A few weeks ago the Senate Economic References Committee released its long-awaited report on affordable housing in Australia. Senator Xenophon, a member of the committee, has described the report as a ‘landmark’ and he’s right, almost literally: the report is monumental (over 460 pages of evidence and analysis, from an 18-month inquiry that took 231 submissions from every major stakeholder and housing expert, and examined 128 witnesses) and it generally indicates a way out of the desert in which housing policy, particularly at the national level, is presently lost.

The report doesn’t get us all the way to a sound national housing policy, and many of its 40 recommendations call for further investigation and information. The most welcome parts of the report are its recommendations for the national governance of housing policy and the attention it gives to rental housing. The most frustrating parts are the recommendations on tax: on the evidence and analysis presented, these recommendations should have gone further. Most disappointing is the Federal Government’s response.

The problem of housing affordability

The report makes appropriately strong statements about the policy challenge: ‘the overwhelming weight of evidence received by the committee demonstrates that Australia has a housing affordability problem…. home ownership is becoming less and less affordable and rental affordability is trending in the wrong direction.’ Aside from the evidence cited in the report, see the body of research into housing affordability problems at AHURI.

The report is also strong on the implications of the problem, for the community and for governments: ‘Poor housing affordability threatens the social and economic fabric of the nation, while throwing into sharp relief the increasingly urgent need for well-considered policy responses.’ And it is properly clear that these responses will have to operate both on the supply of housing, and on demand for housing, and across each the housing sectors: home ownership, private rental and social housing.

The ‘policy architecture’

The report’s most firmly-put recommendations are about government processes and responsibilities: the ‘policy architecture’. It recommends that there should be a Minister for Housing and Homelessness, located within the central agencies of the Commonwealth Government; that this minister and State and Territory counterparts convene a COAG ministerial council on housing and homelessness; that the ministerial council develop a ‘long term national affordable housing plan; and that a new statutory body be established to monitor performance against the plan and report on emerging housing needs. The report also recommends that the Commonwealth Government establish a Housing Supply Financing Taskforce, particularly to develop a ‘Housing Supply Bond‘ as an alternative instrument for housing investment, and to show ‘leadership’ in urban planning and renewal, particularly by reinstating the National Urban Policy, the Major Cities Unit and the Urban Policy Forum.

This ‘policy architecture’ is important, both in getting housing affordability onto the agenda of agencies at all levels of government, and in getting their respective settings lined up and working together. The importance of governance reforms was strongly argued in City Futures’ own submission to the Committee .

Tax settings

Of the policy levers available to governments, none has such an impact on housing as tax settings. How governments tax housing – and, just as important, how they do not tax housing – has impacts that extends across the owner-occupied and rental sectors, and affects affordability and other conditions as well. The report gives tax settings appropriately prominent attention, and makes strong recommendations in relation to State and Territory tax settings.

The report comes out strongly against stamp duties levied on conveyances of residential properties. For owner-occupiers, in particular, stamp duty is a pain: it effectively fines them for moving house or keeps them in a house they’d prefer to move from (on the other hand, the extent that stamp duties also discourage landlords from selling, tenants may benefit from increased stability). Overall, the report is right to conclude that stamp duties have a net negative effect on housing and other outcomes.

In place of stamp duties, the report recommends more efficient taxes including, ‘potentially’, a broad-based land tax. Existing land tax regimes in all States exclude land used the owner’s principal place of residence – which would account for about 60 per cent of the potential tax base – and this undermines what should be a powerful tool for improving housing affordability. As a tax levied annually on the unimproved value of land, land tax discourages the speculative hoarding of land, and instead gives a spur to land owners to put their land to its best use – or sell it to someone who will. In bringing land and housing to the market, land tax improves affordability.

The report recognises the ‘political challenge’ of land tax reform, but also how the challenge may be surmounted: for example, by allowing low-income owner-occupiers to defer liability. If anything, the report could have gone further in talking up the positives of a broad-based land tax, in terms of economic productivity, housing affordability and social justice. Already the ACT is broadening its land tax, South Australia is considering such a move, and the Federal Treasurer has, remarkably, indicated his support.

The report also includes a substantial discussion of Commonwealth tax settings – in particular, the tax treatment of negative gearing and capital gains – but its conclusions here are weaker.

Negative gearing is where the income from an asset – relevantly, rent from a rental property – is less than the interest payments and other costs associated with owning the asset. Under Commonwealth tax law, this loss can be set against the owner’s other sources of income (eg from work and savings), reducing the tax they pay. Capital gain is where an asset increases in value over time: under Commonwealth tax law, capital gains are taxed at half the rate of income from work and savings, and owner-occupied housing are exempt from capital gains tax altogether. The combination of these settings has made negatively geared property speculation a very popular tax strategy, with the greatest tax advantage going to those on high incomes, and with the highest level of gearing.

The report concludes that the treatment of negative gearing has likely had a detrimental effect on home purchase affordability (because highly geared speculators have bid up prices). However, it stops short of finding the same in relation to rental affordability, despite observing that ‘most witnesses who spoke to the issue challenged the idea that negative gearing helps contain rents, and some also argued that it actually serves to undermine the availability of affordable rental stock.’ The report should have gone further here, and recognised that the tax-preferenced pursuit of speculative gains has changed the stock of properties in the rental sector, by adding more high-value, high-rent properties, and dropping out many of the low-rent ones – so that those remaining are fewer, and less cheap.

The report’s recommendations on negative gearing and the capital gains tax discount – that they be the subject of further inquiry by the Treasury, if not the upcoming Tax White Paper – also should have gone further, but at least the options for reform that the report proposed for the inquiry are on the right track.

In relation to the capital gains tax exemption for owner-occupied housing, the report recommends no change, even though it acknowledges that reform could improve affordability. The report should have gone further here too, and at the very least recommended that options to reform the exemption, which is at the root of the impulse to speculate by owner-occupiers and landlords, be subject to further inquiry.

Land and housing supply

The report refers to numerous submissions made by developers about planning constraints on land supply; however, its recommendations affirm the importance of planning and, in particular, of integrating the Commonwealth Government’s roles in infrastructure provision and housing subsidies with State and Territory urban planning. The report also recommends looking at Commonwealth land holding for surplus land suitable for development and, when Commonwealth agencies consider disposing of land, that they deliberately consider opportunities for ‘innovative partnerships involving public, not-for-profit and private consortiums that develop affordable… housing’.

Owner-occupied housing

The committee accepts that ‘it is appropriate for governments to promote home ownership’ and is concerned to make recommendations that ‘bring the “Australian dream” of homeownership back within reach of those who aspire to it’. However, it also recognises, rightly, that this objective isn’t served simply by enabling would-be owners to pay more: it is sceptical about the effectiveness and fairness of First Home Owner Grants, and recommends that they be restricted; and it is against proposals to allow would-be purchasers to tap their superannuation accounts. On the other hand, the report is enthusiastic about shared equity schemes, already operated by several State Governments, and recommends that governments look at ways of expanding these and encouraging private sector schemes too. It also recommends looking again at government-subsidised First Home Saver Accounts.

The report is right in seeking to curb ‘demand-side pressures’ on house prices, but it doesn’t consider whether a wide take-up of shared equity schemes, beyond the group currently targeted by the government-operated schemes, would add to demand-side pressures (we should assume that it would). And of course, it also heightens the question of what to do about ‘demand-side pressures’ coming from owner-occupiers already in the market, and landlords – answers to which lie in tax policy.

Private rental housing

While supporting the promotion of home ownership, the report deserves its ‘landmark’ status more for the attention it gives to private rental housing. As the report observes, ‘as a national policy issue, affordable home ownership tends to overshadow affordable renting even though many Australians struggle to access affordable and appropriate housing in the rental market’ – a point emphasised in much of the evidence before the committee. The report recommends that the Federal Government ‘recognise renting as a mainstream form of tenure in Australia and place it prominently on the national agenda’.

In doing so, the report recommends that government policy should address not only the lack of affordable rental housing for low-income households, but a range of other conditions of the tenure generally, starting with its insecurity: the report recommends that one of the first tasks of its proposed COAG ministerial council should be to ‘start the urgent process of turning around [the] acceptance of short-term insecure tenure as normal’. To this end, the report recommends that governments review tenancy laws according to an ‘aspirational goal of creating longer, safer secure tenancies with reasonable rent rises.’ It also recommends ensuring access to tenants advice services and making dispute resolution more accessible to tenants.

Australian tenancy laws currently afford only mild consumer protection to tenants, while giving landlords quick, cheap access to termination, and they should be reformed to better protect the interests of tenants. However, law reform to better protect tenants’ interests will not solve the structural insecurity and unaffordability of a rental market that is dominated by speculation; what’s also needed are structural reforms that change both the stock and the landlords in the market.

Social housing

The evidence cited in the report about Australia’s social housing sector is grim, reflecting the decline in funding, and the resulting marginalisation, of social housing – particularly state-owned and managed public housing –  over recent decades. However, the report recommends that governments commit to increasing the proportions both of social housing generally, and public housing specifically, and adopting targets for stock levels and wait times.

As regards community housing, the report is surprisingly cautious, recommending that the Productivity Commission investigate the merits of transferring public housing properties to community housing providers and that governments monitor the outcomes of transfers closely. More encouraging for community housing providers is the report’s recommendation that the fifth round of the National Rental Affordability Scheme (NRAS) be restored and, subject to a review by the Federation White Paper process, that NRAS or a revised scheme continue to subsidise the development of affordable rental housing.

The Government’s response

Government members of the committee dissented from many of the report’s recommendations. Their minority report acknowledges the ‘extensive and informative discussion of Australia’s housing affordability problems and the resulting issues and policy challenges’ in the main report, but rejects most of the recommendations as being ‘inconsistent with the Government’s red tape reduction agenda’ (for example, the ministerial council, the National Urban Policy), or as ‘a state and territory issue’ (stamp duties, tenancy reforms) or as a matter for the Federation White Paper process (the national affordable housing plan) or simply as ‘a matter for the Government’ (the supply of new affordable housing and NRAS).

The evidence assembled in the report deserves a more engaged response than that. Politicians from all sides should consider the report’s evidence and recommendations, and be prepared to go further to address Australia’s deep housing challenges. Sooner or later they will need to, if we are to have a more productive economy and fairer society.