hands house

A golden opportunity

Improved housing affordability is only a short-term reprieve, not a ‘get-out-of-jail-free’ card for government action on tax reform.


Tim Reardon

Housing affordability improved over the past 18 months as home prices fell, interest rates were cut and wages continued creeping upwards, making it easier to enter the housing market. These conditions have made housing the most affordable it has been in 20 years, but this is just a temporary reprieve – not a ‘get-out-of-jail-free’ card.
New homes are one of the most heavily taxed commodities in the economy behind the ‘vice taxes’ of alcohol, tobacco and gambling. Yet housing is a true necessity of life. We don’t impose the GST on food because it is a necessity.

Not only are houses one of the most heavily taxed items in the country, taxes on housing raise more revenue than any other particular form of activity or industry. The housing sector contributes 10 per cent of the total revenue collected by all tiers of government. Stamp duty on property also comprises around one in every five dollars raised by state governments.

New homes are also responsible for raising 14 per cent of all GST revenues and if current trends continue, in only a few years, more revenue will be raised from taxes on housing than the GST.

Each new impost adds to the cost of housing, making it harder for the 92 per cent of renters in Australia that aspire to home ownership to achieve their goal. It’s not surprising then than only 49 per cent of renters believe they ever will own their own home.

However, taxes are only part of the problem. Red tape also adds to the cost of home building which in turn adds to the time taken to build a new home. Every delay entails an additional cost on which more stamp duty and GST are applied.

When combined, the taxes and red tape burden applied to the construction of a new house and land package in Sydney can account for 50 per cent of the cost paid by the homeowner. That is, only half of the cost of a house and land package is the house and the land, the other half is all of the other costs imposed by three tiers of government.
Apartments fare a little better as the tax and red tape costs account for up to 37 per cent of the cost of a new apartment in an infill development. This lower cost is due to each apartment bearing only a small share of the cost of developing a block of land. The total outlay is also smaller for an apartment and less direct tax is incurred. 

The interdependency of red tape and taxation in the supply of a new home means that if the regulatory cost of supplying new land increases, then the statutory taxes incurred along the supply pathway will also increase. This is known as a ‘cascading effect’ and is why the tax impost on a house in Sydney is significantly higher than in jurisdictions with fewer constraints on the supply of shovel ready land.

The nature of the housing market also means that the majority of these costs are transferred to the household. This also means that any reduction in red tape or tax imposts would then be passed through to consumers.

As households incur these costs they borrow more to pay these costs in order to put a roof over their head. They then repay these costs over the lifetime of the loan. This makes the mortgage for home buyers 60 to 100 per cent more expensive than would otherwise be the case.

Governments have had a temporary reprieve from the affordability challenge as the recent fall in existing house prices and interest rates have offset the impact of some of these taxes and red tape.

This temporary reprieve is coming to an end.

only half of the cost of a house and land package is the house and the land,

the other half is all of the other costs imposed by three tiers of government

As house prices stabilise, housing affordability will again deteriorate unless there is structural reform in how we tax and regulate the supply of new homes and apartments.

Ten years from paddock to home is too long and $417,000 in taxes and regulatory costs on an average home in Sydney is too much.

There is clearly an opportunity for the new Housing Supply Minister, Michael Sukkar, to investigate, question and guide the tax on housing. It has taken decades of mismanagement to create the housing affordability challenge and resolving the challenge will take time and national leadership.

We need a coordinated national approach to address affordability that includes addressing the tax and regulatory system, which constrains the supply of new homes and is the root cause of the affordability challenge. 

Note: The data referred to in this article is drawn from research commissioned by HIA. The Centre for International Economics has prepared a bottom-up analysis of the costs incurred in building a new house and land package. This analysis also looks at the tax and regulatory imposts in building (in-fill) apartments.

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