Stop blaming investors for the housing shortage

Australia's housing needs need to be addressed, but calls to scrap negative gearing will punish investors and could have deleterious consequences for the economy.

Persistent attacks against negative gearing, most recently by the Murray inquiry, the Grattan institute and so on are not only misguided but will likely prove harmful to society if adopted. Indeed, recent research from the RBA highlights why policymakers will likely have to increase incentives for investors if the country’s housing needs are to be met.

Of course, that wasn’t the purpose of the RBA’s research -- it was an unintended implication. The paper instead made a persuasive case against home ownership under certain circumstances. At best, the paper suggests it’s an even -money bet assuming house price growth matches its prior long-term average. Yet few people expect that to occur, and indeed the consensus appears to be that house price growth will be more moderate and in line with household income growth.

In this instance, the authors suggest home buyers are more likely to be financially worse off. Either way, it’s not exactly a great advertisement for first home buyers. This is at a time when first home buyers don’t need much more of an excuse to avoid the market. Home lending figures already show first home buyer activity at its lowest on record.

If that trend continues, then it’s likely Australia will follow other major advanced economies with already have low or declining rates of home ownership. So for instance, many European nations hold ownership rates around the 40-50 per cent mark - e.g. France, Germany and Switzerland. Similarly, homeownership rates in the UK and the US, while markedly higher at around 66 per cent or so, are falling and are currently around 25 and 20-year lows respectively.

It’s against that backdrop that any punitive measures taken against investors, including regular calls to scrap tax breaks such as negative gearing, would prove extremely harmful and have deleterious consequences for the economy and society at large.

This is because if global trends are any guide -- and the authors of this recent RBA discussion paper are correct- - then the burden for maintaining Australia’s housing stock will increasingly fall to the investment community. Unfortunately, while there is a growing consensus making the case against owning a home, and that does indeed appear to be a global trend, renters don’t build houses! If it’s true that the maths for home ownership doesn’t stack up, the country has a problem.

Make that a worsening problem. Australia already has an acute housing shortage. This is well known, although the exact cause of that shortage may be the subject of some debate. The fact is there is a shortage on current consumer preferences. Short of everyone being forced to ‘move back in with their parents’ or by extension, being forced into large-scale, high-density multifamily units, that shortage isn’t going away.

Admittedly, recent construction and approvals data suggest a rebound is underway, although that rebound may be flattening off. Already investor lending has flatlined in recent months and loans for construction are down sharply. Similarly, approvals data suggest a sizeable slowing, with new applications off in three of the last four months. If the rebound is to continue, if policymakers genuinely want to rebalance the economy and address Australia’s chronic housing shortage with a much needed construction rebound, then the country needs to stop treating investors as the enemy -- as some grave social evil that must be stopped at all costs.

Australia’s housing crisis doesn’t look as though it’s going to be redressed by owner occupiers, especially if the RBA is correct in thinking that the financial incentives (admittedly not the only force driving the home buying decision) for home ownership will deteriorate. It should be clear that punitive measures to discourage investor activity would be self-harming and against the interests of society at large.

Yes, affordability is a significant issue for a growing number of people. Yet the RBA’s study suggests that rather than attempt to boost this segment of the market with homebuyer grants for a market that increasingly won’t want to buy, a better course of action may be to address questions of investor interest in the market. This is especially so for detached housing, where shortages are more acute. 

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