Category Archives: Housing

Compare the Pair: Income Inequality on the Same Income

Can a homeowner really be $30,000 a year better off than a renter with the same income?

We are all familiar with superannuation ads asking us to “compare the pair”: two otherwise similar workers in different superannuation funds getting very different financial outcomes. Today I want to do a similar exercise for the extended incomes of two people on identical wages, with the only substantive different in their lives being that one owns their own home, while the other one rents.

The different financial outcomes that result go beyond just the amount of rent that one of the pair pays. Nor are they based on lifestyle or consumption differences, clever investment strategies, complex tax minimisation planning (beyond a basic voluntary superannuation contribution), or any other scheme beloved of financial planners. As such, and with everything else about their lives the same, the compare the pair exercise enables us to draw some interesting conclusions about the role of housing and taxation in inequality.

Inequality - not what you think

Compare the Pair

Renter-Greg and homeowner-occupier-Greg both work as professionals in suburban Adelaide and earned $100,000 last financial year. They both live alone, but are neighbours in the same set of home units. Renter-Greg pays $350 a week in rent, while home-owner-Greg is an owner-occupier who paid off their mortgage six years ago. Ever since paying off the mortgage, homeowner-Greg has been making voluntary superannuation contributions equivalent to renter-Greg’s weekly rent – leaving both with the same weekly consumption expenditure (neither saves or invests any further or has any other source of income).

You get the picture: a standard simplified model where all other factors are equal so any differences in financial outcomes are only the result of different housing costs and the ability of homeowner-Greg to put money into superannuation. Of course, the ability to buy a home and invest in super may be conditioned by all sorts of social factors, but the model could also simply be viewed as a comparison of potential financial outcomes of the same person with different housing tenure.

As the table below shows, the bottom line is that homeowner-Greg is nearly $30,000 a year better off than renter-Greg, despite them having the same employment income.

TABLE 1: Comparing the Pair, 2023-23

Compare the Pair: Table showing renter and homeowner comparison, with homeowner $3k better off after tax, then earning $18,200 in imputed rental income, and $8,565 in return on extra superannuation contributions.

(a) Tax is calculated using the ATO simple tax calculator, with homeowner tax based on income tax on $81,800 salary and 15% of $18,200 voluntary super contribution.

(b) Income from voluntary super contributions does not include the voluntary contributions themselves, only the income on the accumulated balance of these contributions, calculated using an industry average rate of return (9.2% for the 2022-23 year, and 5.8% for each preceding year).

Explanation

The first step in comparing the pair is simple enough and is just based on salary income and tax. As can be seen above, homeowner-Greg has a higher disposable income because of the tax concessions on voluntary superannuation contributions.

When we include housing costs, the difference is starker. As noted in a previous post, accounting for housing-costs in income comparisons is common in poverty research (which is usually based on after-housing incomes), while the national accounts also recognise the value of housing ownership by including a value for rent that owner-occupiers are deemed to pay themselves in their measure of the size of the economy. The value of this imputed rent is added to homeowner-Greg’s income (because the value of this free housing service is income-in-kind). The result is a further increase in income inequality, with homeowner-Greg’s after-housing income being 28% higher than renter-Greg’s income.

The next step is to account for the extra income homeowner-Greg receives from being able to make a voluntary superannuation contribution. When this investment income is included, homeowner-Greg’s extended income is nearly $30,000 higher in the year than renter-Greg’s. Again, this is based solely on home ownership and the ability to invest the money saved on housing costs in superannuation.

Alternatives

A significant part of the difference in financial outcomes above comes from the superannuation investment. If homeowner-Greg just put the savings into a standard bank account, they would not get the benefit of the tax concession and would have lower returns on accumulated savings. However, with a relatively modest interest (2% ->3%), they would still get some $2,600 more income than renter-Greg in the 2022-23 financial year.

Of course, homeowner-Greg could also just spend the money not going on rent rather than invest it, which would mean less difference in the long-term, but significantly higher weekly consumption and standard of living than renter-Greg on the same income.

There is one final calculation that could be made to include the value of the capital-gain on the house in homeowner-Greg’s annual income. Home unit prices in Greg’s neighbourhood increased by 8.8% in 2022-23, so homeowner Greg would have “earned” $39,600 in capital gains on his $450,000 unit (average unit price). That would bring the difference between renter-Greg and homeowner-Greg’s income to $68,650, or more than two-thirds of their starting income (gross salary). I have argued previously that capital gains are an important driver of inequality which are overlooked in most data, but there is also an argument to exclude capital gains for owner-occupied housing. This is because unlike pure financial investments, where capital gains are a key return, owner-occupied homes are not simply an investment product. They fulfill a basic need (housing), and while a capital gain may be realised upon sale, most people selling are buying another house in the same inflated market – so they are really simply swapping one house for another, not gaining wealth through the capital gain.

The arguments here are complex, and excluding capital gains on the owner-occupied residence probably underestimates the differences between renters and homeowners. However, the compare-the-pair data above shows that even on the conservative estimate, homeowner-Greg’s extended income is 39% higher than renter-Greg, despite doing a similar job for the same pay.

Conclusion and Implications for Analysis

The most obvious conclusion from this data is that it pays, literally, to be a homeowner. However, it is also important to note that the capital income from accumulated voluntary super payments, and therefore the extended income differences between home-owners and renters, will grow over time as investment income increases with capital gains and further contributions.

The compare the pair exercise also has broader political economy implications. It provides further evidence that the standard statistics on income inequality which deal only with money income hide significant inequalities between people/households who appear to have similar incomes.

Further it supports the argument put by Lisa Adkins and others that capital gains and capital income, rather than employment income (which in the Gregs’ case is identical) are the preeminent drivers of inequality.

It is also evident in the comparison above that the tax system is failing its redistribution function. In this case the tax system not only does not tax aspects of tax capital income, the concessional tax arrangements applying to superannuation promote the inequality between these two people on the same money income.

Implications for Advocacy

Finally, this compare-the-pair exercise raises questions for my own work at SACOSS and the approach of many anti-poverty advocates who have traditionally focused on championing rental affordability and renters’ rights. This focus undoubtedly supports those likely to be most disadvantaged in the housing market. However, the data above shows that the fact of them renting puts renters on the wrong side of increasing inequality – which might suggest merit in the traditional conservative focus of getting people into home ownership.

Put another way, an anti-poverty agenda would direct policy (and money) to supporting rental affordability, while an equality agenda might direct policy and resources to enabling more people to own their own home.

Of course this is a false dichotomy. Policies such as increasing Commonwealth Rent Assistance address both poverty and inequality issues, while some people will never be able to afford to buy a house so “the Australian dream” policy options are limited (and expensive).

However, the analysis does highlight the fact that even if we secure tenants’ rights so we become Europeanised and life-long renting is becomes a potentially desired option (rather than a forced option), renters will still be disadvantaged. Perhaps most challenging, this analysis also applies to those in public housing, who will be better off than they would be in the private rental market, but will nonetheless be falling behind homeowners on similar incomes.

Clearly, while current policy directions to increase renters’ rights and the provision of rental housing are absolutely necessary, we also need to change tax and other policies to reduce the difference in financial outcomes between renters and homeowners.

The Landlord Myth and Housing Supply

The South Australian parliament recently voted against a Greens’ proposal to cap rent price increases to CPI. There were a few cold-war rhetorical flourishes about free market capitalism and an argument that governments should not dictate to landlords what they can and can’t do with their property, but the main reason the other parties opposed the proposal was a concern it would drive landlords from the market and reduce the availability of rental properties (see Hansard, from page 2571). Similar arguments are often also raised in relation to increasing renters’ tenancy rights because it might spook landlords into selling up and leaving the market. These are really statements of the great landlord myth: that landlords contribute to housing supply.

Given the parliament’s attachment and propagation of this landlord myth, I am forced to argue (yet again, and not originally) that most landlords do not create housing or add to housing supply. By definition, landlords are rent-seekers, in both the colloquial and economic meaning of the term “rent” (the later referring to unequal returns based on market positioning rather than productive value added).

Housing Supply

A house is a house, and (as long as it is occupied) it provides shelter and a home for one household, whether it is owner-occupied or rented out. When a landlord sells their house, it is either bought by another landlord (probably using the extra market power provided by negative gearing) or by a new home buyer (or another home owner, whose existing home will be sold eventually leading to a new home buyer). No new housing has been created by the ownership or the ownership change. There is still only one home for one household. In the later case, there will be one less rental property in the market, but also one less renter demanding a house.

Of course, when a landlord fixes up a derelict house and rents it out, or builds new rental housing, they are adding to the stock of housing. But most landlords simply buy an existing house. There remain the same X houses for Y households.

But while the government has bought into the landlord myth, it is still right that there is a problem of lack of rental supply. Rental vacancy rates in South Australia, that is, the number of rental properties being advertised as a proportion of all rental stock, is at historic low levels. In March this year, the vacancy rate in Adelaide was 0.5%, down from 2.1% in December 2016. The government rental bond data shows what this means in practice. In the last quarter of 2016 there were 15,630 bonds lodged for new rentals across the state, but in December last year the number was down to 12,725. This represents a significant decline in availability. In this context it is no surprise that rent prices are increasing well above the general inflation rate.

Housing Supply and Renters’ Rights

The problem with the government’s argument is not the analysis that lack of rental supply is driving a crisis in rental affordability, it is just that the problem is not related to rental rights. A key report from AHURI, one of Australia leading housing research bodies, shows a lack of an empirical link between renters’ rights and landlords entering or leaving the market. Other factors were the big drivers of landlord behaviour.

Of course this research referred largely to renters’ rights within the tenancy contract, and arguably a rent price cap (e.g. limiting rent increases to the general inflation rate), may be different because it is a direct impact on a landlord’s revenue stream. But is the result really different? If a rent cap means that a landlord decides their return on investment is insufficient, they can sell their house – with the zero net impact on housing supply noted above. The only short-term impact on rental supply would be if a landlord decided that the rent-increase cap meant the property was not worth renting out and they leave it empty. But it is a strange maths that leaves a landlord better off receiving no income from an empty house, rather than “settling for” $20 or $40 a week below what they wanted.

And in the long run? Yes, a capped revenue stream may discourage landlords buying houses to rent out – but that is only a problem if we believe in the landlord myth.

As the AHURI report concludes, when renters already have very limited rights:

“Where landlords or their representatives say it is too difficult and they will disinvest from existing private rental system dwellings, this should not be taken as a threat, but as a good thing: that is, the incapable and the unwilling exiting the sector, and thereby opening up prospects instead for new owner-occupiers or for differently oriented landlords—especially non-profit rental housing providers.”

Community advocacy organisation, Better Renting, put it a bit more bluntly:

“landlords who sell because they don’t want to comply with the law are probably pretty shit landlords to be honest, and we’re better off without them.”

Building New Housing

So the bottom line is that, if it is not renters rights driving a rental supply and affordability crisis, then rather than depriving renters of rights or leaving them exposed to market prices which are unaffordable and lead to stress, sickness and/or homelessness, we just need to build more houses.

This creates a further problem in that developers will use this market shortage to demand government support and handouts, or to change zoning restrictions or avoid environmental protections. This too is pot of profiteering from people’s need for shelter, but at least developers are building houses (although not always of a type or to standards we may want)!

I say this as I sit just a short walk from hectares of waterfront land “sold” to a developer for $2 so they could bulldoze heritage buildings and build a housing estate. Development. It is the sort of deal governments do when they are desperate for someone to build new housing. They will roll over and do almost anything, anything that is except actually build the necessary new housing themselves!

A saner alternative, one which was at the heart of South Australian development in a previous era but conveniently forgotten with the onset of neoliberalism, is to build public housing. Building public housing not only increases housing supply overall (and the community’s wealth) – it is a build-to-rent scheme which adds directly to rental supply putting downward pressure on rents across the market. As I noted in a previous post, public housing is also particularly important because it provides housing to those on very low incomes and most marginalised in the housing market.

The Scale of Building Required

In February this year, the state government announced new housing initiatives (mischievously titled A Better Housing Future – the previous’ government’s plan was Our Housing Future). A centre-piece of this was the promise to stop the sell-off of public housing and investment in building more public housing. This was a welcome turn-around, but calculations I did elsewhere showed that the promised 564 new public houses over four years would not be enough to keep pace with projected population growth. That is, even with the promised new housing, the proportion of South Australians in public housing would still decline.

To maintain the current market share of public housing and keep pace with population growth, South Australia would need to build 1,421 new public houses by 2025-26 – more than double the government’s plan. Even more challenging, to begin to rebuild public housing assets at the rate they declined in the preceding 4 years we would need to build around 3,600 new public houses – more than six times the current investment.

Conclusion

Unfortunately building public housing – or any housing – takes time, which means that the current rental affordability crisis is not going to go away quickly. However, that does not mean that in the interim we need to continue to punish renters or make them bear the costs of a market that does not work. Yet it looks like that will continue to happen as governments and much media commentary accept and propagate the landlord myth, a myth that enables landlords to leverage support for their interests without actually contributing to the housing supply needed to end the rental affordability crisis.

Who is providing low-cost rental housing?

An analysis of the recently published 2021 ABS Census data clearly shows that low-cost rental housing is provided predominantly through public and social housing, and provides another reason to argue for the importance of public housing for rental affordability. While much of the detailed microdata is not yet available, the following looks at the South Australian rental data as published in the Community Profiles and QuickStats version of the census publications.

The SA Rental Market

The census data shows that in 2021, 27.6% of South Australian households were renting (percentage unchanged since the last census in 2016), with a median rent in 2021 of $300 per week. The ABS (Table G40) divides these numbers by landlord-type as follows:

Numbers of SA Renters by Landlord Type: RE agent = 51% Public Housing = 15% Person not in same h/hold = 24% Other landlord type = 4%

The category of “landlord as a person not in the same household” comprises those renting from family members or other persons – which means that private house or unit renters constitute 75% of all renters, although around a two-thirds of them are not necessarily renting at market rates (hence we will see later a skew to low rent properties). The “other landlord type” “comprises renters in residential parks (including caravan parks and manufactured home estates), renting from employers (including government employees under the Defence Housing Australia), but represents very different tenancies and will not be considered in this post.

The key categories for this analysis are the rental properties managed by real estate agents, which can be used as a proxy for the market rate for private investor landlords, and public housing – although some comparison will also be done for community housing.

Provision of Low-Cost Rent Housing

While South Australia retains a proportionately larger public housing state by comparison with other states, it remains the case that private landlords own the majority of rental properties in South Australia. Yet, when we look at the rent profile of these properties, we see the importance of public housing in providing low-cost rental housing.

The ABS data (Table G40) records the number of households by landlord type in a range of rental price brackets. While these rental brackets are not as good as individual household data, they are enough to show key differences. The graph below shows my calculation of the profile of rental housing provision based on the proportion of houses in each rental price bracket provided by private market investors (acting through real estate agents) and by public housing. Clearly the vast bulk of very low-cost rental housing is provided by the public housing estate, and indeed 70% of the public housing estate is being offered at rentals below $200 per week.

By contrast, the private rental market (via real estate agents) accounts for the vast bulk of properties in the higher rental brackets. And even though these private landlord rentals make up a higher proportion of rental properties at a fairly modest figure of just over $200 a week (the cross-over point of the graph), this represents a much smaller proportion (just 8%) of the private landlord estate.

Line Graph: Profile of Rental Property Provision by Price and Landlord Type showing public housing dominance in the provision of low-cost rental housing

Another way to look at this is by comparison to the median rental of $300 per week – which sits in the $275 – $$349 per week bracket. As shorthand, we can consider the rental price brackets below that as being “more affordable” and the brackets above it as “less affordable” – although this is a gross generalisation which will depend on income. Quite clearly some of the “more affordable” brackets are still not affordable for those on low incomes.

But based on this description, the data shows that while private landlords using real estate agents account for 51% of all rentals in SA, they only provide 27% of the rentals in the more affordable brackets below the median rent. By contrast, public housing provides 15% of all SA rental housing, but 33% of the rentals in the bracket below median rent.

It is also worth noting that the rentals from “persons not in same household” account for around 1 in 5 of rentals below $200 per week (and 1 in 3 at $200-$225 per week), so clearly family subsidy is a significant factor in the low-cost rental housing market. However, those without family owning properties will be largely reliant on public housing or facing the more expensive private rental market.

This importance of public housing in providing the lowest rental properties is probably not surprising given the ideological shift to “public housing as welfare” and the Productivity Commission data showing the extent of public housing “subsidy” on market prices (see my previous post for discussion and critique). However, the profile of private landlord properties evident in the data here should at least make one question whether policies aimed at incentivising more private landlords are likely to help with rental affordability for those on lowest incomes.

Community Housing

Another useful comparison that can be made from this data is between public housing and rentals from community housing providers. This is particularly important given significant transfers of public housing stock to community housing providers in South Australia (including the transfer of over 1000 public housing properties in 2017-18). This transfer was driven by a mix of policy concerns from broad neoliberalism to simply lobbying around ideas of greater flexibility or community connection in the not-for-profit housing sector. And more cynically, the state government may have been shifting maintenance and other costs to the community sector or simply gaming Commonwealth Rent Assistance (which is payable but tenants in community housing, but not public housing).

The graph below shows the profile of public and community housing, but not as above (as a percentage of provision of housing in each brackets) because the data is dominated by the public housing estate which is 3 times larger than community housing. Rather the graph shows the proportion of each estate in each bracket.

Both public and community housing are loaded towards low-cost rentals and both have very few high-rental properties, but the community housing sector has a greater proportion of properties with higher rent than public housing. While 70% of the public housing estate is rented at less than $200 per week, the figure is 54% for community housing, and community housing has proportionately more of its rentals at above $200 per week. In both systems are generally based on a percentage of income, so the difference is partly a product of different rent caps in the community sector and a clientele with slightly higher incomes.

Comparison of Profile of Public and Community Housing showing provision of low-cost rental housing

Conclusion

This is just a quick snapshot based on one part of the recently released census data, and there are of course regional differences in public and community housing estates (see separate Briefing Note). However, the snapshot data does suggest the important role of public housing in providing low(er)-cost rental housing in South Australia (and it would be the same elsewhere). The figures do not suggest that more public housing would provide downward pressure on rent across the market. That argument could be carried by simple supply and demand economics: more supply would lower (or put downward pressure on) prices, but the data does suggest that private landlord investment (outside of family and less-formal rentals) is largely not providing low-price rental accommodation – or at the very least, under-performing in its provision. Added to my previous arguments, both here and at SACOSS, it is another reason to invest in public housing!

Rental Affordability Help: Comparing Public Housing and Commonwealth Rent Assistance

When it comes to rental affordability, the two main ways Australian governments provide assistance to those who would struggle most (or miss out on housing entirely) are through the provision of public housing, and through the payment of Commonwealth Rent Assistance (CRA) to households with Centrelink incomes in the private rental market.

Background

These programs are generally the responsibility of different levels of government. State governments provide public housing (although sometimes with federal funding), while the federal government provides CRA (although state governments also provide some cash-based assistance to renters). But the two schemes also represent very different philosophical or political economy approaches to housing support. Public housing is a direct intervention involving government provision of goods and services, while CRA is premised on the primacy of the market and private rental, with the government role simply to assist those on the margins.

To put it crudely, the former is a social democratic approach, the later a neoliberal one.

Unsurprisingly given this broader political economy, since the 1980s we have seen an increased role for rent assistance at the expense of investment in public housing. (The parliamentary library has provided a nice summary of the shift in the 1980s and 1990s). A comparison of how the two approaches to rental affordability assistance stack up (and for who) therefore not only has relevance for the policies themselves, but also has broader political economic implications.

The following comparison does not deal with important issues of renters’ rights, landlord behaviour, or the maintenance and condition of properties, but simply focuses on rental affordability – “following the money” at a number of levels. While the data is South Australian, the patterns are likely to be similar in other states.

Results: Rental Affordability and Costs to Government

The results can be summarised in a simple graph, noting that it refers only to public housing (i.e. government-owned and managed housing) and does not include community or other social housing.

Graph: Benefits and Costs of Public Housing vs CRA, 2020-21. Public housing has higher support for renters, costs government about the same as CRA in current costs, and less when capital gains are included. Numbers are in the table below.

The numbers are based on calculations made primarily from Productivity Commission data, supplemented by the SA Housing Trust financial statements, and are summarised in the table below. The rationale and detail are set out in the methodology section below, along with some caveats.

Table: Public Housing v CRA, South Australia, 2020-21. Summary data. The figures are available in the methodology section.

Based on these figures it is clear that public housing provides a higher level of support to tenants and gets renters out of housing stress. Further, public housing costs the government/taxpayer about the same as CRA in year-to-year expenses, and slightly less when capital costs and changes in asset valuations are taken into account.

These figures do not include, on the one hand, the opportunity cost of the upfront investment in public housing, and on the other hand, the full capital gains and land tax implications. There are some estimates of these below, but the figures get rubbery and are incomplete.

In summary though, the conclusion from the more concrete rental affordability comparison is simple and stark: public housing is better for tenants and for tax-payers.

Commonwealth Rent Assistance to private renters is important (and is currently too low), but even an increased CRA is no replacement for public housing. The fact that recent years have seen a chronic under-investment in public housing and a preference for support in the private market is another neoliberal own-goal.

Method and Explanation

Comparative Level of Support

The Productivity Commission (PC) data shows that in June 2021, some 26,804 SA public housing tenants were paying less than market rent (Table 18A.5). This was around 89% of all SA public housing tenants. That is, 11% of public housing tenants received no financial support for renting: they were paying the full market rate (and in theory, with efficient management the government should have been receiving a return on investment from these renters).

For the rest, there is a simple calculation of the level of financial support. PC Table 18A.5 estimates that for the week of 30 June 2021 the difference between total market value of rent for all public housing and the rent actually collected in South Australia was $3,483,000. Based on the number of tenant households paying less than market rent, this equates to an average subsidy of $130 per household (per week). (With higher average market rents, the figure for the whole of Australia is $192 per week).

By comparison, the maximum CRA at that time was $70.40 per week for an individual household (or $82.81 per week for a household with 2 children, going up to $93.52 for three of more children).

There are of course great intricacies in eligibility criteria and rates for CRA, and there are fundamental difficulties accessing public housing with long waiting lists, but on the basic comparison above, provision of public housing provides far greater level of support per household than Commonwealth Rent Assistance.

Implications for Rental Affordability

The provision of public housing is not only a more generous benefit to those who could not afford market rental, it makes a significant difference to the household budget. Public housing rent in South Australia is capped at 25% of household income, so by definition no public housing tenant should be in housing stress (based on the widely-used 30/40 rule: housing stress = being in the bottom two income quintiles and paying more than 30% of income for housing).

By comparison, calculations I did for a recent SACOSS Cost of Living Report showed that even with CRA, key Centrelink recipients would still be in significant housing stress. The rental affordabilty table from that report is reproduced below and is based on SA government data for median rental prices in the cheapest Adelaide suburbs of $300 per week for a 2-bedroom unit, and $400 for a 3-bedroom house.

Table: Rental Affordability for Low Income Earners, (Dec 2021). Table from SACOSS Cost of Living Update, https://www.sacoss.org.au/cost-of-living-49

Overall, ACOSS estimates that 45.7% of CRA recipients nationally are paying more than 30% of their income on housing as CRA has failed to keep up with increasing rents over recent years. Accordingly, advocates are calling for a 50% increase in CRA (alongside significant investments in public housing). However, on the figures above, even this would not be enough to get many households out of housing stress (as other income support increases are also urgently required).

Again, CRA fares badly in the comparison to public housing.

Cost to Government

The figures above might suggest that public housing is more expensive than CRA (because the support is more generous). However, this is not necessarily the case due to the rent paid and capital gains (which, as I have pointed out elsewhere in relation to private housing, is a game-changing income stream which is often ignored).

Current Yearly Costs

The Productivity Commission data (Table 18A.43) shows a net current expenditure of $10,361 per public housing dwelling (a figure in line with the South Australian Housing Trust financial statements (SAHT) for 2020-21 when capital costs are subtracted from expenses). However, calculating from PC Table 18A.5 which shows total rent collected in the week ending 30 June as $4,169,000, the rent collected equates to $6,730 annually per property (rent collected x 52 weeks, divided by 32,212 properties as per Table 18A.43). Deducting this rental income from the annual expenditure, the net current expenditure is $3631 per household.

The expenditure for CRA is simply the weekly rate of $70.40 multiplied by 52 weeks for the year. The total is $3,661, which means the recurrent cost of assisting one household through CRA is about the same as the public housing current costs above.

Including Capital Costs

The Productivity Commission data (Table 18A.43) shows an annual depreciation of $1,578 per property in South Australia – which equates to nearly $51m for the whole public housing estate (again, broadly in line with SAHT data). However, the Productivity Commission does not account for any capital gain.

By contrast, Note 5.2 to the SAHT financial statements includes the periodic revaluation of public housing rental properties with increases in 2020-21 of $69.6m in land value and $24.4m in buildings. This $94m equates to $2,799 per household when allocated across the 33,590 public houses (including State-Owned and Managed Indigenous Houses [which are included in the SAHT data, but not in the PC data used above]).

The difference between this capital gain of $2,799 and the depreciation of $1,578 per household results in a net capital gain of $1,221 per public housing household. This is not cash income, but represents a fair accounting of capital income based on the official data.

Subtracting this capital income from the net current costs to government gives the bottom line of public housing costs of $2,410 per household. Again, this is cheaper than the $3,661 yearly cost of Commonwealth Rent Assistance to one household.

However, this capital accounting is not complete – although in going further the figures get rubbery. For this reason, they are not included in the summary table above, but are discussed here.

The big drawback of public housing is the cost of the upfront investment to build the houses, or as the Productivity Commission describes it: “the cost of the funds tied up in the capital used to provide social housing”. While the PC suggests caution in interpreting the data, at Table 18A.43 it estimates this “Indicative user cost of capital” at $18,933 per year for each SA public housing dwelling – an imputed figure which dwarfs all other public housing costs (and would make CRA much more attractive to government).

Yet this accounting is one-sided and does not complete the picture because while capital costs are imputed, the capital gains are not included – and not even fully recognised in the SA Housing Trust revaluations of its rental properties.

The SAHT (Note 5.2) estimate of a total value of rental land and buildings of $7,121m at the beginning of the 2020-21 year, and so the $94m revaluation noted above represents only a 1.3% annual increase in the capital value of public housing assets. This was at a time when market analysts CoreLogic were suggesting a 17.9% increase in Adelaide housing prices. It is not clear why the capital revaluation was so low, but is perhaps based on accounting practice based on depreciated asset (book) value rather than changes in current market price.

That said, market prices are very volatile and uncertain, and both the Productivity Commission’s indicative user cost of capital, and any market valuations, require bold assumptions about interest rates and market behaviour. But if, or to the extent that the Productivity Commission’s imputed cost of capital represents a market value of public housing assets, it is equivalent to about 8.5% of the $7,121m public housing estate valuation. That is, when housing prices go up by more than about 8.5%, the government makes a net capital gain on public housing (or loss when less than that) even with the inclusion of the cost of capital.

Again though, I am not confident of this figure as a true market costing or representation of capital gain. If the market value of public housing properties is significantly higher than the book value, then a smaller capital gain is needed to balance the cost of capital.

Final Caveats

There are a two final caveats to the calculations above.

Firstly, there is no accounting for differences in land tax revenue to government from public or private ownership of rental properties. The SA Housing Trust financial statements show $139m in land tax equivalent expenses – which was 42% of their rental property expenses. While this is the government paying money to itself, it is legitimate accounting and necessary for a comparison to private market support costs – not least because if rental properties are left to market provision with government subsidy through CRA, the land tax take may be considerably less.

For instance, apportioned evenly across all public housing rentals, averaging the total land tax paid across all public housing properties gives a land tax bill of $4,179 per property. By contrast, if a property with the average (book) value of a public housing dwelling ($215,000 based on the $7,121m total valuation) were a private landlord’s only investment property, they would pay no land tax. Even if the private landlord owned 4 such properties, they would only pay $2,535 land tax – about 15% of the housing trust land tax bill for four properties.

It is impossible to calculate the extent of the difference in land tax income for government because it depends on private landlords’ individual circumstance, but rental housing in public hands clearly maximises land tax revenue. Accordingly, in the comparison of public housing costs vs CRA, public housing costs to government should theoretically take account of this land tax gain.

Finally, while the comparison is not a support for existing tenants or a cost to government, there is a difference in the impact of public housing and CRA on rental affordability more generally. CRA payments create no new housing, and while they assists renters into the market they also allow them to bid up rental prices because those renters have (slightly) better rental affordability. By contrast, public housing brings new supply to the market and puts downward pressure on market rents.

Given the above caveats, my calculations are incomplete, but even without precise cost-benefit calculations, the figures above that are available and robust suggest a strong case for public housing.

Massively Underestimating Inequality? The Problem of Housing Incomes

Just before Christmas the Australian Bureau of Statistics (ABS) published statistics on Personal Income in Australia for 2018-19. The data, based on income tax returns, provides a window on inequality – and unusually for the ABS, the data is individual rather than household-based.

The ABS summary data tells us that the ACT has the highest median income and Tasmania the lowest. The top 1% of income earners accounted for 9.5% of all personal income, while the top 10% took one-third of all income. As the graph below shows, it also tells us which local government areas have the highest median income.

Income Inequality by LGA

I was also interested to see some quirky South Australian patterns. Roxby Downs, with miners’ incomes and few pensioners, had a stand out median income ($95,196) – way more than the second highest local government area (Walkerville). SA and Tasmania also had fewer people in the highest income bracket (quartile), which partly accounts for the lower average income in those states.

Problems in the Data

However, despite such insights, this headline ABS data is incomplete and is arguably significantly underestimating inequality.

Most obviously the data is incomplete because it does not include those on very low incomes or government payments who don’t have to file a tax return. Accordingly, it is a very truncated income spectrum. Further, household income may look very different to personal income depending on whether there are one or more breadwinners. As the ABS notes, their Household Income and Wealth survey data is a much better base for analysis.

But there is a more fundamental problem (in both ABS data sets) that leads to underestimating inequality, and that is the treatment of housing income.

Housing is important in income terms because different housing tenures create differences in effective (actual purchasing power) household income. This flows through to very different living standards and chances of wealth accumulation. The two key issues, which are not captured in the basic income data, are imputed rents and capital gains.

Imputed Rent

Tenants pay rent to landlords for the use of a house (the provision of housing services) and this appears as income for the landlord. However, a home owner-occupier pays no rent, yet is clearly in receipt of a “housing service” – the provision of shelter and amenity. This issue has long been recognised as a problem in economic statistics. In national accounting, it is a problem because renting out an existing house would suddenly add income and “product” to the market, when in fact nothing more is produced – the house provides the same amount of housing service regardless of whether it is rented or owner-occupied.

The economist’s solution to this issue is to impute a value for rent – that is, assign a value of income as if the home-owner pays rent to themselves. This recognises the value of the housing service being enjoyed as in-kind income by the owner-occupier. In Australia’s national accounts, some 7.7% of Gross Domestic Product is the value of rent imputed to home owner-occupiers (my calculation from ABS data).

Theoretically, the accounts could go further and impute a value for the other services produced within that house (meals, cleaning, counselling, sex) – but that is another story (and a PhD).

However, in terms of housing income, the imputed value of the rent should be added to the income of home owner-occupiers to better reflect the differences in the purchasing power of income between renters and home-owners. This is similar to the common practice in poverty and inequality research of using “after-housing” income as the benchmark. In this case though, the adjustment happens on the income rather than consumption side of the household budget.

We will see below the potential difference this can make to inequality data.

Capital Gains

The second major problem in the basic income distribution data is that it does not include capital gains. Total income includes wages and all employment earnings, income from unincorporated businesses, and investment and superannuation earnings, but not the increase in the value of capital assets.

In an earlier post, I noted a study by Lisa Adkins and others that argued that asset price inflation means that capital gains, capital income and inter-generational transfers are the preeminent drivers of inequality. Further, the authors argue that housing, more than any other asset class, is driving the dramatic increase in net wealth among high-income households. This is so important that they present a new categorisation of class in Australia based on asset ownership.

Of course, there are cash flow problems and costs/barriers to realising (spending) these non-cash incomes, but the fact remains that if renters and home owner-occupiers spent the exactly the same on non-housing items each week, the home-owner would be saving more and accumulating wealth which the renter would not. Their effective incomes are quite different.

Combining Income and Wealth Data

Again, we will see below the potential difference that including capital gains as income could make to inequality data, but including this (and imputed rent) also begins to address a key problem common in presentations which treat income and wealth inequality as different data sets. As I have previously posted, many low-income households do not have low wealth, and some high-income households do not have high wealth – and there are policy problems in shaping policy responses simply around low income.

The ABS did significant work on these issues in 2013 and developed a concept of low economic resource households (defined as those simultaneously in the lowest 40% of income and wealth) – and also included imputed rent in income calculations. However, it was a sideline to the main income data and the ABS has not really continued this work. Further, the concept is clunky to use and has not really been taken up by anti-poverty or inequality researchers (for instance, the World Inequality Database and the flagship ACOSS inequality report both largely present income and wealth data separately and do not include non-cash incomes).

That said, the ABS does still publish stand-alone estimates of imputed rent, and also household wealth from which capital gains can be calculated. Incorporating this non-cash housing income into income data may then be one step in integrating wealth and income inequality data into something more usable.

The Average Renter/Homeowner

The impact of the above can be seen in the following calculation, which is based on the baldest averages in the ABS Household Income and Wealth data for 2017-18.

The average household disposable income for homeowners (both mortgagees and full-owners[1]) was $1,972 per week, by comparison with $1,508 for all renters. In this standard comparison, the average homeowner earned 1.3 times more income than the average renter.

According to the ABS data, the average net rent imputation (that is, imputed rent minus housing costs) was $248 per week. This would take the average homeowner’s enhanced income to $2,220 per week – or 1.5 times that of the average renter.

The ABS data also shows that the average value of owner-occupied dwellings was $755,000 in 2017-18. Two years earlier, it was $673,000. Assuming that most of that $41,000 a year gain was price inflation rather than improvement in housing stock, that equates to $788 per week in capital gains income. This equates to 40% of the household income of the average home-owner (reinforcing the importance of asset price inflation).

The table below shows the impact of both the imputed rent and capital gains adjustments to the income of the average home owner-occupier. Total income for home-owners increases to $3008 per week, basically double that of the average renter.

Table showing Average Income + Net Imputed Rent + Capital Gain = Total Income

Clearly, the inclusion of non-cash housing income for owner-occupies significantly changes the relative incomes between the average home owner and average renter. It is another reason to argue that issues of housing affordability are felt most acutely by renters. While even on the raw ABS data it was possible to say that renters on average earned less than home-owners and spent proportionately more than home-owners on housing, the figures above show that the real situation is even more pronounced and more unequal.

Research Agenda

There is a caveat to the above because of the limitations of adding 3 separate averages (income, imputed rents, capital gains) and holding all other incomes/circumstances equal. It is order-of-magnitude approximation of the impact on inequality data, rather than a real estimation.

What is really required would be to use the ABS microdata to do this calculation for each household to produce a new total income data set. This could be made more complete by including asset price inflation of non-housing capital assets, and counter-balancing with an imputation for “social transfers in kind” – that is, the receipt of public services such as education, public health care, child care subsidies as well as a range of rebates and concessions.

From there a new income continuum could be constructed based on this total income, and then the standard income inequality measures could be applied to that. For instance, it would be possible to calculate a Gini coefficient, income percentile ratios and income shares for the top 1%, 5%, etc using the new income data.

Pretty clearly from the above, many home owner-occupiers would find themselves in much higher income brackets, while renters would be even more clustered in the lower income brackets. But I think that is the reality, that renters in effect have far lower incomes and much tougher cost of living struggles than home-owners (particularly non-mortgagee owners).

Obviously, the total spread of incomes would also be much greater, which I think would give a much truer picture of inequality in Australia.

Unfortunately though, while all this data is in the ABS Household Income and Wealth dataset, I don’t have the technical expertise to crunch the microdata numbers. Any volunteers?

[1]              The ABS presents this data separately, so I have combined them by multiplying the income by number of households in each category, and dividing the sum of both by the total number of households.