The triumphalism of housing-bubble denialists like Neil Appleby in Crikey‘s comments section yesterday is premature. After Australia’s home prices “fell only 5% or so in 2008”, our “remarkable housing recovery” was entirely due to government subsidies, which were levered up with debt and handed over to vendors (socialism for the propertied class), starting a new speculative spiral.
This is at least partly sustained by the presumption that if prices are driven too high and consequently fall back, taxpayers will cough up another subsidy in another effort to avert a financial crunch and recession. Even while prices continue to rise, industry representatives are not above asking for more buyers’ grants. Imagine what they’ll be demanding when prices fall.
And does anyone not see the moral hazard?
Each new subsidy pushes prices further out of proportion to disposable incomes, so that the eventual correction will be bigger. That’s not kicking the can down the road; it’s rolling the stone up the hill.
Given that price/income ratios must return to earth, and that governments are loath to allow the numerator (price) to fall, the only remaining option is to increase the denominator: disposable income.
The federal government can do this by cutting income tax at the bottom end — by raising the thresholds and/or cutting the bottom marginal rate (preferably to zero). Then it can replace the revenue by taxing capital gains at the full marginal rate with no exemptions and no grandfathering. The capital gains tax (CGT) would not greatly affect current prices. But, by reducing the attractiveness of capital gains relative to current income, it would reduce the tendency to form fresh speculative bubbles.
Alternatively, the states can achieve a similar effect by abolishing payroll tax, and replace the revenue by turning the existing property stamp duty into a CGT-like vendor duty.
While economists argue about whether the removal of payroll tax would create jobs, increase wages, or reduce consumer prices (actually it would do a bit of each), any of these possibilities would increase disposable income.
A further advantage of CGT, especially at state level, is that it gives the government an incentive to invest in infrastructure that raises property values, leading to taxable gains. The result is that property owners receive gains they would not otherwise get. Better still, the gains are sustainable because they are driven by improvements in utility, not by debt-financed speculation.
Oh, yes, home owners will scream blue murder at any suggestion they pay tax on their capital gains — which they have done nothing to earn, and to which they therefore have no moral right. Apparently they’d rather let the taxman steal their hard-earned income or their opportunity to earn it. But I assure them that if they don’t somehow pay tax on their capital gains, they’ll end up making capital losses instead.
Choose your poison.
“…price/income ratios must return to earth…”
You state this as though it is a proven physical law, perhaps some justification would be worthwhile.
As you would have guessed, I don’t agree that there is a set price/income ratio value that is reasonable. Consider generations ago, I strongly suspect (but don’t have data for, so feel free to prove me wrong!) that people spent a much higher proportion of their income on food than they do now. I would also be fairly sure that a lot less used to be spent on travel, communications, mod cons etc. The point being that as the affluence of our society has changed and product values and availability have changed, the proportion of income spent on various things has also changed. They are not fixed ratios.
Consider also that there may be increased competition for better properties. Isn’t it possible that increased competition for desirable properties has led to a social shift where people are prepared to spend a higher proportion of their income on the property they want?
Also consider availability of housing stock. Design regulations, planning regulations, safety regulations, availability of skilled labour, all contribute to higher cost of producing dwellings, meaning that a portion of the price increase is due to these factors.
Undoubtedly there is a speculative component to the property value increases, but it is not reasonable to say that the average property price should always stay at a certain ratio to the average wage.
How very true. Why income derived from capital gains is not fully taxed (or at all, in the case of a family home) is beyond reason.
Disposable income will increase over the coming years as the skills shortage returns, and the boomers start to retire. Once this begins employers will need to increase salaries / wages to find and retain their best staff, or they will simply be passed over.
This will sort out the income / house price imbalance. When it starts, rates will rise as the inflation starts to bite, but, once this is over with, the ratios should be more in balance.
ABARKER is an optimist who believes that wage inflation solves more problems than it causes. I, on the other hand, believe in fairies.
Takes a brave commentator to suggest new taxes these days. I, for one, am so over all talk of new taxes.
Why would any young aspiring home owner agree with the suggestion that they should one day pay CGT on the ‘profit’ they make when they sell their home, which, in all probability, they will need to sell, in order to afford to buy their next home. Primary residences should never be subjected to CGT because the ‘profit’ which the author seems to imply is some kind of windfall that “they have done nothing to earn” is, in fact, not a windfall at all. Any ‘gain’ made on the sale of a primary residence is quickly ‘lost’ and forgotten in the cost of the next residence which, after all, will have itself increased in price over the same period. The only people who might not consider a tax like that to be grossly unfair may be those fortunate enough to buy the ‘one size fits all’ house first time, and never need to sell it to buy another one. Who would be so lucky?
What about the law of demand vs supply: if there’s more people than houses, then some people won’t be able to afford to buy houses. Put more money into people’s hands, it will push the prices of the houses proportionally further out of reach. For houses to be more affordable, there need to be more houses. Unfortunately this means we need to encourage people to build houses further out. This, in turn, needs infrastructure, public transport, hospitals, schools, etc.
Now who’s going to fix that? What we need is government that invests in stuff people actually need instead of stimulating spending on things we don’t. As a society we need to start waking up and being responsible for what we spend our money on. Resources are increasingly scarce. We should hold our politicians accountable to invest in stuff that lasts. Show me a government that will do that with my hard-earned taxes and I’d be happy to vote for them, and even, possibly, entertain the thought of new taxes. Till then…