Housing belongs in the inequality story

Yet another academic article devoid of worked examples and ignoring variables that don’t suit the authors conclusions. Inequality? It’s the supply side that is the problem and Government’s failure to plan.

Yes, devoid indeed, the inequality I see is the drive/ motivation/ risk taken between mortgages and non mortgage holders, what $ value have the authors factored into this?
I also see the government buttering the public up for increased taxes and revenue from the family home.

If capital gains tax is levied on owner occupied homes then the interest on mortgages should be tax deductible. This would make morgates more affordable and the government would recoup lost taxes through capital gains tax when the house is sold.
If the imputed value of rental income was to be included in income tests for the aged pension, then, similarly, the value of rental assistance for aged pensions should be included in the income test.
There are many more hypothetical ways to reduce fiscal inequality, but the one most overlooked is effect of living within income parameters to build wealth over time.

This is typical left-wing rubbish, people in Australia should be free to spend on whatever they want that is legal, without the threat of taxation on successful investments to equalize them with investors who invest in depreciating assets. To get equality go to a communist country as one of the workers.

The Australian housing story has left Australia short of capital for nation building projects as individuals have scrambled to over allocate capital to a tax free overvalued housing story. The system in Australia should change to allow tax deductibility on home mortgages and tax the real gains on homes (actual minus inflation) less a tax free hurdle of say $500,000. The change in the tax law should include a sunset date not a grandfathering clause as this will help solve the current supply imbalance in housing. Freed up capital from Australian taxpayers should then be incentivized into nation building projects that include a federal government guarantee. These projects should be for energy, road, rail, water and telecommunications. And these investments would require a minimum IRR and a guaranteed return to investors which would include an income & equity component.

If mortgage interest is deductible and you give a tax free hurdle (is this the first $500k in gains or property sale or purchase price - it makes a big difference!), then this is simply unfair and makes the inequality worse! (Particularly if you mean the first $500k in gains.)

Also, I don't understand why some replies has said that if the gain is taxable, that the interest on the mortgage must be deductible when you are not also suggesting that rent paid should be deductible. The interest on the mortgage is effectively a substitute for rent, but you are getting the advantage of an appreciating asset, so there is no need for mortgage interest to be deductible if you tax the gain (inflation adjusted of course).

I really want an opportunity to invest in Snowy Hydro 2.0

Yes, and most don't realise this maybe a one off moment due to demographics with high fertility silent generations, through boomer 'bomb' and partly Gen X increasing longevity and holding houses longer, hence, relatively less turnover, for now....

Signals were apparent before Covid, anecdotally on softening house prices, while Cotality showed that 2014-24 no capital city median price had doubled within that decade, signifies stagnation of median house values; converelt Melbour e with population growth too, is one of the most affordable?

One can purchase a house now, but chances are, with boomer 'bomb' transitioning, most houses bought will start losing value immediately.

Housing inequality is massive. I read something recently, I think on Firstlinks, saying the average house in Sydney will increase in value by $1m more than the average across Australia over the next 25 years. That's driven by higher wages for the same work.
My parents and my wife's parents bought their home around 1970 for close to the same amount. My parents in Sydney now have a $2.5m home while my in laws in a large regional town have a home worth $600k. Both get a similar age pension. My parents started with more, due to the higher wages for the same work, which they spent on a number of overseas holidays.
My parents have massively more capacity to reverse mortgage for health or holidays. Me and my siblings get a much greater inheritance than my wife and her siblings.

This story is ridiculous and is only going to divide us more, educating the young on Finance at school will help them prioritise what's important in their life and can then make their own decisions. What cost do you put on the people that went without to own their Home, to provide a Safe Haven for their Families, Housing is definitely a right, everyone deserves a Roof over their heads. The good hard working people of the World deserve Governments that are Accountable and are able to lead a Nation not throw them to the curb when things get tough, why don't our Governments lead by example, the way workers get treated it's no wonder our young don't want to try

The concept of home ownership giving the owner a rent free advantage should not be limited to only houses.
If you own a car then it also should also be classed as capital asset giving the owner a rent free advantage with rental for an equivalent hire car hire imputed as tax assessable revenue to the owner.
Of course a car only looses value so no one will see this as being a valid comparison, no money to be made or transferred here.
Returning to the housing real estate as an investment for homeowners.
Capital gains tax on housing with partnering with mortgage costs tax deductible will make the banks really happy, be windfall for them. This could make the overpriced housing sector more affordable encouraging further increased house prices. Good for Government as on sale time increased Cap Gains revenue.
Remember housing has already been taxed GST on the land development costs and the services required by councils, then include home construction GST costs on all materials and labor.

We have councils and government departments providing property and land values which are used to calculate local government revenue. As valuations are linked to retail sale prices so could there be a conflict of interests here.
So if government policies create a buyer competition this has the effect of increasing prices it will be a win tax wise for both local and federal govt.
The real world reality is its using inflation as a justification for transfer of wealth to a younger generation.
Taxing inflation is never a way to prosperity.
Given the track record of honesty by governments of any name does the younger generation genuinely think they will be receiving this inflation money.
Do the homework and think how many retirees can afford to be assessed on the rental value.

Natural resources such as air and water are collectively owned by all. It is inherently illogical for such resources to be privately owned. Air, for example, is naturally occurring, necessary for life and invented by no one – and thus no one has a greater claim to owning air than anyone else. It is ridiculous to say that someone should have to pay to breathe air.

This logic is applied to another natural resource – land – one of the four factors of production. ‘Land’ in this sense refers not only to real estate but to all the resources that come from the Earth: coal, oil, metal ores, timber, crops and so on. Why do we consider it normal for people to own land, when land – like air – is naturally occurring, necessary for life and entirely uninvented? And why do we consider it normal for the owners of land to extract economic rent from those who wish to use that land? In essence, why do we not treat land as something collectively owned by all?

The paradox of income tax: society does not have the right to tax the income of other people, as that income was generated solely by them through their labour and hard work. Labour is not a part of the commons, and is not a natural resource that should be collectively owned by all.

All forms of income tax should therefore be abolished. Instead, society should introduce a single Land Value Tax (LVT), paid by those who own land. Landlords would pay the LVT as a form of dues to society, to compensate the public for its exclusion from their land. Specifically, we should tax the unimproved value of the land, i.e. without considering the value of man-made improvements such as houses or buildings. Society only has the right to claim the natural resources of the land, not what is built on it, as the latter is the product of someone else’s labour.

This theory was also intertwined with the belief in wealth redistribution and social justice. He argued that, after the government had secured enough revenue to fund its operations, the remainder of the money raised from the LVT should be redistributed equally to all members of society. He called this a citizen’s dividend – a way of ensuring that all citizens could benefit from the land they collectively own. Nowadays this idea, known as Universal Basic Income (UBI) is coming back into fashion, as it is a form of social security that inherently benefits the less wealthy more. This is because the UBI represents a higher proportion of the income of the less well-off compared to the wealthy.

Indeed, one of the main selling points of the single LVT is that it is inherently progressive (i.e. the rich pay more than the poor). With income tax, progressivity has to be artificially engineered, usually by creating tax bands with higher rates for higher earners. But with the LVT only landowners – typically those who are already better-off – have to pay tax. At the same time, workers get to keep the full value of their own labour. [Henry George and the Land Value Tax - edited excerpt]

https://www.thelandmagazine.org.uk/articles/short-history-enclosure-britain

Google: "Terra nullius"
'Terra nullius is a Latin term meaning "land belonging to no one," used in international law to describe territory that has never been subject to sovereignty or was abandoned. It was famously applied by the British to claim Australia in 1770, ignoring existing Indigenous inhabitants, a legal fiction overturned by the Mabo decision in 1992.'
Not enclosed; owned by none, not by all.

Relevance?

"Relevance?":

'MY home is MY enclosure'.
My driveway is my drawbridge.

If a Boomer home owner lives long enough to go into aged care the home will need to be sold and the proceeds given to an aged care provider who will get the imputed rent. The aged care provider can invest the proceeds. So the imputed rent has merely been deferred.

On the question of inequality, how hypocritical is the Government using this tag in the housing debate. The true intergenerational inequality is our massive Government debt which the Government has built up with their out of control spending. The young are going to be left with the bill. A classic pea and thimble trick. Look over here at housing while we build up debt over there.

Aged care ....is a driver of increased govt debt now; about 80,000 people or 40% of older Australians in residential aged care are funded by Commonwealth govt payments, the rest play daily "rent" and other fees up to a cap or receive a 98% refund of their deposit. That's being met by taxes on others and/or increased govt debt.

And then, there are health cards for rich older Australians staying in their own homes - including about 400,000 of self funded retirees and a further 100000 on aged pensions - growing at 50000 people a year

Pea and thimble???

Jeff, there are a lot of other drivers of Government debt too. Start with the NDIS and look at middle class welfare, a large part of which goes to the generations before the Boomers. Look at all the subsidies and concessions from Government that are non means tested. The examples you quote are means tested unlike a lot of the middle class welfare going to the earlier generations eg electricity rebates, solar rebates, electric vehicles. Child care is largely non means tested as the upper limit is over 500k in family income. It seems these days that people are looking for Government money as soon as they start working. Cut out a lot of this middle class welfare and maybe the debt for future generations will be manageable. And stop blaming the Boomers for all the problems of society .

Of course - housing is part of the Australian (wealth and income) inequality story. The question is what's the related problem(s) and (politically/socially accepted) solutions in the national (public) interest in the long run?

Smart young people - should threaten and, if no policy action follows, rationally get up and go elsewhere - rather than look forward to high income tax rates, consumption and education taxes as well as health levies while older Australians receive aged pensions, aged care and tax concessions on super/long term savings locked up in homes and benefit from revalued land in undersupplied rental/new home markets. Alternatively, the bank of mum and dad will help rich families stay together in Australia; and tax free inheritances will eventually trickle down! Meanwhile 10% of Australians are homeless and another 30% renting at least temporarily falling behind in the wealth and income stakes! Is this a happy sustainable Australia? No in. my view!

What

"consequence of (govt) aged pension for all - increased govt debt":

Everyone's a spender. Save-o-phobe hordes run amok.

[ Savings = Income - Expenditure ]

Very interesting concept. Of course, any imputed rent must also appear in the housing COSTS for owner-occupiers. This will push up the measured average cost of housing. And it will give those with a mortgage a very high housing-cost-to-income ratio.

Including increases in the values of homes is problematic, however. The HILDA income definition excludes capital gains (whether realised or unrealised). That is clearly a weakness, but it is not fixed by the selective inclusion of the growth in value of owner-occupied housing.

I think it is fair to say capital city house prices in Australia are very high relative to wages and our tax and transfer system is strongly biased towards home owners. I wouldn’t fancy living on the age pension and even a modest super balance while renting in Sydney.

How to correct this is much tougher.

Do you provide less government assistance to those living in expensive homes perhaps by including the home value above a certain point in the income and assets test? Do you provide greater government assistance to non home owners who are not working or maybe even on the minimum wage? Big cuts to migration but who will do all the jobs Australians don’t want to do. Land tax on all land might encourage the most efficient use of land. Maybe loosen development guidelines. Cut government assistance to home buyers. CGT on the family home? The politics of any of these proposals are wicked.

"capital city house prices in Australia are very high relative to wages":
"How to correct this":

Increase real net interest rate.

Large ratio of price to wage is missing the important factors - interest and term.

Infinite $Price, infinite mortgage term * infinitesimal mortage rate%:
= $0 / y

With finite term and infinitesimal mortage rate%, max repayable $Principal:
= (term y) * (Wage / y)

With finite term and finite mortage rate%, max repayable $Principal:
= PV(mortage rate%, Term y, -Wage / y, 0)
= PV(7%, 30, -1, 0)
= $12.41 * Wage / y

The point is that home-owners are better off than renters - in many ways, but in this respect in their concessional tax treatment. A person with $500,000 of saved income invested in a home is better off than a renter with $500,000 of saved income invested in shares.

What if, instead of taxing the home-owners' imputed rent and capital gains (which of course, outrages home-owners), we gave some parallel concessions to renters (non-home-owners) for tax on their investments in non-home assets? It might go some way to reducing the imbalance in tax treatment that favours those lucky enough to own the place they live in.

Surely anyone with $500k to invest should be free to make that investment wisely or unwisely in housing or any other assets that they consider may perform as well as or better than housing (eg.physical gold) without putting the taxpayer at risk when that investment under-performs.

It's not about subsidising underperforming investments; it's about the different tax paid on income and capital gains. The owned home gets a free pass (through imputed rent and tax-free capital gains), while other investments do not. The 'choice' to invest in a home (mortgage) instead of other assets is not as attainable for those who are younger, facing current high prices, in non-permanent contract work (now very common), and/or single. Some in the younger generations now invest in shares for the decade or so it takes to save a deposit. They don't get to take advantage of the low/no-tax treatment of the owned home for that time - and will pay capital gains tax if/when they sell their investments to use as a home deposit.

Don’t worry reader, the way this government is going in due course CGT will eventually apply to the family home so that should even up the imbalance in tax treatment between home owners and other investments.

If you want to talk inequality, talk about how it is fair that the PPOR is left out of the pension test, so someone with a house in inner Sydney worth several million dollars, saved and invested nothing but spent it all, can still get the pension because "eeeh, I paid taxes all me life" (note: just like everyone else after you will, you are not special).

Yet, someone who does the same, lives in a house in the middle of nowhere but has invested wisely and done without, gets nothing.

Address that one without upsetting the massive boomer cohort that lives on these pages, I dare you.

p.s. @Dan, I agree; CGT will be on the family home, plus that will get means tested for your pension. Watch this space, I have said the same many times before.

It will take a brave Government to apply CGT to the family home so this is unlikely any time soon. Including the family home in the asset test for the pension will also be a difficult task even though it has merit. Even the intergenerational argument will not get them across the line. The proposals being talked about in the Budget to encourage more home ownership will only mean there are more opponents of any proposal to apply CGT to the family home. The budget proposals will also encourage home owners to invest more in the family home as it will be one of the last means of building wealth.

"Address that one without upsetting the massive boomer cohort that lives on these pages":

Abolish Age Pension Mean Tests.
Perfect equality.
No aged need do without the Age Pension.

And the consequence of (govt) aged pension for all - increased govt debt for younger Australians.
Are boomers and/or the rest of Oz happy about that ?

This is typical left wing academic talk.

The writers continually invoke the “redistributive role of taxes and transfers”. They don’t like any assets outside the “state’s main redistributive architecture”.

When you see the role of the state is to redistribute wealth then this article almost writes itself. Anyone who saves, borrows and does without to buy a home is suddenly unfairly taking advantage of the system.

It also follows that these distinguished academics would support wealth taxes and I would hate to think of how they regard billionaires.

Here is my personal take on the so called inter-generational housing inequality story - both of my sons (aged 35 and 32) are engaged and have already purchased or are about to purchase quality family homes in the $2m range in premium eastern suburbs of Melbourne - meanwhile at their age in the early 1980s, all I managed was a modest cream brick veneer in then suburban Chadstone (a modest south eastern suburb of Melbourne) for about $60K and in need of renovation-so I am having a lot of trouble seeing the inequality-unless it’s all is in their favor?
PS.I eventually managed to improve on that modest first home but it took many more years.

You paid cash on the knocker? They mortgaged their family's future projected income?

Far from it - bank of M+D contribution was relatively modest as is the size of their mortgages-the bulk of the proceeds was from the sale of PPRs that they and their partners held/hold (including one fully paid off). Obviously that meant getting into real estate early (one son bought while still benefiting from the bunk of M+D). It also meant securing good educations which lead to well-paid careers for them and their partners. But another important ingredient is the right mind set about managing life and finances, which came courtesy of being sons and grandsons of post war migrants that arrived here with nothing but their suitcases and a determination to make a new life.

"one son bought while still benefiting from the bunk of M+D":

'Bunk of Dad&Mum'; Own home in ~4 years whether Banking proceeds of Bunking or 20% down mort-gage after 8 months of 'Fast Saving' (TM) 80% of net income. Then either way can save ~50% of net with relative ease without troubling Dad or Mum.

= NPER((1 + 5%) / (1 + 3%) - 1, -50% * 300000, -500000, 2500000)
= 11.3 y

"courtesy of being sons and grandsons of post war migrants that arrived here with nothing but their suitcases and a determination to make a new life":

Seems to often have that effect - in part due to source societies having a smaller proportion of rental homes and more difficult mort-gages requiring families to share housing, save to raise capital and build and renovate themselves.

“in part due to source societies having a smaller proportion of rental homes and more difficult mort-gages requiring families to share housing, save to raise capital and build and renovate themselves”

This may have been the case in western Europe but in eastern Europe, post war communism deprived almost everyone (except the party elite) of housing ownership and in the mid 1950s we were lucky to be granted a single room with an adjacent kitchenette for a family of six in a government owned building.