Introduction

- Australian Economic Review (Ross W

Thursday, 22 September 2016

10:28 pm

http://onlinelibrary.wiley.com/doi/10.1111/1467-8462.12178/full
1. Point 1: Taxation
"Taxation policy directly affects the housing market through the
treatments of borrowings for housing, capital gains on housing and
imputed rent. Taxation rules on non-housing assets held by households
affect the housing market indirectly, insofar as households allocate
wealth between competing assets. For example, legislation which makes
superannuation less attractive will increase the demand for housing.
Governments at the federal and state level have introduced measures to
limit housing purchases by foreign nationals through direct restrictions
on the purchase of existing dwellings and by differential taxation. At the
more micro level, governments offer various forms of assistance to low
income households and provide public housing."
"What, then, are the main features of taxation policy for housing in
Australia? Owneroccupiers enjoy exemption from capital gains tax, the
services provided are not taxed and home ownership tends to be
favourably treated in means-tested welfare payments. On the other
hand, interest on loans is not tax-deductible. Investment properties enjoy
full deductibility of interest payments against all income, combined with
only a moderate capital gains tax. Both owneroccupiers and investors
pay local authority rates; state government land taxes are levied on
investment properties and holiday homes. State government stamp
duties are levied on all property sales. The goods and services tax
increases the construction cost of new dwellings. The effects of all these
forms of taxation on the housing market are explored in detail in the first
article by John Freebairn in the Policy Forum. In comparing the tax
treatment of investors and owneroccupiers, in a partial equilibrium
framework, he concludes that increasing taxes on investor housing,
through either increasing capital gains tax or limiting deductibility of
interest payments, would further reallocate the housing stock from rent
to owner-occupied housing and lead to a fall in house prices and an
increase in rents. Freebairn's main policy recommendation is that
conveyance duty and the current narrow-based land tax should be
replaced with a broad-based land tax. Of course, this does raise
jurisdictional issues between levels of government."

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to owner-occupied housing and lead to a fall in house prices and an

increase in rents. Freebairn's main policy recommendation is that
conveyance duty and the current narrow-based land tax should be
replaced with a broad-based land tax. Of course, this does raise
jurisdictional issues between levels of government."
2. Point 2:
3. Point 3:
4. Point 4: Conclusion - unlikely that prices are going to fall.

Two features of the current housing market are causing concern to some
commentators: record high borrowings by households and the large number of
dwellings, especially apartments, under construction. But while housing debt, at
1.34 times annual household disposable income (of which 70 per cent is
borrowed by owneroccupiers), is at record levels, the ratio of housing debt to
housing assets has plateaued since 2009, at around 2 9 per cent. In other words,
the debt to equity ratio is very modest, at least at the aggregate national level.
Turning to t he issue of potential oversupply, this requires information on both
demand and supply. There are a number of factors which make a major fall in
house prices very unlikely, at least in t he absence of a fall in nominal incomes.
On t he demand side, population growth remains strong and, in any event, with
the internationalisation of the m arket, demand is not confined to Australian
households. Furthermore, any fall in house prices will accelerate household
formation by, for e xample, enabling more young people t o m ove out of t he
parental home. With low interest rates, developers and private investors can
leave apartments vacant for longer, pending the run-down of any surplus
stock. On t he supply side, forecasters t ypically do not t ake account of
demolition of t he e xisting stock. In established city areas, new single dwellings
just replace existing stock. Linking stock figures from t he 2 006 and 2011
Censuses with t he annual construction data, demolitions were 1 0 per cent of
completions over t his period.2

To conclude, housing policy is an amalgam of determinations made by a

number of instrumentalities at the federal, state and local government
level. The key levers for influencing the national market are taxation
and monetary policy. But while there are underlying national trends,
factors operating in sub-markets produce quite marked regional and
intra-city differences. At the sub-national level, land release policies
and building regulations matter a lot.