Marc Florio’s letter, “Why families can’t afford a home” (News Weekly, June 9, 2007), is well intentioned, but is in my opinion wrong in blaming the investor for rising property prices.
Property investment by investors invariably ends up as rental property, and this places such housing in the hands of private investors who operate more efficiently than government-run public housing.
Nineteen years ago, I found myself living in a modest 12-square house in the Melbourne suburb of St Albans. Across the road was another modest 12-square house, only this one was owned by the Housing Commission. Both houses were on a corner block.
One weekend I noticed that a few palings on my side fence were coming off, so I went off to the hardware shop and for a few dollars bought a small packet of nails and proceeded to fix my fence.
Three weeks later, I noticed workers attending to the side fence of the Housing Commission house across the road. What struck me as odd was that they weren’t repairing the existing fence. Rather, they were pulling down the old one – which was in the same condition as my side fence before I repaired it – and replacing it with a new one.
I found out later that the tenants in that house had complained to the Housing Commission that their fence was falling apart and, before you know it, they got a new one, compliments of taxpayers’ money.
Incidentally, I was driving past a few weeks ago and the fence I repaired 19 years ago is still standing.
The reality is that, were it not for capital appreciation, investing in property would not be feasible. When an investor invests, say, $200,000 into a rental property, he is likely to get slugged in excess of $14,000 a year in interest.
On top of that there are rates to be paid and repairs and maintenance. The rental yield from such a property would not go anywhere near covering all the expenses.
When the investor ultimately sells that property to realise some sort of profit through capital appreciation, he then has to pay capital gains tax.
If investors don’t invest in property, the result is a shortage of rental houses, which in turn will drive up rents. The more investment there is to produce rental property, the more likelihood there is that rents will go down and stay down.
The reasons why property prices go up are many and complex. One of the main reasons that comes to mind is the fact that we now have dual-income families bidding up prices at auctions.
Another reason is that, thanks to government intervention, older people are encouraged to stay in the workforce longer. They will then have more money to invest and, while some of it might find its way into shares, some will also find its way into property.
Even when they invest their money into superannuation, the superannuation fund will also invest in property. And while we are on superannuation, just think how much the average nest egg would shrink if property did not go up.
Recently, the Government moved to eliminate owner-builders from building investment properties. That also has the effect of driving property up because having fewer builders equates to less competition. Less competition always results in higher prices.
Attacking negative gearing in order to discourage investment in property is something that was tried over 20 years ago. It was quickly reinstated because rents were going up too fast, resulting in a higher rate of homelessness.
It might be tempting to say that investment should be directed instead into the share-market, but even this is not too appealing. You see, the tendency is for share prices to go up the more that workers’ wages and conditions in real terms are eroded. Then you really have less money with which to buy your home.
I really do not believe that discouraging investment in houses is the answer. The answer lies in our politicians embracing proper Christian values, and in turn passing fair and reasonable legislation that will enable the support of the family instead of its destruction.