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Putting roofs over our heads

By Harold Levien - posted Wednesday, 17 September 2014

Australia's housing problem especially for first home buyers and renters has reached critical levels in Sydney and Melbourne. There are ready solutions to this immense social problem. Unless they're placed on the public agenda it's unlikely there'll be any action.

It's a shameful comment on society and our politicians' lack of vision that despite rapid increases in productivity and per capita income over the past 50 years the financial burden of purchasing or renting a first house or apartment has greatly increased. Yet housing is the largest and most important material component in our living standards. The solution requires three steps and would be without cost to the Government.

The first step is to abolish negative gearing for housing-- perhaps phasing it out over three years. Currently this is costing the Government around $5 billion annually in tax foregone and raising the price of housing. This doesn't make sense. There are those who argue that it increases the supply of houses and apartments but the same and greater increase in supply, and at much lower prices, could occur through direct government spending at no cost to the budget as set out in the third step below.


This $5 billion could instead be spent on restoring the budget cuts to essential public facilities and services such as the $2 billion annual cuts to universities, the annual $147 million cuts to scientific research, the threatened annual $260 million cuts to the 5 year renewable energy program, the $569 million abandonment of the preventative health and hospital improvement programs, the annual cuts to the ABC and SBS, the annual $300 million cuts to the unemployment payments to those under 30. This would still leave over $1.6 billion annually towards restoring the $8 billion annual cut to the States' health and education spending.

The second obvious step would be blocking the sale of houses and apartments to non-permanent residents. Surely housing prices and rentals should not be partly determined by overseas residents seeking capital gain at the expense of Australian citizens? Many agents have reported that 25% of Sydney's recent housing auction sales have gone to foreign buyers. The building industry argues foreign buyers increase the supply but the same argument applies as with negative gearing: a similar, indeed greater, increase in supply could occur through the government entering the housing market. This brings me to the third step.

The Federal Government could establish a National Housing Development Corporation (NHDC) to construct additional housing to overcome the market's estimated shortfall of around 40,000 houses annually. At the same time it could offset the supply currently accruing from both negative gearing and overseas investors. There need be no cost to the budget. The government Corporation could readily borrow whatever funds are needed and the interest and administrative costs could be built into the sale price or rental charge. Since the Government can borrow at 2%-3% below the cost to the private sector and because the Corporation would be established as a community service rather than as a profit making venture it could sell or rent housing very significantly below the current private sector market price. Moreover the increased supply would substantially reduce market prices.

The NHDC could gradually overcome the housing shortfall and greatly reduce current housing stress defined as mortgage or rental cost of more than 30% of gross household income. This has been steadily increasing over recent years. During the decade prior to 2011 while average earnings rose 57% average rent rose 76% for houses and 92% for apartments. Since 2011 this gap has been accelerating.

As a major social bonus the NHDC could be subject to statutory requirements for quality architecture and strict town planning principles. It could take account of location to public transport and employment opportunities which private developers often overlook in the interests of the market-driven profit motive. And since rent or mortgage repayments represent by far the largest item in low to middle income family budgets this initiative would make the single largest contribution to reducing poverty.

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About the Author

Harold Levien, in the 1950s immediately after graduating in economics, founded and edited VOICE, The Australian Independent Monthly. It lasted for five years. As a journal of comment its contributors included many of the most respected authorities on economic and political issues of the time. He wrote Vietnam, Myth and Reality in 1967. It went into several printings. Harold has written many articles which have appeared in the Herald, Bulletin, Quadrant, National Times, Australian Options, the Journal of Australian Political Economy and others. Before retiring he taught economics for 27 years.

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