In this March 3, 2017 photo, visitors to Queensland Gallery of Modern Art build lego buildings against a backdrop of the condominium and office buildings along the Brisbane River in Brisbane, Australia. Australia’s prime minister was fending off criticism over tax concessions for investors in booming urban property markets on Wednesday, April 5, after a central banker warned soaring house prices could threaten the economy. (AP Photo/Hiroshi Otabe)

Australian leader promises help on housing affordability

April 05, 2017 - 6:18 am

CANBERRA, Australia (AP) — Australia's prime minister fended off criticism Wednesday over tax concessions for investors in booming urban property markets after a central banker warned soaring housing prices could hurt the economy.

Housing affordability has become a hot-button issue with many first-time buyers priced out of the market, especially in Sydney and Melbourne, where 40 percent of the country's 24 million people live.

A growing share of accommodation is being snapped up by investors who outbid owner-occupiers with the help of the generous tax concessions.

Prime Minister Malcolm Turnbull said the government's budget for the next fiscal year, to be announced on May 9, will include help for home buyers.

But he said state and local governments were causing prices to rise by not releasing enough land for housing construction.

"Changing tax arrangements can have an impact, but they are a minor part of the solution," Turnbull told reporters.

"The key to dealing with the housing affordability issue is building more houses," he said.

In a speech Tuesday, Reserve Bank of Australia governor Philip Lowe raised concerns about a possible housing crisis as household incomes fail to keep pace with mortgage costs. Housing-related debt rose at a 6.5 percent annual pace last year while household incomes increased by 3 percent.

"The concern has been that the longer the recent trends continue, the greater the risk to the future health of the economy," Lowe said.

"A strong lesson from history is that stretched balance sheets make for more volatile times when things turn down," he said.

Lowe said a shortage of housing needed to be addressed.

But he also said the increase in so-called interest-only loans that account for 40 percent of home loans issued in Australia last year were "unusual by international standards."

Investors repay only the interest on such loans and none of the principal, because the interest is tax deductible as a business expense and paying down the principal is not.

The investors then rely on ever-increasing property prices to deliver a profit when they eventually sell. But economists worry that a bursting of the property bubble would land them in trouble.

Australia traditionally has had a relatively high rate of home ownership and the lack of affordable housing is a growing political issue.

The center-left opposition Labor Party accuses Turnbull's conservative government of siding with wealthy landlords over tenants. Labor campaigned at elections last year for a reduction in tax breaks for property investors to level the playing field for bidders who want homes.

"Other than the government and the few remaining friends they've got, everyone else recognizes that the tax policies of the federal government are pushing the dream of being able to afford your own home more out of reach of everyday Australians," said opposition leader Bill Shorten.

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