Alan Kohler’s plan to freeze house prices

Sam Hawley: Hi, I’m Sam Hawley, coming to you from Gadigal land. This is ABC News Daily. It was the Australian dream to own a home and a block of land. But while that was once very achievable, it’s not anymore. So why did that change? And can it be reversed? Today the ABC’s 7PM News finance guy Alan Kohler, who’s written a quarterly essay about the housing market and why anyone born after 1980 is on the wrong side of history.

Alan, tell us about the first home you bought. It was a little while ago now…

Alan Kohler: It was. It was 1980. 91 Rowe Street, North Fitzroy.

Sam Hawley: Right. Giving up the details of the address as well…

Alan Kohler: Oh, well, I don’t live there anymore, so that’s okay.

Sam Hawley: So tell me, how did that all play out?

Alan Kohler: Oh, well, it was okay. It was terrific house. And we liked it. And the multiple of our wages that we paid for the house was basically the same as my parents paid when they bought their first house in 1951. And so that that multiple was 3.5 times house price to wage. That was the kind of median, average. So we paid about 3.5 times our salary for the house. That was what we paid. And it’s also, as it happens, what my parents paid in 1951.

Sam Hawley: And then you went on and you had children and then they grew up and things for them have been a little harder…

Alan Kohler: Exactly. So over the last few years, all three of my children have bought their first house, and they paid between 7 and 8 times their household income for their houses. And that, as it happens, is the median to average wage multiple that currently prevails. So the median Australian house price is about seven and a half times the average wage.

Sam Hawley: Now, I want to look with you at when things started to change, because you look back to the year 2000. What was happening around that time, apart from, of course, the panic over Y2K?

Alan Kohler: Yes, that’s right. Well, up until the year 2000, house prices grew each year at about the same rate as both incomes, wages and GDP. But after 2000, house prices started taking off. And between 2000 and now, house prices have grown at an average annual compound rate of 6 per cent, while wages have grown at 2 to 3 per cent per annum and and GDP roughly the same. About 3 per cent. House prices from that time from 2000 doubled the rate of increase that they’d previously had, and have been double the rate of increase of wages and GDP. So the question is what the hell happened in 2000?

Sam Hawley: Yes. And what is the answer?

Alan Kohler: And the answer is that in September 1999, the Howard Government halved the capital gains tax.

John Howard, former Prime Minister of Australia: Many people like yourselves who believe that life is about occasionally taking a risk, accumulating some capital and not having it taxed at a confiscatory rate. And that is one of the reasons why we were determined to make some changes to the capital gains tax system.

Alan Kohler: The capital gains tax had been introduced in 1985. The deal was that you would add any capital gain to your income for tax purposes, minus the impact of inflation. And in September 1999, that changed. That particular formula was dropped, and it was simply that you added half of the capital gain to your income. So basically it was a you know, you paid half – half the capital gains. And that was a massive psychological change to the way people thought about the tax impact of owning an asset. Everyone understands 50 per cent discount, and it furthermore added significantly to the benefit of negative gearing, the ability to to deduct any losses from an investment against your other income. If your repayments on an investment property exceed the rent, the loss that you suffer can be deducted from your salary. And that was always the case. But what happened in September 1999 is that that really became a fantastic tax dodge.

Sam Hawley: So in the lead up to the year 2000, there was greater tax incentive to buy an investment property basically… And then a whole heap of people thought, well, what a great idea.

Alan Kohler: Sure, because not only do you get a tax deduction while you own it, when you sell it, you only pay capital gains tax on half of the gain. And what’s more, because inheritance tax had been abolished in Australia in 1978, if you didn’t sell it and you just passed it on to your kids, there was no tax to be paid at all. So it was all just fantastic, you know?

Sam Hawley: Yeah, of course. And that meant did it that the more people that invested in housing, the more house prices rose…

Alan Kohler: So that boosted demand from the year 2000. And then demand was further boosted when the Howard government doubled immigration between 2005 and 2006 from around about 100,000 to roughly 200,000. And it’s kind of stayed at that level ever since. In the past 12 months, we’ve had a big surge of new immigration. Obviously, there was no immigration – it went backwards, in fact, in during the pandemic – but we’ve more than caught up with immigration in the past 12 months.

Sam Hawley: So there was some big policy changes at the turn of the century, which helped to supercharge housing prices because more people were investing in housing, because the tax incentives were pretty good. And that meant house prices kept surging.

ABC News clip: Residential property prices have scaled giddy heights, driven by six interest rate cuts last year and government grants for first home buyers. Sydney shakeout in the early 1990s has been followed by strong growth across the country ever since.

Sam Hawley: And that brings us to today, Alan, because it means young people like your kids trying to buy a home are now paying, sometimes seven times their income or more for a house. And you’ve interestingly pinpointed a birth year where if you’re born any time after that, things aren’t so good when it comes to housing.

Alan Kohler: Well, it’s just that, you know, that the increase in house prices, as I say, started in 2000 and has now turned into a doubling of the house price to wage income ratio. And so that means that, you know, anyone looking for a house now, you know, is in trouble. But anyone also looking for a house over the past ten years. So people who were born in, you know, in the early 1980s turned into adults at the time when housing became more unaffordable. And of course, the people who owned a house at that time and had done for a while, i.e. Baby Boomers did well.

Sam Hawley: Yes. And of course, it’s the great Australian dream to own a home with a Hills Hoist.

Alan Kohler: We don’t want Hills Hoists anymore, Sam…

Sam Hawley: No, they’re ugly. Right?

Alan Kohler: Yeah, then they sit in the middle of the back yard. We can’t have that…

I think Australian dream is a nice way to put it. And it’s kind of true. What happened during the Menzies years is, is that the idea of home ownership became almost religious.

ABC News clip: …over go The trees and a few weeks later, up comes another addition to Australian suburbia.

ABC News clip: How important is it to you that you own your own house?

ABC News clip: Well, for me, very important. It’s something that I think every young family should get into very quickly. It’s security for them. They can do a lot with a home. They can get money on it and do things which normally they can’t do if they’re owning a flat…

Alan Kohler: Ownership of a home is good. Renting is bad, more so than most other countries where people are quite happy to rent for a long time, if not all their lives.

ABC News clip: When we first got married, this was our greatest aim was to have our own home. We never thought of anything else, we never travel or anything like this. It was just have your own home.

Alan Kohler: But in Australia we all think, ‘oh God, you’ve got to be a renter. That’s terrible. Poor thing. You’re renting. Goodness gracious. Isn’t that awful?’. And it is true that the balance of power between tenants and landlords is pretty much all in favour of the landlords. So it is true that if you’re a tenant in Australia, you know, you don’t have a lot of rights and you probably can’t own a pet. So, you know, it is the case that home ownership is kind of is better and everyone wants to own a house because of that, and also because it’s the way that everyone thinks that is the way to build wealth, the only way to build wealth in Australia, in a safe, kind of sustainable and respectable way is through home ownership.

Sam Hawley: So the question is, Alan, can it be fixed so the millennials have a better chance of actually owning a home so they can pay, you know, 2 or 3 times their income for a property rather than the 7 or 8 times that we’re seeing now? You argue that house prices need to stay put for a while or a pretty long while to achieve that. Just explain what you mean.

Alan Kohler: Oh well, it’s simple arithmetic, really. I mean, house prices are 7 or 8 times wages. Now, in order to get the that ratio back to what it was three and a half times, then you would need either to halve house prices or to keep them steady for a while so that incomes could catch up. The only way to get the ratio, that ratio back to what it was, or even anywhere near what it was, is to ensure that house prices increase per annum more slowly than wages. So wages are currently increasing at 4 per cent per year. So you would need house prices to stop rising at 6 per cent per annum and rise at less than 4 per cent per annum, and the closer to 4 per cent per annum the increase in house prices was the longer it would take for the ratio to get back to three and a half times.

Sam Hawley: So how long would that take?

Alan Kohler: Well, if house prices didn’t move at all then it would take 18 years. Is that what we want though? I mean, does Australia want the house price to income ratio to go back to what it was. And I don’t know that Australia does want that. I’m not sure there’s much of a consensus, you know, or a or a constituency for house prices not changing. I think the first step to doing something about housing affordability would be to work on achieving a consensus that it was a good idea.

Sam Hawley: So just tell me the policies, though that would lead to house prices not rising as quickly as they have been.

Alan Kohler: Most people engaged in this debate have a pet theory or a pet policy that they want changed. So some people say it’s all about immigration. Others say it’s all about capital gains tax. Others say it’s all about zoning and planning and so on. Other people say it’s all about infrastructure. My view is, yeah, you’ve got to do it all. You can’t, you know, it would be so difficult you would need to do it all. And so but you would need to start with what happened in 2000, because it’s quite clear that that’s when it began. And so what happened? You’ve got the capital gains tax. So you’ve got to start with either reverting capital gains tax to the previous regime of inflation adjustment, or halving the discount to 25 per cent. And at the same time, I think it was a very good policy to confine negative gearing to new houses only.

Sam Hawley: Alan, you’ve described this as a national calamity.

Alan Kohler: I think it is. Personally, I think it is. And I particularly think it’s a calamity that that there’s no end in sight to it. Part of the problem is that I don’t think there’s even a consensus that the increase in wealth that’s resulted in housing going up is good or bad. Is it a good thing that we’re all richer? Or is it a bad thing that houses are more unaffordable?

Sam Hawley: And what’s the answer, Alan?

Alan Kohler: I think the wealth is largely meaningless in a way. I mean, it’s not it’s not productive wealth. It’s circular in the sense that it’s you can’t really do anything with it. You’ve just got to buy another house. And it also entrenches inequality. I think we want a country where wealth depends on your level of education and how hard you work, not on where you live or more particularly, where your parents lived. So it’s really about housing wealth. Who’s got it, who’s able to pass it on? And, you know, and that’s how you get rich in this country.

Sam Hawley: Alan Kohler is ABC TV’s 7PM News finance guy and the author of the Quarterly Essay The Great Divide: Australia’s Housing Mess and How to Fix It. This episode was produced by Nell Whitehead, Bridget Fitzgerald and Anna John, who also did the mix. Our supervising producer is David Coady. I’m Sam Hawley. ABC News Daily will be back again tomorrow. Thanks for listening.