Teaser:
The rich are getting richer in Australia, and it’s due to wealth generation through the rising value of housing. The Queensland Treasurer voices his support for land tax reform.
The Sydney Morning Herald
OPINION
The housing dream that became a nightmare – and isn’t over yet
Ross Gittins, Economics Editor
September 16, 2022
Excerpts:
If you think the rich are getting richer, you’re right – but maybe not for the reason you think. It’s mainly the rising price of housing, which is steadily reshaping our society, and not for the better.
The Grattan Institute’s Brendan Coates outlined in the annual Henry George lecture this week, “The Great Australian Nightmare”, a magisterial survey of housing and its many implications.
But first, let’s be clear what we mean by “the rich”. Is it those who have the most annual income, or those who have the most wealth – assets less debts and other liabilities? The two are related, but not the same. It’s possible to be “asset rich, but income poor” – particularly if you’re living in your main asset, as many oldies are.
The Productivity Commission argues that the distribution of income hasn’t got much more unequal in the past couple of decades, though Bureau of Statistics’ figures for the growth in household disposable income over the 16 years to 2019-20 seem pretty unequal to me. They show the real income of the bottom quintile (20 per cent block) grew by 26 per cent, which wasn’t much less than for the middle three quintiles, but a lot less than the 47 per cent for the top quintile.
It’s CEO pay rises that get publicised and leave many people convinced the rich are getting richer – which they are. The other point is Coates’: if you take real household disposable income after allowing for housing costs, you see a much clearer gradient running from the lowest quintile to the highest. The increase in the bottom quintile’s income drops from 26 per cent to 12 per cent, whereas the top quintile’s growth drops only from 47 per cent to 43 per cent.
Get it? The rising cost of housing – whether mortgage payments or payments of rent – takes a much bigger bite out of low incomes than high incomes. “People on low incomes – increasingly, renters – are spending more of their income on housing,” Coates says.
But it’s when you turn from income to wealth that you really see the rich getting richer. Whereas the net wealth of the poorest quintile of households rose by less than 10 per cent, the richest quintile rose by almost 60 per cent. And here’s the kicker: almost all of that huge increase came from rising property values.
Other figures show that, before the pandemic, the total wealth of all Australian households was $14.9 trillion. Within that, the value of housing accounted for nearly $10 trillion.
Over the past 50 years, average full-time wages have doubled in real terms. But house prices have quadrupled – with most of that growth over the past 25 years.
Be clear on this: research confirms that the huge increases in home prices relative to incomes in advanced economies in the post-World War II period has mainly been driven by rising land values, accounting for about 80 per cent of growth since the 1950s, on average, with construction and replacement costs increasing only at the rate of inflation.
Coates reminds us that, within living memory, Australia was a place where housing costs were manageable, and people of all ages and incomes had a reasonable chance to own a home. These days, plenty of people even on middle incomes can’t manage it.
Coates argues that the ever-growing unaffordability of housing caused by present policies – which politicians on both sides keep promising to fix, but never do – is not just making our society increasingly divided between rich and poor, it’s also making the economy less efficient.
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Comment: by Jesse Hermans of Prosper Australia, Oct 4, 2022
It is good that the Queensland Treasurer stands by his support of land tax reform. This sort of gumption from state treasurers is what Australia needs.
The revised land tax will increase the cost to those investors currently holding vacant properties, including vacant land and vacant dwellings. This increase in property holding costs increases owners’ incentives to sell those properties. If those properties were vacant land, there would be an increased chance of it being developed for rental housing or first homes, both of which improve outcomes for people who currently rent. If those properties were vacant dwellings, there would be an increased chance of them being upgraded to a rentable condition or sold to someone who would do the upgrading or replacement needed to boost the supply of housing. It’s hard to see how renters would lose from any of those changes.
In recent years, Queensland has become popular with residential property investors and interstate landlords seeking to capitalise on the sunshine state’s growing appeal as a lifestyle destination. Another drawcard is the tax minimisation strategy available to property investors, to avoid progressive state land taxes by diversifying investments into different states.
The Queensland government has backed down on nation-leading land tax reform after backlash from other states and an opposing media campaign waged by big property. The tax reform was modest, impacting few investors, and was aimed only at untaxed properties.
Although the sums involved are small, the change itself has special significance as a small first step towards capturing some of the trillions of dollars of windfall gains made on Australian property. Those windfall gains have made it much harder for people without property to own their own home, forcing many of them into a lifetime of renting.
While property investors enjoy windfall gains from owning land, an ever-shrinking proportion of Australians will enjoy the security of owning their own home. We have just experienced one of the single largest wealth generating events in Australia’s history, with property owners reaping close to $2 trillion dollars’ worth of capital gains within two years. According to the Australian Bureau of Statistics, the value of Australia’s residential property jumped from a pre-Covid $7.1 trillion to a whopping $9.1 trillion by the end of 2021. This increase in property wealth within a 2-year period exceeds all the gains made over the previous decade.
Jesse Hermans, Policy Coordinator
