Australia’s income inequality is much worse than we think because official statistics ignore the income that home owners derive from their properties, leading economists say.
New research finds Australia’s extremely favourable tax treatment of owner-occupied housing is fuelling the problem, encouraging Australians to plough money into housing at the expense of everything else — leaving those without housing even further behind.
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Professor Peter Siminski from UTS Sydney, and Professor Roger Wilkins from Melbourne University, say standard measures of income inequality fail to properly capture what is happening in Australian society.
A new paper from the economists considers the untaxed income owner-occupiers get from their homes, via “imputed rent” — the value of living in your own house without paying rent — and capital gains made when the home’s value rises.
They show that when imputed rent and accrued capital gains are included in the income measure, inequality is higher, and rising more significantly, than official statistics suggest.
Widening gulf between renters and owners
The research, using Household, Income and Labour Dynamics in Australia (HILDA) data, highlights that while the average annual disposable income of outright home owners in Australia is 34 per cent higher than renters — when housing income is also counted — it is 86 per cent higher.
The professors say that, since income from investing in owner-occupied housing is tax-free in Australia, while all other investments attract tax, Australians are encouraged to pour money into housing instead of more productive investments.
That boosts demand for housing, and lifts housing prices, which makes it harder for younger people to break into home ownership, while widening Australia’s wealth divide and making income inequality worse.
Maroubra is a popular beachside suburb in Sydney’s eastern suburbs. (ABC News: John Gunn)
They found the tax-free status of housing makes our income tax and transfer systems much less redistributive and progressive than we think, too.
“Owner-occupied housing is the elephant in the room in current debates,” Professor Siminski told ABC News.
“No-one really seems to be willing to discuss it in current debates about tax reform and our standard studies of income inequality don’t really do justice to the role of owner-occupied housing.”
Australia a ‘home owner welfare state’
Professor Siminski and Professor Wilkins have written an article for The Conversation, published today, that explains their paper’s findings.
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They say the size of tax concessions for owner-occupied housing in Australia is similar to the huge tax concessions for superannuation and far larger than for investment property.
However, far more public attention is paid to the much smaller tax concessions for investment property income.
In the past, Australia was famously described as a “wage earners’ welfare state,” but Professor Siminski says that version of Australia has disappeared.
“Australia’s tax and transfer system could be labelled a ‘home owners’ welfare state’ 1755029768, because the amount of privilege home owners are given is really quite extraordinary.”
Treasury estimates it forgoes $50 billion a year in revenue by exempting owner-occupied housing from the Capital Gains Tax (CGT).
“There is also no tax on the rental value of owner-occupied housing, although we did tax such “imputed rental income” between 1915 and 1923,” Siminski and Wilkins write in their Conversation article.
In their paper, they argue that the favourable tax treatment of owner-occupied housing is “a major driver of inequality, undermining the redistributive role of government”.
Professor Peter Siminski says the number of privileges home-owners enjoy in the tax system is “extraordinary.” (ABC News: John Gunn)
For example, they say Australia’s progressive personal income tax system helps to reduce income inequality by applying higher tax rates to people with higher incomes.
But when looking at long-run income trends(over 23 years), they estimate that the “redistributive impact” of Australia’s income tax system is reduced by 40.5 per cent when income from the home is included.
They say the redistributive impact of government transfers (welfare payments) is reduced by 18.9 per cent, because the home people live in is generally excluded from assets tests, such as to access the Age Pension.
The effect of including housing income is big enough to shift Australia’s inequality from 16th to 10th highest amongst OECD countries (without conducting the same exercise for other countries).
Value of home ownership ‘drilled in’
Australians instinctively know how important it is for their long-term welfare to try to secure a home under Australia’s current system.
Cameron Spedding bought his first unit two years ago when he was just 23, something he knows is unusual for people his age.
“It was a bit of hard work and a bit of luck,” he said.
Cameron Spedding saved hard to buy his first home at the age of just 23. (ABC News: Darryl Torpy)
“I was fortunate enough to have a family who was willing to let me stay at home, essentially until I saved up a deposit. I am aware that not everyone has that luxury.”
He paid about $270,000 for a two-bedroom villa unit in the regional Victoria town of Ballarat after accessing a Victorian government first home buyers scheme.
“I was able to get this place with only a 10 per cent down $30,000. It took me about 18 months of strict budgeting to save up $30,000.”
The 25-year-old auditor has struggled with rising interest rates and consumer prices since buying the property.
“In the short term, it’s been quite rough,” he says.
Buying your first home without bank of mum and dad
But in the long run, he is confident the financial pain will pay off.
He says the value of home ownership was instilled in him early.
There is one particular story that his mother told him as a boy that has stayed with him.
“When my mum was a bit younger than [I am now] she was already married and had two kids and she was working at a petrol station with a woman who was nearing retirement,” he says.
“And my mum once asked this lady why she was still working instead of retiring, and the woman said, ‘Well, because I had to rent a place. I need to pay rent each week.’
“My mum really drilled it into my head that I need to buy a place, that I need to own a house, because if I own a place then no matter what else, I’ll be that much more secure in retirement.”
Cameron says everyone should have the chance to buy their own home and wants to see more government action on affordable homes.
But he does not agree with taxing owner-occupied properties.
“I don’t think that’s necessarily going to help with anything in particular. I already kind of pay an owner-occupied tax in the form of [council] rates,” he says.
“I’m very fortunate here in Ballarat — they’ve announced rates will not be going up this year — but to have rates and a tax, it just kind of feels redundant, especially given there are what feels like a lot of different things that could be done in order to address the issue.”
‘Frustrating and scary’ reality of renting
Australia’s record-high property prices, and declining rates of home ownership, have also raised concerns about the reality of more Australians becoming “forever renters” and struggling with long-term housing insecurity.
It is another thing on the minds of younger Australians.
Kieran Murphy, 25, has followed the advice given to his generation — go to university, get a well-paid job — but he is unsure if he will ever own a home.
Kieran Murphy is unsure if he will ever be able to afford a home of his own. (ABC News: Jack Stevenson )
“I’ve tried to make smart decisions — I went and got a degree, I got a job in a niche field within my degree, one that pays well — and I’m still unsure whether or not I’ll be able to save enough to get a home in a reasonable time, or at all,” he told the ABC.
“I worry about what that means for my future, how much money I’ll be able to save long term.
“I worry about what happens if I can’t save long term — if, say, my dog had an injury or suddenly fell ill and I needed to pay a large amount to help them out, or if there was a medical emergency with my partner and I.
“It’s frustrating and it’s scary.”
Saving is about to get even tougher for the oceanographic technician and his two housemates, who will soon have to move out of their below-median price rental.
“I think from what I saw the other day, the median price was about $720,” Kieran said.
“The areas we’ve been looking — which are areas that are kind of in between where I work, where my housemate works and where my partner works — are all looking at minimum $600 to $700 a week. So it’s less than ideal.
“I’m very fortunate that I work full-time and I can afford to rent in the market, but it means that my savings and how much I can save each week will drop dramatically.
“The average price [of property] just seems to keep rising year in, year out — which means the amount I need to save every year keeps increasing.”
Economists say better tax treatment of housing would help more people get into home-ownership. (ABC South West WA: Anthony Pancia)
Despite his concerns as a renter, Kieran is also against taxing owner-occupied homes.
Instead, he says the federal government should target investors who own large property portfolios.
“I’d like to see changes… where the people that have the money to buy multiple properties and develop a portfolio — that’s disincentivised for them to want to do that.
“I don’t know many people my age who own homes, but I can think of a lot of people who are maybe double my age or so that own multiple homes — and they don’t need them. Some of them don’t even rent them out,” he says.
What policy options are available?
Professor Wilkins, who is a co-director of the HILDA survey, says many Australians do not like the idea of taxing the family home.
But he argues that if the tax treatment of housing was reformed, the Australian community as a whole would benefit.
It would open up opportunities for significant tax cuts in other areas of the economy.
Professor Roger Wilkins says the tax-free treatment of owner-occupied housing is distorting Australians’ investment behaviour. (ABC News:Â Simon Tucci)
He says there are plenty of ways to fairly incorporate owner-occupied housing into the tax and transfer systems.
He says a broad-based land tax would be economically efficient (it is advocated by many economists). An explicit tax on owner-occupied housing wealth would be justifiable. A broader wealth tax could be considered.
He says there is a strong case for reconsidering the exemption of housing from pensions means tests, because many wealthy retirees benefit from public pensions that are funded by taxes on the incomes of renters.
But he admits the politics of those kinds of tax reforms will always be difficult in Australia.
“Most renters aspire to be home-owners, so they’re probably thinking that if they’re to achieve that aspiration, increased taxation of owner-occupied housing might seem like it’s putting up further barriers to home-ownership for them,” he told the ABC.
“But we would actually argue that it would help moderate house prices and probably help more people get into home-ownership than it would hinder.
“I think there’s also an inherent scepticism about new taxes because it sounds like we’re just going to be paying more tax, and of course … [when] bringing owner-occupied housing into the tax system, you’d want to be accompanying that with offsetting tax reductions elsewhere, and we’re particularly thinking here about income tax, where we seem to be unduly reliant on income taxes in Australia and that puts a very high burden on younger working-age people.
“So, perhaps if people were presented with that sort of trade-off, you may get a different response, if they could see — and be confident — that income tax cuts would be accompanying the introduction of taxes on housing wealth in some form,” he says.
There are concerns about the likelihood of more Australians becoming “forever renters.” (ABC News: Liz Pickering)
He also says his main concern is about the $50 billion of annual tax concessions on Australia’s owner-occupied housing is about their efficiency, rather than their distributional impact.
“As an economist, I think it’s really distorting our investment behaviour towards what is essentially a non-productive investment,” he says of the tax-free status of owner-occupied housing.
“We’re much too obsessed with investing in property, either our own home or as an investor, and not sufficiently interested in investing in creating new businesses and undertaking entrepreneurial activities.
“I’m always struck by this huge cultural difference between the US and Australia, where in the US people talk about creating wealth by creating a new business and coming out with a new product.
“[But] in Australia the culture seems to be much more oriented around buying your next property or upgrading your existing property as ways of accumulating wealth.”