Monday, January 22, 2007

Who’s to blame for the ‘housing crisis’?

I’m a bit confused.

There’s been a lot of talk recently, in the Sydney Morning Herald for example, about that perennial favourite of economic topics, home affordability. And someone always mentions property taxes.

According to the Herald last week:

IT IS well known that the Federal Government played a large role in fuelling Sydney's housing boom with its halving of the capital gains tax…

In 2000 the Government sparked a frenzy of investment in property after it halved the tax paid on capital gains, while keeping the negative gearing loophole open. Earlier it had introduced a superannuation surcharge for high-income earners, which also increased the relative appeal of property.

As investors rushed into the property market, they fuelled an explosion in building activity [and] home prices… the halving of capital gains tax and the loophole of negative gearing was the main reason for the speculative boom in investment properties.
According to the Herald today:

The Federal Government has urged the states to cut "excessive" stamp duties on conveyancing… to make housing affordability easier for first home buyers… Commenting on a report released yesterday that showed housing affordability had fallen to at least a 22-year low, acting Treasurer Peter Dutton said that in 2005/06 the states collected $10.8 billion in stamp duties…

"Property taxes, such as stamp duty and land tax, now make up, on average, 32.5 per cent of the total revenue raised by the states from their own imposed taxes… Stamp duties on a median priced property in Perth add, on average, $20,500 to the cost of the purchase, he said…

I call on all the state Labor governments to cut stamp duty on conveyancing now and make housing a whole lot more affordable for first home buyers."
So which is it: do tax breaks on property encourage more investment in housing, which increases the price or do high taxes on property increase the cost of housing, which increases the price? Surely it can’t be both - or am I missing something here?


Grant said...

Hi David.

I don't know a heap about the housing market, but I have spent a bit of time trying to understand it since becoming a home owner.

I think the stamp duty claim is a bit of a furfy. Reducing it will increase affordability and will probably increase prices slightly as demand increases - but the key words in the first Herald article are "while keeping the negative gearing loophole open".

Negative gearing, as far as my research tells me, is one of the key drivers for property price growth. If the feds had have removed the negative gearing loophole, and then lowered the CG tax, the market boom wouldn't have happened - it would have done the opposite in fact, if the Labor's experience attempting the same is anything to go by.

Whether the CG tax reduction would have balanced things out I don't know (but I suspect it wouldn't). So my take on it is that the CG tax decrease was pretty much a hand-out to investors - which of course drove prices up.

It's a loaded gun that negative gearing loophole - keep it and prices inflate, get rid of it and the property market crashes. Unfortunately, removing the loophole would hit the 'mom and pops' harder than the investors, as a lot of people have been enticed to take on two or three mortgages as part of their investment strategy, lured by the negative gearing carrot.

When the NSW State Government dropped stamp duty for first home owners, it did pick the market up a bit, but didn't cause it to boom. So I suspect it's a 'pass the buck' manoeuvre on the fed's part...

Dave Iverson said...

Don't forget that we are seeing housing bubbles all around the world. There is a lot of liquidity floating about right now due to what some call a "massive credit bubble".

Different places, at different time, become attractors. Right now there are a lot of attractors. What comes next, and when is anybody's guess. More at my Econ Dreams-Nightmares blog and some of the links on the sidebar.

RossM said...

There lots of factors that contribute, most of which haven't been mentioned by the mainstream media because they can't be fixed in the short term.

Here's a post about them:

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