Oops, they did it again: the $320,000 hidden government costs killing off new homes
Successive governments have promised to improve housing affordability, yet few have tackled the biggest driver of new home prices: the growing burden of taxes, charges and regulation embedded in every new dwelling before a buyer even receives the keys.
Oops, they did it again. Apologies to Brittney Spears but that version of her song title could perfectly describe the latest efforts by a federal government to intervene in housing.
Fresh from encouraging young homebuyers to back their 5 per cent deposit scheme, they then pull the rug from under them with a package of measures designed to rapidly cool the market, leaving many with negative equity, while sellers lament the lack of buyers and falling values and state governments nervously assess falling stamp duty revenues as market activity slows.
Everyone’s impacted.
But this is just one government in a succession that has failed to understand housing markets. The policy blind spot is not confined to one particular party. Successive governments of both major parties have from time to time tinkered with the market, and never with the outcome they envisaged.
The one thing I cannot recall any of them doing, however, is meaningfully address the cost of new supply.
Why is a basic new starter home now so expensive?
In Southeast Queensland, your basic three-bedroom, two-bathroom with garage single level house is now typically approaching $1 million. It’s similar in other states.
Part of the answer lies in what has repeatedly been pointed out to various governments over time: that we are taxing and regulating the supply of new housing in a way that actually discriminates against new stock, versus established housing.
More than 20 years ago I made this point in a publication I wrote for The Property Council, when I was leading its (then new) Residential Development Council.
“Current approaches to the taxation and regulation of new housing have created a generational divide almost without comparison in the history of this country, whereby the purchaser of a $1.8 million home in leafy Mosman (NSW) pays a fraction of the taxes and compliance costs paid by a young family buying a new home in outer north west Sydney. This is a story being repeated around Australia.”
The report may now be old - a $1.8 million home in Mosman? - but the relativities haven’t changed. In that report, we noted that the combination of federal, state and local government taxes, charges and regulatory compliance accounted for between a quarter and a third of the cost of a new dwelling. The report was mentioned in Federal Parliament, debated on radio, profiled on current affairs and TV news. Nothing meaningful happened, and things are now worse.
Broken promises, failed policies
The illustration below should be stapled to the door of every politician in the country who wants to “do something” about housing. It shows how someone buying an established (i.e. second hand or not new) house of around $1 million as an owner-occupier will need to pay around $31,000 in stamp duty, which (other than the actual purchase) is the biggest transaction cost for the buyer.
People hate it, and so they should; it’s a big amount for doing very little.
Those will long memories will recall that all the state governments originally promised to abolish stamp duties in exchange for the new GST. Yeah, that didn’t happen either.
But compare that with what is roughly 10 times the tax for a new project home of the same value.
This research is based on a recent PCA report but groups like UDIA, HIA and others have all variously confirmed that roughly a full third of the cost of a new dwelling is accounted for by taxes and regulatory compliance.
The GST alone, which only applies to new housing and not second-hand housing, is 10 per cent, or three times the rate of stamp duty. Then you have the cascading myriads of fees, charges, compliance costs and of course stamp duty, which combine to give us a price tag of around $320,000 (32 per cent) in hidden taxes and charges on the new home, versus $31,000 (3.1 per cent) for the second-hand home.
Why are people not outraged?
Because the taxes and compliance costs for new homes are never itemised on a purchase contract.
They are buried in the cost of supplying everything from the civil infrastructure below ground to anything above ground, and the paperwork and processes to make it possible. But just because they are not easily identifiable doesn’t make them any less real.
This inequity is something successive governments have failed to tackle.
Market intervention usually takes the form of trying to tinker with the wider established market, via grants, concessions or other measures, including the latest moves on negative gearing and capital gains tax.
Instead, if they just focused on reducing the input costs for new housing – detached and apartments – we could actually achieve something. I’m not holding my breath.
Here’s my concluding warning from that 2007 report*. I wish it hadn’t come true:
The root cause of worsening housing affordability lies squarely at the feet of various public policy settings, identified in this discussion paper. If these policy settings continue on their present path, there is no question that housing costs will continue to spiral beyond reach of many Australians. As this happens, dependency on rental housing will increase. Future generations of Australians will not be able to afford a home of their own and will increasingly be consigned to rental housing - and rising rental costs. Home ownership will be in the hands of an increasingly elite group of Australians: those wealthy enough to afford a home and those who bought into the housing market before the affordability crisis reached a tipping point. Housing standards will fall - due to price constraints - and new homes will be built on smaller and smaller lots, with cheaper and cheaper materials to stem the tide of ever-increasing government and regulatory costs. The signs of a deepening crisis are now evident, and industry groups are united in voicing their concerns that present policy settings will only lead to a worsening problem. Failure to act now will leave future generations of young Australians a dismal legacy of housing stress in a country which by any other assessment should boast the highest standards of home ownership and affordability.
* (“Boulevard of Broken Dreams: The Future of Housing Affordability in Australia” was published in 2007 by The Residential Development Council – a Division of the Property Council of Australia).
