Wednesday, March 29, 2017
As a general rule, the younger generation buys its homes from an older generation, which means rising house prices constitute a transfer of wealth from younger to older generations.
Unfortunately, this conflict of interests between the generations makes it unlikely the measures in the "housing affordability packages" the pollies say they're working on will do much to limit the rise in prices.
Our problem in Australia isn't so much fake news as fake government – governments that, lacking the courage to implement controversial solutions to problems, just create the pretence of solving them.
Since the media usually fall for the trick – the recent excitement over Snowy 2.0 being a case in point – the pollies' preference for appearances over reality has worked well for years, although the drift of voters away from the mainstream parties is a warning the illusion is wearing thin.
As a general rule, older generations don't have much sympathy for younger generations – which is the pollies' dilemma.
We make an exception, of course, for our own kids. This is why parents who've benefited from the rise in house prices over the decades increasingly find it necessary to help their offspring make it onto the home-ownership merry-go-round.
I've done it myself. But get this: what we regard as an act of parental generosity, is actually an act of generational self-interest.
Huh? Everything parents do to help their kids afford seemingly unaffordable house prices helps keep those prices high.
Were parents to decline to help their kids, prices would have to come down until they could be afforded – which would be contrary to the interests of older sellers, such as parents.
Prices rise when demand for the item is growing faster than supply. One reason could be because the population has been growing faster than the number of dwellings has, but this seems less likely to be a big part of the story now we've had a surge in home building and face an excess of units in some state capitals.
It suits politicians to say the solution to affordability is to add to the supply of homes. Federal pollies say it because supply is essentially a state responsibility.
State pollies say it because allowing more homes to be built on the fringes of the city pleases developers without annoying many people.
Trouble is, this does little to increase the supply of homes where people want them to be: closer in – where the jobs and entertainment venues tend to be, and where road congestion and commute times aren't as bad.
State politicians are a lot less enthusiastic about increasing supply in middle-ring suburbs by changing planning rules to allow higher density development. The locals hate the idea.
Next the pollies pretend to help by giving special breaks to first home buyers, such as cuts in stamp duty on home purchases.
But as with help from the Bank of Mum and Dad, all this does is help young people meet and increase the higher prices. The benefit ends up with those older home-owners selling their homes to newbies.
What politicians rarely propose is measures to reduce the upward pressure on prices by reducing the demand for homes.
How? By distinguishing between the two main motives for wanting to own a home: the desire for secure tenure, to modify it as you see fit and minimise housing costs in retirement, as against the desire to own a rapidly appreciating, tax-preferred investment.
Many of the tax advantages politicians have loaded onto home ownership, in the name of encouraging it, have made home ownership more desirable to have but, by increasing the demand for homes, made it that much harder for would-be home owners to attain.
Exempting the family home from capital gains tax, for instance, encourages people to "invest" in improving their home rather than buying shares or securities.
Largely ignoring the value of the family home when assessing people's eligibility for the age pension under the assets test adds to the attraction of homes as an investment.
Then there's Australia's unusual tolerance of negative gearing, combined with the 50 per cent discount on the taxation of capital gains, which adds greatly to the demand for homes as an investment, while adding little to the supply of homes.
Even without all those tax advantages, homes would still be a good lifetime investment – though not as good.
The Great Australian Dream of owning your own home has always been about personal security and autonomy.
The attraction of home owning as an investment option has become a big issue only since the introduction of capital gains tax in 1985 and, more particularly, its modification in 1999.
See the scope for conflict between the two motives for wanting to be a home owner? Making housing less attractive as an investment would reduce the demand for it and so make it easier for first home buyers to get on board.
What makes the pollies reluctant to act is their knowledge that existing home owners – whose votes greatly outnumber first home buyers' – have come to value their home's (or homes') attractions as an investment.
It comes down to a conflict between the generations.