Wanting every worker to be able to afford to buy a home is a nice idea but it’s highly unrealistic, and increasing capital gains tax is unlikely to make much of a difference.
However “unaffordable” dwellings have become homeownership in Australia remains at very high levels compared both with other countries and with our own history.
It’s striking that for all the massive increase in the price of dwellings according to numerous measures, and radical changes in taxation and regulation over the decades, headline homeownership in Australia remains around 66 per cent, little down from the post-war peak of 71 per cent reached in 1966. Before WWII fewer than half of Australians owned their own home.
Tax regimes in Canada, the US and UK differ significantly in many ways yet homeownership there is also around 66 per cent, or even slightly lower than here. Indeed, New Zealand, with no capital gains tax at all, has almost the same homeownership rate as Australia.
All this suggests the government’s plan to impose a minimum 30 per cent tax on real capital gains won’t shift the ownership dial in any perceptible way, but it will undermine saving opportunities, especially among the group the budget is supposedly meant to help – the young.
Widespread homeownership alone is hardly proof of prosperity. Romania, Slovakia and much of former communist Eastern Europe have vastly higher ownership rates than Australia, yet few would regard them as richer.
Indeed, in arguably the richest OECD nation of all, Switzerland, homeownership is below 50 per cent, and I’m quite sure half of Swiss households don’t feel like failures for lack of a title deed. Housing is, after all, a necessity, more akin to consumption rather than investment.
To be sure, homeownership rates among those aged 25-34 have declined from about 63 per cent to 41 per cent but they remain surprisingly high given the vastly increased range of spending opportunities, especially for young people, generated by decades of economic growth and innovation. Avocado on toast and international travel weren’t readily available in the 1960s so, naturally, relatively more funds were available to buy dwellings.
Beyond a lot of hot air and the natural inclination to want prices to be lower, it wasn’t obvious before the budget that there was any housing crisis.
The number of loan approvals for first-home buyers was more than 50 per cent higher in the December quarter than a decade ago, easily outstripping population growth. Households don’t appear to be unduly struggling with their repayment burdens either, spending an aggregate of about 11 per cent of disposable income on home loan repayments, little changed for many years.
It’s not even clear that trying to increase homeownership rates is beneficial. In the 1960s, a less specialised labour market and economy meant relocating for work wasn’t common.
Moreover, stamp duties on property transfers then and now make it very expensive for households to move. So it can be rational for some people to rent for longer in the 21st century, especially as young people begin their careers and typically start families much later.
And arguably too much of the nation’s wealth is tied up in owner-occupied housing already, starving other more inherently productive industries of funds. Australian banks now lend roughly twice as much against housing as they do to businesses.
Yes, homes have become more expensive, especially detached dwellings, but they are typically bigger and often higher-quality than those built generations ago. Moreover, a nation’s supply of desirable land is fixed, making it scarcer and more expensive as its population grows. No government regulation or tax regime can change that.
This obviously hopeless attempt to engineer a higher level of homeownership will instead undermine the incentive to save outside owner-occupier housing, which as I explained last week will become a relatively even more tax-advantaged asset to park savings.
Millions of Australians under 40 who choose to save in shares, either directly or indirectly, rather than owner-occupied property will see their tax rate on capital gains double or more, at the same time as bracket creep relentlessly gobbles up net pay. Anyone who earns up to $135,000 a year, for instance, will see their CGT rate jump from as low as zero under the current regime (for those in the lowest tax bracket) to a minimum of 30 per cent on any real capital gains.
CommSec, a larger online broker, said that more than one million new share trading accounts had been opened since the start of the Covid pandemic in February 2020, including more than 60 per cent by Millennials.
When Mark Carney became prime Minister of Canada last year, one of his first decisions was to dump his predecessor’s plans to increase capital gains tax significantly.
“Cancelling the hike in capital gains tax will catalyse investment across our communities and incentivise builders, innovators and entrepreneurs to grow their businesses in Canada, creating more higher-paying jobs,” he said.
Canada’s centre-left government evidently had the sense not to increase tax in an economy, like Australia’s, that was already overtaxed, over-leveraged and invested in housing, and facing a crisis of economic competitiveness.
Labor’s tax proposals can only further undermine our own already bleak economic outlook: since it was elected in 2022, the number of small businesses with 1-19 employees has fallen three years in a row, declining by over 33,000, according to IPA research from earlier this year.
The inevitable slump in immigration as the Reserve Bank ratchets up interest rates will almost certainly take care of the supposed housing affordability crisis, as these factors have in Canada where capital city dwelling prices – and rents – are down more than 20 per cent since 2022. Indeed, Canada is a reminder that it’s not tax settings that dominate dwelling costs in the short to medium term but immigration and interest rates.
The government’s arrogant attempt to engineer a higher homeownership rate for the young by increasing taxes on their capital gains is doomed to failure.
Homeownership might still be the Great Australian Dream for many young people but living in a sclerotic economy with no job and therefore little consumption and no savings opportunities would be a nightmare.
Unfortunately it’s one that will become more likely should the next generation give up on genuine investment.
