It’s madness, but here’s a way to stop home prices rising so fast

I think I may have mentioned it – maybe once, maybe twice – that I’m a smug property owner these days. I paid $870,000 for my two-bedroom unit in late 2019. When I had it revalued a few months later in a successful attempt to discharge my parents from their guarantee of my loan, the bank valued it at $910,000.

Hands down, the easiest $40,000 I’ve ever made. And completely tax-free.

Illustration: Dionne Gain
Illustration: Dionne GainCredit:The Sydney Morning Herald

If the economists at Commonwealth Bank are to be believed, I’m about to make another $65,000 this year and $55,000 the next. CBA is tipping property values in Sydney and Melbourne to rise about 7 per cent this year and 5 per cent the next.

So, how do I feel about all this? I find it pretty obscene, to be honest.

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Don’t get me wrong. I wasn’t much looking forward to the prospect of falling home values during COVID-19, as immigration dried up and amid fears of mass job losses. But the worst has not come to pass. Indeed, bolstered by ultra-low interest rates and massive government stimulus, home prices are rising again.

This surprises people. How can it be? How can it last? But it really shouldn’t surprise anyone. Having home values outstrip income gains is precisely what we’ve designed the system to do. And, if we do nothing to change that, it certainly can last – to the detriment of younger aspiring buyers.

Ultimately, home values are the product of the forces of supply and demand. The supply side is obvious enough. How many new homes have we built? But it can be harder to unpick the demand side of the equation, which boils down to a question of how much money is being brought to auctions.

How much money there is chasing properties is determined by both the number of bidders in the market and the amount they each have to bid.

The number of bidders is, of course, heavily influenced by migration, which has taken a belting during the pandemic. But the floodgates are open on how much money the buyers who are active in the market can bring to auction. This is a function of several things, including accumulated savings, the availability of credit, the cost of that credit, and the relative appeal of property versus other asset classes as a vehicle for investing money.

COVID has actually boosted savings, thanks to generous support and fewer opportunities to spend money. Banks remain committed to lending. The Reserve Bank has slashed interest rates to close to zero and is buying bonds to push down other lending rates. It’s not hard anymore to find mortgages with a “1” in front, particularly fixed rates.

So buyers can afford to borrow more. And what do Australians generally do when credit gets cheaper? Do we start our own businesses? No, silly! We invest in property!

Why? Because the tax system explicitly rewards us for doing so.

And it’s not just the ability to negatively gear investment properties and enjoy a 50 per cent tax holiday on any capital gains. Indeed, it isn’t investors who are driving today’s predicted property price gains.

It’s largely first-time buyers – at least the lucky ones who have savings and access to credit. Such buyers know they will pay absolutely no tax on any capital gains they make from their homes. In retirement, the value of their asset will be excluded from the age pension assets test. When they die, they can pass on the property tax-free to their children.

While other countries, such as Britain, impose inheritance taxes, Australia’s federal government has no such revenue base to draw on. As a result, Australians pay relatively higher levels of income tax compared with other countries and our companies relatively higher company tax rates (albeit with deductions for many).

Our relatively light touch to taxing accumulated wealth, therefore, not only drives rising inequality, it penalises hard-working Aussies during their working lives. It’s madness.

There are so many things we could do to halt rapidly escalating property values. We could obviously do a better job at planning and boosting the supply of new housing, particularly for low-income earners.

We could wind back concessions on investment properties and force home-owning Australians to dip into more of the capital accumulated in their homes to fund their retirement. We could impose taxes on the family home or on inheritances to shift the burden of taxation onto wealth and not incomes.

But the politics are simply deemed too diabolical. Labor appears to have given up, convinced it can’t win the seats it needs to seize government while pushing an agenda to take heat out of property speculation.

The ultimate insanity of it all is that no one really gets richer from all this. Unless you intend to be homeless, rising prices just make your next home more expensive.

Of course, homeowners can use their home equity to place their kids on the property ladder, while children less lucky in the parental lotto are left desperately behind. Rising home values make us a nation increasingly divided between the property haves and have-nots.

It’s a mess entirely of our own making. We could choose to change it, if we wanted. But we don’t. Perhaps we secretly enjoy those price gains more than we care to admit?

Shame on us.

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Source: Thanks smh.com