Grattan Institute

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Today’s young Australians are in danger of being the first generation in memory to have lower living standards than their parents’ generation, according to a new Grattan Institute report.
<a href="http://icm-tracking.meltwater.com/link.php?DynEngagement=true&amp;H=btYXC68syxmDVppbhVzFoYHdeMNV9070xvOlf%2FNdDQ0wXj6aidRhm9u1v12hvxsvMHi3xwjNyRTqPX5039IoIlePBRTDdCUVr4c%2BV2ddEMbpayGmBnecxcjkOK96dz0p5eVjoqg1ewQ%3D&amp;G=0&amp;R=https%3A%2F%2Fgrattan.edu.au%2Freport%2Fgeneration-gap%2F&amp;I=20190818110734.000003c27524%40mail6-114-ussnn1&amp;X=MHwxMDQ2NzU4OjVkNTY0ODg2ODE2NmRhY2YxZmU5YWJkOTs%3D&amp;S=-QNWs4wuPgpMNSAu2tim0u5I9TAYVDZO3-wSS5YjC2M" target="_blank" data-auth="NotApplicable">Generation gap: ensuring a fair go for younger Australians </a>shows that older Australians today spend more and have higher incomes and greater wealth than older Australians three decades ago.
But living standards have improved far less for younger Australians.
The wealth of households headed by someone under 35 has barely moved since 2004.
Poorer young Australians have less wealth than their predecessors and are far less likely to own a home. In contrast, older households’ wealth has grown by more than 50% over the same period because of the housing boom and growth in superannuation assets.
It’s a myth that young people’s spending habits and lifestyles are to blame for their stagnating wealth.
"This is not a problem caused by avocado brunches or too many lattes," says the report’s lead author, Grattan’s Budget Policy Program Director Danielle Wood. 
<a href="https://www.propertyobserver.com.au/images/2019/8/19/grattan%201.jpg" target="_blank">Click here</a> to enlarge: 
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In fact, younger people are spending less on non-essential items such as alcohol, clothing, and personal care, and more on necessities such as housing, than three decades ago. 
Economic pressures on the young have been exacerbated by recent wage stagnation and rising under-employment. Older households are better cushioned from low wage growth because they are more likely to have other sources of income.
"If low wage growth and fewer working hours is the new normal in Australia, then we could have a generation emerge from young adulthood with lower incomes than the one before it at the same age," Wood says.
"This has already happened in the US and the UK."
<a href="https://www.propertyobserver.com.au/images/2019/8/19/grattan%202.jpg" target="_blank">Click here </a>to enlarge:
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Young Australians will also bear the brunt of growing pressures on government budgets. 
Because the population is ageing, governments will have to spend more on health, aged care, and pensions. But there will be fewer working-age people for every retired person to pay for it. The number of 15-64 year-old Australians for every person aged 65 or older fell from 7.4 in the mid-1970s to 4.4 in 2014-15 and is projected to fall further to 3.2 in 2054-55.
Governments have supercharged these demographic pressures by introducing generous tax concessions for older people.
The share of households over 65 paying tax has halved over the past two decades. And older households pay substantially less tax on the same income as younger households.
<a href="https://www.propertyobserver.com.au/images/2019/8/19/grattan%203.jpg" target="_blank">Click here</a> to enlarge: 
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"Working-age Australians are underwriting the living standards of older Australians to a much greater extent than the Baby Boomers did for their forebears, straining the “generational bargain” to breaking point," Wood says.
Inheritances are not a magic bullet for young people: they tend to come later in life and are much more likely to go to people who are already wealthy. 
Policy changes are required, Wood said. Policies to boost economic growth – such as tax reform, better education and smarter infrastructure spending – are wins for all, but especially for the young. Changes to planning rules to encourage higher-density living in established city suburbs would make housing more affordable. And a fair go for younger people means winding back age-based tax breaks for ‘comfortably off’ older Australians," she advised.
"Just as policy changes have contributed to pressures on young people, they can help redress them," Wood says.
"The time for action is now: none of us wants the legacy of a generation left behind."
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How to ensure a fair go for young Australians: Grattan Institute

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Restrictive zoning contributes about 40% to the price of houses in Sydney and Melbourne, according to <a href="https://www.rba.gov.au/publications/rdp/2018/pdf/rdp2018-03.pdf" target="_blank">new research from the Reserve Bank of Australia</a>. The study looked at zoning restrictions, such as minimum lot sizes and maximum building heights, which affect what kind of housing can be built, and where.
Of course, zoning and planning rules <a href="https://www.pc.gov.au/inquiries/completed/productivity-review/report/productivity-review-supporting10.pdf" target="_blank">play an important role</a> in managing the growth of cities and protecting the character of particular neighbourhoods. But as Australia confronts a housing affordability crisis, the question is whether the costs of our planning rules outweigh the benefits.
Zoning restrictions added A$489,000 to the price of a detached house in Sydney in 2016, according to <a href="https://www.rba.gov.au/publications/rdp/2018/pdf/rdp2018-03.pdf" target="_blank">the research</a> by RBA economists Ross Kendall and Peter Tulip. The figure was A$324,000 in Melbourne, A$159,000 in Brisbane, and A$206,000 in Perth.
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The RBA research refers to the impact of zoning restrictions on house prices as the “zoning effect”. This can be thought of as the price a developer would be willing to pay for permission to build a home on a given plot of land, if the rules allowed them to.
Within Sydney, the zoning effect is largest in northern councils such as Willoughby and the Northern Beaches; in Melbourne it’s in inner and eastern councils, including Boroondara and Stonnington.
<a href="https://images.theconversation.com/files/209437/original/file-20180308-146691-xecna1.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/209437/original/file-20180308-146691-xecna1.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt=""></a>
Sydney zoning effect estimate by local government area. Figures are an average from 2016, A$‘000s. ABS; Authors’ calculations; CoreLogic
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Melbourne zoning effect estimate by local government area. Figures are an average from 2016, A$‘000s. ABS Authors’ calculations; CoreLogic
The impact is not restricted to houses. The zoning effect added about A$400,000 to the price of an average apartment in Sydney in 2016. For apartments in Melbourne and Brisbane, the extra cost was more than A$100,000.
By contrast, the RBA economists find that zoning rules added relatively little to the cost of housing in Australia 15 years ago. As demand for housing has increased, the zoning effect as a share of the price of housing has increased.
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The RBA research adds to international studies on the costs of zoning rules.
A <a href="https://www.propertyobserver.com.au/https://www.jstor.org/stable/26297967?seq=1#page_scan_tab_contents" target="_blank">study in the United States</a> found the prices of existing homes vastly exceed the cost of building new housing in a handful of coastal cities with the most restrictive planning rules, such as San Francisco, Los Angeles, New York and Boston.
<a href="http://onlinelibrary.wiley.com/doi/10.1111/ecoj.12213/abstract" target="_blank">Another study</a> found that house prices in the south-east of the United Kingdom would be 35% lower if as many planning permits were issued as in the north-east. And a <a href="http://www.superu.govt.nz/sites/default/files/Impact%20of%20land%20use%20report%20110717.pdf" target="_blank">study in New Zealand last year</a> also found that land use regulation accounts for a large share of the cost of homes in major cities, particularly Auckland and Wellington.
The RBA research does not measure the benefits of zoning restrictions in Australia, but overseas studies generally conclude that the local benefits of current planning rules (such as protecting the character of particular neighbourhoods) are not nearly large enough to justify the costs.
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<h2>Increasing supply will make the biggest difference to affordability in the long run</h2>
The new RBA research confirms that planning rules have pushed up the price of housing by restricting the number of new homes built at a time of strong demand. <a href="https://theconversation.com/how-migration-affects-housing-affordability-92502">Our own research</a> shows that for much of the decade from 2005 to 2014, annual housing construction was at or lower than the average of the previous 25 years, even though population growth was much higher.
We estimate that if an extra 50,000 homes were built each year for the next decade, national house prices could be between 5% and 20% lower than they would be otherwise. And building more homes will improve housing affordability for everyone, not just those who purchase new houses.
All levels of government in Australia need to build the public case for increased density. State and local governments should change planning rules to allow more medium-density housing in established suburbs that are close to jobs and transport.
State governments should allow denser development along key transport corridors, with height limits set-up front. State governments should also use carrots and sticks to ensure local councils help meet the housing needs of our growing cities.
When councils fail to meet housing targets, independent planning panels should be given power to assess development applications, as is increasingly occurring in Sydney.
<img src="https://counter.theconversation.com/content/93064/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1">Housing affordability is a big problem. The RBA’s findings show that reforming planning rules is a big part of the solution.
<a href="https://theconversation.com/profiles/john-daley-1870" target="_blank">John Daley</a>, Chief Executive Officer, <a href="http://theconversation.com/institutions/grattan-institute-1168" target="_blank">Grattan Institute</a>; <a href="https://theconversation.com/profiles/brendan-coates-154644" target="_blank">Brendan Coates</a>, Fellow, <a href="http://theconversation.com/institutions/grattan-institute-1168" target="_blank">Grattan Institute</a>, and <a href="https://theconversation.com/profiles/trent-wiltshire-316914" target="_blank">Trent Wiltshire</a>, Associate, <a href="http://theconversation.com/institutions/grattan-institute-1168" target="_blank">Grattan Institute</a>
This article was originally published on <a href="http://theconversation.com" target="_blank">The Conversation</a>. Read the <a href="https://theconversation.com/rba-research-shows-that-zoning-restrictions-are-driving-up-housing-prices-93064" target="_blank">original article</a>.
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Zoning restrictions are driving house prices up: Grattan Institute

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Guest Observer
Building an extra 50,000 homes a year for a decade could leave Australian house prices 5 to 20 per cent lower than they would be otherwise, and stem rising public anxiety about housing affordability.
Within living memory, Australia was a place where housing costs were manageable, and people of all ages and incomes had a reasonable chance to own a home with good access to jobs. But home ownership rates are falling among all Australians younger than 65, especially those with lower incomes. Owning a home increasingly depends on who your parents are, a big change from 35 years ago when home ownership rates were high for all levels of income. Those on low incomes – increasingly renters – are spending more of their income on housing.
It’s been a perfect storm of rising incomes and falling interest rates, rapid migration, tax and welfare settings feeding demand, and planning rules restricting supply. As a result, house prices have more than doubled in real terms over the past 20 years. The strains are most acute in Sydney and Melbourne. Since 2012, house prices have risen 50 per cent in Melbourne, and 70 per cent in Sydney.
Development in middle suburbs has increased in recent years, especially in Sydney. But today’s record level of housing construction is the bare minimum needed to meet record levels of population growth driven by migration. Meanwhile a decade of accumulated shortages are forcing younger people to set up their own homes later in life.
To build more homes, State governments should fix planning rules to allow more homes to be built in inner and middle-ring suburbs of our largest cities. More small-scale urban infill projects should be allowed without council planning approval.
State governments should also allow denser development ‘as of right’ along key transport corridors. They should swap stamp duties for general property taxes. And state land taxes on investment property should be flat rate with no tax-free threshold, to encourage more institutional investors likely to provide longer-term tenancies.
The Commonwealth government can improve housing affordability somewhat – and immediately – by reducing demand. It should reduce the capital gains tax discount to 25 per cent; abolish negative gearing; and include owner-occupied housing in the Age Pension assets test. And unless the states are prepared to reform their planning systems, the Commonwealth should consider tapping the brakes on Australia’s migrant intake.
It took neglectful governments two decades to create the current housing affordability mess. They preferred the easy choices that merely appear to address the problem. The politics of reform are fraught because most voters own a home or an investment property, and mistrust any change that might dent the price of their assets. But if governments keep pretending there are easy answers, housing affordability will just get worse. Older people will not be able to downsize in the suburb where they live, and our children won’t be able to buy their own home.
<a href="https://grattan.edu.au/podcast/housing-affordability-re-imagining-the-australian-dream/" target="_blank">Listen to a podcast with John Daley and Brendan Coates discussing the report</a>
John Daley has been the Chief Executive of the Grattan Institute since it was founded nine years ago.
He can be <a href="https://grattan.edu.au/people/bio/john-daley/" target="_blank">contacted here.</a>
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