Bligh’s banking appointment is a masterstroke

From The Conversation.

The Australian Banking Association (ABA), backed by the banks’ financial and political clout, has not yet made its mark in the way the mining or gaming industries have. But this is threatening to change. The appointment of Anna Bligh to head up the ABA may represent an important turning point for the organisation.

That she is the first woman to head the ABA connotes some positive PR. But her party-political background is the true advantage. Bligh, a former Queensland Labor premier, is now the chief spokesperson for an industry that fares poorly in the public eye and is persistently at the centre of political firestorms.

The strategic advantage of Bligh’s appointment comes in two key areas of lobbying strategy. For one, she will meaningfully augment the ABA’s power behind the scenes, where lobbying is done directly between businesses and government.

But her primary role will be in the harsh glare of the public. Banking bosses are often disliked, and PR – in this case a form of “public lobbying” – is essential to win over voters on critical policy issues.

Influence in the halls of power

It is important for industry groups like the ABA to keep governments onside. This becomes difficult when, in (effectively) two-party systems like Australia, power shifts between Labor and the Coalition.

Typically, executive boards are stacked with those from a business and PR background, such as the ABA’s outgoing CEO, Steven Münchenberg (a former PR executive with NAB). Otherwise, there will typically be at least one other executive with a background in politics – usually from the Liberal Party – but ideally both parties are represented.

Along with Tony Pearson, formerly Joe Hockey’s senior economic adviser and now an ABA executive, Bligh’s appointment means the organisation has direct lines to decision-makers regardless of which party is voted in.

However, having a Labor Party elder as your CEO brings added advantages. Like other major industry groups, such as the gambling, alcohol, tobacco and mining industries, the banking industry is highly susceptible to public policy changes.

Also like the aforementioned groups, banks seem to have a better relationship with the Liberal Party (as reflected by policy outcomes) than with Labor. It was Labor that introduced the Future of Financial Advice (FoFA) legislation, which placed a fiduciary onus on banks (and others) to put the interests of clients ahead of their own.

Then came the proposed royal commission into banking in the lead-up to the 2016 election. Labor remains committed to this.

The banks’ strategy is clear: beyond her political savvy, Bligh’s appointment brings greater access than a Liberal appointee would. And she will be expected to use it. As the ABA’s head, Bligh will need to meet with her former colleagues to shape policy.

If Labor wins the next federal election, her status as a prominent and well-connected party figure will become exponentially more useful.

But if the Coalition remains in power, then the ABA takes a back seat. Treasurer Scott Morrison has made it clear that he deals directly with the banks, not through “intermediaries” such as the ABA.

The strategy of the banks is strong in that sense. Whether they lobby individually or use the Bligh-led ABA, they will be well represented.

Influence in the living rooms of power

Beyond the advantages of face-to-face lobbying and the ever-more-rapidly spinning “revolving door” between lobbying and politics, the ABA’s principal focus will be to shape public opinion.

These PR efforts acknowledge the power of representative democracy: work on the representatives first, but keep the “demos” – the people – onside, just in case.

As such, the ABA, like all industry groups with a public face, exists to try to convince the voting public that their own best interests are inextricably aligned with the best interests of businesses, whether true or not.

This PR strategy often relies on press releases and media engagement. But when a significant policy threat emerges – like a banking royal commission – the ABA may well rely on the use of “advocacy advertising”. This is where organisations use ads to try to win over public opinion, in turn pressuring the government.

This technique is used excessively in the US. It has a strong track record in Australia too, most notably during the mining tax and pokies reform debates.

To work, advocacy ads wouldn’t even need to make the public like the banks. In the case of unpopular industries, building goodwill is useful but problematic, so scaring the public can be just as effective.

To return to FoFA’s “best interests” example, convincing the public that banks should be able to put their own interests first is difficult. But if banks can suggest that the economy will suffer, and the public might lose monetarily, the strategy can work.

Currently fighting a similar “best interest” clause in the US, its financial services industry made such a case – and appears to be getting its way. The “Secure Family” financial services lobby group has run TV ads such as this:

For an industry as powerful (and rich) as banks, advocacy ads are usually worth a shot. There’s relatively little to lose but a lot to gain.

For policy battles fought in the domain of TV advertisements, it can be tremendously lopsided: those with money (like banks) can pay-to-play. But, problematically, in a system where a plurality or “marketplace” of ideas is critical to democratic ideals, similarly well-funded and advertised counter-argument is often conspicuously absent. By acting and speaking with a unified voice, banks have a significant advantage.

Commercial interests have long recognised the power of lobbying, but more are now realising the importance of harnessing public sentiment too.

There’s Never Been a Tougher Time to be a Central Banker

From The Conversation.

The two central banks that matter most for Australians – the Reserve Bank of Australia (RBA) and the US Federal Reserve (the Fed) – released minutes from their latest meetings this week. And although there were not a lot of surprises, there was a fair bit of detail about what we can expect on interest rates going forward.

The Federal Open Market Committee’s (FOMC) main message was unmistakable -expect interest rate rises, and expect them sooner rather than later:

Many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the committee’s maximum-employment and inflation objectives increased.

and that they:

continued to see only a modest risk of a scenario in which the unemployment rate would substantially undershoot its longer-run normal level and inflation pressures would increase significantly.

This is exactly what markets have been expecting, and it seems clear that the balance of risks is no longer that the labour market is too weak or inflation too low, but that the Fed might wait too long to continue its path of rate rises.

The really big unknown is how the Fed goes about unwinding a good chunk of its balance sheet, which involves US$2.64 trillion (with a “T”) of treasury bonds that were purchased as part of its effort to stimulate the economy in the wake of the financial crisis. The Fed also holds around US$1.75 trillion of mortgage-backed securities (“MBSs”).

The natural way to unwind this is by not reinvesting those funds when the securities mature. The Fed gets its money back and doesn’t purchase new treasuries or MBSs.

But it’s more complicated than that. New post-crisis capital rules require commercial banks to keep a large amount of reserves sitting at the Fed. This is now around US$2 trillion. The Fed has to match this liability with assets, like treasuries.

Nobody knows, but my guess is that the Fed shifts MBSs to treasuries over time, but has to keep a large asset side of the balance sheet. This suggests that maybe the whole balance sheet unwinding problem may not be as significant an issue as first thought. But this is genuinely unchartered territory.

At home, the RBA minutes confirmed the ongoing dilemma governor Philip Lowe faces. Like his predecessor, Glenn Stevens, Lowe is trying to manage: unemployment, the Aussie dollar exchange rate, business investment, overall growth, inflation and housing price stability all at the same time, but with only one instrument: the cash rate.

To see this, just look at the opening sentences of the long section of the RBA minutes titled “Considerations for Monetary Policy”. They read as follows:

In considering the stance of monetary policy, members viewed the near-term prospects for global growth as being more positive, although recognised the risks from policy uncertainty in the medium term… Domestically, the economy was continuing its transition following the end of the mining investment boom… Non-mining business investment was also expected to gain some momentum…

Conditions in housing markets varied considerably across the country… Inflation outcomes for the December quarter were much as had been expected and there had been very little change to the forecast for inflation…Labour cost pressures were expected to build gradually from their current low levels…

Wow. That’s a whole lot of targets to try and hit with a single (non-magic, non-silver) bullet. No wonder Dr Lowe has now taken to giving speeches that essentially plead businesses to invest.

It hasn’t quite gotten to “there’s never been a better time to be a business in Australia”. But close. It may, however, be that it’s never been a tougher time to be a governor of the RBA.

Author: Richard Holden , Professor of Economics and PLuS Alliance Fellow, UNSW

APRA fiddles on bank risk while Rome burns

From The Conversation.

Australian Prudential Regulation Authority (APRA) chairman Wayne Byers has made it clear the bank regulator will be cracking down on bank capital levels this year.

Bank capital reserves are a loss-absorber, designed to protect creditors if banks suffer significant losses. That protection, in turn, will – ostensibly – prevent panicked withdrawals by depositors, thereby preventing financial contagion and financial crises.

[DFA notes, its the Council of Financial Regulators that is the coordinating body for Australia’s main financial regulatory agencies. Its membership comprises the Reserve Bank of Australia (RBA), which chairs the CFR; the Australian Prudential Regulation Authority (APRA); the Australian Securities and Investments Commission (ASIC); and The Treasury — so APRA is just part of the problem!]

Byers has decided that Australian banks’ capital levels must be “unquestionably strong” in keeping with the findings of the Financial System Inquiry. But how much capital equals “unquestionably strong”? We don’t know.

What we do know is that the inquiry handed down that finding in November 2014. More than two years have passed and only now is APRA getting a wriggle on.

The problem is that, according to the IMF, when it comes to Tier 1 bank capital, this time last year Australia was ranked 91st in the world. That puts us close to the bottom of the G20, the OECD and the G8. Our position has fluctuated, but at no time during the preceding four quarters have we risen above 60th.

Ranked above Australia were Swaziland, Afghanistan and even Greece. That sounds like, at best, unquestionably ordinary. Maybe even unquestionably weak. But definitely not “unquestionably strong”.

The global financial crisis could’ve led to change

Some argue, determinedly and erroneously, that when functioning correctly bank capital levels are almost magical things. As former US Federal Reserve chair Alan Greenspan once said:

The reason I raise the capital issue so often is that … it solves every problem.

Greenspan, as Fed chair, was ultimately responsible for the health of the US financial system. Having touted capital levels, his tenure ended just before the sub-prime disaster turned into the global financial crisis. This earned Greenspan Time Magazine’s moniker as one of the 25 people most to blame for the crisis.

However, bank capital levels were in place before the crisis hit. The Basel Committee – a sort-of UN for Reserve Bank governors and bank regulators – introduced global standards for bank capital as far back as 1988.

Back then, it set the capital level at 8%. In other words, for every $100 in liabilities, banks had to retain $8 in cash (or close to cash). But this level was simply a reflection of the average of the day.

Codifying the average into a global standard was an excellent trick. No-one was made to feel left out, or inadequate.

Then came the global financial crisis. It resulted in an output loss of somewhere between US$6 trillion and US$14 trillion in the US alone.

The Basel Committee said it was going to raise bank capital levels in response to the crisis. This meant it was going to do more of the thing (bolster capital levels) that had been meant to prevent such a crisis from occurring in the first place, but had failed.

What now?

The Basel Committee’s latest attempt to take action on capital levels involves curbing “internal risk-based models”. These models allow banks to determine how risky their assets are, and therefore how much expensive and unusable capital they have to set aside for loss-absorption, to match the risk profile of their assets.

That’s like you or I determining how risky we are as borrowers, and therefore deciding how much interest we should be charged on the money we borrow.

European banks have pushed back against curbing internal risk-based models. They resent not being able to have absolutely everything their own way. And the Basel Committee has proven to be a push-over.

Australian banks have pushed back too, with a not-so-subtle threat that customers will bear the costs of higher capital levels. If Byers and APRA do what they are supposed to, and what the government told them to do in late 2015, Australia’s banks will need to raise A$15 billion or more to rectify their thin capital position.

That’s $15 billion not earning returns or bringing in bonuses. No wonder our bankers aren’t happy.

And while APRA and Byers have fiddled on this issue and effectively ignored government instructions, and Australian banks remained capital-thin, conditions have arisen that economist John Adams argues may result in an “economic Armageddon” for Australia.

If that happens, guess who will be bailing out the banks? You, the taxpayer.

Author: Andrew Schmulow , Senior Lecturer, Faculty of Law, University of Western Australia

Why small business tax cuts aren’t likely to boost ‘jobs and growth’

From The Conversation.

The Turnbull government’s signature economic policy at last year’s election was a 5% cut in the company tax rate, over a ten-year period, at a cost to revenue estimated to be in excess of A$48 billion. As the government itself has conceded, this now stands very little prospect of being passed by the Senate.

However, there is one element of the government’s proposal which appears to enjoy almost universal political support – the idea that “small” companies should get a tax cut. The only disagreement among the Coalition, Labor and the Greens on this score is how small a company should be in order to be deserving of paying a lower rate of tax.

From the standpoint of good economic policy this is surprising. There has been a lively debate for a while among economists as to whether cutting company tax rates will boost economic growth, employment and real wages – and the extent to which this theory is supported by evidence. But there is no evidence at all to support the notion that preferentially taxing small businesses will do anything to boost “jobs and growth”.

Advocates of tax and other preferences for small businesses often argue that small businesses are the “engine room of the economy” – because, for example, 96% of all businesses are small businesses, or because small businesses employ more than 4.5 million people.

According to the latest available ABS data, small businesses (defined as those with fewer than 20 employees) employed just under 45% of the private sector workforce in June 2015. Despite this, small businesses accounted for only 5.2% of the increase in private sector employment over the five years to June 2015.

By contrast, large businesses (defined as those with 200 or more employees) employed less than 32% of the private sector workforce in June 2015 – but they accounted for more than 66% of the increase in private sector employment over the five years to June 2015.

Employment and employment growth by size of business

ABS Australian Industry (8155.0) 2014-15, Author provided

Similarly, a smaller proportion of these small businesses engage in any of the four categories of innovation which the ABS recognises in its annual survey of business innovation than of medium or large businesses.

ABS, Summary of IT use and innovation in Australian businesses (8166.0), 2014-15, Author provided

So on the basis of the available evidence, a policy which sought to encourage employment creation and innovation via the use of preferential tax treatment would surely preference large businesses, rather than small ones.

However, that would be politically challenging, given that a large majority of voters think that big companies should pay more tax, not less.

What sort of businesses create jobs and growth when tax is reduced?

An alternative approach, which would be much more likely to have positive effects on employment, investment and innovation, would be to tax new companies at a lower rate.

OECD research shows that young businesses are the primary drivers of job creation. And new companies are more likely to be at the frontier of productivity growth.

New businesses are of course likely to be small, at least initially. Confining preferential tax breaks to new businesses – for example, by prescribing that a lower tax rate is only available to a business for the first (say) three years after its incorporation – focuses the assistance on those businesses which are actually likely to innovate, and to create jobs. This is instead of dissipating it on the much larger number of businesses who have no desire, intention or ability to do either.

Preferentially taxing new businesses is therefore much more likely to achieve the stated goals of boosting jobs and growth, and of encouraging innovation, at much lower cost.

In addition to this, preferentially taxing new businesses avoids the perverse incentives that inevitably arise when the eligibility for some form of preferential treatment is determined by a business’ size. This is frequently demonstrated by the reluctance of businesses to put on an extra worker when doing so would render them liable to pay state payroll tax.

Of course, there would need to be compliance measures designed to forestall “rebirthing” of companies in order to prolong access to tax preferences intended to benefit new companies, but that would not be difficult to provide.

The Coalition’s support for a preferential tax rate for small businesses appears to owe more to its long-standing, almost religious, belief that there is something inherently more noble or worthy about owning and operating a small business, than there is about managing or working for a large one (or a government agency). Also that this belief should be reflected in the tax system, rather than basing it on any evidence that taxing small businesses at a lower rate than large ones will have any positive impact on economic or employment growth.

Why Labor and the Greens should support this view is much more of a mystery.

Author: Saul Eslake, ice-Chancellor’s Fellow, University of Tasmania

Australia needs to reboot affordable housing funding, not scrap it

From The Conversation.

Federal government ministers have cast a cloud over funding for social housing and homelessness services, leading to speculation that the National Affordable Housing Agreement (NAHA) may not survive the 2017 budget.

Treasurer Scott Morrison and Assistant Treasurer Michael Sukkar point to the recent Report on Government Services, which shows the number of public housing properties has fallen, as evidence of the NAHA’s “abject failure”. Sukkar said:

We believe it’s crucial that every dollar of spending on affordable housing programs increases the number and availability of public and social housing stock. Clearly, this objective has not been met.

It should be no surprise that Australia’s social housing has been largely static for 20 years. Everything we know about the system tells us it is not funded to even cover the costs of its ongoing operation, let alone growth to meet the needs of an expanding population. Aside from a one-off boost under the 2009 federal economic stimulus plan, social housing has been on a starvation ration for decades.

The whole system system is effectively being run at a loss. So, from the perspective of state governments, building a new public housing dwelling is just one more way of losing money.

The federal government has also long lamented the lack of transparency about how states and territories spend their NAHA funds – about AS$1.5 billion a year. And there are glaring gaps in the evidence about the operations and performance of public housing authorities.

In failing to act on a 2009 commitment to modernise and enhance the Report on Government Services metrics, the states and territories have placed themselves in a weak position to rebut claims of ineffective financial management.

That said, everyone who has any contact with the public housing system knows it to be grossly underfunded. One-off studies occasionally illuminate the scale of the issue. For example, a 2013 New South Wales Audit Office report found a $600 million annual operating deficit for that state’s public housing. But no-one can easily quantify the extent of the problem using routinely published data.

A snapshot of social housing in Australia

Around 320,000 of Australia’s approximately 428,000 social housing dwellings remain under public housing authority control. This stock was amassed through a long series of funding agreements between federal and state and territory governments. These were known as the Commonwealth-State Housing Agreements until their 2009 NAHA rebranding.

Australia has had federal-state housing agreements since the Labor government of Ben Chifley initiated the first one in 1945. AAP

From the first Commonwealth-State Housing Agreement in 1945, the basic arrangement was that the federal government would lend funds to state housing authorities to build houses. The states would cover the ongoing costs from the rents paid by working-class tenants.

And, at least to begin with, the housing authorities did build. They made a significant contribution to housing supply, amounting to roughly one in six houses built between 1945 and 1965.

From the early 1970s, the housing authorities were directed, justifiably, to provide more housing to low-income households unable to pay full “market” rents. However, their capital funding also went into a long decline. With the exception of a brief period in the mid-1980s, housing authorities never again built at their earlier rate.

A number of interlocking problems set in. Social housing’s declining share of the housing stock became more tightly rationed to the lowest-income households. This eroded the system’s rent base. At the same time, its ageing buildings and households with greater support needs increased its costs.

Two landmark studies by Jon Hall and Mike Berry charted the implications of these developments for the finances. At the end of the 1980s, all but one of the housing authorities ran an operating surplus. By 2004, all but one ran an operating deficit.

Various attempts to improve the situation have been made. The 1989 Commonwealth-State Housing Agreement switched federal funding from loans to grants; the 1996 agreement allowed federal funds to be spent on recurrent expenses. In the early 2000s, rebates on social housing rents were reduced, slightly increasing revenue.

Modest amounts of public housing have also been transferred into the hands of not-for-profit community housing providers. Partly, this is to take advantage of the eligibility of community housing tenants for Commonwealth Rent Assistance. But although this often enables these providers to run a small operational surplus, it isn’t enough to fund stock replacement or any significant expansion.

Meanwhile, the overall stock has been eaten away, through market sales of public housing, and run down, through skimping on repairs and maintenance. Both are unsustainable strategies.

Running a system without good data

If the broad outlines of the problem are clear, there are major deficiencies in the data as to the details. The Hall and Berry analysis is now dated. There is no current evidence base that shows transparently and consistently what the social housing system in each state and territory costs, and how these costs are met.

For example, the Report on Government Services purports to show the “net recurrent cost per dwelling” for each state and territory. But this does not differentiate between distinct expenditure components such as management and maintenance.

Our 2015 research found that this metric was a “black box”, subject to implausibly large variations across jurisdictions. These reflected the vagaries of departmental restructures, rather than a sound accounting of social housing operations.

There is little doubt that all public housing authorities are now in deficit. However, the Report on Government Services provides no data on the relative scale of these funding shortfalls. Nor do governments routinely reveal the scale of system costs still met by tenants’ rents, nor through stock sales.

What should a rebooted NAHA do?

Although the NAHA does it inadequately, an enduring program of federal funding for operational expenses is essential to sustain the social housing system. Such funding cannot be “replaced”, as Morrison has suggested, by a government-backed aggregated bond financing model.

The bond aggregator model depends on social housing providers having a durable subsidy from government that pays the difference between their ongoing costs and the revenue from rent that low-income tenants can afford.

Instead, NAHA should be rebooted to deliver three things:

  • capital funding for new social housing stock, distributed according to an assessment of current and projected needs in each state and territory;
  • recurrent funding, distributed according to the number of social housing dwellings in each state and territory and an assessment of reasonable net recurrent costs; and
  • clear accounting by social housing providers for costs of provision and the contributions of tenants, government funding and other sources of income towards meeting these costs.

Many in the social housing world would agree the NAHA framework is far from transparent and that there is no certainty that NAHA money is optimally spent. But a ministerial focus on these issues while ignoring the system’s chronic underfunding smacks of re-arranging deckchairs.

Rather than scrapping the NAHA, the system should be rebooted, to properly fund both the growth and ongoing operations of social housing. This must be done on the basis of clear targets for the level of need to be met and the reasonable costs of providing the service.

Authors: Research Fellow, Housing Policy and Practice, UNSW;Associate Director – City Futures – Urban Policy and Strategy, City Futures Research Centre, Housing Policy and Practice, UNSW

 

Tackling housing unaffordability: a 10-point national plan

From The Conversation

The widening cracks in Australia’s housing system can no longer be concealed. The extraordinary recent debate has laid bare both the depth of public concern and the vacuum of coherent policy to promote housing affordability. The community is clamouring for leadership and change.

Especially as it affects our major cities, housing unaffordability is not just a problem for those priced out of a decent place to live. It also damages the efficiency of the entire urban economy as lower paid workers are forced further from jobs, adding to costly traffic congestion and pushing up unemployment.

There have recently been some positive developments at the state level, such as Western Australia’s ten year commitment to supply 20,000 affordable homes for low and moderate income earners. Meanwhile, following South Australia’s lead, Victoria plans to mandate affordable housing targets for developments on public land. And in March the NSW State Premier announced a fund to generate $1bn in affordable housing investment.

But although welcome, these initiatives will not turn the affordability problem around while tax settings continue to support existing homeowners and investors at the expense of first time buyers and renters. Moreover, apart from a brief interruption 2008-2012, the Commonwealth has been steadily winding back its explicit housing role for more than 20 years.

The post of housing minister was deleted in 2013, and just last month Government senators dismissed calls for renewed Commonwealth housing policy leadership recommended by the Senate’s extensive (2013-2015) Affordable Housing Inquiry. This complacency cannot go unchallenged.

Challenging the “best left to the market” mantra

The mantra adopted by Australian governments since the 1980s that housing provision is “best left to the market” will not wash. Government intervention already influences the housing market on a huge scale, especially through tax concessions to existing property owners, such as negative gearing. Unfortunately, these interventions largely contribute to the housing unaffordability problem rather than its solution.

But first we need to define what exactly constitutes the housing affordability challenge. In reality, it’s not a single problem, but several interrelated issues and any strategic housing plan must specifically address each of these.

Firstly, there is the problem faced by aspiring first home buyers contending with house prices escalating ahead of income growth in hot urban housing markets. The intensification of this issue is clear from the reduced home ownership rate among young adults from 53% in 1990 to just 34% in 2011 – a decline only minimally offset by the entry of well-off young households into the housing market as first-time investors.

Secondly, there is the problem of unaffordability in the private rental market affecting tenants able to keep arrears at bay only by going without basic essentials, or by tolerating unacceptable conditions such as overcrowding or disrepair. Newly published research shows that, by 2011, more than half of Australia’s low income tenants – nearly 400,000 households – were in this way being pushed into poverty by unaffordable rents.

Thirdly, there is the long-term decline in public housing and the public finance affordability challenge posed by the need to tackle this. In NSW, for example, 30-40% of all public housing is officially sub-standard.

“Why the “build more houses” approach won’t work

A factor underlying all these issues is the long-running tendency of housing construction numbers to lag behind household growth. But while action to maximise supply is unquestionably part of the required strategy, it is a lazy fallacy to claim that the solution is simply to ‘build more homes’.

Even if you could somehow double new construction in (say) 2016, this would expand overall supply of properties being put up for sale in that year only very slightly. More importantly, the growing inequality in the way housing is occupied (more and more second homes and underutilised homes) blunts any potential impact of extra supply in moderating house prices. Re-balancing demand and supply must surely therefore involve countering inefficient housing occupancy by re-tuning tax and social security settings.

Where maximising housing supply can directly ease housing unaffordability is through expanding the stock of affordable rental housing for lower income earners. Not-for-profit community housing providers – the entities best placed to help here – have expanded fast in recent years. But their potential remains constrained by the cost and terms of loan finance and by their ability to secure development sites.

Housing is different to other investment assets

Fundamentally, one of the reasons we’ve ended up in our current predicament is that the prime function of housing has transitioned from “usable facility” to “tradeable commodity and investment asset”. Policies designed to promote home ownership and rental housing provision have morphed into subsidies expanding property asset values.

Along with pro-speculative tax settings, this changed perception about the primary purpose of housing has inflated the entire urban property market. The OECD rates Australia as the fourth or fifth most “over-valued” housing market in the developed world. Property values have become detached from economic fundamentals; a longer term problem exaggerated by the boom of the past three years. As well as pushing prices beyond the reach of first home buyers, this also undermines possible market-based solutions by swelling land values which damage rental yields, undermining the scope for affordable housing. Moreover, this places Australia among those economies which, in OECD-speak, are “most vulnerable to a price correction”.

While moderated property prices could benefit national welfare, no one wants to trigger a price crash. Rather, governments need to face up to the challenge of managing a “soft landing” by phasing out the tax system’s economically and socially unjustifiable market distortions and re-directing housing subsidies to progressive effect.

A 10-point plan for improved housing affordability

Underpinned by a decade’s research on fixing Australia’s housing problems, we therefore propose the following priority actions for Commonwealth, State and Territory governments acting in concert:

  • Moderate speculative investment in housing by a phased reduction of existing tax incentives favouring rental investors (concessional treatment of negative gearing and capital gains tax liability)
  • Redirect the additional tax receipts accruing from reduced concessions to support provision of affordable rental housing at a range of price points and to offer appropriate incentives for prospective home buyers with limited means.
  • By developing structured financing arrangements (such as housing supply bonds backed by a government guarantee), actively engage with the super funds and other institutional players who have shown interest in investing in rental housing
  • Replace stamp duty (an inefficient tax on mobility) with a broad-based property value tax (a healthy incentive to fully utilise property assets)
  • Expand availability of more affordable hybrid ‘partial ownership’ tenures such as shared equity – to provide ‘another rung on the ladder’
  • Implement the Henry Tax Review recommendations on enhancing Rent Assistance to improve affordability for low income tenants especially in the capital city housing markets where rising rents have far outstripped the value of RA payments.
  • Reduce urban land price gradients (compounding housing inequity and economic segregation) by improving mass transit infrastructure and encouraging targeted regional development to redirect growth
  • Continue to simplify landuse planning processes to facilitate housing supply while retaining scope for community involvement and proper controls on inappropriate development
  • Require local authorities to develop local housing needs assessments and equip them with the means to secure mandated affordable housing targets within private housing development projects over a certain size
  • Develop a costed and funded plan for existing public housing to see it upgraded to a decent standard and placed on a firm financial footing within 10 years.

While not every interest group would endorse all of our proposals, most are widely supported by policymakers, academics and advocacy communities, as well as throughout the affordable housing industry. As the Senate Inquiry demonstrated beyond doubt, an increasingly dysfunctional housing system is exacting a growing toll on national welfare. This a policy area crying out for responsible bipartisan reform.

Rental insecurity: why fixed long-term leases aren’t the answer

From The Conversation.

The insecurity of rental housing and unsatisfactory condition of many properties are receiving much-deserved media attention following the release of a national survey of tenants.

However, the stock response to the insecurity this revealed – longer fixed-term agreements – is not the answer. The solution to the failure of existing legal protections must take into account the structural features of the rental market, including the mobility of tenants.

The survey, commissioned by Choice, National Shelter and the National Association of Tenant Organisations, presents evidence of a widespread sense of worry, dissatisfaction and injustice on the part of tenants. According to respondents:

  • 75% feel that competition for rental properties is “fierce”;
  • 50% are concerned about being “blacklisted” on a tenancy database;
  • 50% have experienced some form of discrimination;
  • 30% live in properties requiring non-urgent repairs, and 8% require urgent repairs;
  • 11% experienced a rent increase; and
  • 10% reported an angry response after requesting repairs.

Residential tenancy laws cover many of these problems. That tenants are not successfully exercising their legal rights indicates a deeper problem of insecurity in renting. This problem is both structural and legal.

Small landlords and mobile tenants

Small landlords dominate the Australian rental sector: 72% own a single property each. Most (62%) make a net rental loss, so it is important to them that they can switch out of the sector when it suits them.

Research for the Australian Housing and Urban Research Institute (AHURI) indicates that 21% of landlords exit the sector within their first 12 months. By five years, 59% will have exited.

When landlords exit, they might sell to another landlord or an owner-occupier. Older research indicates that the transfer of rental housing into owner-occupation is a significant feature of the Australian market.

These dynamics cause structural insecurity for tenants. They also mean many landlords do not willingly tie up their sole asset in a long fixed term.

Despite the legal and structural insecurity of the sector, most moves by tenants are for their own reasons.

The ABS Housing Mobility and Conditions survey shows that tenants generally are very mobile: 81% have been in their current premises for less than five years. About half of moves between rental premises were for “personal reasons” (including family and employment reasons); 20% were to get more suitably sized housing; and 15% because of a termination notice from the landlord.

This degree of mobility suggests it is not in most tenants’ interest to enter into long fixed terms and the rental liability it entails. That’s not to mention the risk of being tied to a small landlord who is an unknown quantity and has no business reputation to protect.

Residential tenancies law in Australia

Each state and territory in Australia has its own Residential Tenancies Act. These differ in the details but are broadly similar in outline. All provide standard terms for tenancy agreements, processes for rent increases and terminations, and relatively accessible dispute resolution and eviction procedures.

Most do a decent job, on paper at least, when it comes to repairs and maintenance. Generally speaking, landlords are obliged to ensure rented premises are provided fit for habitation and maintained in a reasonable state of repair.

This means tenants are entitled to repairs even if the premises were in bad condition to begin with, and even if they pay relatively low rent. Tasmania is an exception: there, landlords are obliged to maintain premises in the condition in which they were first provided.

Similarly, each state and territory prohibits landlords from interfering in tenants’ quiet enjoyment of their premises. Most expand this right to protect tenants’ “reasonable peace, comfort and privacy”.

These are important protections, even though there may be scope to improve them – for example, by adding specific standards for safety devices and fixing particular legal defects like Tasmania’s. The great problem is that the ability of landlords to give notices of termination without grounds undermines the existing protections in every state and territory.

Without-grounds termination notices give cover to terminations by landlords for bad reasons, such as retaliation and discrimination. This means the prospect of receiving such a notice hangs over tenants when repairs and other issues arise.

What’s the solution, then, to high insecurity?

The legal insecurity of tenants might be improved in several ways.

Under the current laws of each state and territory, a fixed term prevents the landlord from terminating without grounds, and on other grounds such as sale or change of use of the premises, for the duration of the fixed term. It also prevents the tenant from lawfully terminating without grounds.

The idea of long fixed-term tenancy agreements is occasionally raised in the media and has caught the attention of the New South Wales and Victorian governments in their reviews of residential tenancies laws. Both those governments are considering how to facilitate long (five-year) fixed terms, including by altering other aspects of their laws – such as the protections about repairs.

But this approach presents problems of its own. Long fixed terms are unwieldy for landlords and tenants. Trying to make them more useful also threatens other valuable legal protections.

The present structures of the Australian rental sector call for different reforms.

We can reconcile the mobility of tenants with their sense of insecurity if we think of “security” as more than just the legal right to occupy. AHURI researchers have conceived of “secure occupancy” to encompass a person’s ability to make a home of premises and exercise housing autonomy. This includes the ability to confidently get repairs done in one’s premises, or keep a pet – and to freely decide to make a new home elsewhere.

This conception points towards a stronger reform agenda for improving security. Instead of long fixed terms, we should abolish without-grounds termination by landlords.

The law should instead provide a comprehensive set of reasonable grounds for termination, with notice periods and exclusion periods appropriate to each ground. This accommodates our present lot of small landlords, and can be done immediately.

Over a longer term, we should set our housing tax and finance policies to get a more stable sort of landlord. That would be one who operates at greater scale, has a reputation to protect and is less interested in switching out of the sector than in receiving a steady trickle of rents from secure tenants.

Author: Research Fellow, Housing Policy and Practice, UNSW

After all the talk, what is the Turnbull government actually doing for small business?

From The Conversation.

Treasurer Scott Morrison continues to warn about the decline of Australia’s global competitiveness if the centrepiece of the 2016–17 federal budget – a company tax rate cut – is not passed.

However, such tax cuts are not necessarily the best approach for the government to support small business. They need other – more immediate – forms of support, our research shows.

What’s being proposed?

The 2016-17 budget reflected the Turnbull government’s catchphrase of “jobs and growth”. From a small-business perspective, the budget wanted to:

… boost new investment, create and support jobs and increase real wages, starting with tax cuts for small and medium-sized enterprises, that will permanently increase the size of the economy by just over 1% in the long term.

In 2014, Australia had the fifth-highest company tax rate among OECD countries, albeit average in the Asia-Pacific region. Local investors benefit from lower taxes on dividends through Australia’s dividend imputation system, which passes credits onto them for corporate taxes already paid.

The Abbott government later succeeded in lowering the tax rate for small businesses with a turnover of less than A$2 million from 30% to 28.5%. The Turnbull government’s plan would eventually reduce the rate for all companies to 25% by 2026-27. It’s a phased implementation over the next ten years, starting with an immediate cut for small companies to 27.5%.

However, 70% of small businesses are unincorporated. This means their owners add profits to their personal income for tax purposes. While the government has promised an increase in their tax offset percentage, it plans to retain the cap of A$1,000.

All small businesses will benefit from the simplification of tax rules for stock, GST and depreciation. But the government’s plan introduces three levels of concessions for small businesses. This complicates the definition of what these small businesses are.

Definition disputes

Defining small business goes beyond an academic debate.

With little consensus on typical turnover numbers – these range from A$2 million to A$25 million – a better indicator could be the Australian Bureau of Statistics definition of small businesses as those with fewer than 20 employees. And 97% of the 2.1 million businesses trading in Australia fit this definition.

It is risky, though, to simplify the definition into one blunt instrument that ignores differences in industry, life cycle and high-volume versus high-worth sales. A more nuanced approach is needed to ensure relief for the businesses that need it most.

However, the major political parties seemingly remain focused on turnover as a measure of what is and isn’t a small business. The government’s plan extends the upper limit for the turnover of small businesses to A$10 million by 2016–17, which covers some of the 3% of Australia’s non-small businesses.

Meanwhile, Labor has argued for immediate support for tax cuts to small businesses with a turnover of less than A$2 million.

Lifting the turnover threshold for all small businesses from A$2 million to A$10 million in the short term will increase the number of businesses that can access some tax concessions by 90,000. And it may improve economic growth as larger firms receive some relief.

What small businesses actually need

Small businesses need immediate and certain tax relief in the short term. They struggle with an uncertain business environment.

But, in the longer term, our research shows increased competition, a lack of market demand and red tape are but a few of the issues small businesses deal with. They highlighted statutory and regulatory compliance, as well as tax planning and compliance, as major issues for them.

More than tax rates, complex tax requirements and regulations are issues causing small businesses substantial distress. The Australian Tax Office’s research supports this: more than 70% of surveyed clients viewed their tax affairs as complex. And the World Bank’s ease of doing business index ranks Australia 25th in terms of ease of paying taxes.

The immediate tax relief for small businesses is tied up in proposed legislation surrounding the government’s ten-year tax plan, which is unlikely to find enough support to pass the parliament in its current form. The uncertainty and complexity that have ensued from the political conflict over tax have negative effects on the small business landscape.

Innovation is likely to suffer under such uncertain conditions. The government’s plan recognises that:

Small businesses are the home of Australian enterprise and opportunity and they are where many big ideas begin.

In addition to ideas and passion, small businesses need resource availability, appropriate capabilities and market access to innovate. The plan proposes measures that satisfy some of these criteria, but more focus on finding ways to minimise bureaucracy to provide time to focus on innovation is needed.

The role of government is undeniable in such initiatives. Even if one argues that tax relief is a temporary reprieve, this cash injection can jump-start small business innovation and growth.

Should the two major parties fail to find common ground on the government’s company tax cut, the stalemate will continue – and leave small businesses in the lurch.

Authors: Martie-Louise Verreynn, Associate Professor in Innovation, The University of Queensland; Thea Voogt, Lecturer in Tax Law, The University of Queensland.

 

States drag feet on affordable housing, with Victoria the worst

From The Conversation.

Moral panic over recent increases in visibly homeless people in central Melbourne has brought to the fore the critical shortage of affordable housing across the metropolitan areas of Australia’s wealthiest cities. But living on the street is only the tip of the iceberg. Many more households are living in insecure and/or overpriced accommodation. Their plight is due to an undersupply of appropriately priced, sized and situated rental housing.

The Commonwealth government is reportedly planning to scrap the National Affordable Housing Agreement with the states. Without a clear alternative, the weakness of state policies, which lack clear targets and mechanisms for providing more and better affordable housing, adds to the problem. One state, Victoria, still doesn’t have an affordable housing strategy.

South Australia’s strategy has 15% inclusionary zoning as one of several mechanisms to achieve affordable housing targets. Western Australia provides regular progress updates on the regional targets of its Affordable Housing Strategy 2010-2020. Tasmania adopted a ten-year strategy in 2015.

New South Wales has had affordable housing policies in place since 2009. The NSW government has a new plan to build more social housing and improve existing stock. Queensland released a draft strategy in March 2016.

While these state policies vary in their success, Victoria does not even have a strategy to critique.

Victoria’s toxic planning legacy

No doubt Premier Daniel Andrews inherited several industrial-strength cans of toxic planning waste when Victorian Labor won office in November 2014. This legacy came not only from the Liberals, but from the earlier Bracks-Brumby Labor government.

Under the 2000s Labor government, the fourth new metropolitan strategy in four decades, Melbourne 2030, largely failed to stop sprawl. The main excuse for sprawl – that increased and largely unregulated housing supply would magically enable affordability – had become a sad joke.

As former Labor adviser Joel Deane’s book Catch and Kill shows, inability to respond to basic public concerns about planning and transport was perhaps the most significant factor in Labor’s 2010 election defeat.

If Labor had been ineffective in creating new affordable housing, the Liberals’ planning decisions between 2010 and 2014 were disastrous. Australia’s largest urban renewal site – Fishermans Bend – was drastically up-zoned from Industrial to Capital City (also known as “Anything Goes”). They did this without extracting a cent in added value from landowners towards affordable housing – or any other infrastructure.

Huge parts of the southeastern suburbs – Liberal strongholds – were essentially walled off from new housing, even though these had some of the best school and transport infrastructure to serve a rapidly growing population. Hundreds of job cuts meant the civil service lost experience and capacity to do better.

A long wait for action on affordable housing

The Victorian Labor 2014 election platform stated:

All Victorians have a right to safe, affordable and secure housing.

Yet in more than two years since its election, the Labor government has not completed any of the major reforms that would enable affordable housing.

Plan Melbourne’s “refresh” has not been published in its final form. The Residential Tenancies Act still has to be strengthened. The residential zone review hasn’t been completed.

Perhaps most disturbingly, we are still waiting for the results of the early announcement that the state treasurer was going to work with the planning and housing ministers to develop an integrated affordable housing strategy.

A new advisory body, Infrastructure Victoria, published a 30-Year Infrastructure Strategy in December 2016. “Social housing” (public and non-profit) was one of its top three priorities. However, compared with principles of “a good plan”, the affordable housing section of this strategy does not pass the test.

According to the literature on plan analysis, good plans should have seven elements: a clear vision; specific goals; a fact base informing alternatives; a spatialised sense of what goes where; a very specific implementation plan, with costs, timelines and responsible authorities; a monitoring and evaluation plan; and specific horizontal (across all parts of government, the private sector and civil society) and vertical (alignment between national, state and local government) integration.

Vancouver shows how to do it

The City of Vancouver’s Housing and Homelessness Strategy 2012-2021 is an example of an affordable housing plan that ticks the boxes. It has a clear vision embodied in the strategy’s subtitle:

A home for everyone.

The strategy sets specific numeric housing targets. These cover everything from supportive housing for homeless people with mental disabilities, to social housing, market rental and home-ownership options.

These targets are based on a robust and transparent analysis of housing trends across the city. While all subsequent neighbourhood plans are intended to achieve a mix of dwelling cost and size, there is a particular emphasis on locating supportive housing near areas with significant homeless populations.

Vancouver has shown what a comprehensive affordable housing strategy can achieve. Kenny Louie/flickr, CC BY

The partnerships with other levels of government, private developers and non-profit providers are comprehensive. A new Vancouver Affordable Housing Authority has been established to coordinate these efforts. Since the report’s adoption, further mechanisms such as a community land trust have been established. Annual reporting against the targets is available on the City of Vancouver’s website.

In contrast, Infrastructure Victoria is an advisory body to state government, not an implementation agency. Its vision of a “thriving, connected and sustainable Victoria where everyone can access good jobs, education and services” begs the question of how progress towards these attributes would be measured.

Infrastructure Victoria does estimate an extra 30,000 affordable homes are needed over the next ten years. But it admits this figure is not well justified, due to a lack of good information on affordable housing deficits.

It recommends further work on an affordable housing plan with specific funding streams. However, this cannot really be expected to be the plan that “tackles [the] affordable housing shortage”, as its own website boasted of the draft report.

At best, Infrastructure Victoria’s plan is a baby step. It does clearly state the importance of social housing as critical infrastructure. It also begins to justify mechanisms that could achieve some scaling up of affordable housing outcomes.

But the public housing waiting list now has more than 35,000 names. About 120,000 households receiving Commonwealth Rent Assistance are still unable to afford living where they do. That includes 50,000 households in the lowest income bracket. And another one million new households are expected to move into Victoria within the 30-year timeframe of the infrastructure strategy.

This all means that baby steps will not be enough to prevent rapidly increasing homelessness.

Author: Carolyn Whitzman , Professor of Urban Planning, University of Melbourne

Moving on from home ownership for ‘Generation Rent’

From The Conversation.

The inequalities and inequities that housing markets generate have become a cross-national issue in the last decade or so. In Australia, the UK and the US, discussions of “Generation Rent” have taken centre stage.

In the generational debate, older, asset-wealthy owner-occupiers advantaged by previously more stable lending conditions and historic house price trends have been pitted against younger cohorts. The latter have been priced out of the home buyers’ market and pushed into rental housing in ostensible perpetuity.

Evidence of just what “Generation Rent” is and, more importantly, why it matters have, however, been somewhat fuzzier.

Economies and security built on housing

One reason declining access to home ownership for younger people is of such concern is that housing is much more than housing. The wealth accumulated in our homes over our lifetimes has come to represent economic security and a means to live more comfortably in old age. It’s seen as a buffer in times of hardship – buying a home is an implicit part of the welfare system in many contexts.

Declining home ownership is contributing to inequality.

Governments have largely nurtured this. They often support or even fund the growth of home ownership and protect property value increases. It has become increasingly evident, however, that this approach to housing markets as a kind of welfare policy has fundamental limitations.

For one thing, the global financial crisis of almost a decade ago demonstrated how deeply rooted and transnational housing finance has become. A welfare system that relies on home ownership in a globalised era is thus critically vulnerable.

Although property markets work at a local level, global capital has become increasingly intrusive. Investment purchases are financed from around the world. While our homes function as our family savings accounts, housing now also serves as safety deposit boxes for transnational middle classes and wealthy elites.

The global financial crisis also illustrated that the very conditions that may require home owners to draw on their property assets as an economic buffer are likely to undermine their value and make them difficult to access when needed.

Since the crisis, housing has again become an overwhelming focus of investment, sustained by quantitative easing, weaker financial markets, and low interest rates. This is driving renewed inflation in house prices, especially in global cities, with overflows downwards and outwards.

Divide grows between owners and renters

Buying a home is now well beyond the capacity of many among the increasingly vulnerable cohorts of younger people. They have also faced reduced job security, subdued wage rises, and diminishing access to credit.

As a result, home ownership rates across English-speaking societies, but also elsewhere, have fallen significantly, driven by the collapse in home buying among millennials.

While it is easy to blame globalisation (especially foreign investors) and dwell on the historic advantages baby boomers enjoyed, much of the problem lies with our housing systems and especially with our approaches to fixing them. Critically, by relying on home ownership and making homes default savings accounts essential to our long-term welfare security (in the context of austerity or welfare state retrenchment), we have come to depend on them for much more than housing.

This is why Generation Rent represents so much of a challenge. It requires more than dealing with the supply and distribution of home ownership. It may require a complete rethinking of home ownership as a basis of our housing systems.

The term “Generation Rent” is not particularly useful as it implies direct conflict between cohorts. In fact, the opposite is true. In recent years different generations within families have increasingly mobilised around their collective property wealth in the face of diminishing economic security.

In the UK, around one in ten first-time home-buyers were getting help from parents in the mid-1990s. By 2005 this was up to 25%. And since the GFC the figure has soared to as high as 75%.

The family assets invested in housing are undergoing profound shifts.

At the same time, has been a remarkable shift in family deployment of assets. Numbers of private landlords increased from just over half a million in the early 1990s to around 2.2 million by 2015 (equivalent to almost one in ten households). This represents a remarkable boom in new landlords, owning just one or two extra properties, since the beginning of the century.

Various studies suggest that house hoarding and “landlording” have become an extension of the home-ownership welfare strategy. Buying and then renting out an extra home represents an effective means of ensuring long-term security. It’s also something that can be drawn upon to help out, or even pass onto the kids.

Generations, then, are not necessarily at odds with each other. There is little evidence that younger people directly blame their elders for their housing situation. In fact, it is older people that are most likely to help them out.

Problem is deeper than Generation Rent

Underlying Generation Rent is essentially a wider problem derived from the maturation of home-ownership systems in a diverse numbers of contexts, from Ireland to Japan.

In the past, home-ownership rates and property prices boomed, supporting asset accumulation for particular cohorts. However, this created conditions for tighter access, which has undermined the tenure and reinvigorated low-level rent-seeking in the longer term.

The outcome is not so much a polarisation between generations, but between younger people based on the housing market position, or strategy, of their parents, or even grandparents. The children of secure home owners are likely to eventually be helped out or inherit. The children of renters, over-leveraged mortgage-holders or ageing households who rely on their unmortgaged property to meet their own needs are likely to remain locked out unless they have a considerable income.

In the context of continued flows of global capital and the normalisation of property investment as family welfare strategy, we cannot realistically expect that socioeconomic inequalities derived from housing or problems of access among younger people are going to be reversed.

Governments have largely responded to declining home ownership by sponsoring access to credit or providing extra cash for potential home buyers. This has done little other than revive house price inflation and thus aggravate the affordability issue.

Rental housing careers are likely then to become more common and last for longer. We therefore need better means to reconcile tenants’ needs with both housing and welfare practices. This will involve policymakers and politicians imaging other ways of “doing” housing that consider different types of households and life courses, tenures and housing ladders.

Younger people themselves seem to be adapting to a post-homeownership landscape. While owner-occupation remains deeply normalised, household situations have become increasingly diverse. Sharing with friends or strangers has become much more common.

In cities, this shift has started to stimulate private-sector responses, including large-scale purpose-built developments expressly tailored to the needs of Generation Rent.

Author: Associate Professor, Centre for Urban Studies, University of Amsterdam