Gavin R. Putland,  BE PhD

Monday, October 29, 2007 (Comment)

The Mother of All BBQ Stoppers

All the “barbecue stopper” issues of the day come down to one: housing affordability. And wall-to-wall Labor governments are unlikely to do anything about it.

In 2001, John Howard coined the term “barbecue stopper” to describe the deteriorating work/life balance. An acceptable balance requires two conditions:

(1) A family can pay off a mortgage on a single full-time income; and

(2) You can keep your job while refusing to work unpaid overtime.

Condition (1) is a criterion of housing affordability. Condition (2), of course, means genuine full employment (not to be confused with statistically fabricated full employment). But jobs cannot be created for the unemployed unless:

(a) the employer can pay the rent or mortgage on the business premises out of the proceeds of the business; and

(b) the workers can pay the rent or mortgage on housing within commuting distance of those jobs, out of wages that the employer can pay out of the proceeds of the business.

Condition (b) is housing affordability, and condition (a) is its extension to commercial/industrial accommodation.

So there we have it: Work/life balance depends on affordability of accommodation, mostly housing.

In case unemployment and “dole bludgers” also qualify as BBQ stoppers, let us further develop the above conditions for full employment. If condition (a) is not met, there will simply be no job vacancies. If condition (b) is not met, then either

(i) employers, in view of the wages needed to pay for housing, cannot afford to offer jobs, or

(ii) workers, on the wages offered, cannot afford to live within commuting distance of the available jobs and therefore cannot take up the offers.

That brings us to the BBQ stopper for which Mr Howard can only blame himself: WorkChoices. The effect of cutting wages is to replace result (i) with result (ii), thus making it easier for politicians to accuse the affected job seekers of being “job-snobs” or being “work-shy” or having made a “lifestyle choice” to remain unemployed, and therefore needing their “mutual obligation” burdens increased.

But the effect of any change in wages is vitiated by high effective marginal tax rates, due to the “stacking” of income tax and income-tested welfare payments, whereas the effect of a similar change in rent or interest payments is not. Hence a dollar saved on housing is worth several dollars gained through more worker-friendly IR laws.

Result (ii), above, also allows employers to complain of “skill shortages”, which allegedly must be relieved by increasing the intake of “skilled immigrants”. If the construction of housing does not keep pace with immigration, the result is to exacerbate the housing shortage which causes the alleged skill shortage! This is not to say that immigration should be cut. Rather, it is to say that if we have high immigration, we must also have policies that ensure a correspondingly high rate of housing construction. But we don't.

So why isn't the high rate of immigration another BBQ stopper? Because the former government's abominable treatment of boat people, subsequently augmented by its demonization of Sudanese refugees, was a lightning rod for xenophobic sentiments that would otherwise have struck the wider immigration program and its effect on housing costs.

Kevin Rudd named several “barbecue stopper issues” in July 2007. Housing affordability was one. But consider the others:

  • Childcare: If housing were more affordable, you could work fewer hours to pay the rent/mortgage and therefore have less need for childcare.
  • Petrol prices: If housing were more affordable (and hence jobs more plentiful), you could live closer to your place of work (or to public transport to your place of work) and consequently drive less.
  • Grocery prices: The grocery bill is one bill among many. Reduce any one bill as a fraction of your income, and all the others become easier to pay. As the housing bill is the biggest, that's the logical place to start.

Moreover, from the viewpoint of private entities, the overall supply of residential land is fixed, as is the supply within acceptable distance of any particular services, infrastructure, or job opportunities. Yet access to suitably located residential land is essential. Therefore the land component of the cost of housing is competed upward until it absorbs the people's capacity to pay. If wages and salaries rise due to a “strong economy”, so does the cost of housing. If childcare or petrol or food gets cheaper, the cost of housing eats up the savings. What the rest of the economy giveth, the housing market taketh away.

Therefore if a benefit for “working families” is not to be competed away in the housing market, it must be delivered through the housing market. This requires supply-side policies — that is, policies that encourage land owners to develop the available residential land, build dwellings, and offer them to tenants and buyers, thus maximizing the supply of housing and strengthening the bargaining positions of renters and buyers relative to landlords and sellers.

Does this mean property investors have to accept lower returns? No, it means that any uplifts in rents or prices must come through improved infrastructure, hence improved amenity. Such increases don't impair affordability, because they don't imply higher rents or prices for housing of given amenity, and because improvements in “amenity” are often realized as cash savings (e.g. cheaper transport). Moreover, if uplifts in site values are taxed at sufficiently high rates, governments have an incentive to provide more infrastructure, causing more uplifts in site values for the benefit of property owners, including investors. These points, although made many times, have been ignored, as if it were an unwritten law that the gains of property investors must come through scarcity, not amenity, and hence at the expense of renters and first-time buyers, not in common with them — that is, as if investors must have comparative wealth (i.e. social status?) rather than absolute wealth.

(Ordinary home owners — those who own no property apart from their principal residences — are the dupes in the middle. They don't benefit from uplifts in property values caused by scarcity, because what they gain in the sale price of the old home, they lose in the purchase price of the new one. They benefit only from uplifts due to improved amenity (e.g. through infrastructure), which they can enjoy while remaining where they are. But most home owners don't understand this, and politicians act accordingly.)

A comprehensive policy for maximizing the supply of housing must adhere to four principles.

FIRST, all property taxes should be on sites (unimproved land and airspace, including attached building rights) rather than buildings, because taxes on buildings can deter construction, whereas taxes on sites can't obliterate sites.

This principle is violated by State stamp duties on conveyances, by municipal rates on combined values of buildings and land (e.g. “Capital-Improved Value” or “Net Annual Value”), and by the federal income tax as applied to rental income (which comes from sites and buildings). All three taxes could be shifted off buildings and onto sites in a revenue-neutral manner; but suggestions to this effect are ignored.

SECOND, all subsidies for residential property should be for buildings rather than sites, because the production of buildings can be increased by incentives, whereas sites don't need to be produced.

The First Home Owners' Grant (FHOG) violates this principle because you don't have to build a house in order to qualify. One could limit the grant to new construction, and make it available to investors to induce additional construction, all on a budget-neutral basis; but there is no political will to do so.

Full deductibility of negative gearing for property investors also violates this principle, again because deductibility is not contingent on actually building anything. The suggestion that full deductibility be allowed only for new construction is sometimes ignored, sometimes obfuscated, and sometimes rejected on the ground that it would create an inconsistency between property and shares — a threadbare excuse, not only because high prices and dividends for shares cannot obstruct economic activity like high prices and rents for accommodation, but also because confining negative gearing to new construction has a counterpart in the share market, namely confining negative gearing to new floats!

As an alternative to negative-gearing deductibility, one could assess only the imputed rent of the site as taxable income, and make the interest on the cost of acquiring the site deductible against that income. The change would be revenue-positive and would make the rent of buildings tax-free. Suggestions to this effect are ignored.

THIRD, all taxes on sites should be holding taxes rather than transaction taxes, because holding taxes encourage income-earning activities (including construction) to cover the taxes, whereas transaction taxes are bottlenecks in supply.

Conveyancing stamp duties violate this principle and would still do so even if they were applicable to site values alone. However, if the duty were apportioned to the increase in the site value since the last transfer of title, it would become in substance a holding tax, because the tax liability would accumulate during the period of ownership and would only be realized, not created, on the transfer of title. Suggestions to this effect are ignored.

FOURTH, all taxes for the funding of infrastructure for new residential developments should be based solely on unearned uplifts in site values caused by (among other things) development approval and infrastructure provision, because lump-sum taxes that are not related to uplifts in value may cause development to be delayed until prices rise sufficiently to cover the taxes.

Existing lump-sum development levies don't satisfy this requirement. They would satisfy it if they were modified along the lines just suggested for stamp duties. Suggestions to this effect are met with deathly silence, as if the effect of development approvals and infrastructure on site values were a state secret, or a trade secret, or both.

Having seen what politicians are not willing to do, let us consider some of their recent proposals.

  • Stamp-duty concessions for first home buyers add to demand, not supply, and fail to distinguish between buildings and sites. They would add to supply if they were contingent on building new dwellings; but they are not.
  • Quarantining negative gearing, other than by restricting it to new construction, does nothing to increase the supply of dwellings.
  • Means-testing the FHOG does nothing to increase the supply of dwellings.
  • Concessionally-taxed savings accounts that can be spent only on first homes suffer from the same problems as the FHOG, except that the accounts take time to build up. Unless the accounts must be spent on new homes, they add to demand, not supply.
  • Shared equity schemes involving parents or institutional investors add to demand, especially if assisted by tax concessions.
  • Federal infrastructure grants to local governments, in lieu of infrastructure levies payable by developers, do not alter the fact that market prices of newly developed lots are increased by provision of infrastructure whether the developers pay for it or not. And of course they'd rather not.
  • Releasing more land for housing is not enough, because the land can be hoarded in anticipation of higher prices. Reducing land tax or subsidizing holding costs makes such hoarding easier.
  • Subsidizing private entities to offer housing for less than market rents, even if the subsidy is contingent on new construction, is a cop-out in that sub-market rents necessarily involve unsatisfied demand and waiting lists; if the waiting lists disappear, the asking rents are no longer sub-market! Attempts to point this out are ignored.

The pattern is clear: Politicians reject every policy that would substantially ease the shortage of housing, while embracing numerous other policies which appear to do something about housing affordability, but which in fact pander to sectional interests and drive up rents and prices — not by improving amenity, of which the benefits would be spread widely, but by maintaining a scarcity of housing, of which the benefits accrue solely to property investors at other people's expense.

Is this a conspiracy theory? You bet it is. I'll retract it when the evidence no longer supports it.

[First published at Gavonomics. Revised December 7, 2007 (post-election). Reposted August 18, 2012.]

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