Happy 140th birthday, Winston Churchill

Three cheers for the Rt Hon Sir Winston Leonard Spencer-Churchill, KG, OM, CH, TD, DL, FRS, RA, on his 140th birthday.

Regardless of anything else he did, Churchill's on our birthday card list because of his advocacy for land tax.

Here's an excerpt from his cracking 1909 speech on the subject:

Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains -- and all the while the landlord sits still. Every one of those improvements is effected by the labor and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived.

Those who love enterprise, take note!

'No Land Tax' does not know land tax: part 2

We discussed the other day the merits of a broad-based land tax, and how the 'No Land Tax' (NLT) campaign gets things wrong. Today we'll consider a few more claims made by NLT, specifically in relation to the effect of land tax on housing – both rental and owner-occupied – and how these claims too are wrong: completely, upside-down-and-back-to-front, wrong.

Rental housing 

NLT claims that 'Land Tax raises rents – making it harder for families and small businesses to make ends meet'. 

Wrong. Land tax does not increase the rents tenants pay; assuming normal market forces are at work, landlords cannot pass land tax on to tenants in the form of higher rents. In fact, if there was no land tax, rents would probably be higher .

 

Here's why. Think of landlords as vendors of a service (shelter). The ability of a vendor to pass on the cost of a tax liability to a consumer depends on the vendor being able to withhold the service from the market, and hold out for a higher price that covers the cost. Their ability to hold out depends on how that tax liability applies. 

 

If the vendor is liable to pay the tax only if and when they've made a sale to the consumer, this tends to allow the vendor to hold out for the higher price. This is how a sales tax, or the GST, applies, so a vendor can generally pass on these taxes. 

 

But with land tax, it's different. 

 

The liability to pay land tax cannot be put off until the vendor has found a consumer willing to pay the vendor's price. Instead, land tax is due every year, regardless of whether the property is let or what price it is let for. This tends to restrain the vendor from holding out for the higher price, and instead encourage them to come to meet the market.

 

(An aside: this assumes, as we said, that normal market forces are at work. We know that during a tenancy, the operation of market forces is inhibited by the high cost to tenants of moving, so landlords may be able to extract a higher rent than they would achieve on the market. This problem should be dealt with by the Residential Tenancies Act's provisions about excessive rent increases. We encourage tenants to use these provisions, especially where the landlord claims that the increase is the result of land tax. These provisions are underused, and should be reformed to make them fairer and more useable by tenants.)  

To reinforce the point about land tax and rents, let's look at the issue the other way. Say NLT had their way and there was no land tax. Would landlords pass on this saving to tenants? No – they've gotten the rent that the market will bear and there's no force operating on them to reduce it. On the contrary, if there was no land tax, we might expect more landlords to do the lazy thing and have their properties sit empty. The result would be a withdrawal of supply from the rental market and hence an increase in tenants' rents.   

 

Owner-occupied housing 

NLT claims that 'Land Tax hurts first homebuyers by making new housing more expensive to build'.

Wrong again. In fact, land tax, properly applied, reduces the price of land and makes new housing more affordable.

That's because land tax discourages land owners from holding land in idle speculation, and instead encourages them to put land to its most valuable use, or sell it. Land tax, therefore, helps bring land to the market.

The problem is that our present system of land tax exempts land used for owner-occupied housing and primary production, so speculative holding still takes place under these uses.

For example, a land owner might own a big block of land that would do nicely for some new houses. If the owner has their own house on the big block, or puts a few cows on it (or bees!), there's no land tax payable, and the owner can sit back and watch the value of the block go up as the demand for housing rises. If, on the other hand, land tax did apply, the owner would be spurred to get on with doing the subdivision and selling the lots to would-be home builders.

As we say, NLT's claims about land tax and housing are completely wrong. Properly applied, land tax helps make housing – rental and owner-occupied – more affordable. The thing to do is to reform our present system of land tax to fully realise its beneficial potential, particularly by broadening the base. 

'No Land Tax' do not know land tax

The Tenants' Union is for land tax. The great problem is that New South Wales (like other Australian States and Territories) doesn't do it right. In particular, more than 60 per cent of the tax base (that is, land used for owner-occupied housing, and land under primary production) is exempt from the tax! The key thing to do is broaden the base, so that all the benefits of this sound manner of taxation can be enjoyed by the State and citizens alike.

We've just come across another outfit, 'No Land Tax' (hereafter NLT), who are aggrieved that there is any land tax at all.

NLT claims to represent 'mum and dad investors saving for their retirement – and working to improve the lives of their families'. In fact, 'mums and dads' would do better with a broad-based land tax that taxed the unearned gains of landowners, and reduced the tax burden on earnings from work and savings.

We're going to try to talk them around. NLT presents some its members* – presumably the most personable and endearing of the bunch – with their own personal messages about land tax. We'll try to set them straight.

Here's Gordon Brown, of Balmain:

Gordon says: 'Some of us are paying more in Land Tax than we are receiving in rent'.

Gordon, land tax is giving you a hint: you are not using that land of yours as productively as you could. Maybe you've let the building on it get run down; maybe it's ripe for multi-unit redevelopment, or a change to some other more valuable use. Think about doing something more with your land, Gordon – or sell it to someone who will.

Here's Stephen Perri, of Randwick:

Stephen says: 'Property investors are being forced out of NSW into lower Land Tax States like Queensland and Victoria. Less investment means fewer jobs, and that's bad for NSW'.

Stephen, c'mon. Over the last year or two, property 'investment' – more accurately, speculation – in New South Wales has boomed. In particular, residential landlords have been borrowing more than ever, and their share of all borrowing for housing has never been higher. This has inflated house prices and priced out many would-be purchasers – including some would-be speculators, who have gone to other States for lower-priced gambling opportunities. 

Land tax generally discourages speculation, but our system exempts too much land for this discouragement to work as well as it should.

As for jobs – land tax encourages job creation.

 

Simply owning land does not create jobs – not a single one. A person who owns a block of land and does nothing with it creates nothing: no jobs, no valuable goods and services. 

 

It is when land is put to use that things get created; that is, when the owner puts a house on the block, and creates the service of shelter; or puts up a factory or office, and creates valuable widgets or widget-servicing. Land tax encourages owners to put land to use, because the landowner needs to get some money to pay the tax. So, land tax fosters jobs.  

 

Now let's turn it around. Say land tax is removed. The owner might still put their land to use in the creation valuable goods and services from which they might profit... but there's always a risk that an enterprise won't succeed. So why not just do the easy thing and withhold the land from use, and just leave it sitting idle? As long as other people keep working and need land for shelter, business etc, the value of the idle land will rise... and if the owner owns heaps of land, they can withhold heaps from use, and push its value even higher – at the expense of workers and enterprise. So no land tax would kill jobs. 

 

Here's Thomas Lee, of Eastwood:

Thomas says: 'It's inevitable that the GST will be increased. And when that happens, Land Tax must be abolished.'

So Thomas wants everyone to pay more GST, so that he doesn't have to pay tax on unearned increases in the value of his land. Enough said.

Finally, here's Rebecca Schembri, of Mosman:

Rebecca says: 'The NSW state election will be held on 28 March 2015 – and the outcome will be close. The votes of 150 000 Land Tax payers and our families could decide the outcome'.

Rebecca, you'd do better by campaigning for broadening the tax base, rather than eliminating it. With a broad-based land tax, we could get rid other taxes that really do hurt people: payroll tax, which really is a tax on jobs, and stamp duty, which for most families is effectively a fine for moving house. We could also start to think about shifting some of the tax burden on the earned rewards of labour and enterprise onto the unearned rewards of increasing land values.

It's not too late, NLT: get to really know land tax, ditch your present misconceived campaign, and support reforms to broaden the base!

* UPDATE – 23 January 2015: for more about NLT's 'Gordon', 'Stephen, 'Thomas' and 'Rebecca', see this blog post.

Getting Serious about Sirius

A guest appearance today from our Executive Officer, Julie Foreman on the importance of the Sirius apartments in Sydney's heritage.

“A landmark building”

“Housing is more than real estate”

“Cities should not be enclaves of the rich”

These are just a few comments from the speakers of a forum I attended last week. Held at the NSW Parliament, the forum shone a light on the social and historical importance of the Sirius building. Speakers reflected on important themes – many of which have been left out of the Government’s analysis and policy development regarding the Millers Point sell off.

Sirius apartments, watercolour and ink on board. Powerhouse Museum collection 2013/36/1

Panel members at the forum were the architect of the Sirius building, Tao Gofers, the Chair of Urban Planning and Policy at University of Sydney Professor Peter Phibbs, the Director of City Futures at University of NSW Professor Bill Randolph, curator and architecture writer Charlie Pickett, and Millers Point resident Mary Sutton.

They led an insightful discussion about the importance, and the history of social and affordable housing in NSW. I learnt much, including the fact that the compact kitchen we enjoy in apartments today was the result of the design and development of public housing in Holland in the 1920’s!

We heard about the iconic importance of Sirius - purpose built by the then Housing Commission. Tao Gofers, the architect talked with enthusiasm of breaking new ground with the design, which had input from the Resident Action Group and the Government.

The design is practical and beautiful; with murals in the entrance inspired by Spanish cave paintings, a photographic mural of the city skyline captured in 1978 hangs in the community room and pictures of the Harbour Bridge in various stages of completion adorn the walls of each of the floors. The roof visible to many via the Harbour Bridge became an important part of the design with roof top gardens.

Professor Peter Phibbs was the peer reviewer for the social impact assessment for the Millers Point sales. He expressed his astonishment that the Sirius building which was not included in the social impact study was then included in the sale proposal! No subsequent social impact of the sale of Sirius has been undertaken.

Peter noted that Sirius did not raise the same repair and maintenance issues as other homes in Millers Point. In fact it was a shining example of a number of Government policy directions – aging in place, need for smaller social housing stock and social mix.

He described the sales as a ‘clumsy and cruel’ policy particularly because of its impact on elderly tenants and because there are other financially viable alternatives. Options such as:
· building new purpose built homes for Millers Point residents or
· relocating residents from Millers Point to Sirius to maintain their social connections or
· slowing the sale process to allow residents to age in place or conducting a partial sale and using the funds to facilitate the sustainable upkeep of the remaining dwellings. [At least two independent, expert reports have identified financial viable alternatives]

Professor Bill Randolph broadened the debate to discuss the impact of the sale on all of Sydney and put it in an international context. His research demonstrates that Sydney is polarising, both socially and economically. Moving away from the more egalitarian city that existed 30 years ago, inner Sydney is set to become an enclave for the rich. Bill acknowledged that the real estate boom has only assisted a few and that Treasury today views public housing as a financial asset to be exploited rather than a social asset. You would have to agree with him that that seeing a city as “purely as real estate shows no imagination or maturity”. Sirius is a social asset paid for by all of us and belonging to all of us.

This is certainly how my father thought. As a child he would bring the family in by train from Wiley Park to enjoy the Rocks and Millers Point and proudly say to his children that this belonged to all of us. He didn’t feel jealous and he didn’t mind contributing taxes from his meagre wages to create a better city for all.

Bill also highlighted how the Treasury approach contrasted with trends in European and American cities. New York has inclusionary zoning, for example. European countries are expanding access to affordable housing in their cities.

Bill stated that the Millers Point and Sirius policy was another brick in the wall of social divide, noting that a disparate group - President Obama, Pope Frances and the head of the IMF cautioned against such policies, that encouraged social exclusion and led to further social and economic costs.

Charles Pickett confirmed the importance of Sirius in Australian architecture history and hailed its success as a public housing building. In the early 1900s the government built model workers public housing in the area - low rise and terraces. Critics at the time said it would become slums! Charles concluded that Sirius is the last major piece of architecture built in this tradition and must be retained.

Mary Sutton gave a detailed history of the building which we hope to soon bring to you on the blog.

If like me you value our social history and want to live in a socially inclusive city let the Minister for Heritage know and ask him to save our sirius.

The Hon. Rob Stokes, MP
Minister for Heritage
52 Martin Place
SYDNEY 2000
office@stokes.minister.nsw.gov.au

To become a friend and show your support for the community of Millers Point email john@piperpress.com.au with your name and contact details with 'FRIENDS" in the subject line.

'Social Housing in NSW' discussion paper... and what's not up for discussion

The NSW State Government has produced a discussion paper on the future of social housing in New South Wales. Its major theme is 'providing opportunity and pathways for client independence', by which it means 'more actively supporting clients' – particularly working age tenants, and young people – to 'transition out of social housing'.

As for what they would transition into... that would be private rental housing, though the paper has hardly a word to say about it.

This is the biggest gap in the discussion paper, and in current discussions about social housing generally. Much gets said about the failings of the social housing system; not nearly enough about the failings of the private housing system, and private rental in particular.

But you really cannot have a proper conversation about social housing – much less actually do any of the things the State Government says it wants to do to social housing – without also saying and doing something about private rental. 

Private rental fails low-income households (ie those in the bottom 40 per cent of the population by income). The 2011 Census counted 219 202 low-income households privately renting in New South Wales. Of these households:

• 78 per cent – 171 563 households – were paying more than 30 per cent of their income in rent; that is, they were in 'housing stress';
• 43 per cent – 94 959 households – were paying more than 50 per cent of their income in rent; that is, they were in 'housing crisis'.

Research by Terry Burke and Simon Pinnegar tells us a bit more about experience of low-income households in private rental. Their survey found:

• 86 per cent 'worry constantly about [their] financial situation'
• 84 per cent 'don't have enough money set aside to meet unexpected expenses'
• 75 per cent experience a 'constant struggle to pay regular bills'
• 61 per cent say 'costs put stress on household relationships'
• 42 per cent say that their 'children have missed out on school activities such as excursions'
• 26 per cent say that their 'family has sometimes gone without meals'.

Focusing on those in housing stress, they report these additional effects:

• 35 per cent say that their 'children have had to go without adequate health and/or dental care'
• 32 per cent 'sold or pawned personal possessions'
• 28 per cent 'approached a welfare/community/counselling agency for assistance'

These rates are between 50 per cent and 100 per cent higher than the rates for households not in housing stress.

That's just how private rental fails on cost; it also fails on security (about one in six tenancies end at the instigation of the landlord, and everyone is subject to termination without grounds at the end of their fixed term, or on three months notice otherwise); and it fails on consumer protection (according to our own survey, 79 per cent of private renters have put up with a problem, rather than assert their rights, because they feared adverse consequences).

It is simply unreal to expect appreciable numbers of households in social housing to happily 'transition' into this. And we know this because Housing NSW already operates such a policy (it reviews tenancies for continuing eligibility at two, five or ten year periods), and has done for seven years, and over this time the rate of exits from public housing has declined. This policy has made matters worse for public housing tenants (who stay poor to stay housed) and for those on the waiting list (who are stuck longer in private rental, or homelessness).

If the NSW State Government really wants to help those on the waiting list, and make 'transitioning' out of social housing a realistic prospect, it must discuss reforming the private rental market too. It should also be open to discussing increased funding for social housing, so that there's more of it. Unfortunately, this too is not up for discussion in the paper, which is predicated on funding 'within the existing envelope'.

At a briefing on the discussion paper, FACS Minister Gabrielle Upton was asked about the lack of reference to the private rental market and its problems, and she replied that the policy levers for reform were not within her grasp, but instead with others in the State Government and, even more so, the Federal Government, and that rather than wait for any action from them, she just had to get on with it. Fair point. But if the social housing policy that follows from the present discussion does not consider the reality of the private rental market, and how it fails low-income households, and how other government policies have shaped it that way, any initiatives for 'opportunities and pathways' out of social housing will only raise false hopes, or real fears.
 

Long fixed terms are not the solution

Domain ran an article the other day about 'long leases' – or to be precise, residential tenancy agreements with long fixed terms. People often suggest long fixed terms as a way of addressing the insecurity of renting, but we don't think they're the solution.

First, let's get clear on what fixed terms do.

Fixed terms are a hangover from the common law, which said every lease had to be for a term – and if it wasn't for a term, it wasn't a lease (resulting in lots of fun case law about what is a term... is 'until the end of the peanut crop' definite enough to be a term?). But never mind about that – it's a hangover, and the Residential Tenancies Act 2010 says a fixed term is not essential: you can have a residential tenancy agreement with a fixed term, or without.

Under the Act, a fixed term protects you (the tenant) from termination without grounds and termination on the ground of sale requiring vacant possession. It also protects from rent increases, but that protection is not absolute: you can get hit with a rent increase during a fixed term if the agreement has an additional term providing for it.

These protections are why people think long fixed terms are a good idea. But there's another side to a fixed term: during one, you cannot terminate without grounds either.

With those things in mind, let's consider the structure of our rental market. It is dominated by small-holding landlords: most (73 per cent) own a single property only. Most are in it as speculators, in pursuit of capital gains (for 66 per cent of them, their rental income doesn't cover the cost of owning). Their best chance for capital gains lies in being able to sell the property not just to other landlords, but to owner-occupiers too (because owner-occupiers also speculate in housing). And to do that, they have to be in a position to deliver the property to its new owner with vacant possession – that is, without you.

For those reasons, Australia's small-holding speculator landlords don't – and won't – voluntarily tie up their properties in long fixed terms.

And there's another implication of the structure of the market. These small-holding speculator landlords are amateurs (they prefer the term 'mums and dads'). Most would try to conduct themselves reasonably, but they don't trade on their reputations and there's not a lot of market discipline operating on them. When you apply for a tenancy, you will most likely have no idea who the landlord is, or how good or bad they may be. They could be a nightmare... and for that reason, tying yourself up in a long fixed term isn't a good idea for you, either.

Long fixed terms are an attempt at a legal fix that doesn't really fit with the structure of our rental market. To really make renting more secure, we need to address both the legal and structural causes of insecurity.

In terms of structure, we need a different type of landlord. Instead of small-holding amateur speculators, looking for the best chance to realise capital gains, we need the sort of landlord who is instead more in interested in receiving an ongoing trickle of cash, in the form of rents... from a multitude of properties, so that a problem in a single tenancy doesn't upset the whole enterprise. In other words, an institutional landlord. This sort of landlord would be a lot better disposed towards long-term tenancies... and because of their scale, they might trade on their reputations and be concerned about their customer relations, and you might be more disposed to consider a long-term tenancy with them too.

That sort of structural reform is going to take some time. Meanwhile, we can improve security in terms of the law, with reforms that are doable considering the present structure. Here's what we should do:

• Legislate a list of reasonable grounds for termination by landlords. The RT Act already has some (for example, 'failure to pay rent' and 'sale requiring vacant possession'), to we'd add:
• 'landlord or family member requires premises for own residence', 
• 'employment-related tenancy and employment is terminated',
• 'premises to undergo renovation requiring vacant possession, demolition or change of use'.

• Abolish termination by landlords without grounds (including termination at the end of a fixed term). This wouldn't cramp the style of landlords who operate reasonably (they'd use termination notices with grounds, as above), but it would give all tenants more peace of mind and assurance.

• Limit rent increases to not more than once in 12 months.

Proposed Redfern public housing criminal record ban won't work

The Daily Telegraph reports today that police have proposed to the NSW State Government that applicants for social housing should be banned from being allocated tenancies in Redfern and Waterloo if they've been previously convicted of drug offences.

Redfern Local Area Command Superintendent Luke Freudenstein is quoted:

'I know everyone's got to have a place to live... but they're going back into an environment where they fall back into bad habits and it's not doing justice for their rehabilitation.'

For that very reason, we think the proposal should be rejected, because it won't work.

As the Superintendent says, everyone's got to have a place to live. If you make a person ineligible for a sizeable part of the social housing system in Sydney, they will have wait longer for another offer of social housing... and while they wait, they'll still got to live somewhere. Most likely, they'll be transient, moving between family, friends and associates. There's every prospect that they'll be back in same environment, at risk of the same 'bad habits', but they'll be there as a transient homeless person.

Research by Eileen Baldry and her colleagues at UNSW shows that for people leaving prison, having only transient accommodation is one of the strongest risk factors for their being imprisoned again. They conclude:

Chaotic living arrangements made doing anything about drug rehabilitation, employment or social connections virtually impossible for the study participants [ie ex-prisoners]. A majority of these transient participants was re-incarcerated by nine months post-release.

To do justice for rehabilitation of ex-drug offenders, the State Government should focus on providing secure housing and helpful support, not denying both.  

Some thoughts on mutual obligation

In an interesting follow-on from our recent discussion on underemployment and housing insecurity, The Monthly magazine has published an excellent article about Australia's contradictory approach to mutual obligation for welfare recipients. It's recommended reading on the Brown Couch - you can find the online version of the article at this link here. It's a long read, but it really is worth giving it some time over the weekend.

Much obliged

In a nutshell, the article explores our expectations of those who receive government assistance at each extreme of the welfare spectrum - individuals receiving some level of income support at one end, and multinational corporations structured for maximum (sanctioned) tax avoidance at the other.

Somewhere along that spectrum - towards the end where tax avoidance happens - we might also add landlords. Landlords who lost nearly $1.2billion in a single year, as part of their tax avoidance strategies. Landlords who have been wearing these losses in exchange for eye-watering capital gains. Landlords who will tell you that they'll stop investing in housing if you even hint at making life a little bit better for tenants...

The social responsibility that comes with being a landlord is something we've occasionally talked about here on the Brown Couch. We think it's far too easily overlooked. It's worth keeping that in mind, as you're scrolling through The Monthly's article this weekend.

Go on - give it a read.

Underemployment and housing insecurity

We were recently discussing unemployment and underemployment, and the awful waste it represents. Not having adequate work also represents a threat to a person's housing, and some new AHURI research puts some numbers on this.

The research focuses on underemployment (that is, where a person is employed less than full-time, and would prefer to work more hours) and notable findings include:

• Of households comprising a single earner who is underemployed, almost half (48.2 per cent) are in private rental (by contrast, 25.6 per cent of all households are in private rental). Of these households:
• 28 per cent fell into rent arrears sometime in the previous year (by contrast, 16.8 per cent of adequately employed single earners had been in arrears);
• 37.1 per cent were 'at risk' of arrears (by contrast, 13.9 per cent of adequately employed single earners were at risk)*;
• 48.9 per cent had difficulty paying other bills in the previous year (by contrast, 31 per cent of adequately employed single earners had difficulty);
• and the median rent paid by these households increased in real terms by 14 per cent over the period 2001-2009 (contrast the real increase of 17.5 per cent paid by adequately employed single earners). 

• Of households comprising multiple earners, at least one of whom is underemployed, 28.3 per cent are in private rental. Of these households:

•  22.6 per cent fell into rent arrears sometime in the previous year (by contrast, 11.6 per cent of adequately employed multiple earner households had been in arrears);
• 16.2 per cent were 'at risk' of arrears (by contrast, eight per cent of adequately employed multiple earner households were at risk);
• 37.9 per cent had difficulty paying other bills in the previous year (by contrast, 22.3 per cent of adequately employed multiple earner households had difficulty);
• and the median rent paid by these households increased in real terms by an awful 54.7 per cent over the period 2001-2009 (contrast the real increase of 26.48 per cent paid by adequately employed multiple earner households)

The researchers also find that underemployment is 'scarring': the odds of an adequately employed person being 'at risk' of arrears are 1.4 times higher if they were underemployed the previous year.

Turning the numbers around, we also find that of private renter households with members in the labour force (counting together multiple earners and single earners):

• 76.35 per cent have all members adequately employed;
• 13.95 per cent have at least one member underemployed;
• 8.7 per cent have at least one member unemployed.

  

* Assessed 'at risk' because they reported they were paying more than 30 per cent of income in rent, would have 'extreme difficulty in raising $2000-$3000 at a time of need, and described themselves as 'just getting by', 'poor' or 'very poor'.