A Progressive Future for Cities

Author: Linda Scott is a Labor Councillor for the City of Sydney. She was elected in 2012 after being selected by 4,000 people in Labor's first community preselection.

 

I would like to acknowledge the Gadigal people of the Eora nation who are the traditional custodians of this land.

I pay my respects to their elders past and present, as well as to the Elders of the many First Nations that make up this land.

I would like to thank the NSW Fabians for the opportunity to address your Annual General Meeting this evening, and in doing so acknowledge the Secretary and President of the NSW Fabians, Osmond Chiu and John Vineburg. I pay tribute to the time, effort and work you put into your roles.

The Fabians have, historically, been one of the strongest voices for progressive policy and progressive politics, and it is an honour to be speaking this evening on the topic of a progressive future for our cities.

I particularly want to focus on the issue of housing affordability, its role in driving economic inequality in our cities, and the role negative gearing has played.

Just today, Tyler Brûlé, a Canadian journalist and founder of Monocle magazine, speaking at the Sydney Vivid Festival of Ideas, is reported to have claimed that Australia is forgetting the value of what a city is supposed to be.

He said, 

"This country is on the verge of becoming the world's dumbest nation. There will be a collapse of common sense here if health and safety wins out on every single discussion…Humanity is about noise and dirt and mistakes. And yet we want to sanitise our cities."

Whilst I fundamentally disagree with his calls for deregulation of all matters health and safety, I do agree with his assessment of the importance of the character and governance of our cities to the future of our nation.

Successful cities are driven by dynamism – they bring people together to live, to work, and to socialise – and the results can be social and economic mobility, opportunities to study or work and build a career, meet partners, raise families, and participate in the cultural fabric of millions of people living in close proximity to one another.

The dynamism of a City is fundamentally dependent on a healthy mix of people from all walks of life.

But increasingly, the City of Sydney is becoming, as Democratic Mayor of New York Bill de Blasio once said of his own home, a tale of two cities.  It is becoming a City with an inequality gap that fundamentally threatens our future.

 

[Fair]

For over a century Labor has stood for building a fair society in Australia.

In the twenty-first century, fairness and equity remain integral parts of Labor’s vision for our communities.

In my role as a Councillor, I believe Sydney should be a City where people have opportunities to lead good, fulfilling lives irrespective of their class, gender, sexual preference, race, religion, or any other factor.

It should be a city of opportunity, with decent jobs and decent wages, and equitable access to essential community services.

Local government, the level of government that I sit on, is at the coalface of providing supportive community services and quality community infrastructure.

Access to these services and infrastructure is a fundamental question of equity and fairness.

Getting the basics right is a key priority for Labor – making sure that each community is treated fairly with equitable investment in services and infrastructure.

 

When I talk to young people in the City, and the majority of those who live in the City of Sydney are young people, time and time again the one thing that they mention is affordability. Whether it is affordability of early-childhood education for parents, affordability of essential community services and affordability of housing, it’s a common topic.

It is on this last point with respect to our cities that I would like to focus tonight.

Several years ago I had the privilege of listening to Neville Wran speak at Glebe Books and he spoke of a time growing up in Balmain when for him, and all his neighbours, colleagues and friends, there was no dream of ever owning a home.

He spoke about renting and his family often being short of money for rent and how landlords in that time, he recalled, were more generous and more flexible.  They allowed you to be a little bit late on the rent every now and then, neighbours and friends borrowed from each other to pay the rent and there was an acknowledgement that it was a time when everybody was struggling.  But there was generally very strong community support.

Sadly, and perhaps ironically, the suburb of Balmain is returning to a time when the idea of owning a home is becoming for many people living in the inner city, and in Balmain, never expect to happen to them.  The idea of being able to rent in the inner city is also being called into question for many.

The concept that our children will be able to own a home in Sydney or indeed many other Australian capital cities is rapidly vanishing.

 

[Affordable]

Housing is one of the greatest challenges facing Sydney.  Since the arrival of the British over two centuries ago, housing availability in Sydney has regularly occupied authorities, policy makers, and government. It’s an economic, social, and an environmental challenge for all levels of government.  And I say all levels of government because it is not a statement that is without contest.

For example on the council l sit on, the City Of Sydney, the current Lord Mayor does not believe it is the role of local government to address the issue of housing affordability. Her firm view is that local government is responsible for rates, roads, rubbish, the maintenance of green spaces and parks. But not for addressing this crisis in housing affordability.  

Unlike her it is my firm view that this is a role for local government and that inner-city Sydney should not be the domain of the ultra-wealthy.  A diversity of experiences enriches our communities.  Without it we truly will become two cities within one.

This means there is the obvious imperative to work with community housing providers to ensure that the most vulnerable people in our society are given the opportunity to live close to good services and job opportunities.

There is also a responsibility to support the protection of existing public housing properties and greater investment in housing.

Through transparent planning processes, architectural innovation, and investment in public infrastructure, Sydney can support higher density living to make it more affordable while still preserving green spaces, protecting heritage buildings, and maintaining access to government services.

But housing affordability has reached a point nationally where owning decent housing is unaffordable for low-income families, and increasingly for average income families, who are being put out of the inner Sydney market completely.

Sixty per cent of low income renters experience housing stress, meaning more than 30% of their income goes on housing costs, and there is a shortage of half a million rental properties that are affordable and available to low income earners.[1]

Meanwhile, rates of home ownership are falling, with two thirds of 35-44 year olds living in their own homes, compared to three quarters 30 years ago. [2]

The median price for a one bedroom unit in Chippendale this month was $620,000. To buy this unit, a young Australian couple on an average household income would need a deposit of over $200,000 and would be in considerable housing stress to afford the repayments without the significant financial support of parents and grandparents. This is the kind of support that is now needed by people who are looking to buy houses in the inner city. 

 

[Young people]

Working young people built this City. They built Sydney’s Universities, schools and education providers, they built Sydney’s culture in its galleries and arts spaces, built Sydney’s finance sector and stock exchange, and they built Sydney’s urban and green spaces. 

In the past, this work created an opportunity for reward.  But now, opportunities to own a home – anywhere, but especially in Sydney, are disappearing from the grasp of young Australians.  

Sydneysiders, even those who own homes, know that this profound inequality affects us all.  Home ownership is rapidly becoming something older people do. When 40 year olds need to rely on their parents and grandparents for financial assistance to live in our cities, it is time to acknowledge we've got a housing crisis.   

Inner Sydney remains a densely populated place. At June 2012, the residential population of the City of Sydney was 187,561 people over 26.15 square kilometres. That’s an average population density of 7,172 people per square kilometre.

Additionally, the City of Sydney is home to the highest density suburbs in Australia, with Pyrmont and Ultimo having 13,850 people per square kilometre, followed by Potts Point and Woolloomooloo (13,600), Darlinghurst (13,200) and Surry Hills (13,070).

Inner Sydney is a youthful place.  Two in five people in the City are under the age of 30.  And for the first time in a long time, since the great push of lower income households from the inner city out to the city’s fringes in the 1960’s and ‘70’s, inner Sydney is a place of young families.

People in other parts of the country like to laugh a little about the propensity of Sydneysiders to talk ad infinitum about our property prices. 

It is the curse of the Emerald City!

But there is now one conversation, both public and private, that consumes us all, but has a special meaning for young people – housing affordability and exactly how this next generation of adults will be able to afford to live in Sydney?

There was a time when Australians and those living in Sydney in particular, smugly looked to the escalating focus on housing affordability in places like New York, Paris and London.  Our eyes widening at the concepts of the financial constraints actually purchasing property to live in meant for residents in those cities.  I think we looked about at our own housing markets and settled back comfortably thinking ‘that could never happen here’.  And yet, in 2015, here we are.  Consumed by the thought, now a growing reality is that our young people and our children will never be able to afford to live in the city that is their home. And will increasingly struggle to rent.

According to the 11th Annual Demographia International Housing Affordability Survey: 2015, Sydney is, after the cities of Hong Kong and Vancouver, the third most unaffordable housing market in the world.[3]

And housing affordability is not an issue facing just Sydney.  It is an issue for every capital in the nation.

It is not an unforseen challenge.  Housing affordability has been the focus of media, experts and government inquiry for some years.  And the role that negative gearing plays has been singled out for particular focus. Negative gearing cannot be held solely responsible for housing market distortions but it is a key reason why affordability continues to decline.

There is no simple fix. Let’s be very clear on this point, made by University of Melbourne future fellow Kate Shaw -

“Affordability cannot be delivered in Australian capital cities simply by increasing supply.” This is not about developing every last opportunity into a profit for a developer. 

Shaw notes, to prove her point -

“The housing market in all Australian cities is made up of submarkets in price, type and location. 16,000 new dwellings in central Melbourne in the last decade and 4800 at Docklands specifically have had no impact on prices on the urban fringe.”[4]

Just as economic growth does not automatically lead to more economic justice and poverty reduction, growth in the number of houses does not automatically lead to more affordable housing.

 

[Negative Gearing]

So what are the arguments for negative gearing, and why was it put in place? Economist Phillip Soos[5] notes the long established tax principle whereby businesses and investors should be allowed to deduct the costs directly incurred in making an income. That is a well-established tax principle.  

For those of us on the progressive side of politics, the key concern with this taxation structure is that is disadvantages labour.

Soos notes:

“A salaried employee incurs substantial costs in the course of earning a wage (for instance, accommodation, travelling to and from the workplace, and childcare) but government policy bars deduction of these costs against wages.”

In this form, taxation principles reward capital growth – growth for those with existing capital resources.

Australia is one of only a handful of countries that provide such a favourable taxation treatment for property investors. According to the ATO, about 1.7 million property owners are utilising negative gearing.

The popular concept that negative gearing is the darling of every day ‘mum and dad’ investors is, in my opinion, simply wrong.

As the ABC’s Michael Janda pointed out last year, the use of ATO figures to suggest that the majority of those who engage in negative gearing are on incomes of $80,000 or less per annum fails to recognise that this is a creative use of Tax Office statistics by the Housing Industry Association.  When Janda examined the ATO figures used, he found that 72 per cent of investors did earn $80,000 or less in the 2011-12 figures used by the HIA.  But Janda’s research showed that these figures did not match with Melbourne University’s four-yearly Household Income and Labour Dynamics in Australia (or HILDA) survey that analyses household finances in depth.

The Housing Industry Association used ATO data that looked at taxable income – income after various deductions have been made to lower tax bills.  Janda pointed out that of the 72 per cent of negative gearers, almost 74,000 people who are declaring rental income or losses have a total income less than $0.  Less than $0 per annum.  Added to this are another quarter of a million people declaring rental income or losses who have total incomes below $20,000.

These are not average wage earners, by any stretch of the imagination.  Most households that appear to be ‘middle income’ usually have higher incomes before deductions are applied.  The key point is this – a continuation of negative gearing is reducing government tax takings for, arguably, the most wealthy.

Research by the Australia Institute and National Centre for Social and Economic Modelling, commissioned by GetUp, has shown that 34% of the benefits of negative gearing were captured by the top 10% of income earners. Over half the individual taxpayers with geared rental housing investments are in the top 10 per cent of personal taxpayers earning over $100,000 and 30 per cent earned over $500,000.[6]

The Australia Institute published research in April this year which examined those getting the largest deductions from negative gearing against the federal electorates they lived in. Of the top 10 electorates for net rental loss, (those claiming the largest deductions) all 10 were Liberal electorates.

  • Wentworth, held by Malcolm Turnbull;
  • Curton, held by Julie Bishop;
  • Assistant Treasurer Josh Frydenberg’s seat of Kooyong;
  • Sydney’s north shore seats of Bradfield, Warringah and North Sydney (two held by the PM and the Treasurer);
  • Higgins, and Goldstein in Melbourne represented by Kelly O’Dwyer and Andrew Robb respectively; and
  • Ryan and Brisbane in Queensland. 

The Australia Institute’s research confirms that income remains the most important factor in negative gearing.  Higher incomes go hand in hand with higher rates of negative gearing and larger negative gearing deductions.[7]

Australians question the fairness of the tax payer funding the shortfall of an investor’s mortgage when there are more pressing issues that need government funding.

As a measure aimed at increasing the number of available rental properties and stimulating housing building and construction, it has to be said that negative gearing has been an epic failure. The reality is that negative gearing is one of the key factors driving economic inequality, especially for young people who want to live in cities.

Recently released figures from Moody’s rating agency confirm that two-income households in Sydney are spending 35.1 per cent, more than a third of their income on mortgage repayments.  For single income households this increases to more than 70 per cent.[8]

Twenty years ago it took three times the median salary to buy a house in Sydney.  It now takes nine times, higher than both London and New York at the height of their market peak.[9]

Moody’s found that Sydney will suffer the worst deterioration in housing affordability of all the capitals due to further house price gains (Sydney’s house prices have risen by more than 6 per cent since January), rising interest rates, and falls in household incomes.

This is a recipe for disaster for our City’s future. 

 

[Rents]

The Housing Industry Association and Federal Government have long held that if negative gearing were abolished, rents would increase. Treasurer Joe Hockey cites the brief removal of the policy in 1985 as proof that backlash from investors drove up rents to ‘replace’ lost income previously provided by negative gearing.

In July 1985 the Hawke Government abolished negative gearing for all future rental property investors (not for all investors). It was reinstated in 1987.

During this period only Sydney and Perth experienced rental price increases.  Rents in Adelaide and Brisbane fell considerably, while in Melbourne there was low or no growth in rents.

Economist Saul Eslake, in his personal submission to the 2013 Senate Economics References Committee inquiry into affordable housing entitled, Australian Housing Policy: 50 years of failure, contended that the localised rental increases in Sydney and Perth did not support the argument that negative gearing was to blame.[11] Low vacancy rates were underpinned by higher interest rates and a share-market boom which diverted investment from rental property.

Indeed, rents escalated from 2006 onwards while negative gearing was in effect.

Eslake also refutes the wide-held belief in a ‘landlord’s strike’ if negative gearing were to be abolished, or the wholesale selling off of investment properties.  This he believes would simply push the prices of investment properties down, therefore making them more affordable to home buyers, and reducing the demand for rental properties at the same time.   As he states

‘it’s actually quite difficult to think of anything that would do more to improve affordability conditions for would-be homebuyers than the abolition of ‘negative gearing’.’[12]

Negative gearing originally allowed taxpayers to defer tax on their wage and salary income, however the Howard Government’s 1999 changes to tax capital gains at half the rate applicable to other income saw negative gearing become a way to both reduce and defer personal tax liabilities.  This has contributed to over-investment in existing properties, lifting house prices and doing nothing to promote the construction of housing, and in particular, affordable housing.

The knock on effect on the whole housing system is reaching crisis point.

Sydney rents are rising four times higher than inflation.[13]  The pressure on public housing lists is unsustainable, removing the traditional social housing support net from the equation.

The combination of taxation incentives and capital growth in the housing market means that private, or ‘mum and dad’ investment in bricks and mortar is prioritised above other important areas - for example, investment in start-ups and other more innovative industries that will create the jobs of the future.

Australia needs more private sector investment in innovative industries to help create new forms of jobs for the future, and the abolition of negative gearing rebalances the government incentive to chart a better economic future for the country.  City of Sydney has Google and many start up organisations that regularly come to me looking for investment and just cannot attract the types of private sector investment that they can overseas. It’s a great disincentive for young Australians starting up businesses here to stay in Australia and it’s a huge problem into the future on where our innovative industries will come from.

 

[What is to be done]

The Australian Council of Social Services (ACOSS) has been a vocal advocate for changes to the existing system.

In their most recent contribution, Fuel on the fire: negative gearing, capital gains tax and housing affordability, ACOSS outlines three key tax reforms as follows: 

  1. Restrict tax deductions for ‘negatively geared’ property investments;
  2. Use part of the revenue savings to strengthen tax incentives for investment in new affordable housing, including building on the strengths of the National Rental Affordability Scheme; and
  3. Increase tax rates on capital gains and reduce them on other investment incomes including interest bearing deposits and rents, to improve equity and reduce distortion of investment decisions by the tax system.[14]

I can’t speak for the Lord Mayor, but it is my commitment that the public interest will be placed firmly at the heart of every decision, every investment, every utterance that I make as a City of Sydney Councillor. 

A breakdown of the City of Sydney's targets and actual results for affordable housing dwellings show that the targets set by the Mayor in her Sydney 2030 vision are a long, long way from being delivered.

The City of Sydney has a target of 7.5% of total dwellings dedicated to social housing and a 7.5 per cent target for affordable housing by 2030.  That makes a total target of 15 per cent.  I must add that while these targets sound good they are much lower than many other international cities.

To meet the 2030 goal for total dwelling, an additional 33,016 dwellings are required.  We are currently at a level of social housing that is 2%. To meet the 7.5% target for affordable housing dwellings, we will need to see a growth of 1,411 per cent increase in the number of dwellings by 2030.

We are in the midst of a system that is broken, facing a series of unprecedented challenges. 

This demands honesty and transparency from government and from oppositions– about what we can, and what we cannot, do. 

Given the skyrocketing prices of housing in many of our cities - both to purchase and rent - it is my strong view that Labor looks to wind back negative gearing at our upcoming National Conference.

We must be honest about our role in the past in supporting negative gearing.

But we must also be honest about the effect negative gearing is having, and will continue to have, in changing out cities, and not for the better.

Our past must not limit our future – or the future of our children, and the future of the cities like Sydney that we all love. 



[1] ACOSS, Fuel on the fire: negative gearing, capital gains tax and housing affordability, 2015, page 8

 

[2] Ibid

[6] ACOSS, Fuel on the fire: negative gearing, capital gains tax and housing affordability, 2015, page 7

[7] Grudnoff, M, Who’s getting negative? The benefits of negative gearing by federal electorate, The Australia Institute, April 2015, page 8

[9] Williams, T and Macken S, Homes for All: the 40 things we can do to improve supply and affordability, McKell Institute, 2012

[10] ABC News, Fact Check: Did abolishing negative gearing push up rents?, http://mobile.abc.net.au/news/2015-05-06/hockey-negative-gearing/6431100 (accessed 22 May 2015) 

[11] Eslake, S, Australian Housing: 50 Years of Failure, Submission to the Senate Economics References Committee, 2013, page 11

[12] Ibid 

[13] Williams, T and Macken S, Homes for All: the 40 things we can do to improve supply and affordability, McKell Institute, 2012, page 10

[14] ACOSS, Fuel on the fire: negative gearing, capital gains tax and housing affordability, 2015, page 6

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