this is a touchy issue, given Australia’s shameful history of openly discriminating against non-Caucasians during the years of the White Australia Policy (the discrimation was so blatant even the Brits were embarrassed by it). Those opposed to immigration in Australia have traditionally been on the right and motivated by a fear of the other. We are, as many are proud to say, a nation of migrants apart from Indigenous people, so who are we to turn others away?
For the record I’m not against immigration as a concept and think that Australia should favour refugees from all races (including asylum seekers who arrive by sea) over skilled migrants. However, I do think we need to look seriously at reducing future increases to the skilled migrant intake and start to plan how we are going to house, feed and provide water for our growing population.
** Please note that I am not bagging people who invest in this way and are simply responding to government tax policy. My own parents have a small investment property and their ordinary-sized house, in a sought-after suburb and on a large block, is now worth over $1.5 million. I am lucky enough to benefit from the fact that my landlord is not still paying off the property I rent, but is an outright owner, so was not affected by the high interest rates before the GFC.