The Grattan Institute and the Australian Housing and Urban Research Institute (AHURI) have respectively published research reports on the issue of housing affordability and reform.

Grattan Institute

In its new report, ‘Housing affordability: re-imagining the Australian dream’, the Grattan Institute affirms that a perfect storm of rising incomes and falling interest rates, rapid migration, tax and welfare settings feeding demand, and planning rules restricting supply led to the current housing affordability crisis, where house prices have more than doubled in real terms over the past 20 years.

As a consequence, the Institute finds, home ownership rates are falling among all Australians younger than 65, especially those with lower incomes. Owning a home increasingly depends on who people’s parents are, a big change from 35 years ago when home ownership rates were high for all levels of income. Those on low incomes – increasingly renters – are spending more of their income on housing.

Grattan CEO John Daley asserts that all policy solutions to housing affordability are difficult, while all the easy reforms are merely cosmetic.

From 13 recommendations, the report makes the following suggestions in regards to tax policy and transfers:

Governments should reduce the demand for housing

  • The Commonwealth Government should limit negative gearing and reduce the capital gains tax discount.
  • The Commonwealth Government should include more of the value of high priced homes in the Age Pension assets test.
  • State governments should broaden land taxes to include owner-occupied housing.

Governments should improve the supply of housing

  • State and local councils should consider introducing more explicit betterment taxes to capture the windfall gains from re-zoning of land.
  • State governments should reform property taxes to improve housing affordability.

On the other hand, the policy ideas the report does not recommend include further stamp duty concessions and other giveaways to first home-buyers; shared equity schemes that are not targeted to low-income households; and financial incentives to encourage downsizing by seniors.

The Institute concludes that, if no effective measures are implemented, housing affordability will just get worse, with older people unable to downsize in the suburb where they live and younger generations unable to buy a home.

(Source: Grattan Institute | Media Release | Read the Report)


Australian Housing and Urban Research Institute

The report ‘The income tax treatment of housing assets: an assessment of proposed reform arrangements’ models several potential transitional arrangements that may ease the distribution pressures arising from reforms to negative gearing and capital gains tax (CGT) reform, and help smooth a reform pathway that is more politically acceptable.

The authors find that negative gearing and CGT discount benefits are currently heavily skewed towards those who are more affluent, raising concerns around the extent to which such policies exacerbate income and wealth inequality among the Australian population.

The analysis models a progressive rental deduction reform whereby ‘mum and dad’ investors receive greater access to generous tax concessions than ‘sophisticated’ investors on higher income and wealth levels. The study asserts that progressive rental deduction reform cushions ‘mum and dad’ investors from significant drops in tax savings and will moderate adverse impacts on their economic wellbeing in comparison to a blunt cap on rental deductions.

Thus, a progressive rental deduction reform has the potential to reduce inequities in the current negative gearing system by reducing tax savings by proportionately greater amounts for those with higher income or property asset levels.

However, progressive rental deduction reforms are likely to be administratively more complex to implement than a rental deduction cap. The former may also blunt incentives to work by investors. A reduction in CGT discount will also have the potential to reduce inequities within the current system that favour higher income earners compared to lower income earners.

The report suggests that a gradual reduction in the CGT discount would ‘soften’ the impact of the CGT reform by providing a transition pathway that raises the after-tax economic cost of holding rental investment housing incrementally.

(Source: Australian Housing and Urban Research Institute)

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