Recent political and media attention on negative gearing and capital gains tax, as well as suggestions that Australia may be heading for a “housing bust”, have placed a strong focus on investment in housing and affordability.
The Urban Development Institute of Australia is strongly opposed to any changes to the current taxation regime for negative gearing and capital gains tax. The UDIA believes any changes to the current system will be detrimental to Australia’s unique housing model and warns that in the longer term will put enormous pressure on Government budgets to supply rental accommodation and social housing.
Essentially Australians are either home owners (with or without a mortgage) or renters. But while almost 69 percent of Australians own or are buying their own home, the equivalent figure for the Northern Territory is much lower, at just under 57 percent. This means that the supply of rental housing is particularly important for us.
For various reasons many people shy away from home ownership and prefer to rent; although these reasons include the inability to raise a deposit and meet mortgage payments, there are also many Australians who prefer not to have the responsibility of home ownership, or wish to retain flexible living arrangements as part of their lifestyle.
The rental market relies on Governments, affordable housing providers and private investors to provide the necessary stock. This is the most efficient means of providing rental accommodation during high population growth.
Without private investment, a much greater Government investment (unaffordable given Australia’s current financial position) would be required. And private housing investment is strongly dependant on the current negative gearing taxation arrangements. It is important to note that Governments ultimately recoup the benefits accruing to property investors using negative gearing, through capital gains taxes which are paid when the property is sold.
The “housing bust” argument seems to arise periodically and no doubt has some effect on owner occupiers and potential investors who are worried about paying a lot of money for a house which they fear may drop in value, leaving them with a bigger mortgage than their asset / investment is worth.
It is critically important to remember that they key driver of the value of real estate investment is demand and supply. Value is also strongly related to the well-worn real estate mantra of “location, location, location”.
If you purchase a house or apartment in a town where the high demand is temporary (such as a mining boom area), you will be able to get extremely high rental returns for a limited number of years. But it should be obvious that when the demand reduces (because the mining project comes to an end due to completion of infrastructure, depletion of the resource, or a significant reduction in prices for that commodity), housing supply will exceed demand and the value of the investment, as well as its ability to generate income through rental, will reduce significantly.
This is far less likely to happen in a capital city like Darwin; although we experience highs and lows in our economic activity and therefore our demand for housing, our economy has a much larger and diverse base than that of a small mining town. Firstly, we have a large public sector workforce (teachers, medical professionals and police to mention just a few of our essential service providers) - their salaries inject over 2 billion dollars into our economy every year.
But we also have a strong investment by the Commonwealth in infrastructure and salaries, particularly in defence. Add to this the busiest live cattle export port in the world, other agribusiness projects, significant LNG exports, huge potential for development of the north, our attractiveness as a tourist destination, our recreational fisheries, huge mineral resources, and the significant growth of our importance as an education hub. It is clear that we have substantially more underpinning our economy than a small mining town somewhere experiencing a temporary boom.
To maintain and enhance the delivery of housing affordability in Darwin we need:
- Ongoing private investment in housing stock, supported by a tax regime which continues to provide offsets against expenses associated with the earning of rental income;
- Not-for-profit housing providers (eg Venture Housing) which are able to become viable through ongoing Government subsidies and sufficient size - this will require significant population growth in the NT;
- Planning processes which provide new greenfield land release and urban infill sites to meet demand;
- Efficient government processes which enable the development industry to function effectively and efficiently; and
- Industry delivery of a mix of housing stock which will facilitate housing affordability, for both the rental and home owner markets.