US a model for housing affordability
How will the federal government budget address the housing affordability problems facing many Australians? The available options are severely limited by past decisions, including those to not reduce or even limit the taxation benefits for investors and to continue to exempt owner-occupied houses of any value from both capital gains tax and the age pension assets test.
A comparison with United States tax arrangements highlights how far our system is skewed in favour of existing outright homeowners. The US allows interest payments on mortgages of up to $1 million as a personal tax deduction but restricts investors from offsetting investment losses against other taxable income. All real estate investments are subject to capital gains tax with a lifetime exemption from tax on the first $500,000 of gains on an owner-occupied home.
The US system is heavily biased in favour of owners of modest properties with mortgage commitments and limits the subsidy available to geared investors. This helps keep housing prices affordable and accessible to families.
Proposals to reduce investor demand in Australia by changing capital gains tax rules or limiting the gearing benefits for new investors would do little to increase the supply of land and existing housing. Increased tax bills apply only to new buyers and reduce the incentive for existing owners to sell their properties.
A more effective way to increase the supply of existing houses would be to offer a full or partial capital gains tax amnesty on sales within a designated period.
This would increase the incentive for investors to take their profits and not be deterred from selling by large capital gains tax bills triggered by a sale.
A crackdown on investors would also encourage over-investment in the family home, especially for the large number of retirees adversely affected by the recent age pension asset test changes.
The age pension rules grant a maximum additional test exemption of only $200,000 for non-homeowners. This puny amount in no way matches the total exemption of the owner-occupied home.
Downsizing in later life is discouraged by the asset test rules. Options such as allowing an asset test exemption of the proceeds of the family home for a reasonable period such as five or 10 years would go a long way to address this distortion and expand the supply of housing.
Whatever action the government chooses, as the Reserve Bank warned recently, policy changes resulting in lower property prices will pose problems for our banking system with its large exposure to mortgage lending. Australia has a serious housing affordability problem when interest rates are at historically low levels.
If interest rates were to increase even by modest amounts, this would deepen the problem for both the financial system and house-buyers.