A Housing Bonanza - For Whom?
‘Housing Bonanza as Prices Rise by $500 a Day’ read a recent front-page headline in the Sydney Morning Herald. The celebratory tone of the article, clearly targeted at Sydney’s existing property owners, implied that rapid housing price inflation is a good thing. The question is, though: good for whom? One doesn’t have to have a higher degree in Political Economy to realise that there are losers as well as winners in a game such as this. Those who seeking to become first homeowners face ever-higher entry prices. Tenants meanwhile face escalating rents as the owners of their homes seek to maintain the rate of return on the current market value of their assets.
The Herald article went on to report the views of a clinical psychologist - rather than a political economist – about what has been driving this buoyant housing market. Predictably, the emphasis was on ‘the fear of missing out’ that drives consumers’ behavior in inflationary markets. Indeed, herd-behavior is common in markets with volatile prices; and there is much to be learned about the way in which personal aspirations and psychological stresses interact with fluctuating market conditions. John Maynard Keynes, you may recall, placed much emphasis on ‘animal spirits’ in his analysis of the behavior of business investors.
The more fundamental political economic concern, however, should be about those who are really missing out: the people for whom homeownership – or even affordable rental - is an increasingly unattainable goal. This is a problem nationwide. In the private rental sector, the proportion of tenants experiencing housing stress (officially defined as households spending more than 30% of their income on housing) is approximately 33%. This proportion rises to over 53% for lower income households (defined by the ABS as those in the second, third and fourth quintiles of the household income distribution). A public housing alternative is not readily available for most of these households because of the stringent criteria of personal disadvantage or incapacity that limit access to the woefully inadequate public housing stock. In this context, the eminently reasonable goal of affordable and decent housing for all Australians becomes ever more elusive in practice.
The situation is exacerbated by the currently low interest rates. One might imagine that ‘cheap money’ should enable more low to middle income households to borrow in order to buy. But it also fuels the herd behavior, pushing market prices further up. It also has some awesome historical equivalents. The ‘subprime mortgage market collapse’ in the United States that precipitated the global financial crash of 2007-8 involved people on modest incomes seeking to borrow to buy houses – and encouraged by lending institutions to do so – without due regard to their capacity to service the debt. Where future incomes are unreliable, especially because of insecure jobs, this can be a disastrous recipe for the individuals and families caught up in this process, as well as for the macroeconomic situation more generally.
Even those homeowners who are ‘enjoying’ the fruits of capital appreciation in real estate values – the Herald’s target audience, evidently – may find that the gains are an illusion. The fact that the market value of your property has risen does not increase your economic wellbeing unless you sell up and relocate to cheaper housing elsewhere (or go to live in a tent). And, if you do so, your prospects of future capital appreciation are then likely to be lower. So the ‘windfall gain’ effect that benefits property owners goes hand-in-hand with a ‘lock-in’ effect that tends to make the gain largely unrealizable – unless they own more than one property.
Looked at from a political economic perspective, the problems that underpin these difficulties in the housing situation are fourfold – relating to (1) economic inequality; (2) the land speculation driver of inflationary processes; (3) the perverse incentives embedded in current tax arrangements; and (4) the inadequate stock of public housing.
Let’s consider each aspect in turn…
Economic Inequality
Inequality is the most obvious source of the problems, as it is with so many political economic difficulties. If all households had similar incomes, housing markets could operate on a relatively level playing field, reconciling the interests of buyers and sellers with diverse preferences for housing types and locations. However, in a society of glaring wealth inequalities, the sorting process has a more coercive and cumulative character. As David Harvey has argued, the rich command space while the poor are trapped in it.
The contrast between wealthy suburbs and areas with poor housing is the physical expression of a deeply divided society. Of course, people’s capacity to service a mortgage or to pay market rent varies markedly according to their income. So it is very difficult to achieve the social goal of decent and affordable housing for all without addressing the economic forces that generate those inequalities. It is not just that some people derive income from capital while others only derive income from labour; nor that some people benefit from inherited assets while others do not. Housing inequalities interact with labour and capital market inequalities to create cumulative patterns of advantage and disadvantage.
Housing and Land
There is also something very distinctive about house price inflation. Housing is purchased both for its ‘use value’ (the benefit of having a nice place to live or even just a roof over your head) and for its ‘exchange value’ (the benefit of having an asset that can be sold at a market price). It is the latter aspect – particularly the possibility of using housing as a means of accumulating wealth – that accentuates the demand for housing. It also highlights the key role of land, an asset whose supply is substantially fixed by nature (even though the intensity of its use can be variable).
When people talk about homeownership, they are normally referring to an asset that combines housing and land: the former sits on the latter. Land is normally the largest component in the exchange value of the combined asset. Indeed, over time, the value of housing typically deteriorates as the building gets older and needs repairs or renovation, while the value of land goes on increasing. This is most obviously the case in the inner parts of large cities where land values are many multiples of the value of similar sized areas in rural or peri-metropolitan regions. As populations grow, urbanization continues and cities spread, the demand-supply relationship creates persistent inflationary pressures. You may recall an episode from the TV drama The Sopranos, in which one of the mobsters asks gang-boss Tony how to invest his surplus ill-gotten gains: Tony replies “buy land, cos He ain’t making no more of that stuff.”
While it is not true that the rate of return on land always surpasses other assets, land is a predictably sound investment in the long term. It is also a focal point for sometimes spectacular windfall gains. While land prices don’t rise uniformly over time, they tend to exhibit a ratchet effect, surging upwards, plateauing then surging again. This is ripe territory for speculation, the more so when local government rezoning suddenly increases the value of agricultural land on the edge of growing cities. Little surprise, then, that there are recurrently corrupt relationships between landowners, developers and particular local governments (as has been recently revealed in the Sutherland Shire in southern Sydney). More generally, it is the combination of fixed supply and potential for speculative gain that makes land a very special asset.
Tax reforms
So, if land prices are the underlying driver of inflation in housing markets, what is to be done? Policy that focuses on housing alone is bound to be inadequate: a more integrated approach to land and housing policies is needed. One longstanding, but commonly ignored, school of political economic thought has been centrally concerned with these issues: it derives from the pioneering ideas of Henry George. It is worth revisiting as a source of insight into the contemporary scene. The characteristic Georgist prescription is for more comprehensive land taxation (or ‘site revenue capture’ as some prefer to call it). A key argument is that a uniform tax applied to the value of all land would drive out the speculative element from the market. Indeed, if the government captured the economic surplus that is currently privately appropriated by landowners, it would only make sense for people to hold land for its use value - whether for housing, agricultural or other commercial purposes. There could then be no significant speculative gain and land ownership would not be a vehicle for capital accumulation.
The current forms of land tax implemented by State governments do not achieve this outcome because the tax rates are low and the exemptions extensive: a more comprehensive, nationwide system would need to replace them. The Greens have become increasingly interested in taxation reform of this sort, reflecting a broader environmental economic philosophy of reorienting taxes towards the use of nature. It is also pertinent to note that, in a world with increasingly mobile financial capital and complex tax minimization arrangements, land is a relatively effective tax base because it cannot easily be hidden. Also a land tax that applied to all residential properties would probably have the effect of discouraging some of the foreign purchases that has been driving up housing prices in Australia’s major cities recently.
Short of a comprehensive change in the land tax system, there are other more modest possibilities for reform. The current income tax provision for negative gearing is perhaps the most obvious case in point. It creates a strong incentive for people seeking capital accumulation to get into debt-financed real estate. Owning rental property is a tax-advantaged form of asset-holding. Politicians have shied away from cracking down on this tax loophole because quite a broad swathe of the Australian population now has a stake in its perpetuation. So, it would take a courageous government – certainly not the current one! – to move on it. But a modest first step could be to require claimants for negative gearing to declare the rental contracts that apply to their property – in other words, to show that the property is actually used for rental. It is not unreasonable to ask claimants of any tax concession that they produce the relevant documentary evidence. Nor would it be unreasonable to insist that only the income from the rental can be set against the mortgage interest payments (i.e., to ‘quarantine’ the tax concession).
A more fundamental reform would be to change the capital gains taxation arrangements. The Howard Government effectively halved the rate of capital gains tax; and thereby made income from the sale of assets, including land and housing, more lowly taxed than income from work. Is there really any sound case for that difference of tax treatment? Indeed, some would argue that income from capital is ‘unearned income’ and should therefore be taxed at a higher, not a lower, rate than income from labour. But a level playing field seems the most politically tenable position. Overall, a strong case can be made for treating all income from whatever source, and without any allowable deductions, as liable to the same rate of tax. Now that’s a simple political economic proposition for the next national tax review to consider. But don’t hold your breath…
Public housing
Turning from taxation to government expenditure, there is also much potential for redress of housing stress. Expenditure on public housing is the clearest focal point. Public housing received major public support from State governments in the aftermath of the Second World War. In South Australia, there was a particularly effective process of public housing provision administered by the SA Housing Trust, in which the eminent social scientist Hugh Stretton played a prominent role. But support for public housing has dwindled nationwide in the intervening years. The Hawke government in the 1980s promised funding that would double the national supply of public housing, but this policy did not bear fruit. The actual provision of public housing remains the responsibility of State governments and, almost without exception, they have been niggardly in funding it, preferring to put more emphasis on privatized housing arrangements.
The result is that public housing has become a residual sector, catering primarily for people with special and multiple needs which render them incapable of surviving in the private rental sector. So, marginalization and stigma have become the pervasive characteristics of this housing sector, reducing public support for what should be, in principle, a viable housing alternative for a broader stratum of Australian society. International experience shows that a good supply of public housing can underpin a much better functioning housing market. Public housing – the Cinderella character in the Australian housing pantomime - needs an invitation to the ball.
Towards a coherent response…
There are connections between these remedial policies. First, a more progressive and redistributive tax system would redress the fundamental problem of economic inequality that underpins so many of the problematic features of housing markets. Second, a reorientation of the tax arrangements to discourage land speculation and eliminate the favourable treatment given to homeowners would reduce inflationary pressures and create more equality of treatment between homeowners and renters. Third, these taxation reforms could increase government revenues and thereby finance a substantially larger supply of public housing, taking the pressure off the private rental sector and helping to keep housing affordable for the bulk of the population.
Rather than celebrating increased housing prices, shouldn’t the mainstream media – and the politicians who are ostensibly concerned with ‘a fair go’ for all Australians - consider these political economic principles and possibilities?
About the Author
Frank Stilwell is a well known critic of conventional economics and an advocate of alternative economic strategies which prioritise social justice and economic sustainability. He has taught for over 40 years at the University and twice been awarded the University's Award for Excellence in Teaching.
Emeritus Professor Stilwell's research interests centre on Australian economic policies, urban and regional development and economic inequality. He is the author of eleven books, including Economic Inequality, the Accord and Beyond, Understanding Cities and Regions, Reshaping Australia, Changing Track : a new political economic direction for Australia; Political Economy: the Contest of Economic Ideas, and Who Gets What? Analysing Economic Inequality in Australia (with Kirrly Jordan). He has also co-edited five other books, including Economics as a Social Science and Beyond the Market : Alternatives to Economic Rationalism.
Disclaimer: Emeritus Professor Stilwell did not receive any funding from institutions, public or private, in the preparation of this post, and the views expressed are his own and do not necessarily reflect those of the Journal of Australian Political Economy or Sydney University.
