Gerard Kelly, ‘Housing Affordability in Australia’ [Australian Fabians Inc]


		National Aust Capital Territory New South Wales Queensland South Aust Tasmania Victoria West Australia
		Home Resources Event Papers 2009 Gerard Kelly, ‘Housing Affordability in Australia’ Australia in the Twenty-first Century faces no shortage of serious challenges, but for many Australians today it is housing affordability that presents the most immediate concern. Until relatively recently, the fact that most working Australians could realistically aspire to home ownership has been a hallmark of the nation’s reputation as a decent, fair-go society for all. From the 1950s until the early 1980s , average house prices in the capital cities were steady at around three times average yearly earnings, increasing to about four times yearly earnings by the mid-nineties. Under the last Coalition government however, housing prices exploded to between seven and eight times annual earnings, making Australia’s housing affordability the lowest in the developed world. Month by month, these dizzying prices are imposing an effective tax on millions of Australians in the form of inflated rents and mortgage repayments, recently reaching an all-time high as a percentage of household income. For many who grew up during the Howard years the prospect of home-ownership has become a remote fantasy. Worse is the growing number of Australians who cannot even afford the basic necessity of a roof over their head. Along with the previous government’s wholesale neglect of public housing, rental costs are a direct cause of the “national obscenity” (in Prime Minister Rudd’s words) that 100,000 Australians go homeless every night. Some may argue that the housing market, given time, will correct itself – that the current downturn will restore prices to a more reasonable equilibrium. Sydney prices have already fallen from their peak, and the coming year is likely to be a cold one for markets across the country. But unfortunately the issue is not that simple. As the recent (belated) Senate Committee Report on the matter described, many of the causes of sky-rocketing prices have been “structural, not cyclical”. They include strong population growth, a reduction in average household size, and shortfalls in the supply of well-located housing resulting from (amongst other causes) high developer costs and zoning regulations. Without addressing supply shortages, an economic downturn is likely to affect incomes more than housing costs. However, some of the central causes of the current crisis were excluded from the Senate Committee’s terms of reference (although they were touched on in the final report); the market-warping taxation policies of the Howard government, and the debt-promoting monetary policies that have been the dominant economic paradigm in the West for decades. Seen in this light, the housing affordability situation is actually part of a broader global problem; the ballooning of private debt to historically unprecedented levels, and the shift in investment from productive capital to the type of speculative practices that led to this year’s worldwide crash. Western public policy since the 1970s, and especially under the surplus-fetishising Howard government, has emphasised the use of central bank interest rates, rather than government investment, to stimulate growth during economic downturns. Rates have usually been set in reference to a 2-3 percent consumer price inflation target, excluding inflation in land prices and ignoring private debt levels. In the low-inflation environment of the late 1990s and early 2000s, rates in Australia and other developed countries were seldom above 6%, and were especially low between 2001 and 2006. It is now widely recognized that the maintenance of such historically low rates during a period of economic expansion, along with the loosening of credit standards by banks and the relaxed attitude of consumers toward excessive borrowing, were key factors in inflating property bubbles in many countries. In Australia the situation was exacerbated by a combination of negative gearing and the 50 percent capital gains tax discount introduced in 1999, both regressive taxation policies that disproportionally benefit those with multiple properties. These policies, combined with the easy credit of the time, hugely increased the speculative demand for housing, with residential property viewed by many as a riskless investment. While the resulting boom in property prices certainly increased the net worth of many home-owning Australians, it was prosperity built on sand; an exponential increase in private debt from around 80 percent of GDP in 1995 to a recent peak of 165 percent. It is this huge debt burden that makes the housing issue such an intractable dilemma for the new government; were the housing market to collapse to historically ‘affordable’ levels, it would leave many Australians paying off mortgages well above the value of their houses, placing deflationary pressure on the whole economy. Recent policies such as the increased first-homebuyers grant seem aimed more at propping up the market than seriously addressing affordability, and stem from the political need to prevent prices falling in nominal terms. This need dictates that a reduction in real market prices will have to be a gradual process, meaning that in the short term quality public housing on a large scale must be made a priority. Beyond that, several policy options are immediately obvious. Capital gains tax cuts and negative gearing ought to be phased out via a grandfathering process, or at least limited to new properties. Zoning regulations and land taxes should be reformed to encourage greater density, rather than the type of urban sprawl that transfers housing costs to transport costs. The government must initiate a major public investment in ecologically friendly, higher-density housing, both increasing supply and stimulating the economy during the current downturn. Growth in regional centres should be encouraged through a combination of tax incentives, subsidies and State government decentralization to relieve pressure on the capital cities. Finally, bank lending practices need to be subject to greater oversight, and the overlooked matter of financial literacy absolutely must become part of school curricula. None of these suggestions are radical, but they do involve a necessary re-examination of basic attitudes toward the relative merits of private verses public debt, and the dubious wisdom of entrusting basic necessities to the invisible hands of a manic market. Housing affordability represents a crucial test for Australia’s new government. Blaming Howard is easy, but can only work for so long.