Cranlana’s Lead Moderator, Peter Mares – Listen Now
Published by ABC
Peter Mares on the affordable housing crisis and his newest book, No Place Like Home
Cranlana’s Lead Moderator, Peter Mares, recognises the need for an ethical approach in society’s major issues. Through extensive research, Peter’s book, No Place Like Home (Text, 2018), raises questions on how we can build secure and affordable rental housing for people on low incomes, confronting bigger crises such as homelessness and rental stress.
Peter’s book is available to buy directly through Text Publishing.
Recorded 20 September 2018 Cranlana Programme Alumni Speaker Series
I am going to put a controversial proposition to you tonight. I’m going to tell you that it is time for home owners to help pay the rent on more affordable and social housing. What does that mean? It means that it’s time to impose a levy on the Great Australian Dream. Yep, if you own your own home, then I want to tax it.
When I put forward this proposition in an opinion piece recently, many readers weren’t so receptive to the idea. The politer responses accused me of being delusional or of having a brain fart. I was variously told that I was a communist, a carpet bagger and the stooge of a grasping property industry. Clearly, my intent was to kick granny out of her home.
So, let me ease you into my argument with a story — two stories really — one about me and one about my friend Carolyn. These are tales of reward and punishment—about how I have been rewarded for being a home owner, and how Carolyn has been punished for being a renter.
Carolyn and I first met in 1986, when we were both 24, and I moved into a share house in the beach side suburb, St Kilda in Melbourne.
I had secured a short-term job with the ABC, and since I didn’t know anyone in Melbourne, I’d found a share house through friends of friends. Fresh off the overnight train from Adelaide, I knocked on the door of a neglected Federation-era terrace. Carolyn greeted me with a beaming smile and we’ve been friends ever since.
There were four adults in that share house—me, two visual artists, and a musician — that was Carolyn. There were also three kids, including Carolyn’s two pre-school-aged boys. It was chaotic, fun and highly sociable, and when my ABC job became permanent, I gladly stayed on. I had the only bedroom on the second floor, which was meant to give me a bit of distance from the trio of exuberant children. But I didn’t always get to sleep in. I might be woken by joyous early-morning shouts as the kids used a cot mattress to slide down the steep staircase outside my bedroom door. Apart from the presence of three children under 5, it was in other ways a pretty typical 80s share house. We shopped in bulk and endeavoured to grow veggies in the backyard. Someone was constantly cooking or eating in the kitchen, there were always dishes that needed washing and the compost bin permanently overflowed. This was before mobile phones so a constant stream of visitors called by unannounced providing me with an instant social network that led me to Julie, my partner now for more than thirty years.
It was a formative time, but like many group houses it didn’t last. After a couple of years, Carolyn and I looked for a new place to move into together. We were compatible housemates, and I enjoyed sharing my life with her boys, who were now at school.
The four of us then lived together in a single-fronted brick terrace in East St Kilda. It was run-down, dark, damp and cold in winter, but on sunny days the east-facing kitchen would fill with morning light.
By 1990, I had been living in shared rental houses in three cities for more than a decade. At times, I imagined—naively, idealistically—that this would be how I would always live. Shiralee, another of my original artistic St Kilda housemates, knew better. She could have an acerbic tongue and I remember her saying that one day I would end up as a Volvo-driving academic. It was an insult and I was affronted because at the time I was restoring a fashionably-dated Holden station wagon.
Shiralee was telling me that I would revert to a conventional middle-class life, and in the long run, she was more or less right. I do now drive a Volvo, and while not on the payroll, I have an honorary association with Swinburne University. True to stereotype, like many other middle-aged Volvo-drivers with a solid employment history, I no longer rent, let alone live in a share house. Julie and I are comfortably and securely lodged in our own home.
My years of shared rental housing came to an end for many reasons. I still got on well with Carolyn and her boys, but I hankered for more orderly surroundings. After four years at the ABC I had some savings, which my mother had just topped up with ten thousand dollars, generously sharing part of her retirement package with her children. Most importantly Julie and I decided that we really wanted to live together. Three years into our relationship, romance and reason coalesced in a decision to buy our first house.
With assets and jobs, we had little trouble getting a mortgage—though at the time eighty-thousand dollars seemed a frighteningly large sum to borrow at 15.5 per cent interest. We bought a modest weatherboard about 6 km from central Melbourne in Northcote.
Julie and I sold that Northcote house three years later, and since then we have bought and sold two other houses in inner Melbourne, realising a significant increase in value over time. The last house we sold was in St Kilda, not far from that dank dark terrace Carolyn and I used to share. Julie and I bought that St Kilda house in 1999, and Carolyn, who still lived nearby, came along to cheer for us at the Saturday morning auction. It was lucky she did, because I’d forgotten our chequebook, and when we ended up as top bidders, we could not complete the contract. Carolyn gallantly dashed home to get her own chequebook and signed off on a fifty-two-thousand-dollar deposit. We all thought this was pretty funny, Carolyn especially, since she had no money in the bank. On the Monday, we replaced Carolyn’s deposit with our own and gave her back her cheque—as a joke, she kept it on her pin-up board for some time afterwards.
Recalling the story now, the humour has a darker edge. In the 28 years since Carolyn and I last shared a house, Julie and I have shifted three times, while Carolyn has lived in more than a dozen different rental properties.
Late last year, as research my book, No Place Like Home, I went over to Carolyn’s to talk about our different housing trajectories.
She was living in a studio apartment on the top floor of a block of sixties-era, walk-up flats. She had a great view, and at $285 a week, Carolyn claimed to have found the cheapest one-bedroom flat in inner Melbourne yet rent still ate up close to 40 per cent of her income, which was roughly equivalent to the minimum wage.
When I arrived, Carolyn had to come down two flights of stairs to let me in. She should have been able to buzz me in from upstairs, but the remote-release lock on the security gate was perpetually broken. On other days there’d be no security because when it rained the wooden gate swelled up and wouldn’t shut.
Carolyn’s apartment had no heating or cooling, and in summer she used sheets of cardboard to block the hot sun penetrating through thin window glass. There was no exhaust fan in the bathroom or the kitchen, which was barely a kitchen in any case because it did not have an oven or a stove. Carolyn did all her cooking on a single plug-in electric hotplate, which she used to fire up the espresso pot and warm us croissants for breakfast.
Carolyn was gradually repainting the flat at her own expense. She had installed a curtain on the entrance to her bathroom because the sliding door was stuck, and she didn’t see much point in asking the landlord to repair it. She got the toilet fixed because it had a leaking pipe, but the result was that the pipe still leaked and now the toilet wouldn’t stop flushing. The kitchen cupboard over her benchtop jutted out from the wall at an alarming angle. Carolyn had got that fixed, too, but rather than secure the cupboard back flat against the wall, the handyman simply braced it to stop it pulling away any further.
Like many renters, Carolyn was also reluctant to ask for repairs in case the landlord saw her as a troublesome tenant or hiked up her rent.
Now in her mid-fifties, Carolyn is worried about what the future holds. She knows the demographic reality: older renters on low incomes are at increasing risk of homelessness.
Most older renters live in what is called housing stress; that means that, like Carolyn, they shell out more than 30 per cent of their income on rent. As a result, they often scrimp on essentials like food, heating and health care.
Say you were a single person receiving the full aged pension and the maximum rate of rent assistance; your weekly income would be about $520. Then imagine you were paying Carolyn’s rent of $285, which, by the way, is well below the median of $360 for a one-bedroom flat in metropolitan Melbourne.[i] You would be spending more than half your weekly income keeping a roof over your head and be left with less than $34 a day to cover all your other expenses.
Of course, older Australians are the least likely demographic to live in rental stress because they have the highest rates of home ownership. Only 6 per cent rent in the private market. Pension rates are set low in Australia, on the assumption that by retirement, people have minimal housing costs because they are home owners.
But with falling home-ownership rates, growing numbers of people are entering retirement—or continuing in casual, low-paid, insecure jobs—without ever owning a home.
Respected housing economist Judy Yates from the University of Sydney estimates that on current trends, by mid-century, when the Gen-Ys have gone grey, home ownership rates amongst the over sixty-fives could be 15 per cent lower than they are today. She warns that there could be 700,000 older households in rental stress by mid-century.
There are likely to be more older women than older men in this vulnerable category, because women live longer and need more money to adequately fund their later years, but generally leave work with fewer assets. Signs of the problem are already evident. The number of women aged over sixty-five living in private rental housing grew by 64 per cent over the past ten years. The number of women recently overtook the number of men presenting at support agencies as homeless, and according to Homelessness Australia, the number of women over fifty who are couch surfing has almost doubled in four years.
Carolyn is not couch surfing, but she is part of this at-risk cohort. In a decade from now, when she is sixty-five, she will probably still have a low income and not much superannuation, and she will almost certainly still be paying rent to a private landlord.
Of course, as I hinted already, rental stress is not confined to older households—they are in fact the generation least likely to experience it, because they are most likely to be home owners. In total, there are already almost 600,000 low-income households living in rental stress nationwide. One in every two low-income households in private rental in Australia is already spending at least 30 per cent of their disposable income on housing, and often much more than that. Let me say that again, half of all low-income tenants are already in rental stress.
Let’s go back to the example of Carolyn’s flat and imagine that the person paying the rent there is unemployed and receiving Newstart allowance and Rent Assistance at the maximum rate. Their total income would be $340 a week. After paying the landlord they would be left with less than $8 a day to live on.
So, if that person had housing before they became unemployed, then they’d be lucky to hold onto it for long afterwards. And their chances of finding something more affordable are zero. Anglicare analysed the online listings of more than 67,000 dwellings across Australia and found only three affordable properties for a single person living on Newstart. Three in total. Needless to say, none of those three properties was in a major city. The situation for a single person earning the minimum wage was not much better. Fewer than 3 per cent of properties nationwide were affordable.
Is it any wonder that the census counted 116,000 people as homeless, up from 102,000 five years earlier?
Is it any wonder that we more than twenty people, including children and pregnant women, have been camping out at the showgrounds in Hobart, where the rental vacancy rate is 0.3 per cent? In other words, there is nothing available for rent. Is it any wonder that some young women feel compelled to provide sexual favours in return for a place to sleep?
When we talk about the housing crisis in Australia, this is what we should be talking about.
The middle-class, barbecue-stopping conversation is rather different. It generally takes the form, “will I ever be able to afford to a house” or “will my kids ever be able to afford a house?”
And that is understandable. Under current arrangements, being a long-term renter in Australia is definitely less desirable than home ownership, and home ownership rates have been trending downwards for a quarter of a century, most notably among younger age groups, especially those on lower incomes. The decline has been fastest in the biggest cities.
Grumpy baby boomers will attest that young folk only have themselves to blame because they go out for breakfast in hipster cafes and waste twenty bucks a time on smashed avocado on toast. Slinging around avocado like this reassures older home owners that their current comfort is a well-deserved reward for years of hard work and careful budgeting. It dismisses the profound housing challenges facing younger generations as the product of their own profligacy. It turns a blind eye to the fact that since 1970, house prices have almost quadrupled while wages have barely doubled. In the past 25 years in particular, real estate prices have risen much faster than incomes.[ii] Even with the market cooling in east coast cities like Sydney, Melbourne and Brisbane, the declines so far are no match for the gains of previous years. And we’d better hope it stays that way, because the only thing that will bring house prices down sharply and quickly is a deep recession and mass unemployment.
For good reason, the smashed avocado trope infuriates prospective first home buyers who find themselves repeatedly outbid at auction by silver-haired investors who can borrow against their existing housing wealth. Negative gearing gives those baby-boomers an edge, by enabling them to claim interest payments as a tax expense against their high incomes.
Still, however lamentable, the inability of middle-class kids to buy homes is not the real locus of our housing crisis. They can at least afford to pay the rent without turning off the heating, and will, in many cases, end up inheriting property wealth, or borrowing from the family bank of parents and grandparents.
The crisis, in other words, is a lack of affordable housing—in brackets a lack of affordable (rental) housing—rather than a lack of housing affordability—in brackets, housing affordability (for first home buyers) —though this is definitely a problem and these two things are of course connected. But the emphasis is different. Australia’s housing crisis has generally been framed as a problem of housing affordability — to buy — rather than as a problem of affordable housing — to rent. As a result, governments have wasted vast sums chasing the great Australian dream, trying to restore home ownership levels to the highs of the 1960s under Robert Menzies. We’ve spent billions on things like first home owner grants and stamp duty concessions, which inflate house prices further and put extra money in the pockets of sellers, but do ‘precisely nothing’ to assist young people or anybody else to buy a home. As economist Saul Eslake comments: It’s hard to think of any government policy that has been pursued for so long, in the face of such incontrovertible evidence that it doesn’t work.[iii]
There are other problems with chasing the Great Australian Dream. It has made us one of the most indebted nations on earth. In 2008, Australia’s total household debt was estimated at a little over $50,000 per household. [iv] A decade on, it’s close to double that $100,000 per household.
So where am I going with this? My thesis is that we need to put more energy into building social and affordable rental housing because that’s where the crisis is—and it’s getting bigger. Renting today is far more than a temporary, youthful stepping stone. The private rental sector is the fastest growing segment of Australian housing and the profile of renters is changing. There are more people renting in middle age, more households who have been renting for longer than ten years and more renters with young families. [v]
The problem is this: building and maintaining social housing is a very expensive business. Private developers won’t do it because it’s not profitable. Superannuation funds may have trillions of dollars looking to find a home, but they won’t invest in social and affordable rental housing for the same reason. It’s not profitable. The only way to increase the supply of social and affordable housing is for government to subsidise it, to bridge the gap between what it costs to build, operate and maintain, and what it can generate in rental returns. We are talking billions of dollars. At least ten billion dollars a year — year after year.
So where does the money come from? At the last election, Treasury estimated that Labor’s promised reforms to negative gearing and the capital gains tax discount would boost government revenue by around five and a half billion dollars. That is enough to build about twenty thousand one-bedroom apartments every year. A great start but still nowhere near enough. So where does the rest of the money come from? It comes from a tax on home owners — or to be more precise, it comes from changing the way that we tax home ownership. Let me explain.
The flip-side of housing unaffordability is housing wealth; and the flip side of generation rent is generation landlord. A housing crisis for some is a housing bonanza for others. Including me.
Julie and I have chosen our real estate well and we have worked hard to improve it—sanding floors, painting ceilings and landscaping gardens. A friend scoffed at us for succumbing to “mad renovators’ disease” long before that malady become fodder for reality television.
To echo the views of seventeenth-century philosopher John Locke on the origins of private property, Julie and I have been ‘industrious and rational’ and so he might say we deserve the wealth that has come our way. In truth, though, like most other Australians who bought houses a decade or more ago, we have primarily benefited from a large dose of generational luck. We were able, on relatively modest salaries, to buy a house in an inner suburb and watch that investment grow steeply in value.
According to estimates on real-estate websites, the modest Northcote weatherboard that Julie and I bought for $137,500 in 1990 is now worth between $1.6 and $2.1 million. Most of the price rise does not derive from the improvements that we, or any subsequent owners, made to the property, but from the underlying increase in the value of the land. Even accounting for inflation and renovation costs, if we still owned that house today, we’d be sitting on a windfall profit of $1 million —all tax free. Not bad work if you can get it—and it’s not even work!
The great nineteenth-century liberal philosopher John Stuart Mill recognised the inequity of such arrangements. He wrote:
Suppose that there is a kind of income which constantly tends to increase, without any exertion or sacrifice on the part of the owners: … In such a case it would be no violation of the principles on which private property is grounded, if the state should appropriate this increase of wealth, or part of it, as it arises.[vi]
We don’t tax this unearned property wealth in Australia today. If we sell our home and realise a windfall profit, we pay no tax on the capital gain. When we die, and pass our houses on to our children, they pay no tax either. The greatest benefits of the current tax treatment of housing accrue to those who already have the most wealth and the highest incomes.
Let me give you a graphic illustration of what I mean.
In 2004, the wealthiest 20 per cent of Australians owned property, that was worth, on average, 1.3 times the average property holdings of everyone else combined. That’s pretty amazing right. The top 20 per cent of the population own 1.3 times as much real estate as the other 80 per cent combined. But wait, there’s more. A dozen years later, in 2016, the average property holdings of wealthiest twenty per cent of Australians were worth 1.5 times the average property wealth of everyone else. The top 20 per cent have one and a half times as the other 80 per cent. That’s what a real estate boom can do for you. They say a rising tide lifts all boats, but the luxury yachts seem to rise higher than the dinghies. And those people struggling in the water without life jackets, well, they are just at greater risk of drowning.
This is the primary argument for taxing the family home. It is about fairness. It is about recognising that our relentless pursuit of the great Australian dream, encouraged by the generous tax treatment of residential property, is creating an increasingly unequal society—a divide between rich home owners and poor renters. And that we have the collective resources to do something about it.
So how should we tax the family home? Easy. Abolish stamp duty and replace it with an annual property tax, as the Australian Capital Territory is doing. This is not an original thought. It was a major recommendation of Ken Henry’s exhaustive 2010 review of Australia’s tax system, and today, economists, business lobby groups, social-welfare advocates and housing experts all generally agree that there are good reasons for using property taxes rather than stamp duty.
Why? First, you pay stamp duty when you purchase a house, which is when you can least afford it, especially if you are a first home buyer, whereas a broad-based property tax spreads the cost over time. The major beneficiaries of a transition from stamp duty to property taxes would therefore be younger Australians seeking to buy their first home. Tick.
Second, the big up-front cost of stamp duty is a deterrent to moving to a new house, making people less likely to shift to get work, or to take up positions where their skills are more effectively used. Modelling by Infrastructure Australia anticipates that a shift from stamp duty to property taxes would bring an average productivity gain of 3 per cent, boosting annual GDP by $24 billion in twenty years’ time and lifting annual tax revenues by $11 billion.[vii] Tick.
Third, by lowering the cost of moving, the shift to a property tax could encourage more efficient use of housing. Empty-nesters may be more willing to downsize if it didn’t cost tens of thousands of dollars in stamp duty. An annual property tax would give them an additional incentive to trade a big house with empty bedrooms for a smaller one that attracts a lower tax rate. Tick.
Fourth, annual property taxes give state governments a more predictable, stable and reliable revenue stream than stamp duties. While the real-estate boom has seen state and territory governments rolling in cash in recent years—especially in New South Wales and Victoria—if the housing bubble pops, then the rivers of gold could quickly become a trickle. The global financial crisis, for example, caused revenue from stamp duty to plunge by a third in twelve months, as uncertainty led people to postpone buying and selling houses.[viii]
Finally, a property tax captures a share of windfall gains I was talking about. And it should be made progressive—in other words, it should be used to at least dampen rising inequality. A progressive broad-based property tax is relatively easy to levy and relatively hard to avoid. Tick.
Let me be clear. I’m not talking about forcing people out of their homes; I’m talking about a relatively modest levy, above a threshold value, that not only replaces the revenue from stamp duty, but increases it, but only by imposing a higher level of tax on those who enjoy the most housing wealth. According to work by the Australian Housing and Urban Research Institute, replacing stamp duty on a median priced house in NSW or Victoria would incur an annual charge of about $1300; in Queensland it would be less than $800; in Tassie less than $500. Of course the transition from stamp duty to a broad base property tax would have to occur slowly, so as to reduce the effects of taxing existing homeowners twice, and there would need to be a mechanism for asset rich but income poor homeowners, like pensioners, to defer paying the tax until they sell their home or to have the proceeds deducted from their estate.
Let’s assume, in a back-of-the-envelope calculation, that in the early phases of the transition, property taxes are increased to raise an additional $50 per dwelling per year. This would raise about $450 million annually.[ix] That extra income could be invested in social and affordable housing. If the tax slowly increased to an average additional payment of $500 per dwelling, then at the end of the twenty-year transition, the additional revenue raised would be around $4.5 billion annually.
Add that to the savings from reforms to negative gearing the capitals gains tax and we’ve got $10 billion to build new social and affordable housing. That could start to make a real difference to the housing crisis. It would also make the housing system fairer and more efficient and give state governments are more stable revenue stream
I said shifting to a property tax was easy. Of course, that’s true only in theory. In reality there are many practical and political issues to overcome. And it is not a silver bullet—there are many other much needed policy changes to repair Australian housing. Let me mention just two: first increasing the overall supply of well-located dwellings in existing suburbs through high-quality medium-density development, and second, professionalising the small-scale private rental industry. The commonly-used term “Mum-and-Dad investors” suggests that landlords are doing tenants a favour by letting them stay temporarily in their property but this is a small business like any other that should be expected to meet minimum levels of customer service.
The transition from stamp duty to a progressive, broad-based property tax is, however, a key part of the mix. It could help to raise the funds needed to build more social and affordable housing, to encourage more efficient use of housing, and to constrain inequality.
In my view, the intellectual debate about negative gearing and the capital gains tax discount has already been won; the only question is when the reforms will be implemented and in exactly what form. It’s time to push debate beyond those tired issues. It’s time to start building the public argument for the switch to a progressive, broad-based property tax.
Not long after I had breakfast at Carolyn’s place the block of flats she lives in was put on the market and sold. Carolyn has had to move again; she’s found somewhere bigger and better, though still very run down and when she moved in it was filthy. The only lighting in the front room comes from two blinding fluorescent tubes that emit a deafening buzz when you switch them one uncleaned chimney is leaking soot in to the lounge room. And she is paying an extra $130 a week in rent.
Carolyn and I have both worked hard, but because of the way we organise and tax housing, luck and circumstance have rewarded me and penalised her. This cycle is likely to be repeated in the next generation. Carolyn’s boys are now in their thirties, and have both been in good, secure, full-time jobs for many years. Both rent, and Carolyn knows she will never be able to help them to buy their own homes. By contrast, Julie and I can afford to act as family bankers for our son, and when we die, he will inherit whatever property wealth we have left. In this way, the real estate market entrenches inequality. As Reserve Bank Governor Phillip Lowe said in a speech a couple of years ago, when he was deputy governor, “it is arguable that the main impact of higher land prices is not really to increase our national wealth, but to change the distribution of that wealth.”
We are walking open-eyed into inequality. We are entrenching disadvantage in bricks and mortar. Those of us who own our own homes may feel secure; our home is our castle and we can pull up the drawbridge and fill the moat. But as housing inequality worsens it will touch more and more people—one day it could be an old friend, a sibling, a child or a parent with no place like home.
If that’s too bleeding heart for you, then let me quote property developer Rob Pradolin, who is in the audience this evening. Rob is an unapologetic capitalist who has ‘lived and breathed residential development’ for thirty years, who declares unequivocally that profit is a good thing. And he says we have to understand that housing is essential social and economic infrastructure. Rob says:
‘We are heading for a lose-lose scenario unless we supply the basic fundamental need of shelter for all, rich and poor. No one creates a successful long-term business without looking after its most important asset, its people. But that is what we are doing as a country. Without providing shelter for all, how can we aim to be a prosperous, creative, innovative and inclusive country?’
We can do things differently and better. We can make housing fairer and more efficient. It’s time for homeowners to help pay the rent on more affordable housing.
[i] Department of Health and Human Services, Rental Report March Quarter 2018, p. 8 https://dhhs.vic.gov.au/publications/rental-report accessed 15 August 2018
[ii] Daley and Coates (2018), p.14
[iii] Eslake (2013)
[iv] Australian Bureau of Statistics, ‘4102.0—Australian Social Trends, March 2009’, 25 March 2009, http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/4102.0Main+Features60March%202009 (accessed 18 February 2018)
[v] Hulse et al (2018), p.2
[vi] John Stuart Mill, Principles of Political Economy with Some of Their Applications to Social Philosophy, Library of Economics and Liberty, paragraph V.2.27, http://www.econlib.org/library/Mill/mlP64.html (accessed 2 April 2018)
[vii] Infrastructure Australia, Making Reform Happen, June 2018, Table 5
[viii] Australian Bureau of Statistics, ‘5506.0 Taxation Revenue Australia, 2015–16’, Table 10: Taxation, Total All States State Government.
[ix] Author’s calculation based on a property tax being levied on 90 per cent of Australia’s 9.9 million private dwellings. The 10 per cent discount is made to provide for some exemptions from the tax take, particularly for social housing.