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Housing Costs and Policies

With Special Reference to Sydney

Peter Abelson
Prepared for NSW Treasury, May 2016

Applied Economics

Contents

Preface

Executive Summary

1 Introduction

2 The Sydney Housing Market

2.1 Key Data for Sydney Housing

2.2 Determinants of House Prices

2.3 Some Important Issues

3 Housing Costs and Affordability

3.1 Housing Costs and Affordability: Key Concepts

3.2 Housing Affordability for Renters

3.3 Housing Affordability for Home Owners

3.4 Causes of Low Affordability

3.5 Conclusions

4 Housing Policies, Options and Evaluation

4.1 Existing Housing Policies

4.2 Policy Options

4.3 Policy Objectives and Evaluation

5 Housing Supply Policies

5.1 Increased Supply of Housing

5.2 Housing Standards and Costs

5.3 Infrastructure Standards and Costs

5.4 Reform of Urban Planning and Approvals

5.5 Stamp Duty on Housing Transactions

5.6 Conclusions

6 Policies to Reduce Housing Demand

6.1 Lower Subsidies for Home Owners

6.2 Lower Subsidies for Housing Investors

6.3 Restrictions on Foreign Ownership of Housing

7 Core Housing Policies for Low Income Households

7.1 Policies for Social Housing

7.2 Income Support for Low-Income Rental Households

7.3 Income Support for First-Home Buyers

7.4 Conclusions

8 Affordable Housing Policies

8.1 Introduction: Affordability Objectives and Policies

8.2 General Issues with Affordable Housing

8.3 Subsidies for Affordable Housing

8.4 Planning Incentives for Affordable Housing

8.5 Planning Regulations (Inclusionary Zoning) for Affordable Housing

8.6 Housing Supply Bonds

8.7 Conclusions

9 Conclusions

9.1 Main Conclusions

9.2 Issues Going Forward

References

Annex A: Supporting Data

Table A.1 Median dwelling prices in Greater Metropolitan Sydney: 1991-2015 ($'000)

Table A.2 Median dwelling price indices in Sydney: 1991-2015 (1991 = 100)

Table A.3 Housing stock and completions in Sydney: 1990-91 to 2014-15

Table A.4 Household incomes in NSW and Sydney: 1990-91 to 2014-15

Table A.5 Average housing prices in Australian capital cities: 1997 to 2014

Table A.6 House prices indices in Australian capital cities: 1997 to 2014

Table A.7 – Housing User Costs in Sydney: 1991 to 2014

Table A.8 Median house prices in capital cities

NSW Treasury commissioned Applied Economics P/L to prepare an overview paper on housing costs and policies, with special reference to Sydney. While the paper aims to include all major relevant factors and policies that affect housing costs, detailed discussion of all factors and all possible policies is outside the scope of this paper.

Peter Abelson is the principal author of this paper. In preparing the paper, I have received information on NSW Government housing policies from Sandra Ianitto and considerable helpful research assistance from Alex Tosh and Alex Petrillo, all of whom are employees of NSW Treasury. I am very grateful for their support. I also received helpful comments on an earlier draft from Dr. Luci Ellis (RBA) and Professor Glenn Otto and Dr. Nigel Stapledon (UNSW).

I also acknowledge with thanks detailed comments on an earlier draft from officers of the NSW Department of Premier and Cabinet, the Department of Planning and Infrastructure and Family and Community Services.

It is also noted that Peter Abelson is Mayor of Mosman Council.

However, all views expressed and all data provided in the paper are fully the responsibility of Applied Economics P/L. They are not necessarily the views of NSW Treasury or of any person who contributed to the paper.

Dr. Peter Abelson

Director

Applied Economics P/L, Sydney

May 2016

The objective of this paper is to identify policies that could reduce the cost of housing efficiently and equitably, especially in Sydney. The prime focus is on policies relevant to the NSW Government. However, these policies can be considered only in the context of, and in conjunction with, Commonwealth welfare, taxation and housing polices. Accordingly, these policies are also discussed.

The paper discusses three main housing affordability issues. These are:

● General affordability: the cost of housing to the general population, which is sometimes summarized as the cost of housing to the median income household.

● Affordable housing: the provision of appropriate housing at an acceptable cost to households with very low to moderate income, generally focusing on the lowest two income quintiles.1

● Social housing: the provision of appropriate housing at subsidized low rents to vulnerable households with very low income.

General affordability applies to home owners or to renting households. In Sydney, home owners make up 67% of households and renters 33%. Affordable and social housing relate predominantly to renting households in the private and public sectors respectively.

The paper discusses all major State and Commonwealth Government policies that affect house prices. However, some important specific issues, such as accommodation for homeless people, domestic violence victims, remote indigenous communities and aged care persons, are outside the scope of this paper.

The following is a summary of the main findings.

The Sydney housing market

Between 1991 and 2015, the median price of all dwellings in the Greater Sydney area rose from $155,000 to $679,000.2 Discounting for inflation, this was a substantial increase in real terms of 136%. Allowing for an increase in the quality of housing of about 1% per annum, the median real constant quality house price approximately doubled over this period. Over the same period, real median disposable household income rose by 51%.

Rents have risen much less than house prices. Between 1990 and 2015, median rent rose from about $165 per week to about $460 per week, a nominal increase of 185% compared with the rise of 438% in housing prices over nearly the same period. Indeed, median housing rent has risen only slightly more than median household income. Between 2000 and 2015, the median rent approximately doubled in nominal terms, which was a real increase of just over 30%. This increase was only slightly more than the increase in median real household income over this period.

Between 1991 and 2004, average house prices in Sydney were over 50% higher than the average in other Australian capital cities. They were only about 15% higher during the resources boom from 2008 to 2012. But by 2015, they were again 40% higher. This differential reflects principally differences in household incomes, coastal constraints on housing and the amenity premium (including preferred climate, access to coast and water, quality of views and abundance of vegetation) compared with the other cities.

In 2014, the population of Sydney was 4.84 million.3 From 1991 to 2006, the population grew on average by about 1.0% p.a. Since then, population growth has averaged about 1.6% p.a. There are currently about 1.8m households in Sydney.

In 2015, there were 1.86m dwelling units in Sydney, including 1.73m private dwelling units and 127,000 social housing units. Between 1990-91 and 2013-14, dwelling completions averaged 22,000 per annum. But they averaged just under 17,000 completions annually between 2006-07 and 2013-14 before rising to 28,314 in 2014-15. The annual turnover rate averages about 100,000 dwelling units per annum.

Like other prices, housing prices are determined by supply and demand. Because the stock of dwellings changes slowly, on average by about 1.4% a year, in the short and medium term housing prices in Sydney are determined mainly by demand factors. These include changes in population, income, interest rates (especially), financial deregulation (loan to valuation ratios), foreign demand and house prices in other cities.

An important finding from Australian and international research is that the price elasticity of housing with respect to the housing stock is in the order of 3.0. This means that, after allowing for changes in demand, a 1% increase in the housing stock will result in a fall of 3% in real house prices. Thus an increase in annual completions from say 1.4% to 2.0% of the housing stock would reduce real house prices in Sydney by about 1.8% (= 3.0 0.6).

The following are some key features of the housing market in Sydney.

The production of housing is basically competitive and efficient. Third party (community) impacts require planning regulations. However, planning regulations may create inefficient restrictions on housing supply.

Prices of new houses are determined principally by the price of existing houses. Generally, lower costs of new housing increase land values rather than reduce house prices. New homes can reduce the price of housing when they significantly increase the supply of housing.

Housing taxes and subsidies are often shifted. They are not necessarily borne, or received, by the parties intended to bear or receive them. The incidence depends on the relative elasticities of demand and supply. Given the relative inelasticity of housing supply, subsidies tend to increase house prices and taxes tend to reduce them.

House prices are a function of location and transport costs. Reducing transport costs (including time costs) generally increases house prices.

There is an inter-city welfare (spatial) equilibrium. Households choose cities by trading off income, house prices, commuting costs and amenity. House prices are significantly higher in Sydney than in other Australian capital cities principally because of the amenity premium (explained above) and to a small extent because of higher incomes. House prices in Sydney can be brought down to the levels in other capital cities only by destroying the amenity premium.

Housing costs and affordability

This paper reports various findings that housing is “not affordable” for many low income households in private rental housing in Sydney. Drawing on ABS data, in 2013/14, about half of all rental households in the lowest two quintiles (about 150,000 out of 300,000 households) were paying over 30% of their income in rents, which is a common benchmark for housing stress. This includes about 40,000 households currently on the waiting list for social housing in Sydney (out of about 60,000 households on the list for the whole of NSW).

It should be noted that the 30% benchmark is an arbitrary measure. Expenditure on housing is to some extent a choice of both housing and household size (about 17% of bedrooms in private rental stock are unused). Also, a significant proportion of households in housing stress, as defined above, move out of “stress” after one or two years as their incomes increase.

The view of this paper is that the priority target for additional housing assistance, over and above those in social housing, should be the low and very low income households with high housing needs at risk of long-term housing stress and that the policy focus should be to identify and aid these households. In Sydney, the total could be in the order of 80,000 to 100,000 households out of the 150,000 households under current housing stress as described above. This is an indicative order of magnitude figure subject to greater definition of high need households.

When the real costs of home ownership are computed appropriately, including real capital appreciation and excluding mortgage repayments which are savings, median and first home owner real housing user costs are found to be an affordable proportion of median and first home owner household disposable income respectively. This conclusion is sensitive to assumptions about real capital appreciation. In terms of user costs, recent increase in house prices have been offset by low interest rates and housing purchase usually brings gains in real wealth over time.

However, some households may be unable to raise the minimum equity deposit and so cannot own homes. Also for some households, an affordable dwelling may mean long journey-to-work times and costs which have not been factored into housing user costs in this paper (or in most estimates).

This paper does not attempt to forecast the number of households in housing stress in the next few years or longer term. However, it can be reasonably assumed that the underlying factors are not likely to change substantially and quickly, so the present is a fair indicator of the near and medium term needs in the absence of major economic or policy changes.

Housing policies, options and evaluation

The main current Commonwealth policies relating to housing are the Specific Purpose Payment (SPP) for housing under the National Affordable Housing Agreement (NAHA), Commonwealth Rent Assistance, and various tax policies and concessions for housing.

The NSW Government’s major public expenditure programs include:

● Development and management of public housing stock

● Provision of most public housing at a significant subsidized rent

● Support for first home owners via purchase grants and stamp duty exemptions for new housing

● Provision of minor private rental assistance (such as RentStart and Start Safely) and

● Provision of infrastructure to support new housing.

In addition, the Government

● Encourages management of public housing by community housing providers

● Seeks to reform urban planning processes to encourage housing development

● Supports high density development in priority precincts and major transportation corridors

● Supports various housing affordability initiatives.

In broad terms there are four main kinds of housing policies:

● Policies to increase housing supply or reduce housing costs, thus improving general affordability

● Policies to reduce the demand for housing, and thus reducing house prices and rents

● Policies specifically to assist low-income rental or first home-owner households, and

● Various policies to provide affordable housing.

Evaluation of policies depends on the objectives. Objectives include lower housing costs for all sections of the community but especially for low income renting households. They also include provision of related infrastructure, environmental amenity, efficient taxation and macro-economic stability. Thus trade-offs between lower housing costs, poorer infrastructure and lower environmental amenity as well as with public expenditure on other services need to be considered. Where possible the evaluation should quantify these tradeoffs using benefit-cost analysis.4

Housing supply and cost policies

Increasing housing supply will have a significant but small impact on house prices. As noted, an x% increase in the housing stock over and above any increase needed to meet demand will reduce real house prices by about 3x%. Thus, doubling annual completions from an average 1.4% p.a. needed to meet underlying increasing demand to 2.8% of the housing stock could reduce real house prices by about 4% (3 1.4%).

Ideally housing targets should be based on (a) a macro model for Sydney that incorporates household incomes and house prices as part of the welfare objective and (b) cost-benefit evaluation of housing development strategies that seek to maximize the net social value of new housing both in Sydney and the sub-regions.

This net social value is essentially the market value of housing less development and construction costs, infrastructure costs and any congestion and environmental costs. In this process, the Urban Feasibility Model developed by the Department of Planning and Environment is a valuable instrument.

The housing target would likely exceed recent completion rates but would take into account concerns about the environmental and amenity impacts associated with higher density development. Where the net social benefit of rezoning is clearly positive, local environmental plans (LEPs) should be revised without delay. Rezoning is seen as the key driver of housing starts and completions.

In the view of this paper, other planning reforms, such as more complying development in appropriate areas (in developed areas it is often not appropriate), shorter development approval times and simpler construction certificates may marginally increase housing supply but would have much less impact than revised LEPs.

Stamp duty more than doubles most house purchase transaction costs in Sydney. Eliminating this transaction tax could encourage an estimated additional 25,000 transactions a year with an estimated benefit to households that move due to the lower cost in the order of $375m per annum (separate from their savings in stamp duties). Replacing stamp duty with a broad based land tax could release a significant amount of under-utilised housing and reduce house prices by an estimated 6% over the medium period.

However, a revenue neutral land tax would amount to about $2,700 per annum on a median priced residential property in Sydney, which could be hard to introduce, and change may have to be introduced slowly so that households involved in recent transactions are not double taxed.

It may be possible to reduce housing costs by a minor amount by allowing lower housing standards and by more efficient provision of housing-related infrastructure. However, these changes would likely have only small impacts on overall housing affordability.

Reducing the demand for housing

Housing demand is encouraged by major tax concessions to both homeowners and investors that push up housing prices. The issue is whether such tax concessions should be reduced or abolished altogether.

The major tax concessions to homeowners are non-taxation of net imputed rents (gross imputed rents less expenses including interest payments) and capital gains. Also home-owned housing is not included in asset tests for Commonwealth pensions. The major concessions to property investors are the deductibility of losses, notably incurred by borrowing costs, against other income, and the apparent concession that only 50% of nominal capital gains attract tax. All these tax concessions are Commonwealth concessions.

The concessions to home owners increase existing housing prices but actually provide only small benefits to first-time home owners. They also indirectly cause higher rents.

On the other hand, in a competitive rental market, subsidies to property investors are passed on principally in lower rents to rental households as a result of the increase in rental properties, but increase house prices for first-home owners. More work is needed to quantify these effects.

Following the analysis in Chapter 6, the paper:

● Supports a broad-based land tax on housing properties which would provide a proxy (though not exact) tax on net imputed rents as well as replacing transaction taxes.

● Does not support applying capital gains tax to home-owned dwellings as these are mainly consumption goods. Such a tax would greatly disadvantage homeowners wishing to exchange homes and, by inhibiting transactions, would reduce labour mobility and be inefficient.

● Supports bringing maximum tax rate deductions for negative gearing into line with the corporate tax deduction rate.

● In the current very low inflationary environment where real gains typically exceed inflationary changes, consideration could be given to increasing the capital gains tax on assets, including residential investment property, to 60% of capital gains as proposed in the Henry Review (2010). But it should be noted that a 50% tax on nominal gains is not a real tax concession when the inflation rate exceeds the real rate of appreciation.

● Consider including homes in asset tests for access to Commonwealth pensions.

However, the effects of tax changes on housing affordability for home owners and renters, as well as on tax revenues, are complex and would desirably be modelled in conjunction with any other changes in tax concessions.

Foreign demand has had a small but recently increasing impact on house prices. There may be a case for a transaction tax on foreign purchases of residential property, but this may be hard to implement.

Housing policies for low income households

Social housing for some 127,000 households in Sydney is the prime state policy and accounts for a very high proportion of state government funds allocated to making housing more accessible and affordable. This is a core program for vulnerable households. The main issue is how to manage the assets and the program efficiently.

Government policy to transfer management of up to 35% of social housing stock to CHPs may improve management of assets and service quality and increase funding for social housing from tenants having access to Commonwealth rent assistance (CRA). However, it is not clear how, or whether, this would lead to a significant increase in the supply of social housing.

As noted above, a major issue is the large number of low income households (possibly 80,000 to 100,000 households) who need substantial housing support but who cannot access social housing.

CRA is provided to about 275,000 low income households in Sydney. This is targeted to assist directly the poorest and most disadvantaged households. It is efficient because it allows households to choose their preferred housing location, size etc., subject of course to income constraints. However, this paper supports the Henry Tax Review (2010) recommendations that assistance could be targeted better by linking assistance to movements in national rental costs and by providing additional support for households who have higher need.

The NSW Government provides very limited private rental assistance totaling about $11.4 million annually to some 18,000 households. There are plans for a modest increase in this assistance. In our view, the various related polices and financial support could be usefully and substantially increased where the benefits are greatest (supporting the most vulnerable). As is recognized within the Government, there is an urgent need for housing policies to provide a pathway vulnerable households away from, or out of, social housing, which is an expensive last resort policy.

The NSW Government also provides modest income support for first home owners of low priced new housing. This support may affect the timing of house purchases but has little impact on overall household choice to own or rent or on house prices or completions.

In the view of this paper, there are social and equity reasons for assisting low-income households to own their own home. The current grant does not recognize the recent increases in house prices. It could be increased and allowed for low-priced existing housing as well as for new housing.

Special policies for affordable housing

“Affordable housing policies” are policies designed primarily to assist very low, low and moderate income rental households who are not in social housing and who do not receive, or who are inadequately supported by, Commonwealth rental assistance.

Affordable housing is typically described as housing rented out at 20% or more below market rent. This can be achieved in three main ways: by direct government subsidies usually on public land, planning incentives or regulations covering some percentage of new housing. Whichever of these may be advocated, the policies need careful specification and metrics.

All three approaches have some similar general issues to contend with. A core issue is the targeting of assistance to a limited supply affordable housing. There are some 300,000 very low and low income renting households but typically only one or two thousand new affordable dwellings available annually. The criteria for selecting households for affordable housing may not meet social priorities (the most vulnerable households). Lowering rents by 20% on new housing is unlikely to make housing affordable to the 80,000 to 100,000 households who most need assistance.

Secondly, it is not clear where affordable housing policies should be applied. Thirdly, rent controls create administration issues. It is not clear what rights tenants have, or should have, when their income rise. Also it is hard to monitor sub-letting and to control trading practices.

A special difficulty with planning incentives is that they either presume existing zoning is sub-optimal or they allow sub-optimal changes to an optimal zoning.5 Inclusionary regulated zoning may deter efficient development and add complexity to the planning system while producing only a small amount of affordable housing.

In general, income support for high-need recipients has significant advantages over rent-controlled dwellings. The advantages include more transparent and improved targeting, more and better household choices, increased labour mobility and improved housing maintenance.

If, notwithstanding this general principle, there are considered to be some special cases where rent controls could be useful, it is suggested that more consideration be given to this strategy, especially to selection of clients.

However, the principle that some of the value uplift from re-zoning should accrue to the community is reasonable especially when re-zoning reflects public investment in infrastructure. This can be achieved most directly by a value uplift tax and less directly by other taxes such as a land tax, a levy on development or capital gains tax.

Properly designed, a value uplift tax is a tax on economic surplus and would not deter development as inclusionary zoning may do. All or part of the revenue could be centrally administered and allocated to affordable housing to households with greatest needs.

However, designing a value uplift tax is complicated and will need considerable assessment. A broad land tax captures less of the economic profit from rezoning. But it is also relatively efficient, does not distort development or not depend on complex planning regulations.

Conclusions

The paper discusses a large number of Commonwealth and State housing policies. From a state perspective there are two main sets of issues:

● How to determine the amount of public resources to support affordable housing and how to allocate this most efficiently and equitably, and

● How best to engage the private sector notably by regulation or taxation of development.

A theme of the paper is the need to identify and assist the most vulnerable renting households in the lowest quintile who are under supported by social housing or by Commonwealth or state government rent assistance. Within Sydney this could amount to some 80,000 to 100,000 households in privately rented accommodation in addition to the 127,000 households in social housing. Identifying and providing greater support to these households is seen as the major policy priority.

This could be funded by a value uplift tax or by a broad land tax or by a developer levy of some kind.

The paper supports a more active rezoning strategy based on cost-benefit evaluations which would most likely support a significant increase in housing activity and completions and produce marginal reductions in real house prices

The paper also supports a move to a broad land tax instead of stamp duty and supplemented by a value uplift tax on re-zonings if such a policy can be designed efficiently. This revenue could support those marginal renting households who are currently under-supported.

As discussed in the paper and summarized above, various other policies have both merits and issues and may warrant implementation. However, in the view of the paper, they are likely to produce marginal, rather than major, changes to housing affordability in Sydney.

In conclusion, it should be reiterated that this is an overview paper. Chapter 9 provides the main conclusions and also suggests some issues where more work could be appropriate.

The objective of this paper is to identify policies that could reduce the cost of housing efficiently and equitably, with a particular focus on the cost of housing in Sydney.6

Our prime focus is on state government policies. However, these policies can be considered only in the context of Commonwealth welfare and housing polices. The Commonwealth is the main provider of social welfare benefits, including Commonwealth Rent Assistance, in NSW as in the rest of Australia. The Commonwealth also sets some key tax rates and concessions that affect housing prices.

Housing affordability in the major capital cities in Australia is a major concern. This was the subject of a recent wide-ranging 400+ page report by the Senate Economics Reference Committee (SERC, 2015), numerous other reports and almost daily articles in the media.

But while these various reports propose numerous policies to make housing more affordable, there is no consensus on which policies, or package of policies, would best reduce the cost of housing. In part this reflects the complexity of the issues to be addressed, including community concerns about over-development.

This paper discusses three main housing affordability issues:

● General affordability: the cost of housing to the general population, which is sometimes summarized as the cost of housing to the median income household.

● Affordable housing: the provision of appropriate housing at an acceptable cost to households with very low to moderate income, especially in the lowest two income quintiles (these are known as the first and second quintiles).

● Social housing: the provision of rental housing to eligible vulnerable households with very low income. Social housing may be owned or managed by government or community organisations, but is generally funded by government.

Figure 1.1 shows these main categories, with the first and second quintiles split into two boxes, and an extra box for housing crisis (homelessness). It also shows the approximate numbers of households in each box. A theme of this report is that the greatest problems occur in the bottom three box categories. This includes over 370,000 households in the first (lowest) income quintile and is the priority area for policy assistance. This does not exclude policies to assist other households, but they generally need less support.

General affordability may apply to home owners, especially to first home-owners, or to renting households. Affordable and social housing apply predominantly to renting households. However, whereas households would pay all or most of the rents for affordable housing, social housing is generally heavily subsidised.

Applied Economics

Figure 1.1 – The housing affordability spectrum

Sources: DPE, 2014, ‘NSW projection data by LGA – Sydney Metropolitan’ [2016 projections of quintile sizes]; Productivity Commission, 2016, ‘Report on Government Services’ [social housing and homelessness numbers].

However, housing cannot be separated from provision of transport and other infrastructure or from concerns about over-development or, more positively, from community preferences for environmental amenity.

To improve the overall welfare of Sydney households, policies need to account not only housing costs but also infrastructure, environmental and fiscal objectives. This often requires trade-offs between these objectives. Also, policies that reduce housing costs for some groups (for say home owners) may increase housing costs for other groups (for renters).

This report responds to these challenges as follows.

Chapter 2 provides key data for the Sydney housing market and discusses the major determinants of house prices in Sydney and some special issues that arise in the analysis of house prices.

Chapter 3 discusses the definitions, meaning and estimation of housing cost and affordability for rental and owner-occupied housing and provides evidence on housing affordability for both renters and owner-occupiers in Sydney.

Chapter 4 describes existing Commonwealth and state housing policies, discusses the range of policy options and discusses policy objectives and evaluation criteria. Four main sets of policies are identified: policies to increase housing supply or reduce housing costs; policies to reduce the demand for housing; standard housing policies specifically to assist low-income rental or first home-owner households; and specific policies to provide affordable housing.

These four main sets of policies are assessed in Chapters 5 to 8 respectively. Where feasible, the assessment makes quantitative estimates of costs and effects. This is challenging because of the scope of the subject and the lack of quantification in much of the writing on the subject of housing policies.

Chapter 9 describes the main conclusions and outlines some issues for further consideration.

2.1 Key Data for Sydney Housing

This section presents summary data on the Sydney housing market. This includes data on house prices and rents, the supply of housing, population and income. As noted in footnote 4, unless otherwise stated, the data refers to the Greater Sydney area of 43 LGAs, including the outer areas of Blue Mountains, Camden, Gosford, Hawkesbury, Penrith, Wollondilly and Wyong. This is a much larger area than would apply to city boundaries in many other countries. Annex A contains more detailed data on house price.

Housing prices in Sydney

Table 2.1 shows median house and unit prices in Sydney for selected years since 1991 as a whole and for the inner, middle and outer rings. It also shows constant price index numbers, i.e. an index of real prices after discounting for inflation. More details are shown in Table A.1 in Annex A.

As shown, the real median dwelling price more than doubled between 1991 and 2015, rising by an estimated 136%. The rate of change was slightly higher in the 1990s than since 2001.

House prices rose by more than unit prices. They also rose by more in the inner ring than in the outer ring. Both phenomena reflect land scarcity. On the other hand, unit prices rose by more in the middle ring than in the inner ring, presumably reflecting greater increase in supply in the inner ring.

However, note that to estimate real house and rent price changes for a constant quality house or unit, allowance must also be made for any changes in size or quality of the housing (see discussion below).

Table 2.1 Median Dwelling Prices in Greater Metropolitan Sydney ($'000)

                         
 

All dwellings

Sydney

Houses: Sydney

Units: Sydney(a)

Year

Sydney

GMR

Rest NSW

Houses

Units

Inner

Middle

Outer

Inner

Middle

Outer

1991

155

110

98

155

140

210

165

136

173

130

130

2001

316

175

137

327

305

565

413

264

370

285

245

2011

534

385

309

650

490

1120

775

470

590

476

370

2015

679

452

335

752

620

1585

1150

625

760

620

480

Indexb

                     

1991

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

2001

165.8

129.4

113.7

171.6

177.2

218.8

203.6

157.9

174.0

178.3

153.3

 

2011

205.3

208.6

187.9

249.9

208.6

317.9

280.0

206.0

203.3

218.2

169.6

 

2015

236.2

221.6

184.3

261.6

238.8

407.0

375.8

247.8

236.9

257.2

199.1

(a) Estimated for 1991 based on overall change in prices as sample sizes for sub-sets too small to be reliable.

(b) In constant prices (corrected for inflation), June 1991=100.

Source: NSW Department of Family and Community Services, Rent and Sales Reports.

Intercity house price comparisons

As shown in Figure 2.1, average house prices in Sydney have generally been over 50% higher than the average in other Australian capital cities. From about 2003, the price premium declined significantly. In recent years the premium has risen back to about 40%. Reasons for this premium are discussed below.

Applied Economics

Source: RBA 2015, Submission to the inquiry into Home Ownership.

Figure 2.1 – Sydney housing prices relative to other capital cities

Housing rents in Sydney

Rents have risen much less than house prices. Between 1990 and 2015, median rent rose from about $165 per week to about $460 per week, a nominal increase of 185% compared with the rise of 438% in housing prices over nearly the same period (see Table 2.2). Indeed, median housing rent has risen only slightly more than median household income. Between 2000 and 2015, the median rent approximately doubled in nominal terms, which was a real increase of just over 30%. This increase was only slightly more than the increase in median real household income over this period. However, first quartile rents increased slightly faster than the median rent.

Table 2.2 Median and first quartile rents for houses and units in Sydney

Median Rents per week in Sydney

                         
 

Houses 2-bedrooms

Houses 3-bedrooms

Units 1-bedroom

Units 2-bedrooms

 

All Sydney

Inner

Middle

Outer

All Sydney

Inner

Middle

Outer

All Sydney

Inner

Middle

Outer

All Sydney

Inner

Middle

Outer

1990

165

214

190

143

189

271

220

171

138

149

129

116

169

194

161

144

2000

220

350

250

180

230

430

290

210

240

270

185

155

250

335

220

205

2015

420

670

460

358

460

850

550

430

480

510

460

340

500

640

480

400

% change (’00-15)

90.9

91.4

84.0

98.9

100.0

97.7

89.7

104.8

100.0

88.9

148.6

119.4

100.0

91.0

118.2

95.1

% real (’00-’15)

24.8

25.1

20.3

30.0

30.7

29.2

24.0

33.8

30.7

23.5

62.5

43.4

30.7

24.9

42.6

27.5


1st Quartile Rents per week in Sydney

                         
 

Houses 2-bedrooms

Houses 3-bedrooms

Units 1-bedroom

Units 2-bedrooms

 

All Sydney

Inner

Middle

Outer

All Sydney

Inner

Middle

Outer

All Sydney

Inner

Middle

Outer

All Sydney

Inner

Middle

Outer

2000

170

300

220

160

195

360

250

189

175

220

160

120

195

280

185

150

2015

350

600

410

320

400

725

490

385

395

440

380

260

410

550

405

330

% change

105.9

100.0

86.4

100.0

105.1

101.4

96.0

103.7

125.7

100.0

137.5

116.7

110.3

96.4

118.9

120.0

% real

34.6

30.7

21.8

30.7

34.1

31.6

28.1

33.1

47.5

30.7

55.2

41.6

37.4

28.4

43.1

43.8

Source: NSW Department of Family and Community Services, Rent and Sales Reports.

Table 2.3 Changes in dwelling prices 2000-15

 

House prices

Unit prices

 

All Sydney

Inner

Middle

Outer

All Sydney

Inner

Middle

Outer

% change

139.5

227.5

202.6

152.0

123.0

124.9

134.0

116.2

% real

56.5

114.0

97.8

64.7

45.8

47.0

52.9

41.3

Table 2.3 shows real changes in house and unit prices between 2000 and 2015. Real house prices rose by about 56% and unit prices by 47%. Actually house prices rose by well over 56% in all rings. The lower increase overall reflects the increase in house sales towards the outer ring.

Clearly housing prices rose significantly more than rents. This reflected the large fall in interest rates which lowers the real cost of home ownership and investment considerably as discussed below.

Estimates of quality changes, housing depreciation and real house price changes

However, to estimate real house price changes for a given quantity and quality of housing, it is necessary to net out changes in size and quality of dwelling.

Households make large expenditures on alterations and additions equivalent annually to about 40% of total expenditure on new houses. Allowing for these expenditures, Abelson and Chung (2004) estimated that average housing quality rises by about 1% per annum and that to obtain a constant quality house price index over time, nominal house price changes should be discounted by 1% in addition to discounting for general CPI changes.

This is a modest amount compared with the ABS (2010) report that the average new house size in Australia increased by 33% from 183m2 to 245m2 over 15 years between 1993-94 and 2008-09. On the other hand, the median house price also reflects the gradual movement of households further from the CBD, so that it is not a constant location measure.

In a note to the consultant, Dr. Stapledon (UNSW) advised that he has estimated a 0.95% quality increase per annum. Such an increase would be consistent with the rise in real incomes that would lead to more expenditure on housing. Allowing for a 1% increase per annum in real dwelling prices, the real increase in median housing prices between 1990 and 2015 was about 85%, not 136% as in Table 2.1.

It follows also that the increase in rents after allowing for inflation may also overstate the real increase for a constant quality dwelling.

Housing stock and completions in Sydney

The total housing stock in Greater Sydney increased by 35.8% from 1.37 million dwelling units in mid-1991 to 1.86 million units in mid-2015. This includes about 1.73 million private dwellings and nearly 127,000 social housing units. About two-thirds of dwellings are owner-occupied and one-third rented.

Table 2.4 shows the numbers of completions and the rates of change over key periods from 1990-91 to 2014-15. More detail is given in Table A.3 in Annex A.7

Private housing completions averaged just over 22,000 new dwelling units per annum between 1990-91 and 2013-14. This represented an average increase in the housing stock of 1.42% per annum. As shown in Table 2.4, the average number and rate of completions was above the long-term average between 1990-91 and 2005-06. However, completions fell significantly between 2006-07 and 2013-14 with very low growth in stock between 2007-08 and 2011-12. This may have reflected in part the relatively flat house prices in the period around the Global Financial Crisis.

Table 2.4 Private housing completions in Sydney: 1990-91 to 2014-15

Year range

Average private completions p.a.

Average completions p.a.
as % of total stock

1990-91 to 2013-14

22,083

1.42

1990-91 to 1999-00

24,956

1.71

2000-01 to 2005-06

24,465

1.53

2006-07 to 2013-14

16,706

0.98

2014-15

28,314

1.53

Source: See Annex Table A.3.

Value of the housing stock, completions and annual turnover

Valuing the housing stock conservatively on the basis of median dwelling unit prices, the total value of the housing stock in Sydney in 2015 is about $1,225bn. This includes $1,174bn of private housing stock (1.73m dwelling units @ $679,000 per unit) and $51bn of social housing stock (128,000 units @$400,000).

Allowing for a 4% rent or imputed rent, the use value of the private housing stock would be $49bn per annum.

At an above average completion rate of 25,000 dwellings per annum, the value of new completions would be about $17.5bn per annum (25,000 dwellings @ $700,000).

Allowing an annual turnover rate of 100,000 (about 6% of the market stock), the capital value of annual turnover would equal $68bn.8 First home owners make about one-fifth of the purchases.

Dwelling utilisation rates

Table 2.5 shows utilisation rates for the dwelling stock with spare rooms defined conservatively as number of bedrooms in excess of persons in dwelling. As shown, spare bedrooms range from 16.4% of the stock for private rentals up to 25.6% for owner occupied homes. The spare room rate is 17.6% for community housing rising to 21.6 % for public housing.

The policy question is how much this reflects private choices for use of housing space in an efficient market or distortions due to high transaction costs. There should be little inefficiency in the competitive private rental market where there are 16.4% “spare rooms”. Investors set a market rent and customers determine use of the rooms. Some people prefer rooms for visits of friends and relatives or entertainment or study. Among home owners, some purchasers plan additional space for a growing family without moving. Also, the Greater Sydney Region includes the Central Coast and Blue Mountains where some households have holiday homes. Allowing for home owners having a higher income and demand for housing space, assuming say 18% to 20% as a market preference, there is significant inefficiency in owner-occupied housing associated most likely with high movement/ transaction costs, as well as some inefficiency in use of public housing. Reducing transaction costs is a potentially significant response to this market failure (see Section 5.5).

Table 2.5 Utilisation rates of housing stock

Landlord type

Spare bedrooms ('000s)

Spare
as % total bedrooms

Private rental

239.4

16.4

Public housing

54.8

21.6

Community housing

6.6

17.6

Owner occupied

1409.1

25.6

Source: NSW Treasury research based om 2011 Census data.

Population, number of households

Table 2.6 shows the population of greater Sydney from 1991 to 2014 and the annual growth rates for various periods. Over this period the population grew by 31.8% from 3.67 million to 4.84 million. This represented an annual growth rate of 1.2%. Growth averaged only 0.7% p.a. between 2001 and 2006 but the rate doubled to 1.5% p.a. after 2006.

Thus the population growth rate doubled in the very period when housing completions fell below 1% p.a. SERC (2015, p.39) also noted that, between 2001 and 2011, the Australian population grew by 15.9% while the housing stock increased by only 15.2%. Thus the rise in house prices in recent years is explained partly by national trends in population growth, associated especially with the resources boom and a high increase in overseas students, combined with relatively low new completions.

Table 2.6 Sydney and Australian Population

Year

Sydney

% p.a. growth

Capital cities

% Sydney

Australia

% Capital cities

1991

3,672,914

 

11,165,682

32.9

17,283,302

64.6

1996

3,856,646

1.0a

11,785,446

32.7

18,221,672

64.7

2001

4,102,580

1.2a

12,526,973

32.7

19,272,117

65.0

2006

4,256,161

0.7a

13,344,725

31.9

20,448,587

65.3

2011

4,608,949

1.5a

14,736,773

31.3

22,336,907

66.0

2012

4,676,118

1.5

15,029,775

31.1

22,728,254

66.1

2013

4,756,398

1.7

15,337,981

31.0

23,125,868

66.3

2014

4,840,628

1.8

15,626,975

31.0

23,490,736

66.5

(a) Over previous five years.

Sources: ABS 2014, 3105.0.65.001; ABS 2015, 3218.0.

However, the population of Sydney fell as a proportion of the population in all capital cities from 32.9% in 1991 to 31.0% in 2014.

In Sydney there were 1.68m households in 2011 with an average household size of 2.7. The average household size for Australia was 2.6 with the average only 2.4 in Adelaide and Hobart, possibly reflecting lower dwelling prices.9

Household income and wealth

As shown in Table A.4 in Annex A, median disposable household income in Sydney rose in nominal terms by 175% between 1990-91 and 2014-15. Mean disposable household income rose by 187%. Allowing for an 82% increase in the CPI over this period, real median disposable household income rose by 51%. This is an annual increase in real household income of about 1.8% p.a.

Since 2000, the median nominal household income has approximately doubled. This is closely in line with the rise in rents over this period (see Table 2.2).

Table 2.7 shows gross household income and wealth in the capital cities, based on sample households. This indicates that gross median household income in Sydney is 13% higher than in Melbourne and 11% higher than in Brisbane, the two most comparable capital cities. But household wealth in Sydney, including housing, is only 2.9% higher than the Australian average.

Table 2.7 Gross household income per week (Y) and wealth in capital cities (2011-12, $)

 

Sydney

Melbourne

Brisbane

Adelaide

Perth

Hobart

Darwin

Canberra

All

Mean Y

2181

1925

1967

1677

2198

1635

2252

2395

2032

Median Y

1726

1568

1534

1308

1695

1312

1969

2124

1612

% Difference

26.4

22.8

28.2

28.2

29.7

24.6

14.3

12.8

26.0

Wealth

803,802

813,417

705,265

686,578

788,983

668,172

792,735

929,784

781,028

Source: ABS, Household Income and Income Distribution, 2011-12 (sample households).

Table 2.8 shows that there has been a significant increase in income inequality as measured by the P90/P10 ratio and the Gini Coefficient in NSW, as has occurred across Australia, but no increase as measured by other statistics. This suggests increasing inequality at the top and bottom of the income range, but less change in the middle of the income range.10

Table 2.8 Income distribution across NSW

 

1995-96

2000-01

2005-06

2011-12a

P90/P10

3.96

4.31

4.23

4.15

P80/P20

2.73

2.76

2.69

2.68

P80/P50

1.63

1.57

1.60

1.55

P20/P50

0.60

0.57

0.60

0.58

Gini coefficient

0.312

0.325

0.327

0.331

(a) These estimates include some changes in measurement and so are not strictly comparable with estimates for earlier years.

Source: ABS, 6523.0, Household Income and Income Distribution, 2011-12.

Expenditure by non-residents (foreign interests)

In a review of foreign investment in residential real estate, Gauder et al. (2014) conclude that:

“The available data, while incomplete, suggest that for much of the past decade or so approvals granted for foreign investment in the residential sector have remained around 5–10 per cent of the value of dwelling turnover in Australia, and perhaps half that share of the total number of dwellings turned over. The actual level of foreign purchases of dwellings has been significantly lower. Foreign purchases appear to be most concentrated in new rather than established dwellings, in higher- rather than lower-priced dwellings, in medium- and high-density dwellings rather than detached dwellings, and in inner-city areas of Sydney and Melbourne rather than other locations.”

According to statistics from the Foreign Investment Review Board, approvals for foreign purchases in residential real estate in Australia escalated substantially from $34.7bn in 2013-14 to $60.8bn in 2014-15. Of this about $50bn was for new homes and $10bn for existing homes. Of the 2014-15 total, 40% was Chinese. As noted, actual investment is less than approvals. Allowing a 33% discount for actual expenditure and an allocation of 35% to Sydney, foreign investment in Sydney residential real estate would have been $14bn in 2014-15 compared with an estimated annual turnover of $68bn (see above). If this is the case, foreign purchases have been a major factor in recent rising housing prices.11

These are just the formal foreign purchases. Purchases through various informal processes doubtless added significantly to these.

Property and related tax revenues

Table 2.9 shows state and local tax revenues from real estate in NSW, including commercial as well as residential real estate. These tax revenues have risen from $5.4bn in 2000-01 to around $14bn a year currently.12 Details of state government expenditures on housing are given at various other points in the report.

Table 2.9 Tax revenues from real estate in NSW ($m)

 

2000-01

2005-06

2010-11

2011-12

2012-13

2013-14

2014-15b

Stamp duties

2,267

3,237

4,045

3,764

4,568

6,045

7,290c

Land taxesa

929

1,717

2,289

2,350

2,333

2,335

2,497

Municipal rates

2,168

2,638

3,303

3,445

3,624

3,790

 

Other

56

61

111

120

116

128

 

Total

5,420

7,653

9,748

9,679

10,641

12,298

 

State land tax. (b) Budget estimates. (c) 79% residential and 21% commercial property.
Source: NSW Treasury.

2.2 Determinants of House Prices

Like any market, house prices are determined by demand and supply. However, house prices are determined differently from the prices of most other goods because housing supply changes slowly. Existing housing typically accounts for around 98.6% of the housing stock and new housing for 1.4% of the total stock on average each year. Thus new supply has little immediate impact on house prices.

Also total housing supply responds slowly to changes in prices. Gitelman and Otto (2012) estimate a supply side elasticity of 0.33 for all housing stock in Sydney compared with an elasticity of 0.55 for all Australia. An elasticity of 0.33 means that an increase in real house prices of 10% may lead to an increase in housing stock of just 3.3%.13 This reflects in large part strong regulatory controls.

These observations are illustrated in Figure 2.2. As noted, total housing supply is quite price inelastic (with an elasticity of about 0.33) and the stock of housing changes only a small amount with new completions.

Drawing on the extensive review and research by Albouy et al. (2013), the price elasticity of the demand for housing can be expected to be in the order of –0.8. The demand (curve) for housing can also shift considerably with changes in income, interest rates and expected house prices. Thus prices react more strongly to changes in demand (Panel A) than to changes in supply (Panel B).

The primary drivers of demand are population, income, interest rates (especially) and foreign demand. Also financial deregulation and higher loan to valuation ratios increases the demand for housing (RBA, 2014, p.6). Andrews et al. (2011) estimated that financial deregulation may have translated into 30% increases in house prices in some OECD countries.

In an analysis of 20 studies across 12 counties Girouard et al., (2006) found the following drivers of real house prices (i.e. prices after allowing for inflation) reported as elasticities:14

● Real house prices to real disposable household income = 1.9 (for 20 studies).

● Real house prices to real interest rates = -3.1 (for 18 studies).

● Real house prices to housing stock = -3.1 (for 10 studies).

Abelson et al. (2005) obtained similar results from a model of average Australian house prices from 1970 to 2003 which included the housing stock. Major findings were:

● Real house prices rose by 1.7% for each 1% increase in real disposable income per capita (i.e. elasticity = 1.7).

● A 1% rise / fall in the real mortgage rate led to a 5.4% fall / rise in real house prices. Note that this is estimated in absolute terms; it is not an elasticity estimate. If interest rates fell from 10% to 9% (typical values for much of this period), this implies and elasticity of -0.54%.

● A 1% increase in housing per capita led to a 3.6% fall in real house prices (i.e. an elasticity of -3.6). Note that this occurs if demand is held constant.

● Expectations of real capital gains also explained the demand for housing.

Applied Economics

Figure 2.2 – The housing market

The main difference is that Abelson et al. estimated lower price elasticity with respect to interest rates. But this variable had the greatest reported variance in Girouard et al. with elasticities from close to 0.0 in 4 studies to over -7.0 in 3 studies. In any case, an elasticity of –0.5 applied to a 25% fall in interest rates from 5% t0 4% would indicate realistically a rise of some 13% in house prices.

However, a city housing market has at least one important difference from a national housing market. The demand for housing also reflects relative inter-city house prices. If an increase in housing supply reduces relative prices in one city, other factors held constant, demand for housing in that city will increase (there will be a move along the demand curve) until price relativities are broadly restored.

As seen above, house prices in Sydney have been 40-50% higher than in other Australian capital cities for three decades of more. This is a common phenomenon for major coastal cities, such as Vancouver or San Francisco. As Kohler and van der Merwe (2015) noted, key factors are land supply limited to 180 degrees because of the coast line and major waterfront amenity impact. Sydney is the major centre of economic activity in Australia15 and attracts high income earners. Sydney has a highly preferred climate, extraordinary access to beaches and waterways dominated by the Harbour through the center of the city, and attractive views and abundant vegetation across much of the city.16 In this paper, this is called the “amenity premium”.

Dwelling prices can be reduced to some extent by increasing housing supply. However, two major caveats are needed.

First, completion rates of around 22,000 dwelling units a year represent just 1.4% of the housing stock. An additional 10,000 units would represent 0.6% of the housing stock. These changes will have only marginal influence on house prices in Sydney. Using a price supply elasticity of –3.0, a 0.6% increase in housing supply would reduce house prices by 1.8%.

Second, the only way to reduce relative house prices in Sydney significantly is to make the city relatively less attractive. The greater the dwelling density and the loss of urban amenity, the lower will be the house price premium for living in Sydney.

2.3 Some Important Issues

In this section, I discuss some key issues that affect policy development. These include:

● Market efficiency, regulations and the role of government

● The price and cost of new housing

● The incidence of housing subsidies and taxes

● Location, transport infrastructure and house prices

● Inter-city welfare equilibrium and city house prices

Market efficiency, regulations and the role of government

A competitive housing market would be efficient. It would provide households with the housing in the amounts, quality and locations that they want, given their income, at least cost (at least after a short supply lag). A key role for government is therefore to ensure that the market is efficient.

Actually, housing construction in Sydney, as in other Australian cities, is competitive. A large number of firms compete to develop land and produce housing and the market is generally well-informed. Thus the production of housing is largely efficient.17

It is sometimes suggested that the imbalance between household size and dwelling unit size indicates a market failure. In 2011 in Sydney, 44% of households were lone or 2-person households, whereas about 25% of dwelling units were 2 bedrooms or less. But the cost of an extra bedroom is pretty small and it would be surprising if developers would add a bedroom if there were little demand for it.

However, infrastructure markets for some services (notably water and wastewater) are not competitive. Thus some infrastructure services may not be supplied in time or at lowest cost.

Market failures can also occur due to amenity and environmental externalities which housing suppliers may ignore in maximising profits from housing development. These externalities are core reasons for planning regulations that aim to ensure a balance between housing and environmental objectives.18

However, the regulations can themselves create inefficiencies when they restrict developments inefficiently (where household willingness to pay for housing exceeds all the associated costs of the housing). Glaeser and Gyourko (2003) found that restrictions on building in established areas were major causes of house price inflation in U.S. cities.

Quite separately, government has a role in assisting vulnerable and low income households who do not have the means or income to obtain adequate housing through the market system.

The price and cost of new housing

The prices of new houses are determined essentially by the market value of the services provided by new houses relative to the services provided by the existing housing stock. This market value often exceeds the sum of the costs incurred in production of housing: real land costs, land servicing, related infrastructure, construction and selling costs. This excess is known as “economic rent” or “surplus”. Where the various components of the building supply chain are competitive, the excess of market prices over real opportunity costs (the economic rent) accrues to landowners in the form of high land values.

This means that the price of new housing is in general not determined by the cost of supplying new housing including the real value (opportunity cost) of the land. This has some important policy implications.

Importantly it is the quantity of new housing that impacts on prices across the housing market, albeit in a minor way, not the cost of new houses. For any given supply of housing, the cost of new housing has no impact on the price of second hand housing. However most first-home buyers purchase second-hand homes. They benefit if other households purchase new homes and release housing supply on to the market. This is known as the filtering principle.

The incidence of housing subsidies and taxes

Subsidies and taxes are prominent in the housing market and are a significant issue for housing policy. Of special interest is the incidence of subsidies and taxes as this has many applications in this paper.

Policies that increase housing demand across the whole market, or any part of it, without increasing supply will increase house prices and disadvantage anyone who does not receive the subsidy. This is shown in Figure 2.3. In this case, a general subsidy increases the demand for housing from D1 to D2. There is a small increase in housing with higher house prices (a move along the supply curve over say 5 or more years) as new houses are a small part of the total housing market. There is no shift in the supply curve. House prices increase from P1 to P2, with most benefits accruing to existing home owners and investors. Households entering the market receive a small net subsidy equal to P1 - Ps.

On the other hand, if only a small group of households receive a significant subsidy, there would be a small shift in the demand curve and small increase in house prices. The subsidised households would get a significant benefit.

Applied Economics

Figure 2.3 – The impacts of general housing subsidies on house prices

It is a basic theorem of public finance that taxes imposed on, or subsidies received by, either producers or consumers are actually borne, or received, by both producers and consumers according to the relative price elasticities of demand and supply (ηs and ηd) respectively. Working with a subsidy (S), the proportions of the subsidy accruing to producers (ΔPc/S) or to consumers (ΔPs/S) are shown by Equations (2.1) and (2.2) respectively.

ΔPc/S = ηs / (ηd + ηs) (2.1)

ΔPs/S = ηd / (ηd + ηs) (2.2)

The incidence would be the same if the subsidy were paid to consumers. The incidence is independent of who receives the subsidy (or who bears the tax)

Now suppose that housing supply has a price elasticity of 0.33 and housing demand a price elasticity of –0.8m as noted on page 24. Equations (2.3) and (2.4) show that producers would receive 71% of the subsidy and consumers 29% of the subsidy.

ΔPc/S = ηs / (ηd + ηs) = 0.33 / (0.8 + 0.33) = 0.29 (2.3)

ΔPs/S = ηd / (ηd + ηs) = 0.8 / (0.8+ 0.33) = 0.71 (2.4)

Location, transport infrastructure and house prices

Figure 2.4 shows a simplified urban model of house prices as a function of transport (commuting) costs. For a given quality house and environment, house prices fall with commuting costs as people travel further to work in the CBD. This sets up an internal house price / transport cost equilibrium across the city. Households with a given income are equally well off wherever they locate.19

The Figure has two versions. In Panel A, the urban fringe is fixed. In Panel B, the urban area expands with improved transport. In both cases, the P1P1 line shows the initial equilibrium set of house prices. Note also that in both cases we are assuming generic improvements in the transport system, rather than specific improvements in one or two directions. However, the general principle that transport improvements are capitalized in higher house prices remains a sound one.

Under the fixed fringe scenario in Panel A, for a given population, a significant reduction in transport times changes the house price gradient to the P2P2 line. Households further from the CBD are paying more for housing whereas the premium for access to the CBD has fallen. However, as city amenity is unchanged, more people move into the city and a new house price gradient is established along the P3P3 gradient (which is parallel to the P2P2 line). Thus improved transport infrastructure leads to higher house prices reflecting both local and incoming demand. The beneficiaries are existing property owners. New home buyers and renters are compensated for the higher house prices and rents by improved transport.

Alternatively, in Panel B, the urban area expands from F1 to F2 as the cost of travel to the CBD falls and the city population expands with improved infrastructure.20 The P2P2 line is everywhere above the P1P1 line, except at the city centre where house prices are unchanged. Again, existing property owner are the beneficiaries and other households pay for the improved transport.

Applied Economics

Figure 2.4 House prices and transport infrastructure location

Inter-city welfare equilibrium and city house prices

Another fundamental issue noted above is the concept of inter-city welfare equilibria and their impacts on house prices. At the margin, equivalent households have equal welfare in each city. Welfare is typically a function of income, commuting (access to work) costs, house prices and amenity. Amenity includes climate, space, access to water, views and vegetation. To achieve welfare equilibria, house prices are higher in cities that offer higher wages and relatively high amenity.

Households choose the city to maximize their welfare. Some households choose cities with high house prices and high commuting costs because the perceived amenity of the city offsets the high prices and commuting costs. Transaction costs of moving may mean that some households feel they would be better off in another city or location but may not move. However, broadly households with a given capacity to earn will be as well off in one city as another (there is a marginal welfare equilibrium).21

This means that housing prices in Sydney are a national problem. Without lower house prices in other cities, lower prices in Sydney would upset the marginal equilibrium and lead to more immigration into Sydney. If there is disequilibrium and marginal household welfare is higher in one city than another, some households move and equilibrium at the margin is restored. Of course, this does not happen instantly. Also many households have intra-margin rents. Nevertheless, there is always a pull towards the equilibrium.

Suppose that a large increase in housing reduced house prices in Sydney by 10 per cent and that house prices in other cities were unchanged. If housing costs are 30 per cent of household income, this would represent a 3 per cent increase in real income. Households from other cities would move to Sydney. Sydney house prices would rise and prices elsewhere fall until the inter-city equilibrium would be restored (or marginally modified). The end result could be a fall in house prices everywhere by some 2 per cent (given that Sydney is about one fifth of the national population). The reverse happens when house prices in Sydney rise and households migrate out to other coastal areas.

3.1 Housing Costs and Affordability: Key Concepts

As noted in the Introduction, this paper discusses three main housing affordability issues:

● General affordability: the cost of housing to the population generally, sometimes summarized as the cost of housing to the median income household.

● Affordable housing: the provision of appropriate housing affordable to households in the lowest two income quintiles.

● Social housing: the provision of appropriate housing to vulnerable households with very low income.

The second and third categories apply mainly to renting households; the first category to home owners.

In assessing affordability, a major issue is the measure of the real cost of housing. For renting households, housing cost is essentially the rent per period. This excludes household maintenance costs incurred by rental households. More critically, it excludes journey-to-work costs which, as discussed in Section 2.3, are arguably part of the cost of housing in any particular location. We return to this issue at various points below.

Measuring housing cost for owner-occupied housing is more complex. Several proxy measures, such as house price/income ratios and mortgage repayments as a proportion of household income, are simplifications and to some extent misleading. The real cost of owner housing is discussed in detail in section 3.3.

Turning to affordable housing, the NSW Affordable Housing Guidelines (2013) describe affordable housing as “housing that is appropriate for the needs of a range of very low, low and moderate income households, priced to ensure households are able to meet other essential basic living costs”.22 This description relies on judgments about what constitutes “appropriate” housing and “essential basic living costs”. These concepts need definition if the extent of the problem is to be accurately identified. Housing location is a key issue. Housing may be affordable in some parts of the city but not in others. Note also, household income is usually defined as very low, low or moderate if below 50% of the median, between 50% and 80% of the median and between 80% and 120% of the median respectively. This brings in over half the population.

In a lengthy review of housing affordability, the Senate Economics Reference Committee (SERC, 2015, pp.9-25) recognized that the definition of housing affordability is unresolved, but concluded by endorsing the 30/40 principle. The 30/40 principle states that housing is “unaffordable” when a household in the lowest two income quintiles (in the lowest 40%) spends over 30 per cent of their disposable income on housing. These households are often described as under housing stress (e.g. SGS, 2015a). Others endorsing this measure include the Australian Council of Social Services (2007), Marks and Sedgwick (2008) and Spiller and Anderson-Oliver (2015).

It should be noted that this definition of affordability is based on disposable household income. This includes all sources of household income but is net income after tax. For practical (data) reasons, many estimates of housing affordability relate to gross household income. For most households in the first quintile, differences between gross and disposable income are very small.

Another issue is the comparability of households which differ in size, composition and consumption needs. In welfare economics, such differences are allowed for by estimating equivalised household income (ABS, 2015).23 The aim is to determine the income required to meet equivalent consumption needs across households. Following standard ABS / OECD metrics, equivalised income is estimated by allowing 1.0 for one adult, 0.5 for a second adult in the household and 0.3 for each child. For example, a disposable income of say $24,000 for a single person would equate to an income of $38,000 for a household with two adults and one child. The concept of equivalised households is important in provision of welfare assistance, but not readily available for deriving conclusions on housing affordability.

Of course, the 30% expenditure benchmark is an arbitrary standard. It does not appear to have been based on evidence of distress such as defaults on payments due. In any case, decisions about house size, quality and location are matters of choice, as is the number of people in a house or unit. For any given level of household income and composition, some households choose to spend more, and others less, on housing. It should not be inferred that the former group is less well-off than the latter because it spends more on housing. A measure of 50% is sometimes used for severe housing stress to seek to identify those most likely to be in need.

A further issue with a simple 30/40 test is that housing stress is measured at a point in time. As shown below (Figure 3.3), many households are in temporary housing stress, sometimes as a matter of short-term choice to take on relatively high housing payments, and they move out of the situations after one or two years as their income increases. This means that being in ‘housing stress’ is financially sustainable for some households.

As shown in Table 3.1, Rowley and Ong (2012) found that while most households in stress reported they were ‘just getting along’ or ‘poor or very poor’, 45 per cent considered themselves ‘reasonably comfortable’ or ‘very comfortable’. In 2011, Rowley et al. concluded that “policy-makers wishing to make the housing stress measure more meaningful could narrow their focus towards people experiencing higher level housing stress, long durations of housing stress, or those who experience housing stress because of constraint rather than choice.” Their report identified some very vulnerable groups within the 30/40 cohort including the 25% who could not raise $2,000 in an emergency, 15% who could not pay rent on time, and 13% who went without meals.

Turning to social housing, this is essentially heavily subsidized rental housing for eligible vulnerable households. Most social housing is owned and managed by the State Government. Community housing providers own a small amount of social housing and manage some state-owned (public) housing. Section 7.1 provides more detail and analysis.

Applied Economics

Source: Rowley and Ong (2012).

Figure 3.1 Household views of well-being in relation to “housing stress”

3.2 Housing Affordability for Renters

Noting the caveats above about measures of housing affordability, there are three main measures for renting households.

1. General affordability: median household rent as a percentage of median household income.

2. Affordable housing: the percentage of households in the lowest two quintiles who pay more than 30% of their income (gross or disposable) on rent.

3. Affordable housing: the percentage of housing stock renting at rates less than 30% of gross household income for the lower two income quintiles.

General affordability: median household rent as percentage of median household income.

SGS Economics (2015a) describes a general rental affordability index (RAI) for Sydney given by Equation (3.1).

RAI = 100 (median gross household income) / (median rent per week 3.33) (3.1)

Given this equation, RAI < 100 implies that a median income household has to spend more than 30% of their gross income for a median rent housing and housing could be described as not affordable.

Drawing on ABS 2011 Census income for households and extrapolating at changes in average weekly earnings to 2015, SGS estimated RAI = 108. This indicates that the median household in Sydney would pay 28% of their gross income for a median rent housing unit.

Table 3.1 shows median household rent for four types of housing across Sydney as a percentage of gross and disposable household income. It may be noted that median rents are higher for units than for houses, reflecting the high proportion of units in inner and middle ring locations.

The results are also sensitive to the comparator: gross or disposable household income. Median rents are around 25% of median gross household income. However, they are slightly above 30% of median disposable household income for 3-bedroom houses and 1-bedroom units and more significantly above 30% for 2-bedroom units.

As we saw above, both median rents and median household income have approximately doubled since 2000. This suggests a fairly stable relationship between median rents and median household income.

Table 3.1 – Median household income and rents

   

House
2 bedrooms

House
3 bedrooms

Unit
1 bedroom

Unit
2 bedrooms

   

Median rent per week for whole of Sydney ($)

   

$400

$450

$460

$495

Income

Median household income per week $

Median rent as % of median household income

Gross

$1,865

21.4

24.1

24.7

26.5

Disposable

$1,442

27.7

31.2

31.9

34.3

           

Sources: NSW Department of Family and Community Services, Rent and Sales Reports and Table A.4 in Annex.

Households with low or very low incomes paying over 30% of household income on rent

Various sources provide estimates of the number of low and very low income households paying over 30% of (gross) household income on rent.

As shown in Table 3.2, ABS (2015) estimated the proportion of low income households in Sydney paying more than 30% of their gross income in rents rose from 42.6% in 2007-08 to 54.4% in 2013-14. In this case, the ABS defined low income households as “the 40 per cent of households with equivalised disposable household income, excluding Commonwealth Rent Assistance, at or below the 40th percentile”. Drawing on the ABS data, assuming that 300,000 of the 475,000 low income renting households in NSW were in Sydney, then about 150,000 low income renting households in Sydney were in housing stress in 2013-14. This is comparable with the SGS (2015b) estimate that 43.4% of low income households in private rental housing in Sydney in 2011 were in housing stress, or in absolute number that 121,338 out of 279,373 low income renting households in Sydney were in housing stress

Table 3.2 Low-income rental households paying over 30% of gross income in rent

Location

2007-08

2009-10

2011-12

2013-14

Sydney (%)

42.6

46.9

43.4

54.4

Rest of NSW (%)

44.8

40.6

35.0

29.0

All NSW households (%)

43.4

44.5

40.6

43.3

Estimated number of low income rental households,
NSW ('000)

396.4

387.0

421.2

475.4

Source: ABS 2015, 4130.0 Housing Occupancy and Costs 2013-14.

As shown in Figure 3.2, the Department of Planning and Environment (DPE) also found a large proportion of low income households paying over 30% of income in rents. Drawing on 2011 census data, DPE found that over 90% of renting households on very low income and 70% of renting households on low incomes were paying more than 30% of income in rents.

Applied Economics

Source: DPE 2015, Overview of Affordable Housing.

Figure 3.2 – Estimates of very low, low and moderate income households in rental stress

However, as shown in Figure 3.3, drawing on national data24 Wood et al. (2014) found that 73% of Australian households in housing affordability stress escape from it in 12 months and 90% escape in 24 months. Changes in income are the key driver. As Wood et al. observe, “year to year escapes are disproportionately driven by changes in income”, The escape percentage may likely be lower in Sydney given the higher rents in Sydney.

Applied Economics

Figure 3.3 Probability of escaping housing stress

Housing stock renting below 30% of household income of low and very low income households

An alternative approach to estimating housing affordability is to estimate the proportion of housing stock available at rents below some percentage (say 30%) of household income. This gets around the issue that some households choose to spend more than 30% of their income on housing.

Hulse et al. (2014) point out that in many parts of Australia, especially in Sydney, the number of low income households significantly exceeds the number of low rent dwelling units. A low rent dwelling unit is defined as a unit where the rent is up to 30% of the income of low income households. They estimate that the shortage of available stock is about 52,000 dwelling units for first quintile households and 40,000 for second quintile households.

Figure 3.4 shows the proportion of affordable rental housing for low and very low income households. This suggests that very low proportions of rental housing are affordable.

Applied Economics

Applied Economics

Source: Family and Community Services.

Figure 3.4 Declining supply of affordable rental housing in Sydney and NSW

3.3 Housing Affordability for Home Owners

Housing costs and affordability for home owners: preferred measure

The real cost of owner-occupied housing is more complex. In the economics literature the cost of consuming a durable good over any period is the dollar value of other consumption goods foregone while leaving the household’s net wealth unchanged in real terms (i.e. the same at the end of the period as at the beginning after allowing for inflation). This is known as the real user cost of durable goods, including housing. In this paper this is described simply as the real cost of housing (RCH).

Drawing on the classic paper on housing user costs by Poterba (1984) and the more recent Australian paper by Fox and Tulip (2014), the RCH per annum equals the sum of real interest payments on a housing loan (mortgage), real income foregone after-tax on own equity in the dwelling, house running costs (maintenance, repairs and insurance), transaction costs, property taxes less any positive change in the real value of the dwelling. This assumes a constant quality property with maintenance offsetting any depreciation. This measure is based on the real interest rate and change in house prices rather than on nominal charges or changes.

Equation 3.2 shows the real cost of housing per annum.

RCH = P.α.rm + P(1-α).re + P (r+t+pt - ra) (3.2)

where

P = house price at start of year,

α = mortgage loan as percentage of house price,

rm = the real mortgage (borrowing) rate,

re = the real rate of return after tax on owner’s equity foregone

r = running costs p.a. as a percentage of house price,

t = transaction costs p.a. for the buyer as percentage of house price

pt = property taxes p.a. as percentage of house price

ra = real appreciation for a constant quality home as percentage of house price.

To illustrate, suppose that P = $1.0m, a = 0.8, rm = 6.0%, re = 2.0, r = 0.6, t = 0.4, pt = 0.5, and ra= 1.5. Results are shown in Table 3.3. In this hypothetical example, the total cost before real capital gain = $67,000. This falls to $52,000 (5.2% of the house price) after allowing for the real gain in capital value. Under this formulation, RHC also falls as the mortgage proportion (the gearing ratio) falls.

Table 3.3 The real cost of housing per annum (example)

Housing cost element

Formula and cost make up

Cost $ p.a.

Borrowing cost (interest payments)

P.α.rm = $1.0m 0.8 0.06

48,000

Cost of equity after tax

P(1-α).re = $1.0m 0.2 0.02

4,000

Running costs

P.r = $1.0m 0.006

6,000

Transaction costs (for the buyer)

P.t = $1.0m 0.004

4,000

Property taxes

P.pt = $1.0m 0.005

5,000

Total cost before real capital gain

 

67,000

Real capital gain

P.re = $1.0m 0.15

15,000

Total cost after real capital gain

 

52,000

Five other observations may be made. First, and critically, RCH excludes repayments of housing loans. Loan repayments do not change household net worth. Loan repayments increase the household’s equity in the dwelling and reduce other household assets by an equivalent amount. This is a significant issue. Many agencies and commentators on housing affordability include mortgage repayments as housing costs, for example the ABS (2015)25 and various affordability measures discussed below. In principle this is wrong for the reasons given. But the preferred measure assumes that markets will allow house buyers to maintain their original gearing if they wish to do so, which may not always be the case.

Second, RCH is estimated over a specified period, usually over a year. However, RCH varies with changes in interest rates, gearing and capital gains. Thus a longer term RCH may be a more relevant consideration for a household.

Third, most measures of RCH ignore journey to work costs. Households can trade housing costs for commuting costs. Say two households have similar incomes and composition. If one household spends more on housing and less on commuting than the other, the former household is presumably as well off as the household who spend less on housing and more on commuting.

Fourth, for any given type of housing, market rents may be expected to exceed homeowner RCH. This occurs because investor landlords will aim broadly to equate the after–tax return on rental property with the after-tax return on other investments including their own property. However, investors pay taxes on net rental income and realized capital gains in rental properties, which homeowners do not have to pay. Thus investors landlords need to obtain a higher pre-tax return from rental property than home owners do from their housing.

The fifth point concerns first-home owners. Affordability measures based on median prices and incomes are unlikely to reflect significant differences between existing and first home owners. Existing home owners often have significant equity from the sale of their home(s), which reduces their RHC. Many first-home owners have below median household incomes and purchase dwellings well below the median dwelling price just as first-time car owners usually buy low priced motor cars.

Estimates of affordability for home owners using preferred measures

Drawing on the above approach we estimate housing costs for median income existing home owners and first homeowners in Sydney from 1992 to 2014 as a percentage of the relevant disposable household income. Detailed estimates are shown in Table A.7. Summary results for 2000 to 2014 are shown in Table 3.4.

For ease of calculation, the estimates are made and shown in nominal values rather than real values and related to the relevant household income for each year.

The key assumptions for the median income household buying are:

● The purchase is financed 50% from a mortgage loan and 50% from own equity.

● The interest on the mortgage loan is the standard variable housing mortgage rate published by the Reserve Bank.26

● The nominal after-tax return on equity is based on 70% of bond rate plus 0.50 percentage points.

● Drawing on Fox and Tulip (2014), hosing running costs sum to 2.0% of property value based on property maintenance at 1.5% of property value and property taxes including sales duty averaged over 10 years at 0.5% of property value.

● Capital appreciation is based on a forward five-year average value per annum with the last five years levelled out at conservative price appreciation levels (as there are no forward data).

The results are that median existing homeowners are usually paying less than 30% of their disposable income on housing except when house prices are not appreciating significantly as occurred between 2003 and 2009. The results are sensitive to the treatment of capital appreciation.

For first-home owners, we assume that the median first-home owner has a household income 25% below median household income, purchases a dwelling 30% below median house price and borrows 80% of the house value. It is noted that these are not evidence based assumptions. First home owners, being more highly geared, are likely to pay a higher percentage of their income in home purchase. This means they may have to purchase lower-priced dwellings depending on their income capability.

This analysis suggests that median income home owners generally are not facing an affordability crisis although first home owners have to economise more on their purchase. The major reasons are the fall in interest rates, which greatly reduce user costs, and capital appreciation (see Table A.7). However, the results are sensitive to the assumptions employed, especially to capital appreciation.

Table 3.4 Housing user costs and household income

Year
June qtr

All dwellings: median total housing user cost p.a.
($’000)

All dwellings user cost as % of median disposable HH income
(%)

First home owner housing user cost
($'000)

First home owner housing user cost as % of FHO income
(%)

Median dwelling price to median gross household income (Ratio)

2000

-8.15

-22.84

-3.85

-14.39

6.26

2001

-5.58

-14.43

-1.59

-5.47

6.32

2002

1.97

5.10

3.47

11.96

7.33

2003

14.34

35.38

12.31

40.47

7.70

2004

28.19

61.41

22.44

65.20

6.98

2005

32.11

66.12

25.31

69.49

6.67

2006

18.52

37.02

15.73

41.94

6.45

2007

19.49

36.82

16.69

42.04

6.29

2008

19.44

33.15

18.64

42.37

5.48

2009

11.25

17.82

10.66

22.52

5.21

2010

19.01

30.50

17.25

36.90

6.40

2011

20.29

31.02

19.10

38.94

6.18

2012

15.70

23.12

16.03

31.48

5.91

2013

11.93

17.36

12.80

24.84

5.75

2014

19.16

25.55

18.67

33.20

6.69

Source: Table A.7.

This conclusion is supported by commentary in Reserve Bank (2015) which indicates that repayments on housing loans are not rising, arrears rates are low, and there is no evidence of systemic credit problems in the housing market.

Other measures of housing affordability for home owners

Other measures of housing affordability for home owners include:

● home ownerships rates,

● house price to household income ratios, and

● mortgage loan and interest payments as a percentage of median household income

As shown in Table 3.5, there has been a significant fall in the proportion of home ownership in Sydney since 2000. However, it is not clear to what extent this reflect a change in the relative cost of homeownership versus renting. In part the change reflects life-style choice and later marriage age. In 2010, the median age for first marriage for men was 29.6 years and 27.9 years for women, an increase of more than three years since 1990 (26.5 years and 24.3 years respectively). The change may also have been driven in part by (a) increasing incomes allowing young people to leave home earlier and (b) by a change in demographics with a large increase in overseas students.

Table 3.5 Home ownership and renter rates in Sydney (%)

Nature of tenure

2000-01

2005-06

2009-10

2011-12

2013-14

Owner without a mortgage

40.1

30.5

32.2

26.8

29.3

Owner with a mortgage

30.4

35.9

35.4

36.6

36.0

Total owners

70.5

66.4

67.6

63.4

65.3

Change in total owners (%)

 

-4.1

1.2

-4.2

1.9

Renters – public housing

5.0

5.4

4.0

5.1

3.2

Renters - Private landlord

22.6

25.0

25.6

28.0

28.4

Total renters

27.9

31.9

30.9

34.6

33.4

Change in total renters (%)

 

4.0

-1.0

3.7

-1.3

Note: It is not clear why the total of owner and rental properties do not add up to 100.0

Source: ABS, 6523.0 Household Income and Income Distribution, from 2000-01 to 2013-14 (titled 6523.0 Household Income and Wealth in 2013-14).

A popular measure of housing affordability is the house price – household income ratio. It is used by the respected Economist magazine and in the widely cited Annual Demographia International Housing Affordability Survey. The metric is simple and readily understood. However, it is a crude measure of affordability as it excludes many elements of housing costs, most notably changes in real interest rates and capital values. It is therefore of little use for inter-temporal comparisons of housing affordability.

Another widely used affordability measure is mortgage loan repayments and interest payments on a median price dwelling as a proportion of household income are another widely-used affordability measure. For example, the Housing Industry of Australia (HIA) produces the following index:

HIA index = Average weekly earnings 0.30 / mortgage repayments on median home price

Payments of principal and interest are calculated on a 25-year loan for 90 per cent of a median dwelling price in the relevant market. The HIA compares their estimated average mortgage repayments against 30% of average weekly earnings of an adult working full time rather than against household income. Housing is described as affordable if the index is greater than 100 and unaffordable if less than 100.

Moody's Housing Affordability Measure (HAM) is calculated as a proportion of the monthly loan repayment to the monthly average household income.

HAM = monthly loan repayment amount / monthly average household income

The repayment amount is calculated assuming the mortgage loan is (1) for a median price dwelling (2) has a loan to value ratio of 80%, (3) has a 25-year principal and interest mortgage term, and (4) has an interest rate equal to the average standard variable interest rate published by the Reserve Bank of Australia. The median dwelling price is based on housing sales over a one-month period (supplied by CoreLogic RP Data). Average household income is based on a two-income household with each income equal to the average income published by the ABS.

An increase in HAM indicates a decline in housing affordability. In March 2015, on these assumptions, Australian households with a new home loan needed 27% of their income, on average, to make such repayments. In Sydney households spent on average 35.1% of their income on repayments as of March 2015, up from 32.8% in March 2014.

As noted above, mortgage repayments are really savings which increase a household’s net worth; not real housing costs. However, where households are required to pay down their loan, notwithstanding rising nominal prices, lack of access to cash (liquidity constraints) for such payments may provide a barrier to home ownership.

3.4 Causes of Low Affordability

As has been seen, low affordability is principally a problem for housing renters rather than for home owners. Clearly, high house prices and rents and low household incomes are basic issues.

The main drivers of high prices were discussed in Chapter 2. Factors include Sydney’s high amenity premium, slightly higher than average incomes nationally, high international demand, low interest rates, financial deregulation and a low rate of housing completions over the last 15 years.

Increasing income inequality, especially in the first and tenth deciles, has made housing affordability especially stressful for very low income households.

SERC (2015, p. xviii) concluded that the lack of housing for low and moderate income earners “indicates market failure”. This is true in that there is a shortage of low priced housing. However, this does not mean that inefficient markets cause the affordability problem.

The housing market in NSW and in much of Australia is competitive and efficient. Many firms develop land and produce housing and the market is competitive and generally well-informed. Thus the production of housing is largely efficient, although the supply of related infrastructure may not be.

Housing prices rise due to planning restrictions on both the supply of land for housing and on urban densities (the application of capital to land) reduce the supply of housing and increase prices. Evidence of these restrictions is found in the differences in land values with and without development rights. However, a core issue is whether substantially increasing the supply of housing will erode, or even destroy, the amenity premium.

There are also numerous taxes and subsidies in the housing market. The impacts of these taxes and subsidies on households are discussed in various sections below.

3.5 Conclusions

There is a major housing affordability problem in Sydney for very low income households, most of whom are renting housing. For some people this is a temporary issue that is addressed by a move to higher income (e.g. unemployed get a job) or moving to lower rental (e.g. move to smaller property or one further out from CBD, or share rental).

However, for disadvantaged and vulnerable people this is often a long term problem. Only a very small proportion of the housing stock is available to very low income households for less than 30% or even 40% of their income including Commonwealth rent assistance. This contributes to various forms of deprivation of basic goods and services for these households, including children.

Housing affordability is a lesser problem for home owners principally because of low interest rates. Also housing purchase usually brings some gains in real wealth over time. Moreover, households can rent out part of their dwelling to offset costs especially in the first year or two of ownership.

However, some households may be unable to raise the required minimum equity deposit. Also for some households, an affordable dwelling may mean long journey-to-work times and costs which have not been factored into housing affordability costs.

This paper does not attempt to make forecasts or projections of the numbers of households in housing stress in the next few years or longer term. However, it can be safely assumed that the underlying factors are not likely to change substantially and quickly, so the present is a fair indicator of the near and medium term future in the absence of major economic or policy changes.

4.1 Existing Housing Policies

In this section we briefly describe the major existing housing policies of the Commonwealth and State Governments.

Commonwealth Policies

The main current Commonwealth policies relating to housing are the Specific Purpose Payment (SPP) for housing under the National Affordable Housing Agreement (NAHA), Commonwealth Rent Assistance, and various tax policies and concessions for housing.

NAHA aims “to ensure that all Australians have access to affordable, safe and sustainable housing that contributes to social and economic participation.” It is intended mainly to assist low and very low income households.

Under the SPP, NSW is receiving $422m in 2015-16. This has risen broadly with inflation from $388m in 2010-11. This funding is used primarily for maintenance and upgrade of public housing managed by the Land and Housing Commission (LAHC), some new public housing, housing provided by the Aboriginal Housing Office housing support services and specialist homelessness services.

The Commonwealth Government provides rent assistance to persons receiving an eligible social security payment. A person is eligible for rent assistance if he or she receives: a pension, an allowance or a benefit more than the base rate of Family Tax Benefit, subject to some special rules; To be eligible, you must be paying more than the minimum amount of rent shown in the payment rates table. Payments depend on household size and composition. Commonwealth Rent Assistance (CRA) is generally not payable to a person leasing public housing,27 although some tenants in the community housing sector are eligible. In 2014-15, the Commonwealth paid $1.41bn to 421,325 NSW households. This included about $80m to Community Housing Provider tenants.28

Various Commonwealth tax policies subsidise housing and / or encourage investment in housing and so tend to increase house prices (though not necessarily housing costs). These policies include tax deductions for investors for expenses including interest payments allowable against personal income (negative gearing), a 50% capital gains tax (CGT) on investor housing, and no taxation of net imputed rents or capital gains for home owners.

Past Commonwealth programs include: the National Building Stimulus Package (NBSP) to support construction of social housing (from 2009 to 2012); schemes under the Housing Affordability Fund (HAF) to reduce the costs of moderately priced new housing; and the National Rental Affordability Scheme (NRAS) to encourage provision of affordable rental housing.

Under the NBSP, the Commonwealth provided $1.9bn to NSW to build nearly 6,000 new dwellings (almost all units) and to maintain and repair just over 25,000 public housing properties.

Under HAF, the Australian Government subsidised the cost of home ownership for up to 50,000 low to moderate income new home buyers across Australia by lowering infrastructure and regulatory costs and increasing the supply of housing.29 The five-year program committed more than $400 million investment in 75 projects to reduce holding and infrastructure costs for new home construction which had to be passed on low income home buyers. This program is no longer active.30

Under NRAS, the Commonwealth provided financial incentives to various organisations to build and rent dwellings to low and moderate income households at a rate at least 20% below the market rent for 10 years to tenants receiving the maximum rate of Commonwealth Rent Assistance and paying at least 30% of gross income in rent. Providers received $8000 per dwelling per annum for 10 years ($6000 from the Commonwealth and the balance from the States and Territories). Australia wide, the program achieved only about a third of its original target of 100,000 new affordable rental properties over five years.31,32 A 2010 BIS Shrapnel report commissioned by Housing NSW found that the scheme provided affordable housing but did not increase the overall supply of housing. The program was terminated in May 2014 although existing commitments would be met.

NSW State Government Policies

The NSW State Government has several housing policies and projects. The Government:

● Develops and manages public housing stock. The Government seeks to unlock publicly-owned land values of social housing and to use these funds for new public housing, among other uses. Current plans are to construct some 25,000 new social dwellings including replacing 18,000 ageing dwellings.

● Provides most public housing at a rent of 25% of household income which constitutes a significant subsidy (see Section7.1).

● Encourages community housing providers (CHPs) to manage and develop a significant amount of social housing (see also Section 7.1).

● Supports first home owners via purchase grants and stamp duty exemptions (see Section 5.4).

● Provides small private rental subsidies (such as RentStart and Start Safely) and rental assistance. These subsidies address a range of needs including transition into and out of social housing, disability and domestic violence. Clients who receive a Private Rental Subsidy are entitled to receive CRA as they are renting in the private sector.

● Seeks to reform urban planning processes to encourage housing development.

● Supports housing affordability policies as per SEPP (Affordable Rental Housing) 2009 and Division 6A of the Environmental Planning and Assessment Act 1979.

● Supports high density development in priority precincts and around major urban transportation corridors, generally on public land. Examples include projects in Redfern, Waterloo and the Bays Project (about 80 ha around Rozelle, Glebe and Pyrmont).

More details of these policies are given in the relevant sections of the report below.

The State Government has also recently initiated two major projects valued at around $1.0 bn each: the Housing Acceleration Fund (HAF) and the Social and Affordable Housing Fund (SAHF).

Under HAF, in June 2015 the Government announced an additional $400 million for housing-related infrastructure, including water, road and electricity networks, to accelerate delivery of new homes and put downward pressure on housing prices, principally in Western Sydney. Total HAF funding is $966 million since 2012.

Under SAHF, the Government has sought proposals from entities interested in contributing to the delivery of 3,000 additional social and affordable homes in metropolitan and regional NSW. This involves establishing service agreements of up to 25 years that comprise access to accommodation, along with tenancy and asset management, as well as coordinating access to social support programs and services where appropriate. SAHF projects will be funded from the investment proceeds of a dedicated fund (SAHF NSW) established by Treasury NSW. The Government has contributed $1.1 billion in seed capital to SAHF NSW. The scheme aims to leverage contributions from the not-for-profit, faith and commercial sectors to increase the quality and capacity of the NSW social and affordable housing sector.

More generally, the State Government is considering affordable housing initiatives that supply new housing rented at 20% below market rents. This may occur on publicly owned land, especially in priority precincts, or via localized voluntary planning agreements and density bonuses, or via regulated inclusionary zoning. These policies are discussed further in Chapter 8.

4.2 Policy Options

In considering policy options, it is convenient to work with four main sets of options:

● increasing housing supply,

● reducing the demand for housing,

● major existing policies to assist low income rental and purchasing households, and

● other affordable housing policies.

The first two sets of policies affect the whole market and thus address both general affordability and indirectly more specific housing issues. The third and fourth sets aim to address more specific affordability issues, though there may be flow on impacts on the whole housing market.

These policies and subsets are outlined below. They include all existing policies and major initiatives. For completeness some policies that are not considered further in this paper are also identified below.

Five policies to increase housing supply or lower costs

1. Increase the supply of housing

2. Lower housing standards and costs

3. Lower infrastructure standards and costs

4. Reform of urban planning and approvals

5. Lower stamp duty on housing purchases.

As discussed in Chapter 5, these options, are often complex. Critical issues for option 1 are the optimal quantity and location for an increase supply of housing. This paper views these as benefit-cost issues. Options 2 and 3 include two separate concepts: lower standards or lower costs to developers or house buyers. As discussed in Section 5.3, the relationship between housing prices and infrastructure is a complex one.

A major reason for reducing stamp duty on property transactions (see Section 5.5) is more efficient utilization of housing space. Consideration could be given to other policies to increase usage of housing stock, for example by allowing short-term renting (such as AirBNB) or at least by not discouraging it. However, discussing housing utilization generally is outside the scope of this report.

Three policies to reduce housing demand

1. Lower subsidies for home owners

2. Lower subsidies for housing investors

3. Polices to reduce foreign ownership

These policies are discussed in Chapter 6. Another potential policy to reduce the demand for housing in Sydney would be to increase the competitive attraction of regional centres, such as Newcastle or Wollongong. While regional employment and population strategies are a core part of state planning, again with appropriate recognition of market forces, forced decentralization policies and projects have not always been effective in relocating households or efficient. Our view is that such policies are not likely to have a significant impact on Sydney house prices.

Three existing policies to assist low-income households

1. Increase the supply of social housing

2. Income support for low-income rental households

3. Income support for first-home owners

As noted above, part of the social housing policy (1 above) is to increase the role of not-for-profit organisations in both ownership and management of public housing. These policies are discussed in Chapter 7.

Four other affordable housing policies

1. Subsidies for affordable housing

2. Planning incentives for affordable housing

3. Planning regulations for affordable housing

4. Housing supply bonds

As seen above, the term “affordable housing” generally refers to housing provided at least 20% below market rates usually to households in the lowest two income quintiles. Option 1 includes subsidizing affordable housing on public or private land. Option 2 is essentially providing density bonuses for providing affordable housing. Option 3 generally refers to “statutory planning controls requiring development proponents to incorporate certain facilities or features on their site or pay cash in lieu contributions for their obligations to be discharged off-site” (Spiller and Anderson-Oliver, 2015). This is sometimes described as “inclusionary zoning”. These policies are discussed in Chapter 8.

As noted above some Commonwealth policies (such as HAF) have been designed to provide new housing specifically to first-home owners at an affordable price. It is not clear how applicants for HAF subsidies (housing producers) could show that the price of housing produced in 2 to 5 years’ time would be lower by the amount of the subsidy (say $10,000 per house) than it would be without the subsidy. Moreover, if someone obtains a house at below market price, what prevents re-sale a few years later at the market price? However, this policy has been discontinued and is not discussed here.

Other policies not considered

There are many other possible housing policies. For completeness, some policies that are not considered along with reasons are mentioned briefly below.

Foremost among these are macroeconomic policies that are the principal domain of the Reserve Bank of Australia. These include higher interest rates, which could significantly reduce house prices but (other things being equal) would increase housing user costs, or credit controls for example on loan to valuation ratios. Nor do we consider regulating interest rates on lending for housing, which is an old and discredited policy.

Nor does the paper consider outright rent controls. These discourage investment and even maintenance in building and lead to contests over access to rent controlled properties. However, most forms of affordable housing are a form of de facto rent control and these issues are considered in detail in Section 8 below.

4.3 Policy Objectives and Evaluation

Consistent with our discussion above, three main policy objectives are identified: improving general housing affordability, providing more affordable housing for the lowest two income quintiles and providing social housing and other supports, including financial support, to the most vulnerable households. The first and third of these were identified in NSW 2021 – Plan to Make NSW Number One.33

1. General affordability (Goal 5). Placing downward pressure on the cost of living and improving housing affordability and availability by increasing the supply of land for housing and providing incentives to help make housing in NSW more affordable and housing stock more appropriate for people’s needs.

2. Housing assistance for most vulnerable households (Goal 13). To improve protection for the most vulnerable members of our community and break the cycle of disadvantage. Actions include reducing the number and rate of people who are homeless will require housing assistance through public, community and Aboriginal housing as well as private rental assistance such as bond assistance, but will also need comprehensive and integrated mental health, drug and alcohol and domestic violence services.

The Government has recently replaced the NSW 2021 plan with a small number of Premier’s and State priorities that include targets aimed at:

● Faster housing approvals

● Reducing youth homelessness

● Increasing housing supply across NSW

● Increasing the households transitioning out of social housing

As noted at the start of this paper, discussion of policies for specific vulnerable groups is outside the scope of this report.

However, affordable housing cannot be assessed separately from efficient resource use, provision of infrastructure, impact on environmental amenity and public revenues or indeed from macro-economic policy. Accordingly, seven policy objectives relating to housing are outlined below. These incorporate the three housing affordability issues noted above. Two of the six objectives are efficiency objectives: providing the housing and other outcomes that households want at least cost (given their income). Three are equity objectives to support households who cannot acquire adequate housing from their own resources. The sixth objective is a tax revenue objective that has elements of efficiency and equity. The seventh relates to the broader economy.

1. To provide the housing that households want at the lowest feasible price (efficiency objective).

2. To provide the infrastructure services and environment that households want at the lowest feasible price (also efficiency).

3. To support access to home ownership for low income households who seek home ownership (equity objective).

4. To provide low income households with access to adequate rental housing (equity).

5. To provide adequate housing to households with high needs (physical, mental or social problems) and often very low income who require assistance and tenure security as well as homes (equity).

6. To raise tax revenue as efficiently and equitably as possible (efficiency and equity).

7. To maintain macro-economic stability.

These objectives require some further detail. The first two objectives are essentially part of one overall objective to provide the housing and environment that households want at least overall social cost. In other words, to maximize the value of a development inclusive of accounting for all direct and third party costs.

The efficient allocation of housing embodied in the first two objectives also has implications for broader economic efficiency, which is a major theme of the OECD review of housing policies (Andrews et al. 2011). The ease of moving houses has important implications for the functioning of the labour market, job matching and the efficient allocation of human capital. There is a positive relationship between residential mobility and the reallocation of labour.

Given that existing home owners are already well subsidized (Abelson and Joyeux, 2007), the principal target for objective (3) is principally first-time home owners on lower incomes, who face affordability challenges to meet the cost of a deposit and payments of principal in the first years of ownership. It should be noted that support for first home-owners may also provide some efficiency benefits in terms of better adjusted and more socially inclusive households.

In terms of objectives (4) and (5), the principal issue is the amount of adequate housing at reasonable prices that warrant some government support. However, it is not practical to assist all renting households in the lowest two income quintiles and indeed not a priority to assist households with rising income and only temporary housing stress (see Chapter 3). Thus, some prioritization towards the households with most needs is essential.

Andrews et al. (2011) describe the sixth objective to raise tax revenue from housing as a “non-housing objective”. Nevertheless, it is a critical objective and taxation of housing needs to be designed both to minimise deadweight loss from taxes and to account for equity issues.

Macro-economic stability may also be described as “non-housing objective”. Extreme house price volatility can have macro-economic consequences, typically by a house price bubble leading to a crash as occurred in 2007-08 in the United States with global economic consequences.

It may be noted that policy makers may have other objectives. For example, two reviewers of an earlier draft suggested that social diversity is, or should be, an important planning and housing affordability objective. This point is recognized, but not discussed in any detail in this paper.

Four further points may be made:

● Given the large number of objectives, the optimal strategy is likely to contain a mixture of policies.

● Policy makers may give more of less weight to each of these objectives and hence to preferred policies.

● Ideally preferred policies would apply in the short, medium and long run. However, it may take time to achieve preferred policies. The focus in this paper is on the medium term, what can be achieved in say five or so years.

● Policies must be practical. Policies that are weakly detailed or require complex administration are unlikely to work well.

This chapter discusses five housing supply policies: increasing the supply of housing (the core issue), housing standards and costs, infrastructure standards and costs, reform of urban planning and stamp duty on housing transactions.

5.1 Increased Supply of Housing

In this section we discuss four issues:

● The role of housing supply in reducing house prices

● Setting housing targets

● Maximizing overall benefits from increased housing supply

● Ways to achieve these goals

The role of housing supply in reducing house prices

As discussed in Chapter 2, housing supply has an important role in reducing, or at least controlling, house prices. Any increase in housing supply in any part of the market reduces demand in other parts and so tends to reduce prices overall.

However, because new houses are only a small part of the total housing stock, an increase in housing supply has only a small impact on house prices in the short or even medium term. In Chapter 2, we saw that the estimated percentage change in house prices in relation to changes in housing stock in Sydney is in the order of –3.0. This means that to reduce real house prices by say 3%, housing completions would need to rise from 1.4% per annum to meet normal demand growth factors to 2.4% per annum. This is feasible but a significant challenge.

Moreover, if such a reduction in house prices led to higher net immigration, the final reduction in real house prices would be less than 3%. As Aura and Davidoff (2008) show, increasing housing supply in one city alone has limited effect on house prices. In a major city like Sydney, if house prices fall relative to prices in other cities, more households are likely to move into Sydney.34

The house price premium in Sydney relative to other cities can fall significantly, by say 5% or more, only if Sydney loses its some of its relative attractiveness. This could occur with a decline in amenity or further transport congestion without compensating amenity measures. On the other hand, as we saw in Chapter 2, if the government could reduce transport congestion significantly, other things being equal, house prices in Sydney would rise!

Setting housing targets

Notwithstanding these issues, the paper supports a broad housing supply target as a policy objective. Planning regulations by government have a significant impact on new housing completions. Changes to these regulations need to be guided by a housing target or at least a robust methodology.

Importantly, housing targets are usually a means to achieve some underlying primary objective(s). For example, a housing target is often designed to meet some projected increase in demand for housing and implicitly to ensure no rise in real house prices, given projected demand and holding factors like interest rates constant. Alternatively, it could aim to reduce real house prices either by some percentage or relative to other cities.

Note here the term “real house prices”. As discussed in Chapter 2, evidence suggests that housing quality rises by about 1% p.a. Thus the price of a constant quality house is 1% less than the observed change in real house prices (i.e. the observed nominal house price less inflation). Thus, over say 5 years, an observed real increase of 5% could actually be consistent with a zero real increase in house prices for a constant quality house.

As discussed below, ideally the housing supply target should be based on some form of welfare analysis including household income and housing prices, not simply on trend projections of completions and arbitrary add-ons. This welfare analysis could be some form of macro-economic model but in any case it should be based on practical cost-benefit analyses of housing development options.

Traditionally, city-wide and sub-regional housing targets have been derived mainly from demographic projections, along with an implicit assumption that real house prices should not rise (though, as noted, real house price is itself an unclear term). A demographic target is typically based on a projection of fertility and mortality rates for local households along with assumptions about the size and demographic profile of net migration.

A purely demographic model without economic drivers or house prices has several limitations. It treats internal migration as determined separately from house prices. And it ignores any income effect on household formation. A zero real increase in house prices would almost certainly require a housing target in excess of population growth to allow for some income effect. In Chapter 2, we saw that the income elasticity of demand for housing is typically about 0.8%. While most of this extra demand (expenditure) for housing will take the form of larger or better quality housing, a small part may take the form of more (smaller) households.

In A Plan for Growing Sydney the Department of Planning and Environment (2014) forecasts that population in Sydney will grow by 33% over the next 20 years and projected a need for an additional 664,000 dwellings between 2011 and 2031, equal to 33,000 new dwellings per annum. This is some 50% higher than the average rate of population growth and number of new dwelling completions over the last 20 years. However, the report does not present a housing price target or any explicit welfare rationale for the housing target.35

So how can a preferred population growth and housing price targets be derived? There are two broad approaches: a top-down macro population / housing modelling approach and a bottom-up micro cost-benefit approach.

A simple macro model would aim to show the interactions between population, housing supply and house prices.36 A high housing target, accompanied by re-zoning, would increase housing density and reduce house prices.37 This would reduce the wealth (income) of existing home owners and investors (though not of owners of developable land). On the other hand, lower house prices would benefit rental households and some first home owners, including newcomers to Sydney.38

However, any such macro strategy target should be informed by cost-benefit analysis of major housing strategies and developments as described in the next section. This is practical and, properly conducted, ensures that the benefits of any major strategy or development exceed the full costs.

A housing target derived from cost-benefit analysis of development options would likely be significantly above completion rates of the last 20 years. Almost certainly, planning regulations have restricted development which would satisfy cost-benefit standards. This housing target would probably produce a small fall in real house prices for a constant quality product, but could still see actual real house prices constant. But, this target would be the product of cost-benefit analysis rather than a trend projection with arbitrary add-ons.

Maximizing net benefits from increased housing supply

An efficient housing development strategy would ensure that each major development showed a net social benefit and maximize the net social benefit of development.

The net social benefit is the value of the housing to the purchaser(s) or occupant(s) less the full cost of supplying the housing. The costs include the direct costs of housing supply (the land opportunity cost, site development and construction cost), public infrastructure costs (including utility costs and any required transport infrastructure) and any third party costs in terms of changes in environmental amenity or congestion costs. Importantly this methodology accounts for both the benefits of housing development and the costs. Housing targets are the outcome of the process to maximize the net social benefit of housing developments across Sydney.

Importantly, this approach also indicates development priorities and assists development of efficient housing target by districts. These will not necessarily reflect demographic trends which reflect existing planning regulations.

Applied Economics reports prepared for the Department of Planning and Environment (DPE) describe this approach in some detail.39 This methodology has also been applied broadly by the Centre for International Economics (2012) and by Applied Economics (2014).40 The Urban Financial Model developed within DPE provides a valuable instrument in this process.

Ways to achieve these goals

As has been noted, the constraints on housing development are principally regulatory, and in particular a result of zoning restrictions, rather than market based. To ensure that society is a net beneficiary of development, evaluations are needed, preferably cost-benefit assessments, of rezoning options in green and brownfield areas across Sydney. To ensure consistency, and to avoid ad hoc developments and special advocacy, this should be based on a standard methodology endorsed by major government agencies.

Where the preliminary estimated net benefit is clearly positive, and not pushed into positive territory by special pleading, local consultations with local households should be undertaken to ensure that all significant factors are adequately considered. The aim should be to review Local Environment Plans more expeditiously and transparently.

Where projects meeting net benefit criteria are constrained by poor public infrastructure, appropriate infrastructure should be provided. Preferably this should be on a user pays basis as this should not discourage efficient developments (where total benefits exceed total costs).

A similar benefit-cost assessment would apply to publicly owned sites, including public housing sites, which may also be open to higher levels of development. In places, this is already occurring.

More problematic is the potential development of land used currently, and often historically, for various other purposes that may be well suited to housing. This may include some public open spaces, under-utilised land owned by not-for-profit or religious bodies, shooting ranges, golf courses and race tracks. 41These uses may not be the highest and best use of scarce land but be effectively protected with low or zero land taxes. While radical changes to existing property rights may be considered inappropriate and difficult for many reasons, some consideration of the rates to be applied and alternative use options could be part of the policy agenda.

5.2 Housing Standards and Costs

In principle housing costs can be reduced either by lowering the standard (quality) of housing or by lowering the costs of inputs. Neither approach is seen as likely to produce significant gains.

The principal process by which housing standards fall is by ageing or depreciation of the existing housing stock. Nearly all low cost housing is provided by existing housing. It is hard to regulate standards for second-hand housing except in cases of extreme delapidation.

Given that the supply of housing is competitive, there is little potential for significantly lower unit costs. Imported prefabricated housing could have a minor impact on the market. It is sometimes suggested that not-for-profit organisations could provide lower price accommodation if they were relieved of land and payroll taxes. But such discriminatory tax policies would have little overall impact, not produce resource cost savings and be open to rorting practices.

Another issue is the quality of new housing. In principle this can be lowered by reducing requirements, for example for minimum lot size or setbacks (for ordinary houses or for granny flats), or by allowing smaller units or boarding houses. Car parking requirements could also be relaxed.

Actually, several regulations proscribe lower housing standards. For instance, State Environmental Planning Policy 65 sets out detailed requirements for new apartments. This requires that one-bedroom units must be at least 50 sq.m and two-bedroom units at least 70 sq.m. SERC (2015, p. xxvi) went further and recommended that minimum standards be set for all rental properties. However, as a reader of an earlier draft noted, Melbourne does not have such tight space standards.

However, most such regulations increase the cost of housing and are contrary to housing affordability objectives. Importantly, minimum apartment sizes are effectively unenforceable because occupancy rates, room and time sharing cannot be controlled.

Thus, this paper supports generally loosening mandatory minimum housing standards. However, there are two exceptions. One is where the health of inhabitants is at risk. The other case is where there are significant negative third party issues arising from lower standards. This may occur especially in relation to vehicle parking requirements where concessionary parking standards lead to congested on-street parking.

Overall, relaxing mandatory housing standards may assist housing affordability and be beneficial, but this is not a major route to improving housing affordability. In so far as minimum standards are already voided by high occupancies, effective cost reductions would be minimal.

5.3 Infrastructure Standards and Costs

Infrastructure for housing includes local water, sewerage and power supply, roads and drainage, active and passive open space, and sometimes related community facilities such as community centres. It may also include non-local infrastructure, such as arterial roads and water pumping stations. Local infrastructure is principally funded by Section 94 (s.94) contributions to local councils or payments to relevant utility suppliers and non-local infrastructure by state infrastructure charges.42

In principle, infrastructure costs could be reduced in three possible ways: by lower standards for infrastructure, lower costs of construction or lower charges to developers. The third of these is the subject of most discussion.

Lower standards for infrastructure would lower house prices but not necessarily increase household welfare. In some cases, infrastructure provision may be excessive relative to market demands and could be modified. But cutting back infrastructure standards is not seen as a major cost issue or policy option.

Turning to costs of infrastructure provision, in so far as public provision is not competitive, there may be areas for cost savings by introducing competition. But again this is not a seen as a major issue.

A more popular policy with the housing industry would be lower s.94 contributions or state infrastructure charges. SERC (2015, p.85) notes that “For new housing developments, the costs of supplying infrastructure are substantial and often add significantly to the price paid by the homebuyer”.

Efficient development charges equal marginal social costs. And they should be transparent and proportional. As SERC (ibid, p.91) notes, if they are excessive, disproportionate or poorly administered, infrastructure charges can discourage housing development.

Since 2010, the state government has capped s.94 contributions to local councils at $20,000 per residential unit in established areas and at $30,000 in greenfield areas and has limited the type of infrastructure and services that can be included in local council calculations of the costs, which must in any case be based on a nexus between the development and the infrastructure needs.

However, as discussed in Section 2.3 above, lower charges for infrastructure will generally not reduce the price of new housing. New house prices are determined by the services provided by new houses relative to the services provided by the existing housing stock. Infrastructure charges do not affect the prices which house buyers are willing to pay. Lower charges will reduce house prices only if they enable an increase in the supply of new housing. In Sydney, where land prices for housing generally exceed the value of land in alternative uses, lower infrastructure charges would generally increase the price of land rather than reduce the price of hew housing.

5.4 Reform of Urban Planning and Approvals

In the discussion on housing supply above, we noted the strong case for more expeditious rezoning processes. This could allow both for more housing and lower standards. This is sometimes described as planning reform.

Other possible planning reforms include simplified local environmental plans (LEPs), allowing more complying developments, speeding up development approvals, reducing requirements for construction certificates and reducing the role of local councils in regulating development including by amalgamation of councils. Planning regulations for affordable housing may also be described as planning reform  these are the subject of a separate discussion in Section 8.

LEPs are often long, complex and cumbersome. Doubtless LEPs could be made simpler. However, in our view the complexity of LEPs is not a major deterrent to developers.

"Complying developments" allow developers to proceed with developments that are deemed to comply with a state planning instrument or the local LEP without requiring development approval or therefore any public consultation. This would increase the speed of development and could increase housing supply by enabling developments that would not otherwise occur.

Complying development may be reasonable in flat, low-density areas, where local neighbor/street concerns may be minimal. Difficulties arise when there are differences of view about whether a development complies. More critically, complying developments that bypass local public consultation may have significant amenity cost. In the view of this paper, complying developments are not appropriate where developments have significant impacts on neighbours or streetscapes, which is often the case in established developed areas.

The Government’s policy target for development approval is 90% of development applications approved within 40 days. If the 40-day deadline is not met, developers can claim deemed refusal and appeal to the Land and Environment Court. Few developers do so because this usually delays approvals much longer, unless they actively wish to bypass the council. In practice, to allow for adequate public consultation on a DA, officer review of issues arising, possible modifications of plans, placing revised designs back in the public domain and referral to an independent planning body (where this is council process), the required time is often twice the standard development approval target of 40 days.43 This is appropriate. The additional DA review time surely has little impact on the costs of the development which has often taken a year or more to develop and has little, if any, impact on the amount of development.

Construction certification requirements are often detailed and onerous and do hold up effective completions. Paradoxically, this is due to some extent to the move to private certification over a decade ago. Before this, certification requirements were relatively short. But a system whereby a developer hires their own private certifier is fraught with potential abuse. Councils responded to this by greatly increasing the detail required in construction certificates.

The fifth issue is the perceived role of local councils in resisting development. As representatives of the local public interest, councils recognize local environmental values. This is a critical component of urban decision making. In so far as council resistance to development is considered to be an issue, possible policies include: rezoning under Department of Planning guidance to allow more housing, employing more external decision makers (such as joint regional planning panels) for major developments, provision of financial support for local councils to deal with negative consequences of development, and amalgamating councils into larger areas and so reducing accountability to local residents. The first three strategies respond directly to the perceived issue. Some financial support methods are discussed in Section 7.4. Council amalgamations raise other issues which are outside the scope of this paper.44

In summary, the major planning reform that could make housing more affordable would be an informed and proactive rezoning policy developed with state and local inputs and financial support for rezoning. Other planning reforms such as simplified LEPs, allowing more complying developments, speeding up development approvals and reducing requirements for construction certificates could have minor impacts on housing supply but should be balanced against potential negative amenity outcomes. .

5.5 Stamp Duty on Housing Transactions

For the majority of properties that are valued between $300,000 and $1.0 million, the rate of duty is $8,990 plus $4.50 for every $100 over $300,000. The rate increases for higher valued properties. Thus stamp duties for properties valued from $400,000 to $2.0 million are as follows:

$400,000 $13,490

$600,000 $22,490

$800,000 $31,490

$1.0 million $40,490

$2.0 million $95,490

Thus, median house purchasers in Sydney are liable to pay about 3% of the purchase price in stamp duty. Purchasers of new homes receive some offsets. First home buyers are exempt from stamp duty on purchases of new homes valued at up to $550,000 and receive scaled exemptions up to $650,000. Non-first home buyers receive a $5000 discount for properties up to $650,000.45 But these are minor concessions. At a median house price, stamp duty around $30,000 typically doubles other transactions costs.

Stamp duties are criticized widely and heavily. For example, SERC (2015, p.75) stated that there is overwhelming evidence that “stamp duties are a highly inefficient and inequitable means of taxing land and improvements and also undermine home purchase affordability”. SERC also argued that stamp duties increase barriers to home ownership and reduce labour mobility SERC (2015, 84).

To assess the impact of stamp duties it is useful to understand their incidence. Stamp duties are paid by the purchaser. But this does not necessarily mean that the purchaser bears all of the cost. Part of the cost may be borne by the vendor. Indeed, if the supply of housing is relatively inelastic, most of the cost of stamp duty will be borne by house owners or suppliers.

Suppose realistically that housing supply has a low price elasticity of around –0.3 and that housing demand has a price elasticity of +0.8. Equations (5.1) and (5.2) show that housing suppliers (mostly existing home owners) bear 73% of the existing purchase tax in lower house prices and house buyers (who pay the tax) would actually bear 27% of the tax.

ΔPc/S = ηs / (ηd + ηs) = 0.3 / (0.8 + 0.3) = 0.27 (5.1)

ΔPs/S = ηd / (ηd + ηs) = 0.8 / (0.8 + 0.3) = 0.73 (5.2)

Putting the above into $ effects. Abolishing stamp duty of say $30,000 on a $770,00 house price would increase the house price by about $22,000 ($30,000 0.73). This would save the purchaser $8,000 after tax.

This is illustrated in Figure 5.1. The line D1 shows the demand curve with stamp duty. The S line shows housing supply. The housing price is given by P1. But the purchaser pays P1 + d (stamp duty). With no stamp duty, the demand curve shifts up to D2.46 The house price has now risen to P2. The house seller has gained P2 - P1. The house buyer has gained (P1 + d) - P2. Of course, a household that is seller and buyer gains the whole benefit from abolition of the stamp duty, though they may buy a house at a different price from the one they are selling.

This paper agrees that such a transactions tax is inefficient and unfair. It is inefficient because it imposes a sizeable tax on exchanging houses. It discourages households from moving to their preferred house size and location, discourages efficient deployment of labour and encourages inefficient utilization of housing space.

DeLoitte Access Economics (2015) reviewed a range of Australian and international studies of the effects of stamp duties on transaction volumes and found “broad evidence of significant effects” citing studies showing that a 1% drop in the absolute rate of stamp duty would increase property transactions by between 8% and 20%.

Applied Economics

Figure 5.1 Price effects of abolishing stamp duty

To assess the cost of stamp duty, we assume that the transfer tax is equivalent to 3% of the average property price and that abolition would increase transactions by 25% (equivalent to 25,000 properties per annum). The benefit of abolishing the transfer tax is illustrated by area ABC in Figure 5.2. With a linear demand for transactions, the net social gain (the benefit to households) is estimated by the product of the extra transactions due to lower transaction costs achieved and 50% of the average stamp duty avoided. Thus, abolition of stamp duty would provide an annual benefit equal to 25,000 transactions $15,000 = $375m per annum. However, the savings of the 100,000 households who transact in any case (area P1ACP2) is a transfer from taxpayers to households, not a net social gain.

While this analysis suggests that abolition of stamp duty would tend to significantly increase house prices before tax (given inelastic supply), this assumes a given rate of utilisation of rooms. Drawing on the analysis in Chapter 2, some 5%-7% of bedrooms in 1.12m owner-occupied dwelling may be excess to preferences. If this equates conservatively to around 70,000 houses, transfer of half of these due to lower transaction costs could result in an effective 2.0% increase in the total housing stock. Over time, this could reduce house prices by around 6% at close to zero resource cost.

In terms of equity, a broad-based land tax is fairer than a large tax on a narrow household basis, whether borne by buyers or sellers. Given annual stamp duty revenue in the order of $7.5bn per annum, and residential and commercial land value of about $1,100bn in NSW, a general annual land tax of slightly under 0.7% of land value (over and above current land taxes) would be revenue neutral. On a typical land value of $400,000 in Sydney, this would be a land tax of around $2,700 per annum. It may not be easy to sell a new tax of this size even if it is revenue neutral. ACT reforms to stamp duty and land tax are being phased in over a 20 year period.

Applied Economics

Figure 5.2 Welfare effects of abolishing stamp duty

5.6 Conclusions

Increasing housing supply will have a significant but small impact on house prices. Broadly, an x% increase in the housing stock over and above any increase needed to meet demand will reduce real house prices by about 3x%. Thus, doubling annual completions from an average 1.4% p.a. needed to meet demand to 2.8% of the housing stock could reduce real house prices by about 4% (3 1.4%).

Ideally housing targets should be based on a macro model that incorporates house prices as part of the objective and by cost-benefit evaluation of housing development strategies that seek to maximize the net social value of new housing. This net social value is essentially the market value of housing less development and construction costs, infrastructure costs and any congestion and environmental costs.

The housing target would likely exceed recent completion rates but would take into account concerns about the environment associated with development. Where the net social benefit is clearly positive, local environmental plans should be revised. Other planning reforms, such as more complying development where appropriate, shorter development approval times and simpler construction certificates may marginally increase housing supply but are not fundamental.

Stamp duty more than doubles transaction costs on many dwellings. Encouraging transactions by eliminating the transfer tax could create annual benefits to households that transfer in the order of $375m per annum. Replacing stamp duty with a broad based land tax could release a significant amount of under-utilised housing and significantly reduce house prices over a few years. However, the land tax would be a significant charge and would likely have to be introduced slowly especially so that households involved in recent transactions are not double taxed.

It may be possible to reduce housing costs by a minor amount by allowing lower housing standards and by more efficient infrastructure. However, these changes would have only small impacts on housing affordability.

6.1 Lower Subsidies for Home Owners

In this section we describe the nature and size of subsidies for home owners, discuss the effects on house prices and real housing costs, and describe and assess policy options. The major subsidies are Commonwealth policies. However, the State Government needs to have an overall strategy towards the level and nature of property taxation.

Nature and size of subsidies for home owners

Home owners do not pay income tax on net imputed rents or on capital gains.47 In the case of a possible tax on imputed rents, for tax neutrality this would be a tax on gross rents less expenses including interest costs. Also the value of own homes is excluded from the assets test for access to Commonwealth provided public pensions. In addition, home owners are excluded from state land tax.

Kelly et al. (2013) estimate that the total subsidy to homeowners across Australia was $36bn a year. This includes exemption from the capital gains tax (CGT) with an estimated annual subsidy of $14.0bn, no tax on net imputed rents with an estimated subsidy of $9.6bn, the asset test exemption worth an estimated subsidy of $7.0bn and exemption of home owners from land taxes valued at a further $5.0bn subsidy.48 However, the figures cannot be readily verified as the report does not explain the implied benchmark of a "normal" tax rate.49

The authors estimate that the total subsidy equaled $6,100 per household in 2013. The estimated concessions are inequitable in that the concessions are worth an estimated $8,000 a year to households in the top income quintile compared with $2,800 for households in the first income quintile. This assumes that the whole subsidy accrues to homeowners who receive the subsidy. As discussed elsewhere, subsidies do not necessarily accrue to the household who apparently receives them.

Given the size of the Sydney economy and the value of the property market, the Sydney property market could account for 35% of these national subsidies, which of course include Sydney. In this case, the total Sydney concessions would be about $12.5bn including a subsidy of $4.9bn for the CGT exemption, $3.4bn for non-taxation of imputed rents, $2.5bn for public pensioners and 1.7bn for land tax.

On the other hand, council rates and state land tax may be viewed as proxy taxes on imputed rents. These taxes total slightly over $6.0bn in NSW (Table 2.9). Stamp duty accounts for another $7.0bn in NSW. Allowing that Sydney homeowners account for two-thirds of the NSW market, property taxes on home owners in Sydney would account for about $8.6bn in tax revenues. Thus, Sydney home owners would receive a total net tax concession in the order of $4.0bn per annum.

To provide perspective, allowing an average dwelling value of home owner properties is 25% higher than the median market price, and home ownership is 67% of the market, the total market value of home-owned residences in Sydney would be 1.7m 0.67 $850,000 = $968 billion. Allowing a 4% rental return, imputed rents would be valued at $39bn per annum. On the basis of the above estimates, net tax concessions would 16.6% of imputed rents.50

Effects on house prices and real housing user costs

What is the effect of these housing subsidies on house prices? And who gains or loses from the changes in house prices? The effects are complex because there are two markets (the owner and the renter markets) and several possible demand and supply scenarios.

Figure 6.1 illustrates the total housing market outcome. The D1 curve shows demand for housing with the subsidies. This includes investor demand for housing that does not receive the subsidy. Demand without home owner subsidies falls to the D2 curve. House prices fall from P1 to P2. The mechanics are broadly the mirror image of those for a relief of stamp duty shown in Figure 6.1. However, in this case the subsidies apply to the 67% home owner part of the market whereas stamp duties apply to the whole market.

Applied Economics

Figure 6.1 Effects of abolishing housing subsidies

With relatively inelastic supply of housing, lower subsidies would be borne mainly as lower prices by existing owners of the housing stock including rental investors (unless the changes were grandfathered which would be complex). First home owners would benefit from the fall in house prices, but be marginally less well off because the lower prices would not fully offset the loss of subsidy. The net extra for them would equal P2 – (P1-S).

New rental investors would pay less for housing, but in a competitive investor market they would pass on the lower house prices in lower rents. Thus renting households would benefit from the lower house prices. Of course, taxpayers would gain from reduced concessions.51

Any reduction in the concessions on the pension asset tests would be a simple transfer from the household currently receiving the concession to the tax payer.

Policy options

To reduce the concessions to home owners, the main policy options would be:

● Application of the existing CGT to owner occupied properties, i.e. a 50% tax on nominal capital gains at time of sale.

● A tax on estimated net imputed rents or a proxy tax such as a tax on land or property values.

● Inclusion of part, or all, of owner's equity in their home as part of the income / asset test for public pensions.

Of course any such tax changes would need to be considered in conjunction with other changes such as a change in stamp duty.

Assessment

All three changes would reduce the distortion between owner housing, rental housing and other goods and services, including investment options. The current concessions create a distortion in favour of home ownership over other assets. Given that there is a deadweight (efficiency) loss when a tax or subsidy distorts consumption or investment decisions, each of these changes is likely to have some efficiency benefit.

On the other hand, there are some external social benefits from home ownership. Home owners tends to tack more interest in their community than do renters (DiPasquale and Glaeser, 1999) and this tends to enhance local amenity in both conventional housing areas and in strata units.

In terms of equity, following the analysis above, a reduction in housing subsidies would be borne largely by existing home owners. New home owners would be marginally disadvantaged with lower prices not quite offsetting the loss of subsidy.

On the other hand, rental house households would gain, possibly significantly. Commonwealth tax payers would gain from the application of CGT and changes to the asset test for public pensioners. State tax payers would gain from the revenue raised from a direct or proxy tax on net imputed rents.

However, there are two main reasons for not applying the current capital gains tax to owner occupied housing. First, for most households, housing is a basic consumption good. It is not a discretionary financial investment like shares that can entirely be disposed of. Suppose that a household purchased a home for the median price of $316,000 in 2001 and sought to sell it for the median price of $679,000 in 2015. Applying the CGT with a marginal tax rate of 37%, the household would be paying a tax of $134,000 on this “capital gain”.52 Such a tax would mean that the household could not move to a house of similar standard without drawing heavily on other savings (if these were available). This would be, in effect, an extraordinary transaction tax and greatly discourage household and employment mobility.

Secondly, as currently applied, the CGT is a tax on both changes in nominal savings and on real improvements. As discussed below, there are arguments against taxes on nominal changes in wealth. In the case of homeowners, the tax as presently constituted would make no allowance for the improvements that households make to their home

Turning to taxation of imputed net rents, as noted above, an accurate tax would be gross rent net of expenses including interest payments, which would be complex. This may explain partly why such a tax is very rare. Andrews et al. (2011) suggest that it is applied only in Iceland, Luxembourg, Netherlands, Slovenia and Switzerland, but in Netherlands it seems closer to a general wealth tax.

In practice, proxy taxes are more likely. This could be a property tax, as (gross) rents are generally imputed from property values, or increased use of land tax. Neither proxy would allow for expenses.

The preferred option here is increased use of land tax for two main reasons. Because land is in fixed supply, land tax is widely recognized as one of the least distorting taxes available.53 A property tax is a wider tax on capital works and hence a little more distorting on investment. Secondly, adding a property tax to a land tax (which is already widely used in Sydney) would be confusing and administratively expensive,

In terms of affordability, an expansion of land tax to cover owner-occupier homes (as a proxy for tax on imputed rent) would reduce house prices. It would have a lesser negative impact on first homeowners who would pay lower house prices but more land tax. Rents would fall as investors pay less for housing.

Thirdly, reducing concessions with regard to asset tests for public pensioners is a simple and practical policy change. The main argument for doing this is equity between pensioners and between more wealthy pensioners and taxpayers. A reduction would marginally reduce the demand for housing, especially large housing and encourage higher utilisation rates, but the impact would not be very significant. To avoid unnecessary transaction and emotional costs for the elderly, the change in concession can become a deferred liability against the home asset at time of death.54

6.2 Lower Subsidies for Housing Investors

In this section we again describe the nature and size of housing subsidies, discuss the effects on house prices and rents, and describe and assess policy options. The major subsidies are again Commonwealth policies.

Nature and size of subsidy

The two major subsidies that are widely described as tax concessions are the tax deductions associated with negative gearing, and the 50% tax rate on capital gains. Sometimes the two are linked because interest and other expenses are 100% deductible whereas capital income is taxed at only 50%.

Negative gearing means providing rental accommodation at a loss due to interest payments on mortgages or other borrowings. These losses are generally deductible against other corporate or individual earnings. This is a standard allowance in business where losses are deductible against income, so long as there is income. If a business runs at a loss, the loss is carried forward against future income.

In the investor rental market, losses due to interest payments are typically deducted against other personal earned or investment income which may attract a marginal tax rate in excess of the company tax rate of 30% in the dollar. This level of deductions is clearly a tax concession. Whether negative gearing that attracts a 30% or lower tax deduction is viewed as a tax concession depends on the appropriate tax benchmark, including whether losses should be deductible against very different types of earnings.

Turning to CGT, contrary to much public opinion, the current CGT is often less concessionary than the CGT which it replaced, namely a tax on 100% of the real capital gain. In general terms, the current CGT equals 0.5(π + rg) where π is the general rate of inflation and rg is the real gain in house prices after allowance for inflation and improvements. Compared with a 100% tax on rg, the current CGT is concessionary only when π < rg. This has been the case recently with several years of low inflation rates, but earlier this was the exception rather than the general case.

In general, when the inflation rate exceeds the real rate of appreciation, a 50% tax on the total nominal gain exceeds a 100% tax on the real gain. Thus, a 50% tax on nominal gain is often not a tax concession. Nor is it clear whether rental investors are subsidized in that they pay the standard CGT rate applicable across the economy.

The issue may therefore be seen as a general one, not a special concession for rental investors. The core issue here is whether CGT should apply to total nominal gains (that include real gains) or to real gains (excluding inflation gains). Arguably, it is real net gains (after expenses) should be taxed but not price changes that simply hold real savings constant.

However, a problem arises because of asymmetry between interest deductions and capital gains. Under the current tax system, nominal interest payments (not just real ones) are tax deductible. Suppose that an investor borrows $100,000 at 7% to purchase a $100,000 asset, net revenue before interest is zero, the investor has a 40% marginal tax and sells the asset for $107,000 at the end of the year. His real net revenue over the year would be $0. However, after tax he has a net operating loss of $4,200 and a capital gain of $5250, a net gain of $1,050. The tax asymmetry has converted a neutral position into a positive financial gain. This can be dealt with to some extent by reforms to negative gearing.

Kelly et al. (2013) estimate that the total subsidy to residential property investors across Australia is $6.8bn a year, or $4500 per investor household. This includes $2.4bn for negative gearing and $4,4bn for CGT concession. They estimate further that tax concessions for residential property investors are worth $9200 for households in the top income quintile compared with $3600 for households in the first income quintile. However, the paper does not provide the benchmark and the allocation to individuals assumes that residential investors receive the whole benefit of the subsidies.

On the other hand, owners of rental housing pay GST on new housing and alterations and additions, land taxes, council rates, and stamp duties. Abelson and Joyeux (2007) estimated that overall residential investors received only a small net subsidy.55

Effects on investor rental subsidies on rents and house prices

Tax concessions increase investor demand for rental dwellings and hence the supply of rental accommodation. This supply is met mainly from existing housing stock, but may result in a small increase in new housing. The subsidies do not affect the demand for renting accommodation. Thus, by increasing supply, the subsidies to investors largely reduce housing rents. Indeed, because the supply of investor housing is competitive and highly elastic, nearly all the benefits of the subsidies go to rental households.

This outcome is illustrated in Figure 6.2. In this figure, the S1 schedule shows the supply of rental housing as a function of housing rents with no subsidy; S2 shows the increase in supply with the subsidy. The rent falls by nearly the whole of the subsidy (or the change in the subsidy). Conversely if the subsidy were to be reduced, rents would rise by most of the amount of the reduction. However, given transaction costs it may take a few years to reach the new equilibrium rent.

On the other hand, rental subsidies reduce the supply of housing available to home owners and so put up house prices for home owners.

Applied Economics

Figure 6.2 – Impact of subsidies for rental investors

Policy options

The two main policy options for the CGT are:

● Taxing a higher proportion of the nominal capital gains up to 100% of the gains. The Henry Tax review (2010) proposed a tax on 60% of the capital gains. Daley and Wood (2016) propose a tax of 75% of capital gains.

● Taxing real capital gains, presumably 100% of any real gain as before 1 July 1999.

On the other hand, there are a large number of options for changes to the negative gearing concession. These include:

● Aligning maximum tax rate deductions with the corporate tax rate of 30% rather than at personal income tax rates

● Allowing a lower maximum tax deduction rate of 20% as in UK

● Capping interest rate deductions at some amount such as $50,000

● Quarantining tax deductions: carry forward of losses on residential investments or any rental property until a profit is made.

● Allow investment interest expenses to be deducted only against investment income (not against earned income) in that year and carried forward if losses are made.

● Allowing negative gearing only for new houses or units.

The Henry Tax Review (2010) recommended that deductions be allowed for only 40% of interest costs and other expenses along with a tax on capital gains at 60% as noted above.

Assessment

We have noted above some issues with reducing the CGT concession in part because often it is not a concession compared with a benchmark of a tax on real gains. It would be hard to change back to a tax on real capital gains (as was the case before July, 1999). But if the real gains do exceed the rate of inflation, there could be a case for moving to the Henry proposal of a tax on 60% of capital gains.

Turning to negative gearing, in the view of this paper this should be viewed as a general tax issue. If interest rates are deductible against income from one product or one form of entity, they should be allowed for other products or entities.

However, there is a strong efficiency and equity case for bringing the maximum deduction for losses on rental property into line with the corporate tax rate of 30%. High income earners are currently gaining exceptional concessions from deductions at higher marginal rates. This would likely have minimal impact on the supply or price of rental accommodation.

Consideration could be given to allowing deductions only against investment income and not against personal earnings. However, to avoid distortions, this would have to apply to corporates as well and it is not clear whether corporates could readily distinguish between investment and service income.

In any event, it is likely that any changes would need to be grandfathered.

6.3 Restrictions on Foreign Ownership of Housing

Core policies on foreign ownership of properties in Australia are national policy. Generally, foreign investment in residential real estate in Australia requires approval from the Foreign Investment Review Board (FIRB). The FIRB assesses proposals based on the Government’s policy that foreign investment should be directed towards purchasing new dwellings and increasing the housing stock. Consequently, foreign purchases of new dwellings are usually approved without condition, foreign purchases of vacant land are usually approved conditional on construction of a new dwelling within four years, and foreign purchases of existing dwellings are generally not approved, with exceptions made for temporary residents purchasing a house to live in for the duration of their stay in Australia only (FIRB, 2016).

In contrast to Australia, rules in similar countries such as the US (HG.org Legal Resources, 2015) and New Zealand56 (Land Information New Zealand, 2015) place few to no restrictions on foreign ownership of residential real estate.

However, at state level, governments can place a differential transaction tax on foreign purchases as is done in Victoria.

As we saw in Section 2.1, foreign ownership is a potential problem for housing affordability because it increases demand for stock while having little if any compensatory impact on new supply.57 Yhere is much casual observation that international financial flows are pushing up property prices in rule-of-law countries with attractive major cities, such as New York, San Francisco, Vancouver and Toronto, London, as well as in Sydney and Melbourne.

On the other hand, foreign investment in residential dwellings is basically asset transfer. It increases the incomes of Australian sellers.

While this paper inclines to the view that, in the interest of local affordability, foreign purchases of properties should be taxed at a higher rate, there are significant practical difficulties in defining a foreign purchase. This is an area where more data and analysis would be useful.

6.4 Conclusions

Housing demand is encouraged by major tax concessions that increase housing prices. The issue is whether such tax concessions should be reduced or abolished altogether.

The major tax concessions to homeowners are non-taxation of net imputed rents and capital gains. The major concessions to property investors are the deductibility of losses, notably incurred by borrowing costs, against other income, and the apparent concession that only 50% of nominal capital gains attract tax. Both tax concessions to home owners and to property investors are Commonwealth government issues.

In both cases, the concessions assist the party receiving the concession to some extent and disadvantage another party. The concessions to home owners increase existing housing prices and provide only small benefits to first-time home owners. They also indirectly cause higher rents.

On the other hand, subsidies to property investors are passed on principally in lower rents to rental households as a result of the increase in rental properties, but do push up house prices for first-home owners. More work is needed to quantify these effects.

The paper inclines to the following conclusions:

● A broad-based land tax on housing properties could provide a more neutral tax / concession policy with respect to net imputed rents, but it would only be a proxy tax.

● For the reasons given above, it would be inappropriate and inefficient to apply the capital gains tax to home owned properties.

● Maximum tax deductions for negative gearing should be brought into line with the corporate tax deduction rate.

● Given the current very low inflationary environment where real gains are typically larger than inflationary changes, consideration could be given increasing the capital gains tax on assets including investment property to 60% of capital gains. But it should be noted that a 50% tax on nominal gain is not a tax concession when the inflation rate exceeds the real rate of appreciation.

● Consider including homes in asset tests of access to Commonwealth pensions.

However, the effects on housing affordability for home owners and renters are complex. More analysis is needed to work through the effects and in particular the interaction of any changes with other parts of the tax system.

Foreign demand appears to have an increasing impact on house prices. There may be a case for a higher transaction tax on foreign purchases of residential property, but this could be hard to implement.

7.1 Policies for Social Housing

In this section we discuss the nature and rationale for social housing, the main issues and some policy options.

The nature of social housing

Social housing is defined as “Rental housing provided by not-for-profit, non-government or government organisations to assist people who are unable to access suitable accommodation in the private rental market. Social housing includes public, Aboriginal and community housing as well as other services and products (NSW Government, undated).

The sector is defined principally by the use of housing stock and the operational regulations governing use, not by ownership. In NSW, as generally in Australia, social housing is a highly targeted scheme. Most clients depend on welfare benefits for most of their income.58 Many clients are socially vulnerable and some have complex needs.

In NSW there are approximately 151,000 social housing dwellings. FACs (2015) reports there are 280,000 people resident in social housing in NSW, which would be 1.85 persons per unit. SGS Economics (2015) reports 214,000 occupants with an average occupancy or 1.42 per dwelling unit.

There are about 127,000 social housing units in Sydney. There has been little change in the number over the last 20 years, although the National Building Stimulus in 2010-11 produced some extra social housing.59 Our estimates of the stock in Sydney are shown in the Annex in Table A.3.

The State Government plans to deliver up to 23,000 new and replacement social housing units over 10 years. Most of this increase will occur in Sydney. There are current redevelopment plans for large specific sites, such as Macquarie Park. However, these rely on value-uplift of the sites for private developers to deliver replacement social housing as well as some extra units of social housing alongside a range of private dwellings. The Land and Housing Commission (LAHC) also has an extensive program of investing its high value properties in its current property portfolio in order to deliver more housing, for example at Miller’s Point the proceeds released will be re-invested into some 1500 new social housing dwellings. But LAHC has limited own-funding to expand stock.

Currently, the State Government owns most of the social housing stock (i.e. this is public housing). SGS (2015) reports that community housing providers (CGPs) own just 3,100 social housing properties,

However, CHPs manage some 24,600 dwellings in Sydney.60 This includes 17,200 properties owned by the LAHC and another 5,600 properties which they lease.61 Most CHPs are small, managing an average of 1500 dwellings.

Government policy is to increase the amount of social housing managed by CHPs to about one-third of the housing stock. It is understood that the transfer to CHPs will be by competitive tender whereby the CHP receives the tenancy income, including contributions from Commonwealth rent assistance, and is committed to meeting existing tenancy agreements and standards and maintenance costs.

In NSW, public housing is generally provided to eligible households at rents equal to 25% of household income irrespective of the quality or location of the housing. The average rent per public dwelling unit is $7,600 p.a. Compared with a modest market rent of $350 per week (equal to $17,500 per annum over 50 weeks), the subsidy is of the order of $10,000 p.a. in Sydney. Of course, such a rent would be quite unaffordable to nearly all households in public housing as 94% are on welfare payments.

CHPs also provide community housing to low and moderate income households, some of whom receive Commonwealth rent assistance.

Reasons for social housing

The main reasons for social housing are:

● To meet the critical complex needs of some households. The market does not supply adequate housing to households in crisis, vulnerable groups or high risk groups who are also on very low incomes. Social housing is especially valuable for households that cannot manage housing and households that face discrimination.

● To assist very low income households because of shortages of affordable rental housing. Of course, many households have high social vulnerability as well as very low income.

● To minimize possible negative impacts of anti-social behavior by persons with complex needs who may end up homeless.

● To assist vulnerable households to contribute to society positively including by becoming a healthier and more productive workforce.

The first two reasons are essentially private benefits. The third and fourth points are broader social reasons for providing social housing,

Issues

There are various issues associated with social housing. A core issue is the excess need for social housing. FACS (2013) reports a waiting list of 60,000 applicants in NSW. SERC (2014, p. 247) recommends that the numbers of households needing special help and an “adequate supply” of social housing be estimated. Figure 7.1 shows that the number on the waiting list has increased by about 50% since 2009.

Applied Economics

Figure 7.1 Persons on waiting list for social housing in NSW

Of course, estimating excess need for social housing is sensitive to the criteria applied. Excess demand is not itself a measure of need when a good is heavily subsidized. The subsidy for public housing of about $10,000 p.a. (varying with location) is over double the maximum Commonwealth Rent Assistance (CRA, the main alternative) of just under $4,500 per annum and three times the average CRA of $3,341 in NSW. In such circumstances it is not meaningful to talk about a demand for public housing. If households were given a rent subsidy of say $7000 or $8000 per annum for housing they might choose this instead of public housing. Nevertheless, there are clearly a large number of households for whom CRA is not sufficient assistance.

A related issue is increasing average length of tenancy (and decreasing exits). Over 50% of tenants in social housing in NSW hold a lease for 10 or more years.62 The high subsidy relative to market rents and the security of tenure provide incentives to retain an entitlement to social housing. Means testing of residents may reduce job-seeking incentives.

Another issue is the appropriate level of housing subsidy to provide to households who are eligible for social housing and whether this should vary by household and dwelling attributes.

Underlying these issues is the lack of an alternative policy that assists households to live independently without undue housing expenditure stress. The principal target would typically be households in the first or second decile category.

Three other issues should be noted. First the concentration of social housing in small areas can exacerbate social issues. For example, as Andrews et al. (2011) observe, there is evidence of adverse neighbourhood effects on the education of children.

Second, public housing is often poorly maintained. Reasons include lack of tenant incentive to maintain their property, lack of public funding and blocks of units that reach the point of no return (where maintenance expenditure would have little positive value). However improved management since 2011 has reportedly reduced the loss of social housing.

Third, surveys indicate that tenants tend to prefer management by CHPs to management by the publicly owned land and Housing Corporation. However, the differential preference is not large.

Policy options

To address these issues, various policies are being, or could be, considered including:

● Increased investment in social housing

● De-concentration of social housing

● Changes to conditions of public tenancies including rents reflecting market conditions more closely where tenants have capacity to pay higher rents

● Transfer ownership of public housing and rights over development to CHPs

● Transfer of management of public housing to CHPs

● Incentives to CHPs to supply more social housing, possibly including social impact bonds or an underwritten financing instrument such as an Australian Housing Bond to secure funds at low cost.

● More assistance to social housing tenants to assist them out of social housing

● Increased financial or other assistance to households who are on the margin of social housing, either to prevent entry into, or to find pathways out of, social housing.

Assessment

Detailed analysis of the options is outside the scope of this consultancy.63 One reason is that the assessment often depends on the detail of the proposed policy. Another is that some options may be combined with others. However, the following are observations on some options.

Investment in more social housing along with de-concentration: given the length of the waiting list and the high priority for households on the waiting list, there are likely to be significant benefits to more social housing, unless substitute policies can be developed. There would seem to be major client benefits from de-concentration, although this could make management more difficult.

Changes to conditions of public tenancies: incremental changes, including rental changes, should increase equity and encourage more efficient utilisation of social housing, but radical changes are unlikely.

Transfer of ownership of public housing or rights over development to CHPs: the transfer of stock to CHPs does not itself increase social housing stock. This may occur by allowing CHPs development rights to public land. However, if sale is by competitive tender there may be no private (leverage) margin unless some such conditions are built into sale conditions. The creation of leverage as recommended by SERC (2014, p. 259) depends on how Government subsidizes the sale to the CHP. But if the development depends on an explicit or implicit public subsidy, the Government could undertake the development drawing on development profits.

Transfer of management of public housing to CHPs has some expected benefits:

● Strong contract and performance management agreements

● Locally responsive services that assist better outcomes for clients

● Improved client experiences and outcomes;

● Reducing government maintenance costs;

● Financial advantages by allowing clients to access Commonwealth Rent Assistance (CRA).

On the other hand, at this stage it is not clear

● Under what terms, conditions and subsidies, management of properties will be transferred to CHPs.

● Whether, and on what terms, CHPs would provide some housing to households on moderate income who would not be eligible for social housing.

● What are the operating rules and conditions governing CHPs.

● How funds from CRA contributions will be used.64

Increased financial or other assistance to households either in social housing or on the margin of social housing: in the view of this paper this is a priority area for the application of public funds. This corresponds with views within government. As noted in correspondence, “some of the programs announced as part of Future Directions have been showing promise, for example the Carers and Caring Program which is being expanded following a pilot in the Hunter Region which showed that long-term unemployed could be trained and employed.”65

7.2 Income Support for Low-Income Rental Households

Nature of income support

The Commonwealth Government is the prime source of assistance to low-income rental households. Commonwealth rent assistance (CRA) is designed to ensure that adults with limited incomes can afford to live in rental housing that meets adequate standards. This involves a base payment to households to assist them meet basic income needs. It is a narrowly targeted policy to support very low income households.

To be eligible for CRA, a person must receive a pension, an allowance or a benefit more than the base rate of Family Tax Benefit, subject to some special rules. The recipient must also be paying more than a minimum amount of rent. Rent assistance is paid at the rate of 75 cents for each dollar above the rent threshold up to a maximum rate. Payments depend on household size and composition. The amount currently varies from $86.27 to $171.50 per fortnight (equivalent to $2,243 to $4,459 a year). Rent assistance is not payable if rent is being paid to a government housing authority. (See SERC p. 394)

In 2014-15, total CRA to NSW amounted to $1.41bn for 421,325 households, with an average $3,341 per household. Allowing Sydney households account for 65% of recipients, about 275,000 households in Sydney received CRA.

In addition, according to NSW Treasury figures, the NSW Government provides about $11.4 million private rental assistance to some 18,000 households in NSW (about $640 per household) principally through Rentstart and Start Safely. This support goes to households with various significant disabilities and low income who would be eligible for social housing but are to obtain entry due to lack of supply. This is primarily to help highly vulnerable households rather than a general income support for very low income households.

Effects of income (rental) subsidies

To put the CRA in perspective, total actual and imputed rents in Sydney are in the order of $50bn p.a. Thus, rent assistance is about 2% of total actual and imputed housing rents.

If housing supply were completely fixed, this subsidy would increase house prices by some 2%. Given a housing supply elasticity of say 0.3, a 2% increase in house prices would increase housing supply by about 0.6% and house prices would rise by about 1.3%.

Thus CRA marginally increases all house prices and rents in Sydney, but provides moderate income support to a large number of low income households in Sydney who receive CRA.66

Options

CRA is a well-established and well-directed welfare policy. This paper does not see grounds for any significant reduction in CRA grants. On the other hand, a significant increase in CRA is unlikely in the Commonwealth's current chronic deficit position. The policy could be fine-tuned by giving more consideration to maximum rent conditions for Sydney reflecting the relatively high rents in Sydney. However, this paper supports the Henry Tax Review (2010) recommendations 102 and 105 that assistance could be targeted better by linking assistance to movements in national rental costs and by providing additional support for households who have higher need.

A key issue in our view is the level of private rental support that the State Government should provide to very low income rental households. NSW Government (undated) reports that the Government plans to increase private rental assistance products from 27,000 assistances in 2015 to 37,000 in 2025, especially to help households avoid, or leave, social housing.67 This will include (p.16) a new medium term rental subsidy (Rent Choice), some new Personal Support Plans, broadened accessibility to Start Safely and planned increased uptake of Rent Start products, Bond Plus and Private Rental Brokerage services.

Assessment

Given that housing affordability is principally a household income problem, albeit made worse by restrictions on housing development, subsiding housing for low income homeowners or renters is an appropriate policy.

CRA income support for rental housing is well targeted and efficient. It allows households to choose their preferred housing location, size etc., subject of course to income constraints. It does not distort choice and force households to choose between second or third best housing options. The rent assistance may not change housing expenditure but it does provide income relief from housing rent stress.68

In our view there would be significant merit in increasing Commonwealth and state government rental assistance for very low income rental households. For the reasons given above, this is seen as the best way to alleviate housing affordability problems for households in most need.69 This is supported by international analysis. For example, Ellickson (2010) found that housing subsidies targeted at tenants are more efficient than regulations requiring certain dwelling units to be rented out at below market rates. Income transfers allow recipients to optimize choice of residence according to their preference and circumstance. Rent control reduces the incentive of developers to ensure the quality of subsidised units (see further discussion in Section 8).

This raises the issue of funding. The current level of private rental support provided by the State Government is very low and it appears that the proposed programs will provide modest increases in support. It should be possible to increase support further for very low income rental households from normal budgetary processes. More support would involve a trade-off with other housing expenditures or policies. Or it could require a shift towards a value uplift tax and away from subsidized or regulatory zoning policies (see discussion in Section 8.4). But this requires more consideration.

7.3 Income Support for First-Home Buyers

In this section we describe the state support for first-home buyers, discuss the effects, briefly consider other options, and draw some conclusions.

Support for first home buyers

As of January 2016, the NSW Government provides a grant of $10,000 for first home owner purchases of new homes sold for up to $750,000. Previously, the grant was $15,000. And prior to September 2012, the grant was available for purchases of existing property.

The NSW Government also provides first home buyers of new homes full exemption from stamp duty on new homes of $550,000 or less and partial exemption on homes priced between $550,000 and $650,000. And it provides a $5000 discount or grant for first home owners of existing property valued at up to $650,000.

Neither the first home owner grant nor the stamp duty concession is means tested directly. The house price limit provides an indirect means test as higher income households may purchase more highly priced properties,

In 2014/15, the NSW government provided 8,500 first home owner grants valued at $125 million and gave stamp duty concessions for 10,700 homes valued at $115 million.70 This was an average concession of $14,700 per first owner purchase of a new dwelling and an average stamp duty concession of $10,750 per purchase of any dwelling (with higher concessions for new dwellings). As noted, the first home owner grant fell to $10,000 in 2016.

Main effects

Given an estimated turnover of about 100,000 dwellings with a value of $68bn per annum in Sydney, the first home owner grant involves about 8.5% of the housing stock turnover per annum but the total monetary value of the grant is 0.2 per cent of the total value of the total turnover value of the stock.

However, first home owner purchases represented about one third of the new housing completions. Data on the average value of new completions are not available. Allowing an average value of $700,000, the turnover value would have been $17.5bn. Thus the first home owner grant would have been about 0.7 per cent of new home turnover value.

It may be concluded that first home owner grant has minimal impact on existing or new house prices. Consequently, the first home owner grant almost wholly benefits the recipient.

At $10,000, the grant is likely to have only marginal impact on household decisions to purchase housing especially when limited to new housing.71 If plausibly, the price elasticity of demand for buying a first home is say -1.0, as renting is a ready substitute, a reduction in effective price of 1.7% from $600,000 to $590,000 could induce an extra 1.7% of first home buyers into the market (which would be some 150 additional new home buyers in a year). First home owner grants could also bring forward home purchases by easing liquidity constraints.

Another issue is whether the first home grant actually increases the number of new dwelling completions. The above analysis suggests that the impact in the demand for new houses is small and would have minimal impact on the level of new completions.

Possible policy options

SERC (pp. 169-183) canvassed many policy options for first home owners. These include:

1. Minor changes to existing first home owner grant schemes. In NSW this could include applying to all dwellings, a change in the amount of the FHOG or the house price limit (up or down), or income testing

2. Support for real interest only loans for housing. In this case the mortgage usually increases with inflation so repayments increase with inflation.

3. Shared equity plans. In this case the lender takes an equity stake and shares changes in capital values with the home owner.

4. Government provides subsidies for savings by households for a deposit for a first home.

Assessment

In our view, policies (2) to (4) do not provide a significant advantage over a FHOG and often have practical issues.

Policy (2) is sometimes preferred because households can face up-front liquidity costs when they make mortgage repayments and pay interest in nominal terms. Nominal housing costs could be significantly reduced in the short run if households paid only real interest rates on their mortgages. These real rates would increase in absolute terms each year as the nominal house value increased (as there would be no loan repayments). Without mortgage repayments, mortgages would rise in nominal terms and be a constant proportion of house prices. Such a policy would raise make housing more affordable as currently defined by several authorities.

However, with regard to (2) and (3), if markets are unwilling to make such loans, it is hard to argue that governments should step in and make them. The administrative costs would be considerable. There could be a lack of transparency on the one hand and increased public risk if property prices fell on the other. In our view, supporting low income households directly and transparently via a FHOG is more practical preferable. Likewise, it is not clear how a subsidy for deposits for a first home would work.

Regarding the FHOG, the principal arguments for some such support are the social benefits of home ownership arising from the stake that homeowners have in their local neighbourhood and community as well as direct support for households with a significant (housing) need). Anyone who has had experience in a large strata unit will appreciate the difference in amenity and cooperation between strata properties with majority-owned and majority-renter units respectively.

In our view these points warrant support of the level currently given. The price constraint operates as a proxy for income testing, which would present difficulties as households often have temporarily low or high incomes. The policy may bring forward home ownership but have little impact on total home ownership. To have a major impact on home ownership the FHOG would have to be increased significantly. This report considers that there are more important priorities in assisting low income and vulnerable renter households.

7.4 Conclusions

Social housing is the prime state policy and accounts for a very high proportion of state government funds allocated to making housing more accessible and affordable. This is a core program for vulnerable households. The main issue is how to manage the assets and the program efficiently.

Government policy to privatize management by transfers to CHPs may improve development, management of assets and service quality, but the policy seems to need clearer specification. It is not clear that transfers will increase significantly the funding available for development or that CHPs have more professionalism than public sector employees.

A major problem is the large number of households who need substantial housing support but cannot access social housing. Many of these households would be in the first or second decile category. It is not clear that current housing policy supports these households adequately.

Commonwealth Rent Assistance is provided to a large number of low income households. It is efficient because it allows households to choose their preferred housing location, size etc., subject of course to income constraints. Although this is generally well targeted to assist the poorest and most disadvantaged households directly, Henry Tax review (2010) suggests that more allowance could be made for households with higher need.

The NSW Government provides very limited private rental assistance to households to help them avoid of social housing. In our view this could be significantly and usefully increased.

The state also provides modest income support for first home owners of low priced new housing. This support may bring forward home ownership in some cases, but overall probably has only a small impact on household choice to own or rent.

The policy implicitly recognizes the case for a home owning community and arguably the first home owner grant could be increased for low income households, as proxied by purchases of lower priced homes. To have a major impact on home ownership the FHOG would have to be increased significantly. This report considers that assisting low income and vulnerable renter households has a higher priority.

In this chapter we discuss:

● affordability objectives and policies

● general issues with regard to affordable housing,

● public subsidies for affordable housing,

● planning incentives for affordable housing

● regulated affordable housing (inclusionary zoning) and

● housing supply bonds to assist affordable housing.

8.1 Introduction: Affordability Objectives and Policies

Generally, “affordable housing policies” are policies designed to assist very low to moderate income rental households who are not in social housing and who do not receive, or who are inadequately supported by, Commonwealth rental assistance. The prime instrument is the provision of rental housing at affordable rents to these households. Instead of providing income assistance, these policies reduce the price paid for housing, the usual benchmark being at least 20 per cent below market rents.72

Three related objectives for affordable housing are: (i) to provide a pathway out of social housing, (ii) to assist low to moderate income with access to jobs; and (iii) to increase social diversity. With regard to (i), there is concern that, even with some financial support, households on the edge of social housing cannot afford housing at market rents and thus rent-controlled housing is required. With regard to (ii), the main concern is that employers (public or private) will not be able to attract key workers unless the workers have access to subsidised accommodation.

Thirdly, various agencies and consultants consider that affordable housing will create social and cultural benefits from diversity, improved overall well-being and less inequality (for example, Spiller and Anderson–Oliver, 2015). SGS Economics (2015b) cites significant external benefits such as diversity, health improvements, development of human capital and savings in social services, producing overall a net community benefit. The report claims high benefit cost-ratios for affordable housing provided in Brisbane. However, the results appear to reflect assumptions rather than evidence-based research.

Box 8.1 outlines NSW Affordable Housing Guidelines 2013. Key points are that affordable housing supply is “allocated to very low, low and moderate income households in housing need”, who do not meet the social housing eligibility criteria (or presumably households who meet the criteria but cannot obtain social housing). Households must be able to demonstrate need, such as currently living in unsuitable housing or needing to relocate for work or family reasons.

The Guidelines also state that affordable housing should be “owned by or operated under the long term management of registered community housing providers”. Under State Environmental Planning Policy (SEPP, 70, Affordable Housing, Revised Schemes), management by a registered community housing provider is a requirement of consent for affordable housing. Under SEPP (Affordable Rental Housing) 2009, dwellings can be approved as affordable only if they are used as affordable housing for 10 years from the date of the issue of the occupation certificate.

Box 8.1 Affordable Housing Policy: Excerpts from Draft NSW Affordable Housing Guideline July 2013

The national definition of affordable housing agreed by Australian housing, planning and local government ministers is “housing that is appropriate for the needs of a range of very low, low and moderate‐income households, priced to ensure households are able to meet other essential basic living costs.”

Affordable housing supply:

● Is owned by or under the long term management of registered community housing providers;

● Is allocated to very low, low and moderate income households in need;

● Is financially self-sustaining – providing housing does not depend on recurrent subsidies from the NSW Government

Affordability – Affordable housing supply will be let at a discount to local market rents, taking into account household income and capacity to pay.

Social mix – Affordable housing supply will ensure a social mix by avoiding large congregations of affordable housing units and through the allocation of housing across varying income bands. Consideration should be given to achieving income mix on individual projects noting that allocations will be informed by the need to match demand to available supply.

Affordable housing which is subject to these Guidelines will target households whose incomes fall within very low, low and moderate income bands:

● Very low – less than 50% of the median household income.

● Low – between 50% and 80% of the median household income.

● Moderate – Between 80% and 120% of the median household income.

Income eligibility limits will vary by household size as set out in Appendix 2 in the Guideline.

It is intended that affordable housing supply will be allocated across these three income bands. The allocation to different income bands will aim to balance the needs of households in housing stress with the requirement to generate sufficient income to meet finance as well as other operating costs. Consideration should also be given to applicants’ connection to the area and local conditions, such as labour supply, when making allocation decisions.

Based on an estimated 221,000 households in housing stress in NSW, SGS (2015b) proposes that a minimum target of 165,555 affordable dwellings be constructed over 20 years or 8,200 dwellings per annum. This presumably equates to about 5,500 new affordable dwellings in Sydney per annum, compared with the current average of about 22,000 completions per annum. In the short run this would have little impact on the total stock of affordable housing in Sydney (or NSW).

Affordable housing may be created by government subsidies usually for developments on public land, by planning incentives (density bonuses) that are written into local environmental plans or the outcome of voluntary planning agreements, or by planning regulations (inclusionary zoning). These methods are discussed in turn below. But first this paper discusses some general issues.

8.2 General Issues with Affordable Housing

The following are some general observations that apply to affordable housing strategy.

First, affordable housing policies may be applied in specific locations or generally across an urban area. Under current policy, affordable housing is encouraged in three council areas (the City of Sydney, Leichardt and Willoughby) and in priority, high density, areas including urban activation precincts, major transport corridors and possibly in very large developments.

A selective location policy limits the amount of affordable housing, but is perhaps more practical. But, if affordable housing is location specific, by what criteria are the locations chosen? There does not appear to be clear specification or justification for the proposed areas. And whatever the chosen areas and omissions, there is a risk of unequal dealing across private property rights.

Second, it is not clear whether the aim is to allocate a proportion of new housing stock to affordable housing or to produce housing stock that would otherwise not be supplied. Under subsidized and regulated policies (see Sections 8.3 and 8.5), affordable housing is provided by subsidizing or allocating a given housing stock. It therefore simply redistributes housing stock and rents. It does not reduce rents across the housing market. Under a planning incentive strategy (Section 8.4) the housing stock is increased but, as discussed below, possibly inefficiently.

Thirdly, and most important, is the selection of households for affordable housing. There are some 300,000 renting households in the two lowest income quintiles in Sydney and only a few thousand affordable units may be produced each year. Thus selection criteria are critical. In particular, it is not clear why or when households on moderate incomes should have priority over those on low or very low incomes. However, in central city areas, rents at 20% below market rates would be affordable only for households on moderate incomes. SGS (2015b, p.25) suggests that households with “key workers”, such as workers in education, health and police services should be given selection preference. But the criteria for key workers are not clear and not generally limited to public sector workers. SERC (2014, p.356) notes that some affordable housing has been let to overseas students.

Nor is it clear why households should be supported only if they pay over 30% of their gross income in rent. Hardship is generally defined by disposable equivalised household income that allows for different kinds of household. It would be unfair to penalise a household with a given equivalised income that chooses to spend less than 30% of income on housing.

Another key issue is whether a subsidy for a given dwelling unit is the best way to assist a household. Suppose that the rent subsidy for an apartment is worth $3000 a year. Would the household be better off receiving the $3000 and choosing their accommodation, which may not be the "affordable" unit? In essence, this is the choice between rent assistance and rent control as a means of household support. Andrews et al. (2011) cite various well-known advantages of rent assistance: improved targeting, better household choices, increased labour mobility and improved housing maintenance.

Finally, it is hard to hard to monitor use of affordable housing. Market and affordable rents need to be set on a regular basis. It is not clear what happens if a tenant’s income increases. And, although sub-letting of housing is an efficient response to housing problems, sub-letting is presumably banned. In any case it is hard to monitor sub-letting and to control trading practices.73

Box 8.1 provides some summary observations on rent controls and affordable housing regulations in New York and in England.

Box 8.1 Rent Control and Affordable Housing in New York and in England

New York City has a longstanding rent stabilisation policy, covering approximately half of its available rental units. Rent stabilisation caps annual rent increases, mandates minimum rental services required to be provided by landlords to tenants, and entitles tenants to have their leases renewed. Violations of the stabilisation regulations can result in a mandatory reduction in rent.

The Furman Center contends that this policy is poorly targeted and can create perverse incentives. As an example, the median income of households enjoying stabilised rental conditions in ‘core’ Manhattan is higher than the median income of tenants subject to market rates in all but eight neighbourhoods outside of the core Manhattan region. This suggests that households who do not require assistance are receiving substantial support. Further, the monetary benefit of rent stabilisation to the tenant typically grows as tenure increases. Consequently, the policy can limit household mobility, with the percentage of households that have been in their current home for more than 20 years 16 percentage points higher for tenants in rent stabilised units than for tenants in market rentals across the New York City region (23.1% compared to 7.1%).

New York City has introduced mandatory inclusionary housing (inclusionary zoning) for all new housing approved through land use actions. This includes a percentage of new dwellings to be provided at a set percentage of area median income, with maximum income limits for prospective purchasers/renters. This supplants the existing voluntary inclusionary zoning regime.

New York City has also introduced a ‘Zoning for Quality and Affordability’ policy which seeks to relax zoning regulations to allow for increased building envelopes for senior and affordable housing, and to reduce parking requirements for new developments in certain zones so as to encourage the more appropriate construction of housing for certain targeted groups (particularly senior housing).

It is too soon to determine whether these policies will have any significant effect on the production of affordable dwellings or the supply of market price dwellings.

In England, planning and development regulations include mandatory negotiations between local councils and property developers under the Town and Country Planning Act 1990 S106 Development Obligations for developments of more than 15 units. Given that S106 development obligations take the form of a negotiated agreement, the outcomes are uncertain. However, the agreements are typically used to mandate the inclusion of a set percentage of affordable housing within the development. In this context, affordable housing would typically mean housing available to rent or purchase at less than 80% of the prevailing market rate. S106 obligations often therefore amount to inclusionary zoning. S106 obligations can also be used to secure financial contributions from developers, or to restrict the development or use of the land under negotiation in some way.   

In an evaluation of S106 policies, Burgess et al (2007) found that the discretionary nature of S106 developer obligations results in a spatially inconsistent contribution of the obligations to the construction of affordable housing units. In total, the study finds that S106 obligations do contribute to the development of affordable housing units, though possibly to a lesser extent than is possible given that a number of local councils do not actively engage with S106. The study does not have any finding relating to the effect of S106 inclusionary zoning on the price and quantity of market price dwellings delivered to market.

8.3 Subsidies for Affordable Housing

Subsidies for affordable housing can be provided for developments on public or private land. On public land, the government or a publicly owned entity provides housing to designated households at 20% or more below the applicable market rent. On the other hand, for private developments the most direct subsidy would likely be a grant to the developer or community housing provider on the condition that the housing would be provided at an affordable rent.74

For public developments this means simply allocating some housing stock in chosen precincts to households deemed to be in need of lower market rents. This could be on a temporary, 10 year or longer basis.

Given an efficiently determined housing stock, the subsidy is simply a transfer payment (from tax payer to households with housing needs) with no efficiency impacts for housing supply. However, this would not be an efficient welfare solution if the recipient household would prefer to receive the rent subsidy in income that he or she could spend as they wish rather than on specified housing.

In principle, the same applies to privately-supplied affordable housing with a public grant. The housing stock can be efficiently determined prior to provision of the subsidy, there is no misallocation of resources and the grant is an income transfer from taxpayer to selected households. However, it is not clear how subsidized dwellings or households would be chosen. Indeed, all the practical problems described in Section 8.2 apply.

8.4 Planning Incentives for Affordable Housing

Planning incentives work by allowing developers higher floor space ratios (FSRs) on a site, typically by allowing increased building height or bulk, in excess of standard guidelines, in return for the provision of an agreed amount of affordable housing. These are sometimes described as density bonuses. These bonuses can be written into a planning scheme or the outcome of negotiated voluntary planning agreements. For example, Waverley Council has a floorspace bonus scheme for residential developments that include an affordable housing component either on site or as a financial contribution.

This additional floor space is conditioned on provision as affordable housing at rents 20% or more below market rents. From a developer perspective the affordable housing would be allocated to the lowest prices area as this would minimize the loss of value to the developer or owner.

A core problem with this policy is that planning bonuses are not efficient. The efficiency principle is that optimal FSRs, heights and bulks of buildings should be determined on their market, planning and environmental merits. As discussed in Chapter 5, efficient policy seeks to maximize the value added from the development subject to consideration of their party costs or benefits. This first best efficient solution is preferred to an inefficient built envelope.

Under the bonus policy, buildings are either undersized initially or over-sized after bonuses are allowed. Neither planning strategy is efficient. Generally, density bonuses assume that initial zoning is conservative and sub-optimal. They reflect poorly designed planning regulations which could be improved. But deliberate under-sizing and allowing bonus floorspace so long as it is provided at a subsidy could deter some efficient developments.

Moreover, planning incentives typically work on an ad hoc site by site basis. There is rarely a general formula. This adds complexity to a planning system that is already complex because of the universal clause in LEPs that allows developments that meet LEP objectives even if they fail LEP building guidelines. And planning incentives would be discriminatory unless general across Sydney.

8.5 Planning Regulations (Inclusionary Zoning) for Affordable Housing

Under the regulatory inclusionary zoning method, development is conditional on developers providing a given percentage of units or an overall sq.m of rentable floor space at affordable rents. Alternatively, developers may contribute the difference between market and affordable rents.

The idea is that the developer would develop the optimal amount of housing on any given site as per planning guidelines and that a proportion be allocated to affordable housing. Typically, the developer would allocate the lowest rent units to affordable housing as this would minimize the cost to the developer.

Under SEPP 70, councils can require new developments to provide a proportion of affordable housing to a CHP or pay a monetary contribution. At present SEPP 70 applies only to the City of Sydney, Willoughby and Leichardt local government areas. The SEPP could be amended to apply to other councils.

Regulatory (inclusionary) zoning has similar complications as above. Clearly the policy, including location, must be determined in advance rather than retrospectively.

South Australia has a policy that 15% of new dwellings in “significant residential development” must be affordable housing.75 It is not clear how significant residential development is defined (or would be defined if applied to Sydney). Such a ruling could encourage developers to construct residential developments that are not quite significant.

Generally, inclusionary zoning may encourage less than optimal new development and change housing form. Some marginal developments will be deterred, especially in lower priced areas, thus reducing total housing stock and increasing prices.

Critically, inclusionary zoning is a de facto method of rent control. Selected households receive rent controlled accommodation generally without time limit. There is a large international history of problems arising with rent controls (see Box 8.1 for an example). As discussed in Section 8.2, rent-controlled dwellings are often allocated to households with lesser needs. On-letting or sub-letting is hard to control. And the housing is often poorly maintained as landlords have no income incentive to maintain the property at a higher level.

Inclusionary zoning adds complexity to the planning system, produces a small amount of affordable housing unless applied widely, and applications may be discriminatory.

However, the principle that at least part of the value added from upzoning should accrue to the community, and hence to social services, is reasonable especially when upzoning reflects public investment in infrastructure.

Many submissions to Federal Standing Committee on Infrastructure, Transport and Cities support a land tax that would capture some of the value uplift. However, a land tax would typically be a relatively low tax rate of some 1% of land value. A value uplift tax would be levied at a significant percentage rate on the change in land value.

Thus a real value uplift tax would capture the uplift due to rezoning much more effectively than a low-rate broad land tax. All of this revenue (or part of it) can be allocated to affordable housing. This approach captures some of the economic profit from rezoning as inclusionary zoning does, but it does not depend on potentially complex planning regulations or deter development since it is essentially a tax on economic surplus. Also the revenue could be centrally administered to provide for affordable housing to households with greatest needs.

However, designing a value uplift tax is complicated and will need considerable assessment. A broad land value tax is much simpler but less equitable because it captures only a small proportion of improved value and, unless levied at a significant rate, would raise less revenue

8.6 Housing Supply Bonds

Housing supply bonds (HSBs) are special purpose financial instruments designed to reduce the cost of funding available to CHPs below other funding methods available from the private sector and, thereby, to enhance their capacity to increase the supply of affordable housing. Thus, Lawson et al. (2012) propose a HSB that incorporates a combination of public funding (providing direct subsidy) and private bond finance (indirectly subsidised through tax incentives and government guarantees). This appears to require Commonwealth and State Government support.

A HSB would be a special purpose vehicle to issue bonds linked to CHO loan obligations. The aim is to provide low risk, low yield and long-term borrowing instruments to provide cheapest funds. This would strengthen financial capacity of providers to develop more housing and reduce risks to lenders. But they do require tax incentives. Capacity to repay would be based on revenue stream so that rent assistance and eligibility policy would be critical.

Whatever form of financial intermediary is developed, the intermediary, the bonds and the housing providers obtaining loans would be subject to appropriate financial regulation. This is required to ensure that the intermediary is appropriately capitalised (or guaranteed); the funds raised by bonds issued are held in trust to ensure they are used for their intended purpose; housing providers have the requisite management and financial skills; and investors are aware of the characteristics of the bonds they are purchasing.

HSBs aim to complement and extend the value of public subsidies to increase the long-term supply of affordable housing. However, it is hard to see how they would generate private finance at a lower rate than would be available if affordable housing was funded directly through government borrowing.

Of themselves HSBs will not deliver affordable outcomes for tenants regardless of circumstances. Other assistance may be needed to ensure affordability outcomes for tenants of rental housing and to assist with repayment of the bonds over their (presumed 10-year) life span.

8.7 Conclusions

“Affordable housing policies” are policies designed primarily to assist very low to moderate income rental households who are not in social housing and who do not receive, or who are inadequately supported by, Commonwealth rental assistance. They may also provide pathways out of social housing, housing for key workers and social diversity.

These policies can be provided by government subsidies, planning incentives of planning regulations. Whichever of these may be advocated, the policy involves rent control and needs careful specification and metrics.

A critical issue is the criteria for selection of households for affordable housing. There is a large mismatch between the likely supply of affordable housing and the number of very low to moderate income renting households. Without tight targeting, affordable housing is provided to households with lesser needs and does not provide an effective pathway out of social housing. The policy is hard to administer with changing rents, rising household incomes, variations in household size and potential sub-letting or on-letting.

A special difficulty with planning incentives is that they either presume existing zoning is sub-optimal or they allow sub-optimal changes to an optimal zoning. Neither is desirable.

In addition to the general issues noted above, specific issues for inclusionary regulated zoning are: it may deter efficient development and adds complexity to the planning system while producing only a small amount of affordable housing.

In general, income subsidies to high-need recipients have significant advantages over rent-controlled dwellings. The advantages of rent assistance include more transparent and improved targeting, more and better household choices, increased labour mobility and improved housing maintenance.

If, notwithstanding this general principle, there are considered to be some special cases where rent controls could be useful, it is suggested that more consideration be given to this strategy.

However, the principle that some of the value added from up-zoning should accrue to the community, and hence to social services, is reasonable especially when up-zoning reflects public investment in infrastructure.

A value uplift tax would be levied at a significant percentage rate on the change in land value. This would capture some of the uplift due to rezoning more effectively than a low-rate broad land tax. Properly designed, it is a tax on economic surplus and would not deter development as inclusionary zoning may do. All or part of the revenue could be centrally administered and allocated to affordable housing to households with greatest needs.

However, designing a value uplift tax is complicated and will need considerable assessment. A broad land tax captures less of the economic profit from rezoning. But it is also relatively efficient, does not distort development or not depend on complex planning regulations.

9.1 Main Conclusions

This report examines three main housing cost issues: general housing affordability for the population as a whole, affordable housing for the lower two income quintiles and housing needs for vulnerable low income households (generally very low income households). While some policies respond to all three issues, it is convenient to consider the main policies that emerge for each category.

Policies for general housing affordability: housing supply and demand

It should be recognised at the outset that housing prices have averaged over 40% more in Sydney than in other Australian capital cities for several decades. This is because it is a coastal city with limited urban land; it is the physical centre of a growing economy with a growing population; it has high amenity; and it attracts high income earners who compete for access to scarce amenity and urban space. These basics are not likely to change significantly.

Policies for reducing housing costs across the price spectrum generally involve either increasing the supply of housing or reducing demand or both.

Increasing housing supply can have a significant but small impact on house prices. The paper finds that an x% increase in the housing stock over and above any increase needed to meet demand will reduce real house prices by about 3x%. Thus, doubling annual completions from an average 1.3% p.a. needed to meet underlying demand to 2.6% of the housing stock could reduce real house prices by about 4% (3 1.3%).

However, this would occur only if the reduction in house prices did not lead to increased immigration as Sydney became relatively more attractive than other cities. Thus to some extent house prices in Sydney are a national issue.

Ideally housing targets should be based on cost-benefit evaluation of housing development strategies by locality that seek to maximize the net social value of new housing to the community. This net social value is essentially the market value of housing less development and construction costs, infrastructure costs and any congestion and environmental costs.

The housing target would likely exceed recent completion rates but would take into account concerns about the environment associated with development. Where rezoning has a clear positive net social, rezoning in greenfield and established areas should be undertaken promptly.

Other planning reforms, such as more complying development in appropriate areas (it is often not appropriate in developed areas), shorter development approval times and simpler construction certificates may marginally increase housing supply. But, in the view of this paper, these changes would have much less impact than establishing improved zoning rules.

Stamp duty more than doubles most transaction costs. This deters transactions, results in significant under-utilisation of the housing stock and has an estimated loss of benefit to the community in the order of $375 million per annum. Replacing stamp duty with a broad based land tax could release a significant amount of under-utilised housing and reduce house prices by about 6% after several years. However, change may have to be introduced slowly or carefully so that households involved in recent transactions are not double taxed.

Housing costs may also be reduced by a minor amount by allowing lower housing standards and by more efficient contestable provision of housing-related infrastructure, along with efficient development charges. However, these changes would likely have only small impacts on housing affordability.

Housing demand is encouraged by major tax concessions to both homeowners and investors that push up housing prices. The issue is whether such tax concessions should be reduced or abolished altogether.

The major tax concessions to homeowners are non-taxation of net imputed rents and capital gains. The major concessions to property investors are the deductibility of losses, notably incurred by borrowing costs, against other income, and the apparent concession that only 50% of nominal capital gains attract tax. Both sets of tax concessions are Commonwealth government concessions.

On the other hand, both homeowners and investors pay significant transaction taxes as well as municipal land taxes and some state land taxes.

The concessions to home owners increase existing housing prices and provide only small benefits to first-time home owners. They also indirectly cause higher rents.

By contrast, subsidies to property investors are passed on principally in lower rents to rental households as a result of the increase in rental properties. However they increase housing prices for first-home owners. More work is needed to quantify these effects.

The paper inclines to the following conclusions:

● A broad-based land tax on housing properties could provide a more neutral tax / concession policy with respect to net imputed rents, but it would only be a proxy tax.

● It would be inappropriate and inefficient to apply the capital gains tax to home owned properties, which are essentially consumption goods, as this would unfairly penalise and discourage homeowner movements.

● Maximum tax deductions for negative gearing should be brought into line with the corporate tax deduction rate.

● Given the current very low inflationary environment where real gains are typically larger than inflationary changes, consideration could be given increasing the capital gains tax on assets including investment property to 60% of capital gains. But it should be noted that a 50% tax on nominal gain is not a tax concession when the inflation rate exceeds the real rate of house price appreciation.

● Consider including homes in asset tests of access to Commonwealth pensions.

However, the effects on housing affordability for home owners and renters are complex. More analysis is needed to work through the effects and in particular the interaction of any changes with other parts of the tax system.

Foreign demand has had a small but increasing impact on house prices. There may be a case for a higher transaction tax on foreign purchases of residential property, but this could be hard to implement.

Policies for affordable housing for the two lowest household income quintiles

Of some 700,000 households in the lowest two income quintiles, about 300,000 households are renting housing and about 150,000 of these spend over 30% of their income on housing rent and may be deemed to be in housing stress. However, a significant proportion move out of stress within one or two years with increases in income.

This paper supports small subsidies for first home owners on modest or low incomes. Home ownership is a public good as well as a private benefit. FHO grants may bring forward house purchase. But they should be targeted primarily at low income households to meet equity objectives.

“Affordable housing policies” are policies designed primarily to assist very low to moderate income rental households who are not in social housing and who do not receive, or who are inadequately supported by, Commonwealth rental assistance. They may also provide pathways out of social housing, housing for key workers and social diversity.

These policies can be provided by government subsidies, planning incentives of planning regulations. Whichever may be advocated, the policy involves rent control and needs careful specification and metrics.

A critical issue is the criteria for the selection of households for entry into affordable housing. The number of very low to moderate income, renting households is likely to greatly exceed the supply of affordable housing. Without tight targeting, affordable housing would be provided to households with lesser needs and fail to provide an effective pathway out of social housing. Policy administration is also difficult with changing rents, rising household incomes, variations in household size and potential sub-letting or on-letting.

A special difficulty with planning incentives is that they either presume existing zoning is sub-optimal or they allow sub-optimal changes to an optimal zoning. Neither is desirable.

In addition to the general issues noted above, specific issues for inclusionary regulated zoning are: it may deter efficient development and add complexity to the planning system while producing only a small amount of affordable housing.

In the view of this paper, income subsidies to recipients have significant advantages over rent-controlled dwellings. The advantages of rent assistance include more transparent and improved targeting, more and better household choices, increased labour mobility and improved housing maintenance.

If, notwithstanding this general principle, there are considered to be some special cases where rent controls could be useful, it is suggested that more consideration be given to this strategy.

However, the principle that some of the value added from up-zoning should accrue to the community, and hence to social services, is reasonable especially when up-zoning reflects public investment in infrastructure.

A value uplift tax would be levied at a significant percentage rate on the change in land value. This would capture some of the uplift due to rezoning more effectively than a low-rate broad land tax. Properly designed, it is a tax on economic surplus and would not deter development as inclusionary zoning may do. All or part of the revenue could be centrally administered and allocated to affordable housing to households with greatest needs.

However, designing a value uplift tax is complicated and will need considerable assessment. A broad land tax captures less of the economic profit from rezoning. But it is also relatively efficient, does not distort development or not depend on complex planning regulations.

Housing policies for vulnerable low income households

Social housing for some 127,000 households in Sydney is the prime state policy and accounts for a very high proportion of state government funds allocated to making housing more accessible and affordable. This is a key core program for vulnerable households. The main issue is how to manage the assets and the program efficiently.

Government policy to transfer management of up to 35% of social housing stock to CHPs may improve management of assets and service quality and increase funding for social housing from tenants having access to Commonwealth rent assistance (CRA). However, it is not clear how, or whether, this would lead to a significant increase in the supply of social housing.

A major problem is the large number of low income households (possibly 80,000 to 100,000 households) who need substantial housing support but who cannot access social housing.

CRA is provided to about 275,000 low income households in Sydney. This is targeted to assist the poorest and most disadvantaged households directly. It is efficient because it allows households to choose their preferred housing location, size etc., subject of course to income constraints. However, this paper supports the Henry Tax Review (2010) recommendations 102 and 105 that assistance could be targeted better by linking assistance to movements in national rental costs and by providing additional support for households who have higher need.

The NSW Government provides very limited private rental assistance totalling about $11.4 million annually to some 18,000 households. There are plans for a small increase in this form of assistance. In our view, the various related polices and financial support could be usefully and substantially increased where the benefits are greatest (supporting the most vulnerable). As is well recognized within Government, there is an urgent need for housing policies to provide a pathway vulnerable households away from, or out of, social housing, which is an expensive last resort policy.

The NSW Government also provides modest income support for first home owners of low priced housing. This support probably affects timing of house purchase decisions but has only a small impact on overall household choice to own or rent and little impact on house prices or completions.

The policy implicitly recognizes the case for a home owning community and arguably the first home owner grant could be increased for low income households, as proxied by purchases of lower priced homes. To have a major impact on home ownership the FHOG would have to be increased significantly. This report considers that assisting low income and vulnerable renter households has a higher priority.

Conclusions

The paper discusses a large number of Commonwealth and State housing policies. From a state perspective there are two main sets of issues:

● How to determine the amount of public resources to support affordable housing and how to allocate this most efficiently and equitably, and

● How best to engage the private sector notably by regulation or taxation of development.

A theme of the paper is the need to identify and assist the most vulnerable renting households in the lowest two deciles who are currently under supported by social housing or by Commonwealth or state government rent assistance. Within Sydney this could amount to some 80,000 to 100,000 households in privately rented accommodation in addition to the 127,000 households in social housing. Identifying and providing greater support to these households is seen as the major policy priority.

This could be funded by a value uplift tax or by a broad land tax or by a developer levy of some kind.

The paper supports a more active rezoning strategy based on cost-benefit evaluations which would most likely support a significant increase in housing activity and completions and produce marginal reductions in real house prices

The paper also supports a move to a broad land tax instead of stamp duty and supplemented by a value uplift tax on re-zonings if such a policy can be designed efficiently. This revenue could support those marginal renting households who are currently under-supported.

As discussed in the paper and summarized above, various other policies have both merits and issues and may warrant implementation. However, in the view of the paper, they are likely to produce marginal, rather than major, changes to housing affordability in Sydney.

9.2 Issues Going Forward

In conclusion, it should be reiterated that this is an overview paper. Several issues would benefit from more detailed consideration. In particular, their practicality needs to be demonstrated.

The following is a selection of subjects that could benefit from more evidence and / or analysis.

● A housing target model for Sydney

● The application of cost-benefit analysis in developing sub-regional housing targets

● The definition, extent and impact of foreign purchases of residential property

● The role of community housing providers in social and affordable housing

● The benefits of social diversity in housing

● Creating pathways out of social housing

● The optimal extension of state government provided private rental assistance

● Criteria for selecting households for affordable housing

● Methods for capturing value uplift

● The incidence and impacts of a broad land tax in place of stamp duty

● Overall tax revenue from property

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Table A.1 Median dwelling prices in Greater Metropolitan Sydney: 1991-2015 ($'000)

 

All dwellings

Sydney

Houses: Sydney

Units: Sydney (a)

Year

Sydney

GMR

Rest NSW

Houses

Units

Inner

Middle

Outer

Inner

Middle

Outer

1991

155

110

98

155

140

210

165

136

173

130

130

1992

165

115

98

175

148

251

180

150

183

138

136

1993

170

120

100

177

155

254

198

148

174

148

133

1994

175

122

107

184

159

280

220

143

185

157

130

1995

188

120

115

199

172

291

233

160

208

165

147

1996

199

130

116

210

181

315

242

168

220

170

158

1997

221

136

120

230

210

375

272

175

270

190

170

1998

242

145

125

250

230

421

313

190

290

220

186

1999

265

150

127

275

253

441

350

212

304

240

200

2000

295

163

135

314

278

484

380

248

338

265

222

2001

316

175

137

327

305

565

413

264

370

285

245

2002

370

221

158

390

353

697

520

323

425

336

282

2003

415

279

195

457

378

790

528

385

458

360

323

2004

427

320

230

486

384

775

600

412

445

370

340

2005

435

320

247

490

395

795

600

410

465

365

350

2006

436

324

260

485

391

825

585

400

470

370

339

2007

450

330

275

500

400

895

600

409

480

372

335

2008

435

324

276

499

395

880

625

390

480

380

320

2009

435

329

272

484

400

876

609

400

488

395

335

2010

522

367

308

595

480

1100

750

462

585

470

375

2011

534

385

309

650

490

1120

775

470

590

476

370

2012

530

381

306

591

498

1068

745

476

600

495

393

2013

520

391

310

630

518

1200

825

500

641

510

395

2014

650

440

325

735

590

1365

1000

579

720

590

442

2015

679

452

335

752

620

1585

1150

625

760

620

480

(a) Estimated for 1991 based on overall change in prices as sample sizes for sub-sets too small to be reliable.

Source: NSW Department of Family and Community Services, Rent and Sales Reports.

Table A.2 Median dwelling price indices in Sydney: 1991-2015 (1991 = 100)

 

All dwellings

Sydney

Houses: Sydney

Units: Sydney

June qtr.

Sydney

GMR

Rest NSW

Houses

Units

Inner

Middle

Outer

Inner

Middle

Outer

1991

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

1992

103.0

101.2

96.8

109.3

102.3

115.7

105.6

106.7

102.4

102.7

101.2

1993

104.9

104.3

97.6

109.2

105.9

115.7

114.8

104.1

96.2

108.9

97.9

1994

106.0

104.2

102.5

111.5

106.7

125.2

125.2

98.7

100.4

113.4

93.9

1995

111.9

100.6

108.2

118.4

113.3

127.8

130.3

108.5

110.9

117.1

104.3

1996

113.3

104.3

104.5

119.6

114.1

132.4

129.4

109.0

112.2

115.4

107.3

1997

122.1

105.8

104.8

127.0

128.4

152.9

141.1

110.2

133.6

125.1

111.9

1998

133.3

112.5

108.9

137.7

140.2

171.1

161.9

119.2

143.1

144.4

122.1

1999

144.8

115.5

109.8

150.3

153.1

177.9

179.7

132.1

148.9

156.4

130.3

2000

159.6

124.2

115.5

169.9

166.5

193.2

193.1

152.9

163.8

170.9

143.2

2001

165.8

129.4

113.7

171.6

177.2

218.8

203.6

157.9

174.0

178.3

153.3

2002

183.0

154.0

123.6

192.8

193.3

254.4

241.5

182.0

188.3

198.1

166.3

2003

199.6

189.1

148.3

219.8

201.3

280.4

238.5

211.0

197.3

206.4

185.2

2004

200.1

211.3

170.5

227.8

199.3

268.1

264.2

220.1

186.9

206.8

190.0

2005

198.8

206.1

178.6

224.0

199.9

268.2

257.6

213.6

190.4

198.9

190.7

2006

194.5

203.6

183.4

216.3

193.1

271.6

245.1

203.3

187.8

196.7

180.3

2007

193.0

199.4

186.5

214.4

189.9

283.3

241.7

199.9

184.4

190.2

171.3

2008

182.7

191.8

183.4

209.6

183.7

272.8

246.6

186.7

180.6

190.3

160.3

2009

174.9

186.4

173.0

194.6

178.1

260.0

230.1

183.3

175.8

189.4

160.6

2010

207.0

205.1

193.2

235.9

210.7

322.0

279.4

208.8

207.8

222.2

177.3

2011

205.3

208.6

187.9

249.9

208.6

317.9

280.0

206.0

203.3

218.2

169.6

2012

196.8

199.4

179.7

219.5

204.8

292.7

259.9

201.5

199.6

219.2

174.0

2013

190.8

202.2

179.9

231.2

210.4

325.0

284.4

209.1

210.7

223.1

172.8

2014

232.9

222.2

184.2

263.4

234.1

361.0

336.6

236.5

231.2

252.1

188.9

2015

236.2

221.6

184.3

261.6

238.8

407.0

375.8

247.8

236.9

257.2

199.1

Source: Table A.1 above.

Table A.3 Housing stock and completions in Sydney: 1990-91 to 2014-15

 
Year

Private completions (a)

Private
housing stock (b)

Social
housing (c)

Total housing
stock (d)

Change in total housing stock

Private completions as a percentage of total housing stock

1990-91

16,308

1,178,752

100,000

1,278,752

 

1.28%

1991-92

19,966

1,198,718

100,000

1,298,718

1.56%

1.54%

1992-93

23,523

1,222,241

100,000

1,322,241

1.81%

1.78%

1993-94

23,785

1,246,026

100,000

1,346,026

1.80%

1.77%

1994-95

27,894

1,273,920

100,000

1,373,920

2.07%

2.03%

1995-96

25,305

1,426,266

100,000

1,526,266

11.09%

1.66%

1996-97

24,641

1,450,907

100,000

1,550,907

1.61%

1.59%

1997-98

25,618

1,476,525

100,000

1,576,525

1.65%

1.62%

1998-99

30,172

1,506,697

100,000

1,606,697

1.91%

1.88%

1999-00

32,347

1,539,044

100,000

1,639,044

2.01%

1.97%

2000-01

30,545

1,438,394

120,000

1,558,394

-4.92%

1.96%

2001-02

29,241

1,467,635

120,000

1,587,635

1.88%

1.84%

2002-03

24,394

1,492,029

120,000

1,612,029

1.54%

1.51%

2003-04

23,919

1,515,948

120,000

1,635,948

1.48%

1.46%

2004-05

20,300

1,536,248

120,000

1,656,248

1.24%

1.23%

2005-06

18,391

1,423,535

125,098

1,548,633

-6.50%

1.19%

2006-07

15,761

1,439,296

124,703

1,563,999

0.99%

1.01%

2007-08

14,885

1,454,181

123,795

1,577,976

0.89%

0.94%

2008-09

13,584

1,467,765

123,220

1,590,985

0.82%

0.85%

2009-10

13,960

1,481,725

122,352

1,604,077

0.82%

0.87%

2010-11

15,317

1,640,199

124,590

1,764,789

10.02%

0.87%

2011-12

15,591

1,655,790

126,835

1,782,625

1.01%

0.87%

2012-13

21,097

1,676,887

126,512

1,803,399

1.17%

1.17%

2013-14

23,456

1,700,343

127,082

1,827,425

1.33%

1.28%

2014-15

28,314

1,728,657

127,799

1,856,456

1.59%

1.53%

(a) Source: Department of Planning and Environment

(b) Based on June 1991 plus private housing completions, with the exception of Census years. The bolded private housing data in 1990-91, 1995-96, 2000-01, 2005-06 and 2010-11 comes from the 1991, 1996, 2001, 2006 and 2011 Censuses respectively. At each Census year we re-adjust the private housing stock to the Census number. The larger changes in housing stock in the Census years are likely due to measuring differences resulting in the growth in the ABS Census data not precisely aligning with the growth implied by the DPE private housing completion data.

(c) From 2006-07 onwards, social housing data is drawn from the Report on Government Services 2016, Volume G, Chapter 17, Table 17A.3 - number of social housing dwellings at 30 June for NSW (summing together all four types of social housing listed). For 2015, data on Indigenous Community Housing is unavailable, so the 2014 figure is used. It is assumed that 20,000 social housing units are located outside of Sydney

(d) Equal to private housing plus social housing.

Table A.4 Household incomes in NSW and Sydney: 1990-91 to 2014-15

FY

NSW

NSW

NSW

NSW

Sydney

Sydney

Sydney

Sydney

 

Mean gross HHY per annum

Median gross HHY per annum

Mean disposable HHY per annum

Median disposable HHY per annum

Mean gross HHY per annum

Median gross HHY per annum

Mean disposable HHY per annum

Median disposable HHY per annum

1990-91

               

1991-92

39,422

29,850

30,213

22,878

45,063

35,483

34,536

27,195

1992-93

38,912

30,188

30,555

23,704

44,479

35,884

34,927

28,177

1993-94

39,019

30,533

30,904

24,183

44,602

36,295

35,326

28,747

1994-95

40,448

31,609

31,994

25,003

46,235

37,574

36,572

29,721

1995-96

42,809

32,947

33,348

25,665

48,934

39,164

38,119

30,508

1996-97

43,669

32,891

33,758

25,426

49,917

39,098

38,588

30,224

1997-98

45,153

37,058

34,864

28,614

51,613

44,051

39,853

34,013

1998-99

47,110

36,527

36,336

28,173

53,850

43,420

41,535

33,489

1999-00

49,172

37,669

37,472

28,706

56,208

44,777

42,833

34,123

2000-01

51,111

39,665

38,671

30,011

58,424

47,150

44,204

35,674

2001-02

53,512

42,066

41,420

32,560

61,168

50,004

47,346

38,705

2002-03

54,676

42,487

41,835

32,509

62,499

50,505

47,821

38,643

2003-04

57,568

45,320

43,326

34,108

65,805

53,872

49,525

40,545

2004-05

65,294

51,483

48,967

38,609

74,636

61,198

55,973

45,895

2005-06

70,059

54,859

52,177

40,857

80,084

65,211

59,643

48,567

2006-07

73,749

56,859

54,573

42,075

84,301

67,588

62,382

50,014

2007-08

78,067

60,186

57,766

44,535

89,237

71,543

66,032

52,939

2008-09

87,764

66,823

64,799

49,337

100,321

79,433

74,070

58,648

2009-10

89,984

70,204

68,077

53,112

102,859

83,452

77,817

63,135

2010-11

89,921

68,603

68,719

52,428

102,787

81,548

78,552

62,321

2011-12

96,158

72,682

72,806

55,032

109,916

86,398

83,223

65,416

2012-13

99,107

75,494

74,984

57,119

113,287

89,740

85,713

67,897

2013-14

99,312

76,030

75,517

57,813

113,522

90,377

86,322

68,723

2014-15

111,280

81,796

85,821

63,082

127,202

97,231

98,100

74,986

Source: ABS 6523.0, Household Income and Wealth, Data Cube 16: Household Income and income Distribution in NSW.

Table A.5 Average housing prices in Australian capital cities: 1997 to 2014

Year

Sydney

Melbourne

Brisbane

Adelaide

Perth

Hobart

Darwin

Canberra

1997

211,221

131,445

141,475

125,156

127,437

133,752

166,323

175,613

1998

231,160

144,300

142,496

127,641

133,425

131,378

160,242

177,840

1999

256,000

166,304

144,435

137,807

141,559

137,963

163,529

189,390

2000

271,039

182,401

152,397

143,681

150,146

144,332

161,722

203,723

2001

317,676

219,924

167,198

165,482

161,669

149,298

167,145

238,372

2002

388,984

247,371

209,457

200,385

180,423

162,792

174,787

281,232

2003

441,172

274,047

273,207

240,443

219,787

208,091

198,205

343,074

2004

424,165

275,371

283,443

258,128

248,021

233,438

227,501

337,267

2005

409,159

282,432

295,253

269,417

304,054

247,519

275,565

346,945

2006

413,661

306,704

316,905

284,844

427,413

269,424

322,713

373,075

2007

446,174

373,781

386,191

345,802

436,969

300,403

358,417

428,721

2008

422,665

363,190

377,136

352,198

403,523

293,831

385,882

410,334

2009

480,187

435,122

414,535

380,419

449,565

326,062

451,798

472,271

2010

506,697

466,454

413,354

394,342

451,303

333,572

466,446

495,981

2011

492,192

441,300

394,458

378,914

431,756

318,865

449,509

488,239

2012

518,702

443,065

400,363

377,033

456,949

307,913

493,453

492,594

2013

595,232

484,106

421,621

392,837

494,739

323,246

516,340

492,594

2014

667,760

505,730

444,060

402,620

500,820

330,443

520,460

500,820

Source: NSW Treasury research.

Table A.6 House prices indices in Australian capital cities: 1997 to 2014

Year

Sydney

Melbourne

Brisbane

Adelaide

Perth

Hobart

Darwin

Canberra

1997

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

1998

109.4

109.8

100.7

102.0

104.7

98.2

96.3

101.3

1999

121.2

126.5

102.1

110.1

111.1

103.1

98.3

107.8

2000

128.3

138.8

107.7

114.8

117.8

107.9

97.2

116.0

2001

150.4

167.3

118.2

132.2

126.9

111.6

100.5

135.7

2002

184.2

188.2

148.1

160.1

141.6

121.7

105.1

160.1

2003

208.9

208.5

193.1

192.1

172.5

155.6

119.2

195.4

2004

200.8

209.5

200.3

206.2

194.6

174.5

136.8

192.1

2005

193.7

214.9

208.7

215.3

238.6

185.1

165.7

197.6

2006

195.8

233.3

224.0

227.6

335.4

201.4

194.0

212.4

2007

211.2

284.4

273.0

276.3

342.9

224.6

215.5

244.1

2008

200.1

276.3

266.6

281.4

316.6

219.7

232.0

233.7

2009

227.3

331.0

293.0

304.0

352.8

243.8

271.6

268.9

2010

239.9

354.9

292.2

315.1

354.1

249.4

280.4

282.4

2011

233.0

335.7

278.8

302.8

338.8

238.4

270.3

278.0

2012

245.6

337.1

283.0

301.3

358.6

230.2

296.7

280.5

2013

281.8

368.3

298.0

313.9

388.2

241.7

310.4

280.5

2014

316.1

384.7

313.9

321.7

393.0

247.1

312.9

285.2

Source: Table A.5.

Table A.7 – Housing User Costs in Sydney: 1991 to 2014

Applied Economics

Sources: See discussion in Chapter 3.

Table A.8 Median house prices in capital cities

 

Median December Price of Established House Transfers ($'000) (b)

Year

Sydney

Melbourne

Brisbane

Adelaide

Perth

Hobart

Darwin

Canberra

2002

444

280

208

195

206

128

195

291

2003

520

320

296

247

250

182.3

226

375

2004

515

321

310

270

280

237.3

259

372

2005

500

332

320

280

340

252.5

320

387

2006

500

360

343

300

470

278

380

421

2007

540

410

415

358

480

310

418.5

468

2008

468

385

399

355

425

300

445

450

2009

595

478

455

399

505

350

520

509

2010

620

520

460

410

500

345

545

534

2011

533

495

430

385

480

337

515

500

2012

640

508

440

395

510

331

561

519

2013

745

561

465

412

552

350

579

503

2014 (a)

838

572.5

485

427

550

365

582

570

2015

910

621

500

443

535

371

582

621

 

Median December Price of Attached Dwelling Transfers ($'000) (c)

Year

Sydney

Melbourne

Brisbane

Adelaide

Perth

Hobart

Darwin

Canberra

2003

387

285

241.6

191

198

175

135.5

300

2004

390

281

267

220

229

200

171

289

2005

383

290

280

228.8

276

215

225

308

2006

393

315

298

246

362

231

260

317

2007

410

365

357

290

385

260

307

365

2008

373

350

350

301

350

245

329

360

2009

450

421

381

327

415

285

400

402

2010

488

460

385

335

410

288

420

425

2011

460

432

380

327

400

275

399

415

2012

525

440

385

325

410

294

410

415

2013

565

467

400

330

450

295

481

420

2014 (a)

615

485

395

345

450

270

440

424

2015

685

505

397

350

435

297

440

418

(a) ABS 6416 notes that: "Users should apply caution when comparing data prior to March quarter 2014 with data after March quarter 2014 due to a change in data source."

(b) Established houses are defined in ABS 6416 Glossary as "Detached residential dwellings on their own block of land regardless of age (i.e. including new houses sold as a house/land package as well as second hand houses).”

(c) Attached dwellings are defined in ABS 6416 Glossary as "Dwellings which share a structural component with one or more other buildings. This may include walls, ceiling, floor or roofing, for example, flats, units and apartments and semi-detached, row and terrace houses."

Source: ABS 6416, Residential Property Price Indexes: Eight Capital Cities, Dec 2015, released 22 March 2016.

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