The problem with capital gains and housing

A very broad overview.

Everybody wants to be the beneficiary of capital gains. Everybody wants to purchase something and then be able to sell it at a later date for more than what they paid. This is perfectly rational as an individual. We all want more money. Money improves our lives, to a point.

But it’s important to realise that capital gain only exists for the individual. Collectively there is no capital gain, there is only redistribution of wealth from someone who pays more for an item than what you paid. This wouldn’t be a bad thing if the wealth was flowing from richer to poorer people, but in aggregate the opposite is what happens. Capital gains accrue to those who were rich enough and fortunate enough to invest in something before it appreciated in value. Of course there are outlier circumstances where a poor individual makes a good investment and makes a return. But the net effect of capital gain is to increase inequality.

It’s great to aspire to be financially comfortable, but what can we say of a society that only enables that reality for a select class of people, at the expense of poorer working class people?

The culture that has arisen in Australia around housing investment is lamentable. There is a collective acceptance that the best pathway to financial freedom is through property, and for many this has proven to be true. The problem is that its a game we can’t all win, and those who do win, win at the expense of others.

This ideology is based on the notion that house prices can increase exponentially forever, and ignores the reality that the lion’s share of net future gains in house prices will accrue to those with the largest holdings presently.

How did this happen? Since 1970 in real terms (adjusted for inflation) wages have roughly doubled and house prices have roughly quadrupled. We have all seen and felt this, and it’s a common topic of discussion among all levels of Australian society. We all have friends or relatives who have benefited from this increase in price, and the inverse is also true — we know people who may be more excluded from the housing market and more likely to be long term renters. When the price of an asset is visibly increasing much faster than wages, of course you want to own that asset.

But why did house price growth outrun wages by such a large margin?

There are many drivers of housing prices in Australia, both demand and supply side. On the demand side there exists; rapid population growth, (which can be further divided into natural increase and immigration), low interest rates and banks ability and willingness to lend, tax incentives for investors, and competition from foreign investment. On the supply side we see the creation of new dwellings not keeping up with demand and also a fixed amount of desirable land where prices have increased the greatest.

But at the heart of all of this is bad policy over multiple generations by successive federal governments — policies which saw investors and developers prioritised over the interests of Australians and aspiring homeowners.

So what can we do about it?

We need to start thinking about what a desirable distribution of housing would look like in Australia within the context of a sustainable society.

In the last 20 years we have seen substantial change in the composition of home ownership. The rates of home ownership without a mortgage have decreased, home ownership with a mortgage has increased, and the number of people renting from private landlords has increased.

By what metric are these trends desirable?

The federal government has incentives to allegedly help first home buyers into the market, but under current policy settings we are seeing the exact opposite being achieved. These first home buyer incentives are completely counteracted by tax incentives for investors to buy multiple properties (negative gearing and capital gains tax concessions). Accumulation of property in the hands of older property investors, and decreased home ownership rates among younger people is the current trend.

We have to admit plainly that having house price growth outrun wages is a terrible and reversible situation. Governments and media need to stop using the euphemism of ‘housing affordability’ and just admit that house prices are too high. We need to target stable house prices relative to wages over the long term, and change the feverish culture around property investing by removing the incentives which presently make property investment so appealing.

It’s important we start to look at housing primarily as a place for people to live and not as an investment vehicle. It’s not good for our economy to have so much capital tied up in non productive assets (houses) where investors profit from the scarcity of housing and inability of renters to own their own home. It would be much more desirable to have investment flow towards industries that actually produce goods and services. This would have a net benefit to society and improve quality of living in the long run, not just redistribute wealth from poor to rich.

We can simply reduce demand for housing with some simple sensible legislative changes, that in time can allow property prices to return to Earth.

These would include using tax to disincentivize owning multiple houses, increasing the capital gains tax on housing, removing foreign investors from our domestic housing market and reducing our economic immigration intake.