Considering how significant the property sector is in Australia as a provider of shelter, a store of wealth and source of production and employment, it’s no wonder that government exerts an influence on it through a variety of micro and macroeconomic policies, legislation and regulation.

We have a three tiered system of government in Australia and all three levels influence the supply and demand for housing and therefore its price and returns in a multitude of ways.

LOCAL GOVERNMENT :

1.ZONING – refers to the classification of land into categories for permitted use and development in order to manage growth patterns, increase the efficiency of existing and planned infrastructure and to maintain the quality and enjoyment of the land owner’s use. Both state and local governments legislate and enforce zoning laws, regulating the use of land. Zoning laws and categories vary from state to state but essentially they divide land use up into broad categories:

  • Commercial
  • Industrial
  • Mixed-Use
  • Residential
  • Agricultural
  • Public Use

Within residential zoning, in NSW for example, there are different categories:

  • R1 – General Residential.
  • R2 – Low Density Residential.
  • R3 – Medium Density Residential.
  • R4 – High Density Residential.
  • R5 – Large Lot (Rural) Residential.
  • B4 – Mixed Use.

Examples of how zoning can affect the price of land and therefore housing include the appeal of land rated as R3 or R4 because of the potential for subdivision and development or when land outside the urban fringe is rezoned from rural to urban, its value can increase significantly. In the north west of Sydney for example, which was traditionally long held in market gardens (R5), many landowners became overnight multi millionaires by the swipe of a pen to R2!

All 152 councils in NSW work from their own individual plans known as a Local Environmental Plan or LEP to guide them in the zoning of land.

An example of strategic planning of land use well into the future is the NSW Government’s Land Use and Infrastructure Implementation Plan for the North West Growth Area.

The objectives are to provide a “vision for Sydney’s future as a ‘strong global city, a great place to live’. It makes it clear that as Sydney grows, it must be planned for in a strategic way so that Sydney is not only bigger but also better. This requires planning that puts the necessary infrastructure in place to support growing communities”

STATE GOVERNMENT – apart from its planning and major infrastructure provision responsibilities and powers, the state governments exert influence on property demand and prices through a variety of of taxes, rules and enforceable guidelines.

Land tax is a progressive impost on the ownership of land and varies at the rate at which it is applied from state to state and territory (not NT). It is a progressive, redistributive measure as it’s imposed on land other than the primary place of residence, on owners who own more than one property. Land tax is charged once a certain threshold is reached and so it is another reason to diversify and not hold all your properties in one state.

The Valuer General in each state issues a statement of  the ‘unimproved capital value’ of the land each year to property owners and it is this figure that the land tax is levied on.

Land tax calculators are available on state government revenue websites  for example in Vic https://www.e-business.sro.vic.gov.au/calculators/land-tax

State governments also determine tenancy laws – setting out the rights of tenants and landlords and procedures that need to be followed in regard to bond collection, regular inspections and the right of tenants to ‘quiet enjoyment’ of the property. State tribunals exist to mediate and rule on disputes, breaches of lease agreements, evictions and the return of bond monies etc.,

State governments also redistribute incomes by offering grants to first home buyers along with discounts on stamp duty. The measures are designed to make a first home more achievable but often has the effect of simply increasing housing prices by the size of the grant!

FEDERAL GOVERNMENT – influences the cost of land and housing predominately through the implementation of macro economic management policies designed to smooth out the excesses of the business cycle by influencing the level of aggregate demand.

Fiscal or budgetary policy manipulates the levels of tax revenue and government spending to either expand the level of production, employment and incomes, normally by delivering a deficit budget (spending > revenue) or, to put ‘the brakes on’, by having a surplus of revenue over spending.

It’s important to understand though that the impact of the budget is not necessarily as obvious as some might think, because it’s the adjustments from year to year that matter, or the turns on the dial!  A deficit can be contractionary if it is a smaller one than the previous year and it’s net effect depends on whether it was the result of reduced spending or greater tax receipts?  The reverse is true with the opposite settings.

Any measures that influence the income and wealth of households and consumer confidence, will, ceterus paribus, or all things being equal,  increase the level of demand for housing:

Changes to the marginal rates of taxation that puts more disposable income in people’s pockets are designed to encourage positive consumer sentiment and increase the propensity to consume. Remember that national income or GDP or the size of the ‘pie’ or the ‘swimming pool’ are a function of C + I + G + (X-M).

Examples in the 19-20 Budget targeting ‘C’ (consumption) include:

  • Immediate tax relief for low- and middle‑income earners of up to $1,080 for singles or up to $2,160 for dual income families to ease the cost of living.
  • Lowering the 32.5 per cent rate to 30 per cent in 2024-25, increasing the reward for effort by ensuring a projected 94 per cent of taxpayers will face a marginal tax rate of no more than 30 per cent.

The multiplier effect of consumption, particularly in the housing sector, is significant. The multiplier depends on the propensity ( or inclination) of households to spend.

Multiplier (k) = 1/MPC

For example if an extra dollar is earned (or $1 less in tax is paid) and households spend 50c of the $1, then the multiplier effect will be x 2 ( 1/.5=2)

BUT if households decide to spend 80c in every additional dollar the k effect will jump to x 5 (1/.8=5)

So, government decisions to lower taxes to encourage consumption or wages growth may result in additional spending, demand and job creation many times beyond the initial injection. But if consumers are lacking in confidence, they may decide to pay down debt instead of spending.

Negative gearing legislation that allows investors to claim all the costs of earning an income from property investment to reduce their taxable income, is an example of a specific policy designed to incentivize self reliance and entrepreneurial spirit, reallocate resources and to reduce the burden on the public sector for the provision of an adequate housing stock. It is an acknowledgement that the private sector can provide an essential commodity more efficiently than the public sector.

While owner occupied properties receive preferential tax treatment, investment properties and the capital gains they may deliver are subject to a disincentive, the application of Capital Gains Tax.

Capital Gains Tax is a broadening of the income tax base, (as is GST because it’s hard to escape!) as prior to its introduction in 1985, some people were able to enjoy tax free income if all their earnings came from sources other than wages and salaries (with the exclusion of assets held for less than a year) Obviously, this tended to favour wealthier people and was considered unfair – it is a redistribution of income in the interest of equity.

Microeconomic reform aims to make the economy more efficient and adaptable – it works on the supply side of the equation.

Government has policies to improve structural impediments and make the supply of housing more ‘elastic’ or responsive to the changes in demand. Price is a rationing device and if demand rises and supply cannot, even in the short term, prices will rise. Cutting ‘red tape’, fast tracking infrastructure projects and encouraging the training of skilled labour, all improve the ability of the housing sector to respond to increases in demand.

According to the HIA,

“The residential construction sector operates in a complex regulatory environment with enormous scope for productivity gains. There are many policy levers. With the right policy changes, however, the industry could
operate at even more efficient levels and contribute to increasing housing supply and lifting productivity across key sectors of the Australian economy.

By creating barriers to the supply of new homes for both owner-occupier and private rental occupation,through poor policy settings, governments place additional and unnecessary pressure down the housing supply continuum, increasing demand for greater government expenditure on rental and housing assistance.” HIA Response to Productivity Commission on Increasing Australia’s Future Prosperity– December 2016

We don’t live in a laissez-faire, freely operating market economy, and it’s just as well we don’t. In terms of the supply and demand for land (and therefore housing) while there any number of imperfections or areas of ‘market failure’, government modifications are ultimately desirable and in our best interest.

Planning laws limit urban sprawl and ad hoc inappropriate development. Maintaining a level of infrastructure and service provision within designated growth corridors reduces the incidence of isolated and dysfunctional pockets of housing and the attendant problems that come with poor planning, including unemployment, crime and poor mental health.

Planning puts a ‘floor’ under prices. By limiting the release of land, prices are supported and the wealth of households is protected, developers have more certainty about returns and employment is boosted.

Monetary Policy – involves the manipulation of the money supply by the Reserve Bank to influence the cost and availability of credit which in turn influence the level of consumption, the cost of debt and employment.

Obviously, the cost of credit is a strong determinant of the demand for housing. Being a large ticket item and the single largest purchase that most people will make, we need to borrow significant sums of money to fund our purchases.

If interest rates are eased (they are at all time lows at the moment in 2019) the flow on effect would normally be an incentive to stimulate demand, borrow, and spend. However, access to credit is a function of more than just the prevailing interest rate. Credit criteria, business and consumer confidence and  the outlook for production and employment to name a few factors all influence the perception of risk that lenders have when assessing applicants.

If all the economists were laid end to end, they’d never reach a conclusion. ~George Bernard Shaw