18/07/2006 - 22:00

Tax system distorts investment options

18/07/2006 - 22:00

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Housing affordability is something we are hearing more and more about. It’s the classic case of an issue everyone knows is a major problem yet no-one is really prepared to deal with.

Housing affordability is something we are hearing more and more about. It’s the classic case of an issue everyone knows is a major problem yet no-one is really prepared to deal with.

In many ways, it’s a just a case of pure economics. More people want to live somewhere where the economy is good. At the same time, it’s that same economy which gives them more spending power.

Hey presto; housing prices rise.

But it’s just not that simple.

There are many complicating factors.

Land availability is one issue. Arguably, if land releases keep pace with the population, then prices shouldn’t rise dramatically. Of course, location is a factor in this, depending somewhat on the proximity of jobs and services as well as prestige and natural amenities, such as the beach. For some, a location close (or as far away as possible) to where they grew up could also be a deciding factor.

Land availability is, arguably, the key lever of the state government. The other is tax, which has been used on investment properties in places such as NSW. That, of course, is less comfortable for politicians than releasing land.

Another alternative is herding people into more compact housing. Strangely enough, the lessons of the past have not been great in this sector. These days only the rich seem to really want a high-rise lifestyle – by choice.

Governments must ensure they have provided the administrative capacity to allow land releases in a timely manner. They may also care to make sure that supply comes on stream when it is needed, not necessarily when developers think the timing is best.

Of course, there are myriad other issues in this great debate – the environment versus growth, urban density versus sprawl, and population growth versus maintaining the status quo, among others.

How much of our lifestyle do we wish to give away to maintain a healthy level of economic growth?

What kind of place do we want to leave our kids? Will they be able to afford to live where we do?

These are all complicated arguments, many bordering on nostalgic, some as misguided as a child trying to stop the tide with a spade and bucket.

But housing affordability has to be an issue when you need young people to come here for work and they increasingly find they can’t afford a house.

Many first homebuyers are simply the victims of the new Australia, where people and capital are far more adventurous then they have ever been.

More than ever before, Perth is now a destination for housing investors and those seeking work.

Unfortunately, the two are naturally entwined and choking themselves at the same time.

For the rising ranks of the investor classes, Perth has looked affordable for that second property compared with Sydney or Melbourne, though that view is changing.

I have questioned this before. I am not satisfied that anyone but those working in the property sector benefit from tax laws that encourage over-investment in property, except of course those who got in first.

Clearly property is a major strategic investment class in its own right. By virtue of population growth and rising affluence, the rich have long sought to tuck away their fortunes in the safety of this sector.

Only in places like Beirut does property investment look unsound.

But in Australia we have distorted the rules to create a self-fulfilling prophecy of wealth creation through property.

By allowing capital gains tax breaks for owner occupiers, a loophole consistently abused by pseudo developers at the smaller DIY end of the market, we make property the number investment choice of almost everyone who pulls together the increasing amount needed for a deposit.

Of course, once you’re in, you’re in. As the next lemming rushes to buy, you cash in on your increased value, gear up again and rush out to compete with the first home-buyers or your investment rivals for the next property. Usually it’s a negatively geared decision motivated by tax concerns, because your income is too high.

On and on it goes.

We’ve become a nation of people feeling good because they get richer every year by parking their money in the ground.

I remain unconvinced this is a good idea.

I understand the tax-free status on the home. Even if it’s economically illogical, it’s political dynamite to change it.

But why not level the playing field for other, arguably more important investments?

Why not offer tax-free status on any first non-property investment up to the value of Australia’s medium house price? Then people may chose to make their next second investment in other markets that arguably need the capital more than housing markets, which boom and bust way too often.

Shares, funds, even private business would all benefit from being more competitive with property.

Strangely enough, I see this as more synergistic economically and ultimately beneficial to the property industry.

If it drove investment in business, it would fuel the economy, which would naturally drive up house prices – hopefully more steadily than the drama we see today.

Perhaps this would still result in housing affordability issues, but at least the young renter would still have other investment class options from which to use their capital-gains-tax-free benefits, arguably in smaller licks than a house takes.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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