Less Tax On Houses…Greater Affordability
April 18th, 2012‘A fundamental truism of economics is that if you tax something, you get less of it’, writes economics lecturer Stephen Kirchner in The Conversation. This helps explain why Australia’s housing market is chronically under-supplied and affordability is an issue.
The Tax Burden On Housing
The Henry Tax Review recommended that saving via owner-occupied housing remain tax-exempt.
Stephen Kirchner says:
“The pre-occupation with the principal residence exemption from capital gains tax and negative gearing has diverted attention from the fact that housing in Australia, far from being supported by the tax system, is in fact very heavily taxed. A recent report by private consultancy, the Centre for International Economics (CIE), Taxation of the Housing Sector in Australia, prepared for the Housing Industry Association, quantifies the tax burden and its adverse implications for housing affordability.
The tax burden on new housing includes direct taxes such as the goods and services tax, stamp duty, land tax and council rates, as well as a variety of indirect taxes on inputs into housing and hidden taxes that arise from the planning and approvals process. CIE estimate that these taxes account for 44% of the purchase price of a representative new home in Sydney or around $267,879. Most of the burden of these taxes falls on home buyers and not home builders because the demand side of the housing market is less price sensitive than the supply-side.
The tax burden on housing also accounts for much of the financing cost of a new home and thus the burden of mortgage debt and associated interest payments. The cost of financing the tax component of the price of a new house in Sydney is equivalent to 33% of the after-tax income of a young couple aged between 24 and 35 on average wages. The burden is even higher in the first year when stamp duty is paid, accounting for a staggering 72% of after-tax income.
Australia’s under-supplied housing market and housing affordability problem is largely due to the tax burden on housing. Abolishing the principal residence exemption from capital gains tax and negative gearing would only add to this tax burden and further reduce housing supply.”
How To Improve Both Tax Efficiency AND Housing Affordability
Substituting more efficient taxes such as the goods and services tax for inefficient taxes on residential property should be considered.
“CIE estimate that replacing taxes on housing with a broadening of the GST base could increase GDP by around 2% and increase residential construction by 14%, providing a much needed boost to housing supply.
The main obstacle to a reform of this type is the dependence of state and local governments on residential property taxes, accounting for around 40% of their total revenues. This points to the need for a federal-state compact on tax reform that finances the abolition of inefficient taxes on residential property through changes in the GST rate or base. State and federal governments unwilling to consider such a compact are not serious about addressing housing affordability.
The solution to Australia’s housing affordability problem is to build more and cheaper houses. This can only be achieved by easing the tax burden on housing and not through the abolition of existing tax concessions.”
Are our pollies reading The Conversation, I wonder?
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April 20th, 2012 at 9:34 pm
Well I do not want more houses built in distant outer suburbs with lousy transport little shopping and nothing for young people to do. We have enough. I would like to make having tenants not something you have to declare if you are over 60 This would make very law abiding older people feel okay about letting rooms to international students who tend to be well behaved and drugfree at the moment at least. Or may even dividing their house up a bit so they can let parts to local couples or families without their being taxed for doing so or losing pensions. There are many people living alone in large houses to keep the inheritance going. Would need some organising though.I think if all the 3 bed houses with 1 occupant in them were allowed without losing part benefits to have someone else move in that would take the burden off the housing market for single low income earners of whom I know many. Non living in ideal situations whether working or not. The idea of more sprawling suburbs of unimaginative non sustainably built cheap brick veneer ticky tacky houses is a bit horrible.
April 23rd, 2012 at 5:59 pm
CIE are not being completely tranparent with their support for retention of Negative Gearing and Capital Gains Tax concessions on residential housing in Australia.
These two tax concessions have caused residential housing to become a speculative commodity, and in the process destroyed the traditional function of housing – to be the place where people build and have their home.
Economists have expressed grave concerns that so much of the personal wealth in Australia is tied up in residential property. There is no guarantee that the price of housing will not collapse. Look at America if you have any doubts as to what happens when housing becomes unaffordable to the person who wants to live in it – not speculate in it.
As to the claim that housing would be cheaper if the taxation regime for housing construction was reduced – there is no price control on housing in Australia. There is no obligation on the developer to pass on any taxation reductions to the purchaser. The sole determinant of housing price in Australia is what someone will pay for it. The developer has an obligation to his shareholders to achieve the best price possible so as to meet his duty of care obligation to maximise profit.
It would be interesting to know who commissioned CIE to write the report cited in the article and what the brief for the report was.
April 24th, 2012 at 11:53 am
Thanks for starting a discussion and raising some good points Ross. The CIE website says this Report was ‘a major review of taxes on housing for the Housing Industry Association in the run up to the Government’s October 2011 Tax Forum. The report measured the burden and incidence of housing taxes relative to the rest of the economy as well as the inefficiencies of various housing taxes.’ The HIA is saying the tax burden on housing is at crisis levels. See this comment here: http://hia.com.au/hia/news/article/MR/National/EC/Taxation%20Burden%20on%20Housing%20at%20Crisis%20Levels.aspx