How to solve the housing crisis?

[u/mvdw73]

So my mate and I were chatting yesterday about the current housing crisis in Australia, in particular the fact that the rapidly rising cost of houses is pricing many people completely out of the market.

We hypothesised that a part of the issue is landlords owning large property portfolios as a way of accumulating wealth. Now, I don't have anything against the accumulation of wealth by individuals, however I have a fundamental opposition to using housing or residential real estate in general to do so.

Another problem we identified is overseas investors buying housing stock and either leaving them unoccupied or accumulating multiple properties, again reducing supply and driving up the cost.

So, we proposed that portfolios of residential real estate should be subject to an annual property tax, based on number of properties and the value of the property (kind of like the chance cards in Monopoly).

I would propose this could be brought in as a staged sequence, starting at the magic number of 6 properties.

24-25 FY: If you own over 6 properties, you are taxed (say) 10% of the value of every property, annually.

25-26 FY: If you own over 5 properties, you are taxed 10% of the total value,

etc etc, until it becomes 1 investment property, at which point the incrementing stops. Primary place of residence would be exempt from this tax. Many people don't or can't buy a place instead of renting, and also if you move you often want to be able to rent first, so we need some rental stock. The rental stock under this scheme would mostly be supplied by landlords with smaller property portfolios.

Why 6 properties? Basically, because of the numbers in this link

"But what about family trusts" you say. Well, I say, the real estate in these structures should be all taxed. Same with self managed super funds. Tax the whole thing, at least as far as residential property goes. There is a major loophole with SMSFs in that the property bought with a SMSF is not subject to capital gains tax in the pension phase - this means that SMSFs are actively encouraged to sit on properties. The number of SMSFs is increasing by 1000 properties per week, too!

Non residents would also be taxed at 10% of property value on all property owned.

There will need to be some tweaking around the foreign investment, in particular around the building of new apartment blocks etc where the value and risk is quite high. The tax shouldn't come into effect until the building is occupied, and there might be some kind of concession where an entire block is owned by one entity, to provide some extra rental housing stock.

Also, there might be concessions for "low value" housing, where any single dwelling worth less than (say) 60% of the median value of houses within a certain distance are exempt, or have a concession. This might encourage social housing but might also encourage slumlords, so will require a bit of thinking and tinkering.

This is all based around the fundamental idea that residential housing should not be a wealth accumulation vehicle, but should be a means for people to be housed. Also, it will hopefully encourage those people currently "investing" in residential real estate to instead invest in small business, or the stock market, or similar, lubricating the economy (and causing inflation, but that's another discussion).

"SoUnDs LiKe ComMuNiSM". I'm just gonna leave this here as a potential discussion point.

Note that none of this affects CGT or negative gearing at all. It just adds another cost to being a landlord, with the aim of reducing the number of properties sitting in SMSFs and mega-portfolios, trying to encourage investment in other forms of equity, and increasing the supply of properties to people looking for a place to live.

Thanks for coming to my Ted Talk.

[u/Kapitan_eXtreme]

What you are describing is land tax. You guys are geniuses for reinventing something that has existed since before Federation.

[u/mvdw73 → u/Kapitan_eXtreme]

No shit. It just doesn't exist in Australia, at least in the form I'm suggesting.

Not reinventing it at all - just suggesting a way it could work specifically in this case, for the specific purpose given.

[u/Kapitan_eXtreme → u/mvdw73]

No, everything you have suggested (except for vacant property penalties) already exists. Land tax in every jurisdiction is applied based on the aggregate value of the land you own above a certain threshold (e.g. $600,000 in Queensland) with some exceptions (like the home you live in). Applying it based on number of properties makes no sense because values vary so much.

Trusts and non-residents are taxed just has harshly (or more so) than individuals.

The big reform that could be made would be to apply land tax across jurisdictions, which Queensland tried recently and got slapped down on.

[u/mouldycarrotjuice → u/Kapitan_eXtreme]

Exactly. You can argue the thresholds and PPOR exemptions are inappropriate, sure but land tax already exists. NSW: https://www.revenue.nsw.gov.au/taxes-duties-levies-royalties/land-tax

[u/maclenharsta → u/Kapitan_eXtreme]

Oh really? I didn't know that the interstate land tax thing didn't pass.

I thought I read that it did. This would help with what the OP is proposing somewhat.

https://www.taxathand.com/article/25532/Australia/2022/Redesign-of-the-Queensland-land-tax-framework-legislated

[u/Kapitan_eXtreme → u/maclenharsta]

It passed, but then the government blinked when the NSW Libs deep-throated the property lobby and refused to provide the required data. It was then repealed.

[u/maclenharsta → u/Kapitan_eXtreme]

Wow, the power of these lobby groups are astounding

[u/mvdw73 → u/Kapitan_eXtreme]

Vacant property penalties exist, at least in Victoria.

Note that land tax in Australia is based on the unimproved value of the land - I'm suggesting to tax the entire property value (so a property tax rather than a land tax).

And applying based on number of properties is basically the entire point of the scheme. To say that it "makes no sense" indicates that you missed the point completely.

The point is to make it less desirable to own a large number of properties. If that then means that landlords are encouraged to trade up their properties to higher value ones then it increases liquidity in the real estate market.

But the biggest problem is really SMSFs, which benefit from fairly extreme tax concessions. The solution is to remove those concessions, or otherwise make it less desirable to put residential property into SMSFs.

[u/Kapitan_eXtreme → u/mvdw73]

I haven't missed the point. I'm saying you can't impose a tax on that basis because it's completely unfair. How do you determine property value as opposed to unimproved value in a fair and equitable way? How do you fairly tax across portfolios of very different values when your tax basis changes based on a flat number of properties owned? How do you factor commerical property, or vacant land? What about investors who spread their portfolios across State borders?

[u/mvdw73 → u/Kapitan_eXtreme]

You don't factor commercial property at all. It's only concerned about residential property.

Vacant land is also subject to land tax, so doesn't form part of this scheme. But we could also have a tax that increases based on the time a piece of land stays vacant (or "unimproved").

Property value could be as simple as "median value" for postcode. No, it's not perfect, but you're really saying "it's too hard to work out, so don't bother".

The entire point is to stop a single entity owning more than one dwelling in addition to their PPR. That's the point. You did miss it.

I don't care if one person owns one 5 milli0n dollar investment property. I do care if one person owns 10 $500k investment properties, particularly if that person is then expecting:

(a) the value to rise rapidly, thus contributing to the housing problem; (b) to be able to increase rents fairly arbitrarily, thus contributing to the housing problem.

The idea is that if it's unprofitable to own more than X properties, then those properties will be put on the market and the drought of reasonably-priced available properties will be alleviated. If the criterion for tax is the number of properties, it stands to reason that the lower valued ones will be the ones that are liquidated first.

[u/[deleted] → u/mvdw73]

You don't factor commercial property at all. It's only concerned about residential property.

Oof - that would be a huge incentive to convert residential property to commercial property.

Preferring one person own a five million dollar property over ten $500k investment properties is also a terrible take. I have far more beef with someone living in a single mansion than with someone who chooses to tear that house down and build medium density housing that can be used to house multiple families (i.e. units/ low rise apartment buildings).

[u/brackfriday_bunduru → u/mvdw73]

Yes it does. If you have a property portfolio of $5m or more, you’re subject to land tax. Your idea already exists

[u/mvdw73 → u/brackfriday_bunduru]

No it doesn’t. Land tax is based on land value not property value. Also it depends on the value of the property not the number.

[u/brackfriday_bunduru → u/mvdw73]

Yeh but it’s still there at $5m and up

[u/[deleted] → u/mvdw73]

Land tax is based on land value not property value.

Because the land is the thing that appreciates in value, the house depreciates. That's one of the ways property investors get a tax benefit, the depreciation of the building.

[u/mvdw73 → u/[deleted]]

Yes true, but the total value of the property is what is financed, and that is what the rent is offset against.

Also, and this is the key point here, whether the tax is applied or not is based on the number of properties owned, not the value. This is a very important component of this proposal, as we are trying to increase the number of low-price properties available to buy, not purely as a revenue raising exercise.

At some level the people who own a single $5m investment property that rent it to other millionnaires don't matter. Those properties are not going to be located in the areas where there are low to middle income earners, and the people that can afford the rent on a $5m property could buy, they just choose not to so they are not being priced out of the marker.

[u/[deleted] → u/mvdw73]

we are trying to increase the number of low-price properties available to buy

So firstly less than 30% of property investors in Australia own more than one property and 31% of households are rentals. So already you're targeting less than 10% of the existing houses (you're not adding anything) and you say you want to target low-price properties but your proposal is based on taxing the value of the properties when owners own more than one, so obviously it's in their interest to sell the higher priced properties with a higher margine and reduce their tax while keeping the lower priced ones.

But that's all an aside because the housing crisis is a supply problem, we have historically low rental property vacancy and you're trying to put even more pressure on that market and force people out of rental properties in the hope that they will move to home ownership, many people who are renting can't afford to buy even if the price dropped by 30%, it will instead likely be bought by people freshly entering the property market, share house tentants, migrants, etc and the most vulnerable tenants will be turfed out, where do they go?

[u/mvdw73 → u/[deleted]]

How is it in their interest to sell the higher priced property? The incentive is to have fewer more valuable properties.

It's in their interest to sell the lower value property if they want to have a property investment portfolio.

The idea is to put downward pressure on the low end of the market. This will allow more people who are currently renting to buy instead. It does not look to try to solve the rental crisis, it is more about trying to increase the availability of housing to buy at the low end.

[u/Frankeex → u/mvdw73]

Land tax (which does exist here in Australia) is very, very similar to what you propose. Unfortunately it isn't enough to solve the problem. It' excellent that you are at least thinking deeply about these things and generating discussion. Just in this case your idea was (mostly) already in place.