Australia has a choice to make. Is residential property there for people to live in? Or, is residential property for amassing as many investment properties as you can like a game of Monopoly?
If you believe in the latter, there is nothing that needs to be changed.
An individual investor who earns an income of $120,000 per annum who buys an investment property today valued at $700,000 will receive a tax refund of $12,685. It will cost that investor $21/week to own that investment property after rent, expenses and tax benefits.1
If that same $700,000 property was purchased by a first home buyer who paid a 10% deposit, the weekly home loan principle and interest repayments would be $1,050 (Or $810 based on an interest only loan).2
As you can see, the current tax system serves real-life Monopoly very nicely.
What is the problem if young people cannot buy a home? Is it a big deal if they are confined to a life of renting?
Ilan Wiesel who is a Lecturer in Urban Geography at the University of Melbourne succinctly summarised the current situation of how Australians live in their home is divided now by social status:3
- The renting class: Ilan identifies these are the Australians who are confined to renting and cannot afford to buy a home. Historically, renters were low-income earners, but this is not the case anymore. The proportion of private renters in the total population is slowly but surely increasing – from 20.3% in 1981 to 23.4% in 2011. The average renter paid 19% of their income on rent in 1981. In 2011, this proportion increased to 26.9%. And, in 2014, around 40% of low-income private renters were in housing affordability stress, paying more than one-third of their income on housing.
- The home owner class: Home ownership is the main way many Australians have built their wealth. Around half of a home owner’s wealth is in their home. In my opinion, as property prices have skyrocketed above inflation combined with low wage growth, many Australians are struggling now to save a deposit to buy a home to live in. Without this capital gains tax-free asset to help grow wealth and leverage from it, this is where we are starting to see a divergence in wealth between those who can own their own home and those who cannot.
- The housing elite: These are the people who have been rewarded by the housing boom well beyond the capital gain on their own homes. Ilan highlights that much wealth of Australia’s elite has been generated through the property market – through investment, construction and financing of housing. Of note, Ilan highlights that Australia’s top 20% wealthiest citizens hold most of their wealth in their own home and in other investment properties as well as the share market – which is dominated by the big banks who have business models dominated by housing loans.
McCrindle have produced the below graphic that clearly shows the difference in income and ability to create wealth between top, middle and low income earners. As discussed above, home ownership historically has been the main foundation in Australia in which people can grow their wealth.
Source: McCrindle, ABS
So, what can we do to make housing affordable again in Australia? Below are some of the changes that I see need to be made:
- Reforms to negative gearing will help make home ownership more affordable:
As per my earlier example, our tax system right now heavily favours property investors over home owners. Not reforming negative gearing rules in Australia is akin to washing your dirty car by only cleaning the windscreen. I like the proposed reforms to negative gearing that would incentivise investors to focus on building new housing only. This in turn will help to create new housing supply. It will also reduce competition from investors for first home buyers when buying an already establishing home. - Deferring or reducing stamp duty for first home buyers will help housing affordability:
The stamp duty on a new home of $700,000 is around $27,000. Stamp duty concessions do help to make first homes more affordable for first home buyers. After all, stamp duty is a tax. Currently, stamp duty concessions only apply on brand new properties in NSW up to the value of $650,000.4
I like the idea of concessional stamp duty for first home buyers. Another idea is the introduction of a stamp duty deferral scheme where first home buyers pay stamp duty costs in affordable monthly instalments over, say, five years. - Bring back First Home Saver Accounts:
I like the idea of the First Home Saver Accounts (FHSA) that was introduced in 2008. Unfortunately, this scheme was canned by the Commonwealth Government in 2015. Under this scheme young people could open an FHSA and earn a 17% contribution on savings up to $5,000 – $6,000 each year. I don’t think this scheme was around long enough to help make a difference for first home buyers.
In conclusion, the ability of Australians to be able to buy their own home is the first crucial step in creating wealth over the long-term. We need to make some policy changes in Australia to ensure future generations can buy their own home.
1. Based on a $700,000 investment property in NSW. Salary = $120,000, 10% deposit of $70,000, rental income = $620/week, interest only loan at 5.50%, rental expenses = $8,727, building depreciation and fixtures and fitting depreciation claimed.
2. Based on a $700,000 home purchase. 10% deposit of $70,000. Principle and interest and interest only repayments calculated at a 5.50% interest rate.
3. ‘How the housing boom is remaking Australia’s social class structure’, by Ilan Wiesel, 17th October 2016, http://theconversation.com/how-the-housing-boom-is-remaking-australias-social-class-structure-66976
4. http://www.osr.nsw.gov.au/grants/fhnh
SOURCES:
http://fortune.com/2012/09/11/can-the-middle-class-thrive-without-home-ownership/
http://theconversation.com/how-the-housing-boom-is-remaking-australias-social-class-structure-66976
http://www.dailytelegraph.com.au/business/australias-middle-class-shrinks-as-property-creates-great-divide/news-story/3bb5af104bac7cc435fc330586003fa8
http://mccrindle.com.au/the-mccrindle-blog/australias-household-income-and-wealth-distribution
Andrew Zbik
Senior Financial Planner
Omniwealth
t: (02) 9112 4316
m: 0422 038 253
e: andrew.zbik@omniwealth.com.au
www.omniwealth.com.au