An affordability time bomb?

The fuse was lit in the early 2000s, as housing affordability quickly began to deteriorate across Australia. But the fuse is a long one, and the real damage may not be felt for another 20 or 30 years when a generational change makes itself felt across Australian society. If the predictions are right, it could be very painful.

That there is a housing affordability problem in Australia should be beyond doubt. This issue is something that ought to be separated from movements in broad housing markets – typically measured by changes in median prices of established houses – because the affordability problem is not universal. Instead, it is felt most by young families in the early stages of family formation, and who are in average income brackets, trying to enter the housing market.

Making the bomb

For these households, the last decade has seen the price of new housing escalate rapidly – well ahead of any increase in their household incomes. Driven by restrictions on new land supply, exacerbated by the rapid imposition over a few short years of increasingly usurious upfront levies, and worsened by a dysfunctional and counter-productive planning system which adds costs and delays for no measureable benefit, the cost of new housing has been forced beyond the reach of many traditional purchasers. I am not talking here about the median price based on established houses in settled areas but the cost of new land for housing at the fringe. They are quite different markets.

These younger and typically lower income households are increasingly deferring their decision to buy a home of their own, either waiting for a change in their financial circumstance or waiting for prices to fall. They may be waiting a long time because what needs to happen for prices of new housing to fall is a wholesale reform of planning regulation and infrastructure financing. In short, less bureaucracy and lower taxes. Don’t hold your breath. The Bligh Government’s recent budget offer of a $10,000 grant for any new housing purchases under $600,000 is tokenism in the broad scheme of things. Plus it’s only 6 months worth of tokenism.

For evidence of the impact of these failed policy experiments, you need look no further than the growth in the cost of new land for housing. According to the UDIA’s 2011 State of the Land Report, the cost of a typical block of land in south east Queensland has leapt from around $80,000 at the beginning of the decade to around $220,000 by 2010. That’s almost a threefold increase in price. In the Brisbane Statistical Division – which takes in surrounding local authority areas where much of the land supply is located – new lots grew from $78,000 to $215,000 but shrunk in size over that time from 705 square metres to 615 square metres, meaning the cost per square metre jumped from $111 to $350 – a 215% increase. Average weekly earnings in that time grew from $800 to $1200 – a 50% increase.

There are some economists who still point the blame for high land prices at a demand side thirst for land, fuelled in part by high levels of population growth and low costs of debt. But that story ignores the underlying cost-push pressure on land, imposed directly by regulatory mechanisms. The UDIA report also identifies that the land acquisition cost itself is only $60,000 per lot for a typical city fringe subdivision. (That figure itself would be lower if there was more competition in the supply of land). But that $60,000 is doubled after taking into account the cost of preparing the land for the market (development works), then add the cost of government levies ($39,000 per lot), GST ($20,000 – which is money for the State Government remember), stamp duty and land tax and other costs, and you’re up to $200,000. A significant chunk of that $200,000 number - $39,000 in levies, $20,000 in GST, $5,200 in stamp duty and land tax, and $12,000 in finance costs – is directly attributed to government and much of it delivered in the past decade. Finance (holding) costs, for example, are directly linked to the interminable delays in getting subdivisions approved – which have gone from a number of months to several years in that space of time.

Making the fuse

So with prices of new land being pushed up faster than the capacity of its typical consumers to pay (that is, younger and lower income households in the early stages of family formation), we get the inevitable result: lower levels of home ownership.

According to a recent and I think worrying report by REST Industry Super, one in four Australian households by 2036 will be retiring without owning their own home. That’s a fall from 85% retiring with their own home today, to 75% in 15 years’ time. Home ownership of Australians under 35 years of age has fallen from 45% in the mid 1990s to around a third today, and that reduction in home ownership will only work its way through the demographic cycle, as the REST report identifies.

But what’s worse is that alternate future savings aren’t what they could be. The same report notes that median superannuation fund balances for people aged 55 to 64 are a miserable $70,000.

Now do the maths here and if you’re a policy maker with a long term view you should start to worry. In 15 to 20 years time, we may have a greater proportion of the population entering retirement and not holding title to their own home. Plus, superannuation balances are nowhere near what’s needed to fund these people in their retirement years. The ageing of the population is going to mean more people in retirement relying on taxpayer support (the current boomers) but they are likely to be followed by another generation entering retirement with even less financial independence than their predecessors.

If you think that superannuation ever stood a chance of taking the place of the pension or aged welfare in the future, think again. And the situation’s been made worse because we’ve denied a larger chunk of the current young population the chance to save for their own future via home ownership, by deliberately increasing the cost of new housing supply through introduced regulatory and tax measures.

Adding more combustible material

Now if all this wasn’t bad enough, we’ve now got the anti-growth provocateurs claiming that our rates of population growth aren’t sustainable, and that we need to effectively halt growth or the sky will fall in (or some equally nonsensical doomsday scenario).

The ‘sustainable’ Population Minister Tony Burke recently released a population plan which said nothing about future population and entrepreneur Dick Smith continues to wage his campaign for low or no growth in Australia. With politicians running for cover and Dick pushing himself in front of news cameras, it was left to Bernard Salt to point out that, if we now choose to slow our population growth by reducing immigration, we reduce our productive taxpayer base and effectively kneecap our economy. Look what falling population growth (now at a twenty year low) is doing to a wide range of economic sectors in Queensland – from airports to construction to property – for an insight into what a low growth or no growth future might be like. Bernard’s articles here and here on population growth are worth reading if you haven’t done so yet.

The bottom line is a rapid slimming of the population bulge of young working age Australians will mean fewer taxes for the non-working Australians in the future. And in the future, if fewer of those Australians enter retirement without the title to their own home, or do so still holding a large mortgage because the upfront costs and mortgage size were excessive and their entry into the market deferred, there’ll be less capacity to self-fund retirement. Super nest eggs of $100,000 won’t go far – figures of five or six times that are what’s needed.

Ka-boom?

The shame of it all is how unnecessary the current policy settings are. Despite the clear damage being done to the current generation of new entrants and young families by deliberately increasing the cost of new entry level housing, and the increasing reports of mortgage stress and defaults in the face of mortgage overburden and cost of living increases (and yes, imagine the collateral damage we’ll see with a carbon tax), policy makers blindy carry on citing untested and unproven ideology.

If you ever wanted an example of the sort of deranged policy speak that passes for town planning in some circles today, have a read of this tirade by a Queensland academic, suggesting that the ULDA’s involvement in low price housing at Flagstone is somehow a reckless return to ‘1960s style sprawl.’ Typical of many similar ideologues, the author makes no mention of the affordability issue and is totally removed from market needs of young families.

Left unchecked, today’s policy settings will continue to exert unnecessary cost pressures on new housing. It will deter many from the market because they simply cannot afford it. Or they will defer their entry into the market, still with low deposits, and find themselves retiring still with a mortgage and a miserable super fund balance, and a relatively smaller society of working taxpayers who will resent any further burdens on their wallets to pay for someone else’s aged pension.

This is something that the highly paid academics may not get. They may be planning their second investment home, and a generation of highly paid bureaucrats may face retirement with lovely super fund balances and a tidy property portfolio. In the process, we may have created two classes of Australians – those with property (and probably quite a bit of it), and those without.

Personally, I don’t think that’s a pretty picture. And how ironic that this is potentially the future we now face? It was almost 70 years ago that Robert Menzies gave his ‘forgotten people’ speech. A lot may have changed in that time, but much of what he had to say then rings loud and true today:

I do not believe that the real life of this nation is to be found either in great luxury hotels and the petty gossip of so-called fashionable suburbs, or in the officialdom of the organised masses. It is to be found in the homes of people who are nameless and unadvertised, and who, whatever their individual religious conviction or dogma, see in their children their greatest contribution to the immortality of their race. The home is the foundation of sanity and sobriety; it is the indispensable condition of continuity; its health determines the health of society as a whole...

The material home represents the concrete expression of the habits of frugality and saving "for a home of our own." Your advanced socialist may rave against private property even while he acquires it; but one of the best instincts in us is that which induces us to have one little piece of earth with a house and a garden which is ours; to which we can withdraw, in which we can be among our friends, into which no stranger may come against our will. If you consider it, you will see that if, as in the old saying, "the Englishman's home is his castle", it is this very fact that leads on to the conclusion that he who seeks to violate that law by violating the soil of England must be repelled and defeated.

England may have lost its chance with widely available home ownership, but is it too late for Australia?