The real housing supply problem (part 3)

A little while ago we were discussing Australia's real housing supply problem: that is, the problem of getting affordable rental dwellings to the low-income households who really need them.

We observed that across Australia, 60 per cent of lower-income households renting privately are in 'housing stress' (paying more than 30 per cent of their income in rent); and 25 per cent are in 'housing crisis' (paying more than 50 per cent). In New South Wales, the figures are, respectively, 65 per cent and 28 per cent of low-income private renters.

We also observed that for all but the very poorest (ie lowest 10 per cent) these lower-income households (and, throughout Australia, there's estimated 857 000 of them), there are actually dwellings out there that are going for affordable rents (an estimated 1 256 000 of them) – the problem is that lots of higher income households (an estimated 937 000 of them) live in these dwellings instead.

So, who or what is to blame for this?

First, let's say who is not to blame: the higher-income renter households. We're a liberal-minded lot at the Brown Couch, and if a higher-income tenant prefers to spend less of their hard-earned and live in a less flash house, it is not for us to challenge the sovereignty of their consumer preferences. In fact, we'd say that the developers and buyers of flash 'investment' rental properties should reflect upon the evident preferences of higher income renters: the majority of them don't want the expensive, flash, 'premium' properties that these interests are pushing.

No, we point the finger at the Australian tax system – in particular, at its treatment of negatively geared rental property speculation.

Almost uniquely amongst nation-states, Australia allows losses generated by an asset (specifically, interest and other costs paid on a rental property) to be set against its owner's other sources of income, thus reducing the owner's tax liability and enhancing the prospect of a speculative profit when the dwelling is sold.

For years, negatively geared rental property speculation has been wildly popular, which has pushed property prices up – which has made it more popular. Which means, on the other hand, that it has worked to the disadvantage of priced-out, would-be owner-occupiers – that's who so many of those higher-income private renters are.

And it has worked to the disadvantage of low-income private renters too, by distorting the rental market. As a tax-avoidance strategy, negative gearing works best for landlords with high incomes, and high levels of gearing. And to work at all, the landlord needs a property with a high prospect of capital gain. This means that over the years of negative gearing's growing popularity, more and more 'investments' in rental property were in established properties in very desirable locations, going for high prices and hence high rents.

And as lower value properties, going for lower rents and with less prospect of capital growth, have come onto the market for sale, fewer and fewer of them have been bought by landlords. So, those remaining in the rental market have become more scarce, and have more expensive.

It should be said: there are other factors involved in our affordable housing supply problem. Some will say the planning system is too restrictive of new development and housing supply. Others might say the problem lies on the other side of the concept of 'housing affordability': that is, that low-income households incomes are just too low, and should be increased. There's fair points made in support of each of those cases.

But as we've presented this picture of our real housing supply problem, we see that negative gearing has got its fingerprints all over it.

[UPDATE: everyone's getting stuck into negative gearing today – see Philip Soos and Macrobusiness's Leith van Onselen for further critiques, with excellent graphs.]