The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Friday, January 21, 2011

OECD gives Aussie housing market a mixed report-card

While international comparisons of housing markets are fraught with difficulties, the OECD’s analysis, which was released today (HT: Nicholas Gruen), provides Australia with a mixed report-card.

The OECD validates Rismark’s analysis that Australia has one of the highest transaction cost housing markets in the world. On the basis of round-trip transaction costs, Australia is the fourth most expensive market in which to transact in the OECD with total costs of more than 13 per cent of the value of a home. If we just look at vendor costs, Australia has the highest expenses in the OECD. This eviscerates the notion that Aussie housing is tax-advantaged vis-à-vis the rest of the world.

The chief transaction costs are obviously stamp duties and real estate agents’ fees. The OECD’s findings accord with the Henry Review’s recommendation that governments should dump stamp duties in favour of a more efficient tax base. There is also an argument here that we need to look at the efficiency of the real estate agent industry.

Since my 2003 report to the Prime Minister’s Task Force on housing, I have argued that one of the principal drivers of the escalating cost of housing in Australia has been increasingly inelastic supply. This was not a fashionable analysis at the time, and was explicitly rejected by the RBA. The RBA has, however, subsequently accepted that Australia’s inert supply-side plays a very important role in our housing cost story.

The OECD’s research confirms my 2003 analysis, and finds that housing supply becomes less responsive as land use regulations rise and land scarcity increases. This can lead to imbalances that perpetuate strong price growth that can be ultimately punctuated by unnecessarily sharp price declines if and when the supply-side is finally liberated.

In international terms, Australian housing supply appears to be middle-of-the-road in terms of its price elasticity. However, Rismark’s analysis has found that the elasticity of Australian housing supply has declined appreciably over the last seven years. New starts are running well below almost all independent assessments of demand.

The OECD argues that governments should seek to remove subsidies that favour housing investment over other asset-classes. This is true by definition. Yet recent research by the RBA’s Dr Luci Ellis found that the tax treatment of Australian housing is not, in fact, anomalous compared to most peer countries. For example, most nations allow negative gearing on investment properties. In many ways, the most anomalous country from a tax perspective is the US where home owners get deductible mortgage interest repayments, but are also taxed on capital gains. This encourages borrowers to gear up by taking out higher LVR loans, and using longer pay-down periods. It also likely stimulates higher default rates.

In comparison, Australia has one of the lowest mortgage default rates in the world despite the fact that mortgage rates here are higher than pretty much any developed country on earth. One explanation for this dynamic is the fact that holding non-deductible debt is expensive: it makes sense to pay-down the loan quickly.

People tend to forget that Australians pay a massive price for the CGT exemption on housing: the debt repayments are not tax deductible, as they are in all other asset-classes. When you combine this with the huge transaction costs associated with home ownership, as identified in this OECD analysis, and local government levies that represent a land tax of around one per cent per annum of the value of a home, it is not at all clear how owner-occupied housing is a more tax-efficient vehicle than, say, shares.

On a more positive note, the OECD concludes that Australia has the second-highest residential mobility in the developed world notwithstanding our heinous transaction costs. This is likely an artifact of the structural changes taking place in the economy care of the resources boom, which has necessitated shifts of labour across conurbations, and our stunning population growth over the last decade.

Australia also ranks comparatively well in the context of the efficiency of our rental market, as defined by the extent of price and landlord regulation. This should be further encouraged.