Date created: 3/5/07 Last modified:3/5/07 Maintained by: John Quiggin John Quiggin
3 August 2006
The news that financial institutions are contemplating the introduction of 40-year and 5-year mortgages should be ringing warning bells for those who’ve assumed that we have managed a soft landing from the house price boom that gave us a doubling of average house prices (or even more depending on your choice of index) between 1998 and 2003. When combined with yesterday’s 25-point increase in the Reserve Bank Cash rate (the sixth since 2004, with at least one more just about certain), the emergence of proposals for 40-year mortgages raises doubts about the sustainability of current price levels
Although prices of established houses have been flat since 2004 for Australia as a whole, any improvement in affordability generated by rising incomes has been more than wiped out by increases in interest rates. The increases since 2004 amount to a 25 per cent increase in the interest component of loan payments, far outstripping growth in the incomes of potential first home buyers.
In these circumstances, it is unsurprising that banks and potential borrowers should contemplate financial innovations previously seen only in the last stages of the Japanese property bubble when terms as long as 99 years were offered. And given the parallel circumstances of inflated prices and rising interest rates, it is unsurprising that our banks are copying, as they so often do, financial institutions in the United States, some of which have already offered these products (about 5 per cent of US mortgages now have a 40-year term).
There is no serious prospect of loans like this ever being paid off. Obviously, the assumption is that, as has happened so often in the past, capital gains will come to the rescue, enabling borrowers to sell their houses and emerge with enough equity to form the basis of a more traditional loan later on. This calculus is even clearer with interest-only loans, but these have generally been offered only for relatively short terms.
At the same time as the purchase of a house becomes impossible for many, rents are rising, by as much as 20 per cent a year in some urban markets. With vacancy rates at very low levels, further increases are inevitable.
Of course, these developments have not gone unnoticed, and the usual calls for government action have been made. But even a cursory look at the history of Australian housing policy shows that concerns about the interests of would-be homebuyers run a poor second to the imperative of protecting the interests of existing homeowners. The interests of renters, the most vulnerable segment of the community as far as housing is concerned, barely register on the political scale.
The most obvious barrier to homebuyers is stamp duty, which can add tens of thousands of dollars to the cost of buying a home. There have of course, been calls to cut or abolish stamp duty, but this measure alone would do little for affordability, since the cut would be capitalised into the price of houses.
If we really want to improve affordability, for both new homebuyers and renters, we should replace all existing taxes on land and housing by a uniform land tax, with no exemption for the family home. Such a tax could be levied at a rate far lower than the existing land tax, and would therefore reduce the costs of ownership for investors in rental housing, a reduction that would be passed on, at least in part, to renters.
Even to write such a suggestion is to realise its impossibility, amply demonstrated by the failure of former NSW Treasurer Egan’s attempts to impose land tax on a tiny fraction of the most valuable homes in Sydney. No matter what exemptions were offered, some real or hypothetical case of hardship could be found to generate a sense of outrage. The plight of income-poor but asset-rich homeowners who might be forced to borrow against their property and impair their middle-aged children’s inheritance attracted far more effective sympathy than that of young couples trying to bring up a family in rented accommodation.
If taxing million-dollar properties is politically impossible, the idea of a tax on all property seems, in the Australian context, like radical Bolshevism. Yet, in the United States, most expenditure on public schools is funded from property taxes, and capitalism does not seem to be in peril of imminent collapse.
As long as the interests of existing homeowners remain paramount in Australian politics, rhetoric about affordability will remain just that - rhetoric.John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland.
John Quiggin is an Australian Research Council Federation Fellow in Economics and Political Science at the University of Queensland.
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