Australia's Future Tax System

Final Report: Detailed Analysis

Chapter E: Enhancing social and market outcomes

E4. Housing affordability

E4–1 The role of housing in Australia

In its myriad forms, housing provides shelter, security and a savings vehicle to millions of Australians. Adequate shelter is fundamental not only in meeting basic human needs, but also in providing a base from which to develop individual capabilities, to raise a family and to participate in the community and the workforce.

The value of housing derives from more than the day-to-day shelter it provides. More than two-thirds of Australians enjoy the benefits of owning their own home. Whether they are a first homeowner with little equity or a retiree whose mortgage has been paid off, the security of tenure associated with home ownership provides an additional benefit over and above physical shelter. In many areas, a stable base of home ownership underpins social integration. Home ownership can benefit not only homeowners, but their communities too.

As well as providing vital services to individuals and communities, housing also forms a large share of Australia's savings. Houses are built to last — many people work hard to pay off their house during middle age, in order to ensure they have access to accommodation with no cash payment obligations when they are old. As a form of savings, housing has additional benefits over other savings vehicles because it not only acts as a store of value, but also reduces exposure to fluctuations in rental costs. In particular, those on fixed incomes are insulated from housing cost fluctuations, ensuring that other necessities like food or energy are affordable and they are protected from the risk of poverty.

Australia currently has one of the highest rates of home ownership in the OECD. In total, 68 per cent of Australians own or are buying the home they live in, compared to an OECD weighted average of 63 per cent. For those aged over 65 years old, the rate is 82 per cent, which is among the highest in developed countries (Bradbury 2008). These high levels of home ownership often reflect strong personal preferences for home ownership over other forms of housing tenure, as well as deliberate government policies to enable owner-occupied housing.

The Review's recommendations are intended to support this policy goal. There is a strong case for continuing Australia's approach of ensuring that owning their own home is within the reach of ordinary families. The role of owner-occupied housing as the key source of voluntary retirement savings is a major reason for continuing to exempt it from income taxation (see Section A1 Personal income tax). Further, owner-occupied housing plays a particularly important role in providing financial security for the large majority of Age Pension recipients who own their own home. Continuing the means test exemption for owner-occupied housing, up to an indexed threshold to ensure fairness of the test, will support this objective (see Section F2 Means testing).

However, home ownership will not be realistically available, or the right solution, for all households at all times. Ensuring access to appropriate rental housing is an integral part of Australia's transfer system. The reforms to housing assistance recommended in this report would mean that the transfer system is better placed to address housing affordability by ensuring access to affordable housing at the rents available in the market (see Section F5 Housing assistance).

In framing its terms of reference, the Australian Government requested that the Review pay particular attention to Australians' access to affordable housing. The affordability of housing, in light of high housing price rises and increasing rents, is a fundamental challenge facing all Australian governments.