The crude political calculus behind Australia’s housing crisis was never more clearly expressed than by John Howard during an interview on Brisbane radio on September 19, 2003.

Since the election of the Coalition government in 1996, house prices had doubled. Howard’s interviewer wanted to know what the government planned to do about it.

The answer was nothing.

“I haven’t found anybody in seven-and-a-half years shake their fist at me and say, ‘Howard, I’m angry with you for letting the value of my house increase,’ ” the then prime minister said.

That line has been cited with increasing frequency over recent times as the crisis has worsened. More revealing, however, was what followed.

The interviewer responded: “Let me be the first to complain – people like myself are actually being forced to face the possibility that we may be renting for the rest of our lives because getting into…”

Howard cut him off: “Do you own a home?”

Host: “No, I rent.”

Howard: “No, well, I’m sorry. I was talking about people who owned a home.”

Howard could hardly have been more dismissive of those locked out of housing. Nor could he have been clearer in his view that a house was not so much a home as an investment.

As far as he was concerned, the interests of the people who owned homes were paramount. Back then, in 2003, that was more than 70 per cent of people – although the idea of what it meant to “own” a home also changed substantially during the Howard years.

When he came to power, about 42 per cent of people truly owned their homes – free and clear with no mortgage. Just over 28 per cent had mortgages.

By the time he gave that interview, there were more home owners with mortgages than without.

When Howard came to power, house prices and average wages had been ticking up roughly in parallel for decades. Then, quite suddenly, prices zoomed far ahead of incomes. They have kept zooming ahead, with only a couple of minor interruptions, ever since.

Between 2001 and 2022 house prices grew more than 400 per cent, more than twice the pace of wages. A pandemic could not stop them; falling real wages and increased interest rates could not stop them. A report out this week from Oxford Economics predicted the national average house price would be more than $1.3 million by 2027.

As Alan Kohler noted in his recent Quarterly Essay on the housing crisis, the shift that occurred around the turn of the millennium “has altered everything about the way Australia operates and the way Australians live”.

He’s not wrong. Back then, less than 20 per cent of households were in the private rental market. Now it’s close to a third, and to an ever-increasing extent they are under financial stress. At the last census, in 2021, a record 122,000 Australians were homeless. That number has likely increased as rents have escalated and housing supply has fallen even further below population growth.

In 2002, the average retirement age was 55 and only 4 per cent of home owners aged over 65 carried mortgage debt. By 2020 the average retirement age was 64, and more than 50 per cent of home owners aged 55-64 still had mortgage debt.

Older people can’t afford to retire and younger people can’t afford to leave their parents’ homes. The cost of housing has been blamed for couples putting off having children and having fewer of them.

It’s not all John Howard’s fault. Over the preceding decade, the government had all but given up on directly building houses in the belief – misguided – that the private sector could do it better. However, it was on Howard’s watch the big shift began and it was his government that purposefully pursued tax policies that made things worse than they would otherwise have been.

In that 2003 interview, Howard was asked about one of them: negative gearing.

He said he would not countenance winding back that tax break for property investors because that would result in rents going “through the roof”.

This claim, still made today by some defenders of the tax breaks that benefit property owners, infuriates Saul Eslake.

“It’s a lie,” says the veteran economist. “And it’s a big lie.”

The basis of the lie is a decision made by the Hawke government in 1985. Bob Hawke and then treasurer Paul Keating abolished negative gearing on rental properties, only to reinstate it in 1987, following sharp rises in rents in Sydney and Perth.

Eslake and others point out that the rises in those two cities were a consequence of a shortage of supply. In Brisbane and Adelaide, rents actually fell and the abolition had no impact anywhere else in the country. Still, Labor buckled in the face of a “thoroughly dishonest” campaign by then opposition leader John Howard, vested property interests and the usual media suspects.

The restoration of negative gearing – which allows rental property owners to claim a tax deduction against their other income if they receive less in rent than they pay out in interest and other associated costs – was not the worst of it.

In 1999, acting on advice from one of Howard’s friends, the businessman John Ralph, the Howard government halved the rate of capital gains tax (CGT) payable when properties were sold.

For example, if an investor bought a property for $400,000 and subsequently sold it for $500,000, they would be taxed on only half the gain: $50,000 rather than $100,000. This was done at the marginal rate of tax, which meant those in higher tax brackets received a bigger benefit.

Until the Howard government did that, says Eslake, “what negative gearing essentially did was allow you to defer tax on part of your wages and salary income, because when you ultimately sold the property, you paid tax on the real capital gain”.

Eslake says when the then treasurer, Peter Costello, changed the CGT regime “it became a strategy not just for deferring tax but permanently reducing it”.

The promise was the halving of the capital gains tax would result in a more dynamic economy and more investment, including in building more homes, which would improve housing affordability.

Furthermore, the theory went, cutting capital gains tax would dramatically increase the number of capital transactions, such that there would be no impact on tax revenue flowing to government.

It was supply-side economic sophistry, in Eslake’s view.

“I recall Ralph saying it would turn Australia into a nation of shareholders and entrepreneurs,” he says. “Instead, it turned us into a nation of landlords and property speculators.”

The shift in Australians’ attitude to housing – from seeing it as somewhere to live to seeing it as an investment and source of wealth – did not happen overnight. However, the CGT decision certainly played a big part.

Given the double incentive of being allowed to claim a tax break for the cost of buying and maintaining a rental property and then another tax break on the capital gain when that property was sold, investors piled in.

In the early 1980s, when the Hawke government began worrying about negative gearing, only about 6 per cent of taxpayers were landlords.

“By 2010, that had jumped to 19 per cent,” says Eslake. “Throughout the past decade it’s been about 20.”

The cost to government revenue is astronomical. The most recent Treasury figures, released in January, expect forgone revenue due to rental property deductions in 2023-24 will total $27.1 billion, with the benefits flowing overwhelmingly to wealthier Australians. This represents 37 per cent to the top 10 per cent of income earners and 65 per cent to the richest 30 per cent.

When it comes to the CGT discount, the tax benefits are even more skewed towards the rich. Treasury estimates forgone revenue this financial year will be just over $19 billion, with more than 80 per cent going to people in the top income decile.

In sum, the tax changes made by the Howard government 25 years ago failed to produce any of their promised benefits. They did not result in greater housing supply, because most speculators bought existing stock. Instead, they resulted in huge cost to government and they widened inequality by putting more money in the pockets of people who already were wealthy. Most importantly, they did nothing to reduce the cost of buying or renting a home.

So the question Howard’s interviewer asked back in 2003 remains: why hasn’t something been done?

Ahead of the 2016 election, the Labor Party did propose reform: to reduce the CGT discount from 50 to 25 per cent, and to end negative gearing for existing homes.

It claimed the changes would raise $32 billion over a decade and that restriction of negative gearing to new builds would increase the stock of housing, make homes more affordable and generate construction industry jobs.

Labor picked up 14 seats in the election, but the Coalition squeaked home with a majority of just one. Encouraged by the result, Labor not only kept those policies but proposed other economic reforms at the next election in 2019, including to franking credits, a policy few understood and that opponents maliciously equated to a “retirement tax”. Labor’s vote went backwards and it subsequently dumped the policies, along with its leader, Bill Shorten.

Just as happened after then treasurer Paul Keating attempted to wind back tax breaks in the 1980s, Labor was panicked out of what most respectable economists consider good policy. Labor came to the view that the cynical political calculation behind Howard’s 2003 answer was unassailable: more people own homes than don’t, booming prices make them feel richer, they are fearful of anything that might reduce the value of their major asset, and they will vote accordingly.

As Shorten himself put it recently, when Labor tried to implement change, things backfired. “What did we get? Scott Morrison.”

There is reason to suspect this view is wrong, however, and that changing demographic reality is making it more wrong. Eslake is one who holds that view. Another respected independent economist, Chris Richardson, is another.

“Back in the day, when capital gains taxes were halved, rising house prices was a vote winner,” says Richardson. “It is no longer true.”

Older voters who own their homes – and often also investment property – are a shrinking electoral cohort. Conversely, the number of people affected by rising prices is growing.

Home ownership rates have been on the slide for many decades and the slide is picking up pace, as Brendan Coates, economic policy program director at the Grattan Institute, detailed in a major speech in September 2022, using data gleaned from various sources, including the previous year’s census.

Between 1981 and 2021, he showed, ownership rates among 25- to 34-year-olds fell from more than 60 per cent to 40 per cent. Among the poorest 40 per cent of that age group, it more than halved, from 57 per cent to 28 per cent.

In the early 1990s it took about seven years to save a 20 per cent deposit for a typical dwelling. That blew out to 12 years.

It was not just the young who were struggling, either.

The last census data, said Coates, showed accelerating declines among middle-income households, too, with “noticeable falls in home ownership at all age levels”, including older, middle-income households. Among the poorest 40 per cent of 45- to 54-year-olds, just 53 per cent own their homes today, down from 71 per cent four decades ago.

Nearly half of all retired renters live in poverty. Homelessness is growing and growing fastest among women aged over 55.

More than half of low-income Australians in the private rental market suffered rental stress, especially those in the capital cities.

One in five working-aged renting households are in financial stress, which is defined as skipping a meal, using charity, pawning something or not heating the home.

Yet dwelling prices just keep rising, albeit with the odd, brief downturn.

For most of the seven years to mid-2019, Coates noted, “the median Sydney home earnt more than the median full-time worker”.

“How can it be,” he asked, “that a relatively low-risk, low-effort investment can often provide greater returns than a year of hard work?”

The answer is complex. One truthful thing Howard said in that 2003 interview was low interest rates were part of the cause. From a historic high of 17.5 per cent in 1990, official rates trended generally down for 30 years to a historic low of 0.1 per cent in December 2020.

Property buyers – whether for investment or occupation – grew comfortable borrowing more and banks grew more willing to let them. This meant greater competition and higher bidding at auctions. People who had only ever seen rates decline maxed out the amount they spent on purchasing a place, unconcerned that rates might go up.

When they did go up to 4.35 per cent – further and faster than at any time in at least 40 years – many borrowers were squeezed, property investors included. Those investors put up rents, which hurt tenants. According to some data, those increases covered only about half the increase in repayments.

Another big factor driving home prices higher is migration. Australia has always had a high migrant intake compared with most countries, but it has waxed and waned. Through the 1990s it waned, but in the latter years of the Howard government, in the mid-2000s, it shot up. Under succeeding governments, it has stayed high.

The trouble is, we do not have enough places to house those migrants. Over the 20 years leading into the Covid-19 pandemic, Australia’s housing stock relative to population declined precipitously, to be among the lowest in the developed world.

“It is undeniable that more migration makes housing more expensive in the short term,” Coates tells The Saturday Paper. “That is just a fact. If you have more people and you don’t add to the housing stock, there’s going to be more competition for housing.”

Furthermore, relatively few of the people who migrate to Australia work in construction. According to the Grattan Institute, about 32 per cent of Australian workers were foreign born, but only about 24 per cent of workers in building and construction were born overseas.

There are those who do not accept that migration is a big contributing factor to the housing crisis. Australia’s experience during the pandemic might appear to bolster such thinking, as property prices went up even when international borders were closed and more people left the country than arrived.

There is an explanation for that, however: people living, working and studying at home needed more space. The average size of households shrank. Fewer people per dwelling meant demand for 140,000 extra homes.

Another thing that happened during and after the pandemic was an enormous boom in home renovations, which diverted tradespeople from building new places – and also contributed to a steep rise in the cost of tradespeople. This happened at a time when disrupted supply chains made building materials scarcer.

According to the best estimate of Tim Reardon, chief economist of the Housing Industry Association, “somewhere between a quarter and a third” of tradespeople’s work goes to renovating existing dwellings rather than constructing new ones. It’s hard to be precise because smaller jobs, such as kitchen or bathroom upgrades, do not require building approvals.

“It used to be you’d get a kitchen/bathroom renovation at the age of 35 years,” Reardon says. “Now we’re looking at a new kitchen or bathroom after about 25 years.”

Climate change is another factor in the housing crisis, including the impact of fire and flood.

Reardon relates an anecdote about the Halloween storms that struck south-east Queensland on October 31, 2020, causing more than $1 billion damage, mostly due to hail damage to roofs. “It took two weeks for the increase in demand for roof plumbers in Brisbane to hit the price of roof plumbers in Melbourne. Literally it just swept down the country.”

All these things have increased housing demand, as have the grab bag of government subsidies for homebuyers: first home owner grants, stamp duty concessions, mortgage deposit guarantee schemes and shared equity schemes.

Saul Eslake sardonically calls them “builders’ and land developers’ profit margin expansion grants”, and notes that once again John Howard’s fingerprints are on them.

“Almost 60 years of history – since Menzies introduced the first home owners’ grant scheme at the instigation of the Young Liberals’ then president, John Howard – shows that anything that allows Australians to pay more for housing than they otherwise would have has resulted in more expensive housing, not in more people owning houses.

“Suppose a first homebuyer can afford to spend $500,000. And then the state government comes along and says, ‘Well, you won’t have to pay $50,000 on stamp duty’, then the homebuyer thinks, ‘Well, okay, I can now afford to spend $550,000.’ Probably buying the same house, because there’ll be someone else with the same stamp duty exemption competing for it.”

In a 2011 submission to one of the innumerable parliamentary inquiries into housing costs, Eslake calculated about $22.5 billion had been spent by governments between 1964 and 2011 on various schemes to assist homebuyers. More recent work updating the numbers, he says, puts the cost at $36.4 billion up to 2021.

Labor is pushing another one now, a modest shared equity scheme.

It seems the major political parties simply will not let go of the idea of demand-side fixes, despite the overwhelming view among economists that they only serve to increase prices.

The Coalition’s current idea is to allow would-be homebuyers to dip into their superannuation, which would not only push up home prices but also drain the future retirement incomes of young homebuyers.

The solutions are not simple. Cutting negative gearing and the CGT would not be a panacea for housing affordability. By Grattan’s estimates, it would see prices rise about 2 per cent less than they otherwise would have. According to the analysis, however, it would see speculators sell homes and owner-occupiers buy.

“It wouldn’t change prices very much,” Coates says. “But – and this is really important – you would still see quite a big change in who owns houses.”

A number of major studies have reached similar conclusions, says Peter Tulip, a former senior Reserve Bank economist now with the centre-right think tank Centre for Independent Studies.

He agrees there are “strong tax policy and equity arguments for changing negative gearing and the capital gains discount”. Such demand-side measures, however, would have a “trivial” impact.

The real problem, says Tulip, is supply.

“As a crude simplification, demand has been growing about 3 per cent a year, and supply has been growing at 2 per cent, going back five or six decades.”

Fixing that will require reforms beyond the direct purview of the federal government.

It can commit more money to directly funding more housing and Labor, pushed by the Greens, has done so; but the major choke points are at the state and local government levels. They are planning and zoning laws and regulations that hinder redevelopment close to city centres, encourage urban sprawl and increase infrastructure costs.

Reforming those to allow greater density inevitably meets opposition from established residents.

Tulip is bluntly unsympathetic to these objections. When it is put to him that knocking down old dwellings in inner-ring suburbs to accommodate medium- or high-density housing will just see them replaced with more expensive dwellings, he says he hopes that’s what happens.

“That’s the intention. People living in old terraces filled with mould and rot… It would be wonderful to upgrade our housing stock.”

The benefit, he says, would be “indirect”, in that it would set up a “moving chain”.

“You build a bunch of luxury apartments, and maybe it’s millionaires that move in. But they will vacate somewhere else and other people will move in, and other people will move in where those people vacated and so on.”

As evidence that it works, he points to the example of Auckland in New Zealand, “where in 2016, they substantially up-zoned most of three quarters of the city, allowing medium density”.

Six years later a study found construction had roughly doubled, the dwelling stock increased about 5 per cent and rents were down between 14 and 35 per cent than they would otherwise have been.

Of course, there are other potential solutions. Alan Kohler, in his recent essay, suggested urban sprawl would not be such a problem if transport links, specifically fast rail, were built.

Others suggest cutting migration further, at least until the housing stock and infrastructure can catch up.

Coates welcomes the $3.5 billion the federal government has put on the table to encourage the states to meet a target of 1.2 million new homes over the next five years, and the moves by some states to take greater control of planning.

The signs are there the federal and state governments, if not some local governments, have got the message that what will do most to rein in runaway housing costs is simply building a lot more homes.

That’s not to say other measures, such as cutting tax breaks, finding more workers and providing better transport infrastructure, will not help. Housing, as Tulip says, is “the No. 1 social political issue in Australia at the moment” and requires multiple responses.

All solutions come with significant cost. As we have seen, however, the cost of doing nothing is even bigger.

As Chris Richardson says, even if Australia managed to settle on a perfect solution involving one or more of these options, it still would take a decade at least for it to have any great effect.

The housing have-nots, such as John Howard’s unhappy, renter interviewer back in 2003, will suffer for a long time to come. 

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