Tearing Down The White Picket Fence

The dream of owning the quarter acre block with a white picket fence for many young Australians appears to be just that—a dream. As property prices soar to unprecedented levels in Australia’s major cities, and affordability ratios leave hopeful Australian property owners as some of the worst off in the developed world, perhaps the writing is on the wall for property-friendly taxation and welfare policies.

Consider the personal place of residence (PPR) exemption to the capital gains tax (CGT). If a person realises a gain on the sale of their PPR, a full CGT exemption will apply. What this means is that the portion of the gain that would ordinarily be taxed in a sale of an asset in a different class is money that is likely to be reinvested in more property (assuming the seller of the property remains in the property market). The favourable treatment of the family home does not end there. In determining eligibility for the aged pension, for example, the value of the family home will not be means tested, irrespective of its value. Throughout the GFC as well, the First Home Buyers Grant was introduced to improve housing affordability for individuals entering the property market for the first time. The taxation benefits associated with negative gearing also add to the attractiveness of property more generally. Such a policy-bias has even been recognised by the RBA, which recently stated: “Australia’s treatment of property investors is at the more generous end of the range of practice in other industrialised economies.” [1]

Importantly, the net effect of each of these policies is to increase demand for property and, in turn, increase market prices. This is, of course, holding supply constant—a plausible assumption since suppliers of housing stock are unable to respond to changes in demand in the short run. [2]

Such policy prompts a critical discussion: to what extent should a government encourage investment in property over other asset classes such as equities or debt? After all, isn’t the individual meant to make investment decisions based on the risk–reward trade-off that best meets his or her financial planning needs, not on an Australian dream that was forged generations ago?

Indeed, there are a couple of reasons why continuing to ‘pick an asset winner’ is damaging and should come to an end.

Firstly, this form of government intervention has, at least for younger Australian generations, failed to secure the Australian dream for which it was designed. Australians looking to enter the property market now face the unfortunate reality that their income has one of the weakest property purchasing powers in the world. Australia’s median house price-to-income multiple (the median multiple) reached 5.5 times in June 2015—the country’s highest on record. [3] The situation is more extreme in Sydney and Melbourne, where the median multiple has climbed to 9.8 and 8.7 times respectively. By developed world standards, Australia’s median multiple ranks as the second highest among comparable countries, with only Hong Kong proving more unaffordable. [4]

A more telling picture is revealed when analysing particular housing markets within a country. According to the 2015 Demographia Housing Affordability Survey, Australia has the lowest number of affordable markets among the comparable countries in the report.

Although there are potentially multiple explanations for the current state of the Australian property market, the situation is unsurprising in light of Australia’s property-friendly policies and the cultural appetite for property such policies have engendered. If we accept that the objective of Australian governments over the years has been to promote the realisation of the ‘Australian dream’ to own a quarter acre block, then the policies themselves are underpinned by a rationale that is inherently flawed and self-defeating. This is because stimulating demand for those entering the property market today axiomatically comes at the expense of those trying to enter tomorrow. Especially given what appears to be a cultural reluctance to live in smaller or high-rise dwellings in or near the city centres (in contrast to European cities), land scarcity will inevitably drive up property prices.

Secondly, maintaining a taxation and welfare system that favours the family home blinds Australians from alternate, yet still economically rational, investment options. For example, one such option is to rent and invest the amount that would otherwise be devoted to servicing a mortgage in different asset classes. Pursuing this option might even be particularly advantageous in the current climate, which is seeing rents stabilise and property prices rise into bubble territory. [5] What’s more is that this approach has the added benefit of encouraging the Australian population to diversify its personal investment portfolio, thereby mitigating the risks of a property crash to the Australian economy.

Tied to this is a policy setting that fools the Australian population into believing that property is a safe haven. In fact, property is historically the second riskiest asset class, with only returns on equities (i.e. shares) showing greater volatility. If the reason for supporting property ownership through policy is based on economic stability, then this justification is also misguided.

With fears of a property bubble greater than ever before, perhaps it is time to tear down the white picket fence and do away with policies that incentivise the investment in property over other asset classes. In doing so, capital appreciation in property should moderate for those still clinging onto the ‘Australian dream’ and the individual is free to make better-informed investment decisions without being influenced by market distortions.


Rob is a fourth year Commerce/Law student with an interest in Australia’s macroeconomic policies.


[1] ‘Submission to the Inquiry into Home Ownership’, RBA, June 2015.

[2] DiPasqaule–Wheaton Four-Quadrant Model.

[3] ‘Why Australia’s Property Market Looks Like a Bubble that is Likely to Keep Growing from Here’, Business Insider, 1 July 2015.

[4] 11th Annual Demographia Housing Affordability Survey: 2015.

[5] ‘Rental Growth Slowdown Signals Property Boom on Borrowed Time.’ The Age, 27 June 2015.

Illustration: Jessica Watts