Advertisement

Alan Kohler: Housing affordability is largely a matter of tax reform

Victoria's approach to housing affordability must be commended, Alan Kohler writes.

Victoria's approach to housing affordability must be commended, Alan Kohler writes. Photo: TND/Getty

The Victorian government’s blizzard of housing announcements this month, mainly directed at building a lot of high-rise apartments in 50 close-in neighbourhoods near existing infrastructure, is the first serious, specific effort to deal with housing affordability.

As the Financial Review’s John Kehoe wrote: “Australia is belatedly experiencing an outbreak in good housing policy.”

It’s good, yes, but will it work? Unfortunately, no.

That’s partly because residents are going to fight it – they’ve already started – and while the state government can forcibly provide planning permits, it won’t last beyond November 2026 because the Opposition will no doubt oppose it to win votes in those suburbs, and having won the election, cancel it.

It’s also partly because Australians don’t want to raise families in three-bedroom apartments; focusing housing supply on flats will probably just drive up the prices of houses, as they become relatively scarce.

Apartments cost more to build

But the main reason it won’t work is that apartments are more expensive to build, and therefore cost more to buy.

You heard right … apartments are dearer than houses, especially existing houses, but also new ones.

Developer Max Shifman told me that a developer needs to sell apartments for at least $14,000 per square metre while a house sells for about $4000 per square metre.

The difference is partly explained by the rule that any building above three storeys must be unionised for insurance and safety purposes.

And as we have learnt recently with stories linking the construction union – the CFMEU – with organised crime and bikie links, not to mention thuggery and intimidation, this is a very effective union at getting higher pay and better (i.e. more expensive) conditions for its members.

How it works

As Shifman put it, anything needing a crane is a whole different proposition, in terms of building materials, regulations, insurance and unionisation, and the cost of building a block of apartments has increased by about 40 per cent since the pandemic.

That $14,000 price per square metre translates into $650,000 for a small one-bedroom apartment, $1 million for a two-bedroom apartment of 70 square metres and about $1.5 million for a reasonably sized three-bedroom “family” apartment or more. These are not “affordable” dwellings.

As a result the Australian apartment market is now almost entirely directed towards building luxury apartments for downsizers.

My email inbox these days is filled with ads for posh apartments in existing suburbs near train stations (because my recent house-hunting has alerted the marketing bots that my wife and I are in the process of downsizing).

And what I’m seeing in the emails are all premium, luxury apartments. They’re going up everywhere, and most of them look very nice. But a friendly real estate agent told us not to touch any of them; some are well-built, many are made of paper mache, he said, and it’s hard to know which is which till you’re in.

Developer contribution reform

One thing the Victorian government is planning that makes sense is to reform the “developer contribution” for infrastructure.

The plan is to make it a uniform, transparent amount, but it will also be extended to new suburban high rise as well as the greenfield housing estates on the city fringe that pay it now.

At the moment infrastructure contributions for new builds in existing suburbs is a matter for negotiation with councils under S.173 of the planning act, which can be an unpredictable, lengthy nightmare. Taking it out of the hands of councils is a good thing.

Developer contributions are one of the many reasons that housing became unaffordable from 2000 onwards.

Follow the money

During the 1990s, when governments were privatising everything and handing over the building of freeways to toll companies (i.e. Transurban), they also shifted part of the cost of suburban infrastructure like roads, water and sewerage to developers.

They used to be provided by the government as part of its job; now it’s in the cost of the house.

Also, in 2000 another 10 per cent was added to the cost of a house by the GST, and stamp duty rates have been increasing steadily as state governments cope with the healthcare demands of an ageing population.

The result, according to the Property Council, is that 30 to 40 per cent of the cost of a new dwelling is tax, which is the sort of taxation that gets put on a product the government wants to discourage, like tobacco.

The obvious problems with building enough high-rise apartments in existing close-in suburbs – NIMBYism, consumer preference for houses and cost – is why in my recent Quarterly Essay (The Great Divide), I concluded that the solution to more housing supply must be fast trains to regional areas to open up more land for subdivision further out.

But I have to admit that’s unrealistic as well: It’s too expensive. Governments don’t have the money and private operators couldn’t charge enough to make the business model work.

Cheaper solution

The reason the solution to housing affordability is all about building apartments near train stations is simply that it’s cheaper – governments don’t have to build more train stations.

Of course, all the other infrastructure in those suburbs, as well as the trains – roads, health care, shopping – will become impossibly crowded as Melbourne and Sydney head for 10 million population, but that’s a problem for another day – and another government.

Max Shifman says that townhouses in middle-ring suburbs is the sweet spot.

In a piece in The Age last week, he wrote: “There are many pockets in existing suburbs that can deliver swaths of new homes that don’t require 12 to 20- storey apartment buildings. But they will need a departure from some firmly held planning and tax beliefs.”

Tax issue

Yes, tax. Increasing housing supply, and improving affordability, is a matter of tax reform, as well as industrial reform and planning reform – that is, shifting tax collection from one set of things to another.

(Unless governments start building the houses themselves, as they used to – but that’s not going to happen either).

The tax reform needed is pretty obvious: Put housing on the list of essentials excluded from GST (after all, shelter is as essential as food and medicine) and eliminate developer contributions for infrastructure, and pay for it by halving the capital gains discount and restricting negative gearing, which would also help reduce demand.

Just as driving on freeways is becoming unaffordable because some state taxes have been buried in tolls, housing is unaffordable partly because some state taxes have been buried the price of a house.

Alan Kohler writes weekly for The New Daily. He is finance presenter on the ABC News and also writes for Intelligent Investor.

Advertisement
Stay informed, daily
A FREE subscription to The New Daily arrives every morning and evening.
The New Daily is a trusted source of national news and information and is provided free for all Australians. Read our editorial charter.
Copyright © 2024 The New Daily.
All rights reserved.