05 May, 2022 To make housing affordable, property prices need to fall, hurting many Australians with big debts
“Let’s make housing affordable”. It’s a catchphrase that federal politicians in recent decades have repeatedly used in their pre-election pitches, and which current major party campaign pledges are centred on.
Over the past four decades, governments have thrown money at first-time buyers under the guise that it will make housing more affordable.
While those who got the grants may be grateful, many economists argue it’s simply fuelled house price growth and made it harder for another generation of young people to buy a home (or at least do it without the backing of their parents).
A report released this week by think tank Per Capita shows the rate of home ownership is declining rapidly, especially among those under 40.
On current trends, it estimates that fewer than 55 per cent of people born after 1990 will own a house by the age of 40, compared to a historical high of almost 72 per cent.
But anyone who talks about making housing more affordable also needs to address the worrying flip side – falling house prices for Australians who are already in the property market and have a mortgage.
Two-thirds of Australians own their home, or more than one home, although most of them share ownership with their bank.
Per Capita notes that the proportion of outright home owners has shrunk by a quarter in the 20 years between 1997-98 and 2017-18, from about 40 per cent of the population to 30 per cent.
On the most recent data available, out of 10.5 million dwellings in Australia, about 37 per cent of Australians are owner-occupiers with a mortgage, about 29.5 per cent own their home outright, 27 per cent rent from a private landlord, and 3 per cent rent from state or territory housing.
So, can we make housing affordable without sending house prices tumbling?
With interest rates starting to rise from rock bottom, improvements to affordability from cheaper debt look like being history.
Like other subsidies, grants or tax breaks that added to demand, cheaper debt only tended to push up home prices and make housing less affordable anyway.
That means it’s all but impossible to genuinely make home ownership cheaper without lowering house prices.
The question then becomes, what policy changes can moderate house prices without tipping too many Australians into mortgage stress and causing them to lose their homes?
How consecutive governments made housing unaffordable
Per Capita notes that over decades we have witnessed the “financialisation of housing”: the great Australian dream of owning a home changed from being a place of essential shelter and became regarded as an asset to create and grow personal wealth.
This has happened due to several factors, the first of which was deregulation.
Since the early 1980s, regulations that set limits on how much and to whom banks could lend to have been wound back.
Another factor that helped fuel housing demand and contributed to deteriorating housing affordability was generous tax breaks that primarily benefit wealthy investors.
Economists argue tax rules that fuel speculative buying include allowing for negative gearing against property (reintroduced by the Labor Government in the late 1980s shortly after the same Hawke government had abolished it), and the 50 per cent capital gains tax discount (introduced in 1999 by the then Howard government).
We know these housing tax breaks well, because Labor tried to reduce them at the 2019 election. And some argue that because the party was politically punished for it, that led to the Labor ditching those policies late last year.
Instead, in recent weeks, both major parties have been campaigning heavily on making housing affordable, but their policies – focused on grants or equity schemes that help younger and lower-income Australians get into the housing market – may, in fact, do the reverse.
The Morrison government’s most recent announcement is the Home Guarantee Scheme, which supports first home buyers to buy a property with a deposit as low as 5 per cent. History suggests that subsidies like this have had the opposite impact and further fuelled house price growth.
Meanwhile, federal Labor has promised, if it wins government, to slash the cost of buying a home for 10,000 low- to middle-income earners a year, via a “shared equity” scheme.
The scheme would basically mean that the government buys 30 or 40 per cent of a property with the buyer. But again, this could also simply add fuel to an overheated housing market by helping more people to compete for the homes on the market.
Value of Australian property nears $10 trillion
When the COVID-pandemic hit in early 2020, economists were predicting house price falls of between 10 to 20 per cent.
But government pandemic-support measures – including first home buyer grants, the $25,000 HomeBuilder grant and the move to allow Australians to withdraw $20,000 of their superannuation — helped increase demand for homes and sent prices skyrocketing.
As Per Capita’s report notes, in the two years since the onset of the COVID-19 pandemic, median house prices in Australia have risen 31 per cent.
The value of Australian residential property increased by $2 trillion, to more than $9.9 trillion last year, with average houses in both Sydney and Melbourne above the million-dollar mark.
In just six months, between February and September 2021, the median new mortgage increased by $80,000 — more than one-and-a-half times the average annual income.
Australian households are among the most indebted in the world. Since the 1990s, house prices have risen from 2.5 times annual household income, to more than six times today.
And it’s not just a problem for young Australians. The proportion of home owners aged 55 to 64 years still owing money on mortgages has tripled from 14 per cent to 47 per cent over the past 25 years.
With Tuesday’s interest rate rise, and more rate hikes expected to follow in the coming months, almost 300,000 Australians who over the past two years borrowed six times their income or more (some with deposits of less than 10 per cent), are at risk of defaulting on their home loans.
As house prices have risen much faster and higher than wages over the past 20 years, there has been a clear rise in the number of owner-occupier households in mortgage stress.
In Per Capita’s report mortgage stress is defined as 30 per cent of pre-tax income going towards servicing a mortgage for a low-income household (bottom 40 per cent).
It cites data from Martin North’s Digital Finance Analytics that shows mortgage stress roughly doubled between the millennium and the 2008 Global Financial Crisis, from just over 10 per cent of households to about 20 per cent.
Of the top 20 areas of mortgage stress across the country, 12 are Labor held seats and seven are Coalition held. So that begs the question, is there a genuine political desire to address the problem?
Proposals to introduce limits on borrowing and wind back tax breaks
Most economists and housing experts agree something needs to be done to address housing affordability.
What they disagree on is the best policy pathway to make housing more affordable.
Monetary policy – that is interest rates – can play a part in cooling the housing market.
And while the Reserve Bank has moved to lift rates to ease inflation, rising rates alone are not going to help housing affordability as they increase repayment burdens.
That then leaves policy changes that could, if introduced carefully and gradually, make a difference.
There are some who advocate more drastic changes to end the Australian habit of allowing households to take on more and more debt.
Steve Keen, who is currently campaigning for a seat in the NSW Senate, says one simple policy change would be to restrict negative gearing to investors that rent out properties with long-term leases of five years or more.
Another change he suggests, that is perhaps more complicated to implement, is to set limits on the maximum amount that a person can borrow to buy a property, to a maximum of a multiple of that property’s potential rental income.
Mr Keen suggests the ratio start at its current level of about 20 to 1, reducing over several years to 10 to 1.
That would mean a property expected to rent for $1,000 a week would have an initial limit of $520,000 for the maximum amount of debt that anyone could take out to buy it.
“At the individual level, this would stop us ‘shopping around for the best loan’ and motivate us to save money for a deposit instead,” Mr Keen argues.
“The person who would win the house-buying contest under our scheme would not be the one with the biggest debt, but the one with the biggest savings.”
Nevertheless, Mr Keen acknowledges such a policy change is “going to be a bit dangerous”, as it may have the impact of landlords with multiple properties selling off their homes, causing house prices to tank.
But he argues that, for most people, it reduces debt and increases equity: “It’s the leveraged speculators who are in trouble, not the home owners,” Mr Keen suggests.
Executive director of think tank Per Capita, Emma Dawson, advocates a more commonly proposed solution — for housing tax breaks to be wound back.
Ms Dawson, who has also taken a tilt at politics but last year withdrew from federal Labor’s preselection contest for the seat of Melbourne after voicing her disappointment over the party’s decision to support tax cuts for high-income earners, says the capital gains tax discount has been encouraging speculative buying.
She says, while negative gearing is not currently having a huge impact on house prices (because interest rates, while rising, are still very low), the CGT concession is problematic.
“We now have the highest levels of household debt in the world, as a result of tax policy settings that encouraged people to put their money into property,” Ms Dawson says.
“That’s also limiting investment in more productive parts of the economy.”
Ms Dawson argues that, unless you are an investor, the property market is not creating real wealth for most Australians.
“If your house price goes up, you don’t get any more disposable income out of that unless you refinance and take on more debt, or you sell, but then you have to buy another property, which has also gone up in price,” she says.
“No-one wants house prices to drop precipitously. But what we want is for the housing market to be more regulated so that the correlation between wages and incomes and housing affordability is bought back into line.
“At the moment, unless you inherit capital, you cannot buy a house, or unless the government goes in with you on a shared equity scheme — as Labor’s just proposed, which is basically like the ‘Bank of Mum and Dad’, for people that can’t have the ‘Bank of Mum and Dad’.'”
Do policies that increase housing supply work?
Ms Dawson also argues that social and affordable housing construction has dived over the past 30 years, and it’s time to lift the availability.
“We’re simply not building enough public housing and community housing to meet the needs of the nation,” she argues.
Economist Stephen Koukoulas, who was previously a senior economic adviser to former prime minister Julia Gillard, agrees that tax breaks like negative gearing and the CGT discount need to be wound back and that governments should stop handing out first home buyer grants, which lift demand.
But, in his opinion, the best way to make housing affordable without denting house prices too much is to increase housing supply. That is, build more homes where people want to live, with the infrastructure needed for people to move there.
“Have — through the Commonwealth, but also state and local governments — a strategy to build properties, up and out,” he says.
“If we build 1.1 million dwellings, you’d get a bit more supply, they will take some of the pressure off housing, and you will get the correction occurring that way.”
Mr Koukoulas is far from alone in that view among economists, with former Reserve Bank economist and now Centre for Independent Studies researcher Peter Tulip strongly advocating reduced zoning and planning restrictions that he says artificially limit supply and add hundreds of thousands of dollars to the cost of homes.
In a recent blog, Dr Tulip says planning restrictions reserve most urban land for low-density detached housing and in the few spaces where apartments and townhouses are permitted, height and other restrictions limit the number of dwellings.
He says these restrictions reduce supply and hence raise prices, further dividing the haves and have-nots.”Housing policies ensure continual wealth gains for current home owners while leaving renters and potential buyers locked out of the market,” Dr Tulip says.
“For both equity and efficiency reasons, we should be encouraging higher-density housing instead of stopping it.”
The view that we need to increase supply and ease planning restrictions has long been advocated by the property industry, but despite a surge in home building over recent years, housing is increasingly getting out of reach for many.
Fixing the problem perhaps requires a combination of policies that address both supply and demand.
That is, increasing housing supply in areas where people want to live and social housing for people who really need it, but also ensuring tax breaks don’t keep flowing to the wealthiest households while rental and mortgage stress is concentrated among lower and lower-middle-income households.
Owning one’s own home has long been the Great Australian Dream. But that dream is fading quickly. There need to be changes to the system to make it a possibility for all, without severely hurting those who took out big mortgages.