Housing Justice Roundtable	  
Dedicated to improving access to affordable and secure housing	C/O Joint Convener
Barry Pullen
117 Johnston Street
Collingwood 3066
bpullen@infoxchange.net.au  	

17 October 2003

First Home Ownership Inquiry
Productivity Commission
Locked Bag 2, Collins St East
Melbourne Vic. 8003

Dear Commissioners,

This submission represents the views of agencies , organisations  and individuals who meet to discuss housing issues under the auspice of the Housing Justice Roundtable.

Our primary concern is the provision of affordable housing for families and individuals on low income.

But we also recognise that it is ineffective to look at their needs in isolation from the general issue of housing affordability.

Consequently we argue that the first homebuyer problem is not only an issue of problems in the owner occupied housing market but also of problems of the private rental sector and the public housing sector.

For the above reasons we believe that a sustainable solution to housing affordability requires action across all tenures.

Further that the most effective results will be obtained by coordinated action involving the three levels of government.

The focus of the submission is on solutions rather than causes. 

The recommendations are designed to address problems and fill gaps in taxation regimes, the financial system and its lending instruments, the regulatory environment, the small size of the social housing sector and the specific forms of housing assistance.

We would like an opportunity to present our views to the Commission.

Yours Faithfully

Co convenors: 	Barry Pullen	Tony Nicholson	Michael Yore
A list of supporting organizations and individuals is attached

Housing Justice Roundtable

Submission to the Productivity Commission Inquiry into
First Home Ownership

October 2003

HJRt submission to Productivity Commission Inquiry into first home ownership
Introduction
This submission represents the views of a collection of agencies and organisations (Appendix 1). The submission begins with a brief review of the factors constraining access to first home ownership followed with a more detailed focus on solutions. 

We would like to state that the causes of the affordability problem are broader than a first home buyers issue and that no single explanation such as land shortages, planning controls, stamp duty, etc is adequate. The problem is rather the product of a specific institutional environment (taxation regimes, the financial system and its lending instruments, the regulatory environment, the small size of the social housing sector and the specific forms of housing assistance in Australia) which encourages over consumption of housing generally and the under production of lower cost housing.

Competition between investors and first home buyers
While it is true that the price of houses responds to demand, the housing market is very different from other markets in significant aspects. For instance we can distinguish between people who are basically purchasing housing services for their own consumption and those that approach housing primarily as an investment product. For the first category, home ownership provides a hedge against poverty as well as security of tenure. Home ownership costs decrease as people age, and provide stable housing for families with children at school and for those who require increased levels of care increasingly to be provided in the community. Home ownership and other forms of secure, affordable tenancy are necessary for individual and family stability and social cohesion although excessive mortgages can place stress on family relationships as well as the economy. By contrast the pure investor is primarily interested in how the investment performs against possible alternatives. To the investor, the tax treatment of capital gain and the capacity to negatively gear against other sources of income are key considerations in assessing their investment decision and the price they are prepared to pay for a property.

We believe that current rising house prices are due to increased demand, fuelled by increased investment and competition over limited resources. As a result, many low to medium income first home buyers are being priced out of the market.

Most first home buyers are further disadvantaged when competing in the housing market with investors and second and third homebuyers with secure capital bases, looking for capital gains and increased amenity. In contrast, first home buyers are mostly seeking secure and affordable homes for their own use, usually at the time of household formation and/or the birth of the first child.
The decline in low cost private rental
Secure low cost rental housing can support household saving and therefore become a staging point for eventual owner occupation. We believe that any decline in first home purchases needs to be considered in relation to the private rental market. Furthermore, the decline in first home purchase places greater demand on the private rental market. Unfortunately, increased demand for low cost rental housing has forced prices up, making it less low cost and new investment has not increased supply of affordable, well-located housing. 

This decline in low cost rent stock identified by Wulff, Yates, and Burke (2001) means that fewer moderate to low-income households are able to save for a deposit for their first home while in this tenure. Furthermore, Wulff et al claim higher income households are also competing for this lower cost housing, placing greater stress on the housing status of even more disadvantaged people. Only increased access to public housing will prevent them from becoming homeless.

Other savings barriers
As well as the housing affordability factors already identified by the Commission, younger Australians now often have additional demands on their incomes, such as HECS and credit card debt, that combined with high rents put home ownership out of reach. 

We believe that this savings issue is compounded by the increased inequality amongst the incomes of Australians and the concentration of full time, permanent employment amongst the higher income bracket. While we have not directly focused on these issues in this submission, given the terms of reference of the Commission’s inquiry, we believe it is naive to ignore their influence on the capacity of many households to participate in the benefits of wealth creation associated with home ownership.

The rental market in urban Australia further compounds the first homebuyer problem by being structured in a way (minimum security of tenure, minimum control of tenants over their home) that most households want to exit to ownership, intensifying demand pressures on the owner occupied sector.

While it is beyond the scope of this submission to address this issue in detail, a number of policy levers are available to improve the housing outcomes of low to moderate income households in the private rental market and support many to make the move to home purchase:
•	Review and reform of Commonwealth Rent Assistance, 
•	Strengthening of state based tenancy legislation – particularly in relation to security of tenure, and 
•	Standardising and better regulation of the Real Estate Industry

Therefore, this submission does include a number of policy recommendations for better outcomes for low to medium income households in the private rental market, in particular options to expand the supply of affordable rental housing, as we believe that this will have flow on effects for first home ownership.
Stamp duty
We appreciate that the making of policy does not derive only from evidenced based research but is a political process. In the context of this inquiry the ‘problem’ of stamp duty has been placed on the agenda because of intergovernmental politics. This effectively creates an imperative for stamp duty on the transfer of land and housing to be researched and discussed. Therefore, this submission discusses stamp duty and makes a number of recommendations about changing the system to link the tax more directly to more progressive housing policy outcomes.
Recommendations
These recommendations are based on the assumption that a sustainable solution to housing affordability requires action across all tenures. Moreover, we assume the most effective results will be obtained by coordinated action involving all levels of government, this submission proceeds by proposing key policy measures to be implemented by:
•	The Commonwealth Government 
•	State Governments
•	Jointly by Commonwealth and State governments 
•	Local government

We believe that in some instances current policies, particularly but not exclusively at a federal level, have exacerbated impediments to first home ownership for low to medium income households. 
1)	Taxation Reforms: Commonwealth Government
To reduce the rapid price escalation in existing housing markets we believe taxation reforms are urgently required.

We question the Coalition government’s basis for its refusal to consider tax changes, when the Reserve Bank has suggested that the generous tax breaks for housing investors may be partly responsible for the high rate of household debt and the inflated housing market that pose risks for the economy.

However, to reduce impact on investors who have taken advantage of these existing but distorting concessions, we propose any reforms should be phased in. This would send a message to investors and speculators about the future investment environment. 

These reforms would be based on a distinction between existing and new dwellings. In particular we propose an incentive for investment in new affordable rental housing and in the medium term at least, in designated low income rental properties such as rooming houses.

Recommendation 1
Reform negative gearing
Reform negative gearing to encourage increased supply (construction) of affordable housing that is targeted to low to medium income households. This would apply to new developments and redevelopment. The proposal is not anti negative gearing. We accept that there are legitimate business costs that should be tax deductible. However residential property, unlike stock and shares, is a different kind of good with important social and urban form implications flowing from the product of that investment. In a context of over investment in high-end rental housing and a contraction of supply of low cost rental housing we believe there is justification for some targeting in the application of negative gearing.
a)	For existing investments, no change in current tax arrangement. 
b)	For new investments (post some nominated date) in existing (already constructed) housing, negative gearing of the interest component of loan payments to be phased down to 75 %. Other expenses eg repairs, upgrades and maintenance, etc, at the full 100% deduction. 
c)	For investments in newly constructed housing, a sliding scale from 125% of interest on loan payments at affordable end, for example under $200,000 (detached house and land package) and other figure for multi-unit developments, indexed annually to 75% at expensive end (over $500,000), to be indexed annually. The idea is to provide a greater incentive for landlords to invest in new and more affordable rental housing rather than turnover and inflate the price of existing property. Other expenses eg repairs and maintenance, etc, at the full 100% deduction.

The ideas here simply illustrate principles. Percentages and values can be modelled for most effective results in terms of revenue and housing outcomes

Recommendation 2
Depreciation allowance
Increase depreciation allowance for construction and upgrade of defined affordable accommodation, including multi unit development and other forms, in particular registered rooming houses. Owners and operators of this kind of low-income housing are seldom able to use negative gearing to their financial advantage and current arrangements are driving them out of this tenure. In the absence of concerted federal and state government programs to bridge the gap, it is important to stabilise this accommodation in the medium term.
New scales could be arranged to be generally expenditure neutral for                                                federal and state budgets

Recommendation 3
Reform Capital Gains Tax
The 50% concession on the application of capital gain tax should be removed for non-home occupiers. The full concession for home occupiers would be retained for the principal place of residence. Savings from this reform could be directed to the supply of affordable housing.
Auditing procedures should be strengthened to reduce abuse of this exemption, in particular the length of time a property is required to be owned to be considered the principle place of residence.

2)	Taxation Reform: Victorian State Government (and as a lead to other states)
Reforms to Stamp Duty
Recommendation 4
Reforming basis of collection 
1.	This tax adds to the expense of home purchase for many people on low or moderate incomes who wish to purchase a dwelling for their own use. Stamp duty scales could be restructured to provide relief at more affordable end of market and increased at the luxury end. This will send a message to speculators and could be arranged to be revenue neutral. Additional relief to first home buyers could be easily incorporated with a threshold change. 
•	We have modelled the situation for metropolitan Melbourne and produced new schedules with the following features: (The methodology and computations are set out in Appendix 2)
•	Reducing the rate to a minimum amount up to a certain level of purchase price for all first home buyers (set and adjusted to cater for regional differences and CPI changes)
•	Progressively increase the rate from then on with a higher than existing rate for luxury homes.
•	Revenue neutral.

Recommendation 5
Redirect the use of stamp duty revenue 
The purpose and usefulness of this state tax could be made more transparent to the public if a proportion of the increased revenue was directed to relevant housing programs. The Victorian Government could simply do this by legislating or at the least announcing as part of its annual budget the purposes for which a definite proportion of stamp duty was to be used. A number of important projects to increase the supply of affordable housing could be established and sustained in this way:
Community building, neighbourhood renewal and area improvement activities in both country and metropolitan areas. This would be administered to involve local communities and local government in the development and implementation of projects.
Urban and regional infrastructure investment to foster the sustainability and diversity of housing development and redevelopment.
This funding line could support “housing affordability partnership projects” with local government 
Directly assist the alleviation of homelessness with increased supply of public housing, youth housing and other low cost housing initiatives including housing for the aged.
3)	Infrastructure investment
There is clearly a growing imbalance in our major cities between those established areas with extensive physical and social infrastructure, the newer areas with minimum services barely able to support low-density development and the older outer suburbs where the infrastructure is in decline and where there are perception of poor amenity and an unsafe environment eg parts of South East Melbourne and Western Sydney. 

The established areas are booming but at the price of escalating land values and loss of affordable housing. On the other hand there is still high affordability in the other areas (houses under $200,000-$250,000) but few first homebuyers want to live there. The lack of transport infrastructure connecting affordable housing and labour markets is a key issue here.

This means that housing affordability interventions should have two foci. One concerned with putting more affordable housing into high cost areas (multi unit redevelopments) and the other with improving the amenity in affordable areas so that more first home buyers will choose to live there. The maintenance and creation of liveable cities and the provision of affordable housing in outer and new areas is important to creating balanced sustainable cities as well as for maximising choice for housing consumers.

This change needs to be lead by key infrastructure investment. This level of investment is beyond that provided by private developers and requires government intervention. 

Hence we recommend that:
Recommendation 6
Investment in infrastructure
Commonwealth, State and Territory governments increase infrastructure expenditure to generate more choice, diversity and range of affordability in new housing supply
States could match federal contributions from the restructured stamp duty revenues previously recommended
Additional funding to be obtained from the issue of infrastructure bonds to attract long-term low interest funds from institutional investors.

Recommendation 7
Affordable housing projects
To demonstrate what can be achieved in creating more diversity and choice in both new and urban renewal situations we recommend that state agencies such as VicUrban in Victoria and Landcom in NSW develop affordable housing projects in partnership with other levels of government and industry.

Recommendation 8
Renewal of existing social housing stock
A special one-off increase in funds under the Commonwealth State Housing Agreement to specifically assist State Housing Authorities (SHA’s) to renew existing housing stock that is failing to meet the more diverse needs of their clients and to facilitate community renewal and participation in urban and regional redevelopment projects
4)	Initiatives to increase private sector involvement in the provision affordable housing: 
The private investment sector requires two things before investment will flow to the construction of affordable housing:
•	A financial model/product and 
•	A subsidy to reduce the gap between income and housing costs.

Considerable work and modelling has already been done by the Affordable Housing National Research Consortium, which has resulted in the recommendation of a bond scheme model designed to attract institutional investment (Hall, Berry & Carter 2001).

The Consortium—made up of key bodies from the public, private and social sectors—commissioned work to specifically respond to the lack of affordable housing. The bond model can provide State Housing Authorities with funds to build affordable housing financed by private investors with a minimum guaranteed return. 

A subsidy is needed to make up the difference between actual rent yield and the minimum guaranteed return of the bond. The bond principal is repaid after, say, 25 years when the housing is sold. This model lends itself to the sale of housing to tenants who may choose to develop some equity in the housing while paying rent.

The subsidy can be provided by government in a number of ways.  The Commonwealth Government could provide a subsidy, either through a direct payment out of consolidated revenue, or an (income or company) tax concession on the annual return relating to the bonds income. The first option is preferred by the Consortium. State governments could also provide some capital subsidies through increased stamp duty revenue.  

This scheme gets a good score on the six point scoring criteria established by the Consortium which relate to such matters as effectiveness in increasing stock and reduction of risk to private investors.

The main advantage of this scheme is the size; it’s potential to raise billions and to make a noticeable impact on the supply of affordable housing. It has the further advantage of demonstrating to financial institutions that it is possible to invest with limited risk in affordable housing.

Recommendation 9
State Governments could establish this scheme but we strongly recommend that it be set up and operated as a joint Commonwealth state program (within the existing CSHA) as it is in the national interest.

This would have the dual advantage of demonstrating bipartisan support and inspiring long-term confidence in the institutional investors.

The development of this type of rental housing for low and moderate income households with incomes greater than existing public housing tenants would potentially support the movement of households into home ownership. This housing, if it provided security of tenure at affordable rents, would provide an opportunity for household saving which could be used for a deposit for a first purchase. Of course progress into homeownership would be greatly assisted if other policy change, such as the tax policy changes suggested above, were successful in moderating the rapid and consistent house price increases that have become a feature of the Australian housing system

The funds could be utilised for increasing the supply of affordable rental housing in the public and community rental areas providing a savings opportunity for families using this sector by choice as a transition to home ownership. 
5)	Role of local government
The success of the infra structure and affordable housing initiatives above are very dependant on the local and regional planning environments.

The important positive role that can be played by local government is often neglected by other levels of government and others advocating for more flexibility in housing provision.

Local government can be risk averse and reactive to perceived cost shifting, but it is also under resourced and like any democratic institution sensitive to the views of its constituents

To better facilitate the involvement of municipalities: we recommend:

Recommendation 10
That barriers to the further involvement of local government in the facilitation and provision of affordable housing outcomes be determined and resolved with reference to the following issues:
Local housing policy development including local housing need and strategic land use planning frameworks
Effective use of inclusionary zoning and developer contribution schemes
Removal of legislative constraints to future partnerships or joint ventures with private sector
Identification of local government land holdings and land assembly opportunities
Effective approaches to the social housing development approvals process

Recommendation 11
State Governments should encourage municipalities to prepare housing strategies with three to five year operating periods. Such strategies to be periodically updated and binding on municipalities. and include minimum housing roles of:
Documenting housing need
Encouraging and supporting social housing projects including support through the statutory planning permit process under reasonable periods for obtaining planning approvals
Encouraging and supporting private sector affordable housing initiatives
Facilitating projects from other social housing providers
Dedicating resources to implementation of strategies
Identifying and promoting land opportunities for social housing

Recommendation 12
These housing strategies would be integrated and supported by broader policy frameworks within local government such as Local Planning Schemes and their Municipal Strategic Statements, Corporate Plans and supported by relevant other municipal policies. 

Recommendation 13
Seeding grants should be available to municipalities that elect to prepare housing strategies.

Recommendation 14
On completion of strategies such municipalities should become eligible for implementation funding from State and Commonwealth Governments 
Conclusion
Member organisations of the Housing Justice Roundtable are concerned about the housing available to households with low to medium incomes. Many are potential first home buyers and some have fallen out of home ownership because of family breakdown or insecure employment. 

These households require well-located, appropriate and affordable housing of a good standard. Because they have limited wealth, they are unable to compete with higher income households for a declining stock of low cost housing. Increased demand is driving up prices that consumers with low to medium incomes are unable to pay. The market is failing to supply what should be a human right. 

Furthermore, increased expenditure on housing is resulting in less disposable income for other forms of consumption. People are having to make tough choices about what they can and can’t consume. This is having an impact on their social and economic participation and it will have an impact on the wider economy, as more and more wealth is concentrated in housing. 

References
Hall, Jon, Berry, M & Carter, G 2001 Policy Options for Stimulating Private Sector Investment in Affordable Housing Across Australia Stage 2 Report: Identifying and Evaluating the Policy Options & Stage 3 Report: Options for a Public-Private Partnership to Stimulate Private Investment in Affordable Housing. Affordable Housing National Research Consortium/AHURI. Sydney.
(http://www.ahuri.edu.au/publish/page.cfm?contentID=30&projectid=42)

Wulff, M, Yates, J & Burke, T. 2001. Low Rent Housing in Australia 1986 to 1996: How has it changed, who does it work for and who does it fail? Australian Housing Research Fund, Commonwealth of Australia, Canberra.

Appendices
1	HJRt members supporting this submission
2	Details and graphs of stamp duty modelling.
3	Housing for All broadsheet (to be included with hard copy)
4	Terms of reference of HJRt

Appendix 1
HJRt members supporting this submission
•	Anglicare Victoria
•	Brotherhood of St Laurence
•	City of Port Phillip
•	Community Housing Federation Victoria
•	Council of Homeless Persons
•	Good Shepherd Youth and Family Services
•	Hanover Welfare Services
•	Melbourne Affordable Housing
•	Northern Homelessness Network
•	Port Phillip Housing Association Inc.
•	Salvation Army Community Housing Services (Vic)
•	Tenants Union Victoria
•	Terry Burke
•	Victorian Council of Social Service
•	Victorian Local Government Association

i)	Appendix 2.
ii)	Collection of Stamp Duty on Residential Properties in Victoria

The task was to test the feasibility of adjusting the schedules currently used to assess stamp duty  to meet two objectives
1.	To reduce burden on first home buyers purchasing at the more affordable end of the price spectrum.
2.	To maintain as far as possible a revenue neutral outcome for State finances

The method used involved the following steps and assumptions:
1.	Records of house sales in metropolitan Melbourne were gathered from the Age Newspaper for the period April to September 2003.
2.	These were plotted and as might be expected fell into a normal distribution around the median house price

3.	The existing schedules were then applied to this sample to estimate the tax revenue obtained from these sales.
4.	New scales were then created to meet the design criteria and adjusted to provide a comparable tax income.

5.	
The change with respect to housing consumers in buying in different price ranges is illustrated in the following table:

6.	The main features are:
Under the new schedules purchases up to $200,000 have a minimum reduction of pay approximately half the current  stamp duty equivalent to $3,660
At $300,000 their payment is reduced by 20%  equivalent to$2,660.
At $400,000 it is reduced by about 4% equivalent to $660.
The schedule is progressive with regard t o price so that for house purchases of $1,000,000 the duty increases by 20%

7.	The following spreadsheet sets out the detailed calculations together with relevant assumptions

Melb. Metro.						Tax revenue		Tax revenue	
Sale price	Existing rates (1)	Proposed rates(2)		Sales distribution(3)	Ex Av Rate	Existing(4)	Av Rate I	Proposed(5)	
$0	$0	$0		 	 	 	 	 	
$100,000	$2,200	$0		23.0	$1,100	$25,300	$0	$0	
$200,000	$7,660	$4,000		492.0	$4,930	$2,425,560	$2,000	$984,000	
$300,000	$13,660	$11,000		1061.0	$10,660	$11,310,260	$7,500	$7,957,500	
$400,000	$19,660	$19,000		1279.0	$16,660	$21,308,140	$15,000	$19,185,000	
$500,000	$25,660	$27,000		759.0	$22,660	$17,198,940	$23,000	$17,457,000	
$600,000	$31,660	$35,000		425.7	$28,660	$12,200,562	$31,000	$13,196,700	
$700,000	$37,660	$43,000		236.5	$34,660	$8,197,090	$39,000	$9,223,500	
$800,000	$43,660	$51,000		141.9	$40,660	$5,769,654	$47,000	$6,669,300	
$900,000	$49,500	$59,000		94.6	$46,580	$4,406,468	$55,000	$5,203,000	
$1,000,000	$55,000	$67,000		47.3	$52,250	$2,471,425	$63,000	$2,979,900	
$1,100,000	$60,500	$75,000		33.3	$57,750	$1,923,075	$71,000	$2,364,300	
$1,200,000	$66,000	$83,000		24.3	$63,250	$1,536,975	$79,000	$1,919,700	
$1,300,000	$71,500	$91,000		18.3	$68,750	$1,258,125	$87,000	$1,592,100	
$1,400,000	$77,000	$99,000		13.8	$74,250	$1,024,650	$95,000	$1,311,000	
$1,500,000	$82,500	$107,000		10.3	$79,750	$821,425	$103,000	$1,060,900	
$1,600,000	$88,000	$115,000		7.8	$85,250	$664,950	$111,000	$865,800	
$1,700,000	$93,500	$123,000		5.8	$90,750	$526,350	$119,000	$690,200	
$1,800,000	$99,000	$131,000		4.3	$96,250	$413,875	$127,000	$546,100	
$1,900,000	$104,500	$139,000		3.3	$101,750	$335,775	$135,000	$445,500	
$2,000,000	$110,000	$147,000		2.3	$107,250	$246,675	$143,000	$328,900	
				4683.5	 	 	 	 	
				Relative income	 	$94,065,274	 	$93,980,400	
				 	 	 	 	-$84,874	
NOTES:									
a. (1)Existing rates are 1.4% of the property value for first $20,000 plus 2.4% ofvalue in excess of $20,000 to $115,000 plus 6% ofvalue above 	
$115,000 to $870,000. Above $870,000 rate is 5.5% of total value of the property.					
b. (2)Proposed rates are no charge for the first $100,000, 4% of the value in excess of $100,000until $200,000, plus 7% of the value in excess of 	
$200,000 plus 8% of the value above $300,000. 							
c. (3)This distribution is obtained from the actual sales inMetropolitan Melbourne as reported in the Melbourne Age forApril-September2003.The values 	
between $500,000 and $1,000,000 are interpolated using equal area and those in excess of $1,000,000 extrapolated by progressive reduction. 	
d. (4)&(5) The relative tax revenues for existing and proposed scales are obtained by the product of thenumber of properties and the effective rate. 	

e. The 2003-04 budget estimate forfinancial and capital transactions is $2,348.2 million. 	
The variation predicted by this model would be of the order of $2 million downwards.	
Given the volatility in the variables impinging on the calculation and 	
that Treasury estimates have varied by several hundred million  in recent years
it is pointless to seek greater accuracy.	

Appendix 3	Housing for All broadsheet

Hard copy available on request from:

Mr Barry Pullen
Housing Justice Roundtable

Ph:  (03) 8412 7326
Email: bpullen@infoxchange.net.au

Appendix 4

Housing Justice Roundtable
Dedicated to improving access to affordable and secure housing

Membership:

•	Open to all groups and individuals committed to improving the access of people in this region to affordable housing.

In addition to actively seek the participation of the following:

•	Elected representatives from Local, State and Federal areas.

•	Voluntary and community based organisations concerned with assisting people in housing matters.

•	Professionals, researchers, academics and community workers concerned with housing

•	Housing consumers.

Aims:

1. To facilitate the development of strategies aimed at improving the access of individuals and families in Inner and Northern Melbourne to affordable and secure housing.

2. To encourage the open discussion and exchange of ideas and information concerning housing and related issues including planning and access to employment.

3. To assist in fostering  coordinated research efforts and cooperative actions between participants.

4. To liaise with other housing groups to assist campaigns for affordable housing.

Structure:  

•	To be kept to a minimum and initially consist of joint convenors, one from each of the main constituent groups whose role would be to call and arrange for the meetings of the roundtable.

•	The operation of the group to be reviewed after 12 months and a decision made then on its future role and form.

(Terms of reference as adopted by meeting on 7th August 1997)