What we earn.

Discussions about housing affordability focus almost exclusively on the price of the real estate, movements in which are monitored by multiple organisations on a seemingly daily basis. There is comparatively little discussion about people’s incomes, which are equally as important as prices in determining what can and can’t be reasonably afforded. The income profile of what most Australian’s actually earn paints a sobering picture which could more often be taken into account in debates about housing and affordability.

It’s becoming fashionable again for business lobbies to complain about Australia’s high wage structure. It explains, they’ll argue, why we lost Holden, Ford, Toyota, and (almost) Qantas, among other things. And yes, Australia’s wages are high by competitor standards - but so are our costs. One of the most fundamental of needs, along with food and clothing, is shelter. And it’s the cost of shelter relative to incomes which has been stretched to beyond reach for a large proportion of young Australians.

Reducing minimum wages or reducing wage growth further, if at the same time allowing housing costs to further escalate, will only make this situation worse. Arguably, if we could substantially reduce the cost of supplying new housing, this would relieve upward pressure on wages and work towards improving our global competitiveness – along with repairing living standards for working and middle class families, rather than eroding them.

First, here are some of the facts on the infrequently discussed income side of the equation. (I am again indebted to the team at Urban Economics for making these available. These are top line numbers only: if you want more detailed analysis, please contact Kerrianne Bonwick).

Nearly two in three of all Australians earn less than $52,000 per annum. It doesn’t much matter whether it’s Brisbane, Sydney or Melbourne; the proportion is roughly the same.  It’s not much. Slightly more than another one in every eight earn from $52,000 to $78,000 per annum. Roughly eight in ten Australians earn less than $78,000 per annum.

Personal Incomes

	Brisbane	Sydney	Melbourne
< $52,000	64.4%	62.8%	65.4%
$52,000-$78,000	15.0%	13.8%	14.1%
$78,000 to $104,000	7.0%	7.2%	6.4%
> $104,000	6.3%	8.2%	6.5%
Not Stated	7.2%	8.1%	7.7%

Source: Urban Economics

Problem? It is if you’re trying to buy into the housing market. Take a modest house of say $400,000 (very modest depending on location). A worker on $50,000 – and these represent nearly two thirds of all workers remember – is facing a price multiple which is 8 times their gross pre-tax income.  Basically, two thirds of us are stuffed in terms of affording even a modest $400,000 property if we weren’t already in the market. A more reasonable price multiple of say 5 times income would require an income of $80,000 per annum or more. But there are less than 15% of Australians who fit this category.

But wait, shouldn’t we count household, as opposed to personal, incomes? A good point, particularly for younger families and young couples, where dual incomes are the norm due to necessity.

But even based on combined household incomes, a third of all households earn less than $52,000 per annum. Another 14% to 15% earn between $52,000 and $78,000 and another 11% or 12% earn between $78,000 and $104,000. A reasonably healthy 30% of all households bring in a combined $104,000 per annum or more, but seven in ten bring in less than that.

Taking our modest $400,000 home again, and  roughly half of all household incomes fall short of the $80,000 mark required for a price-to-income multiple of five. For one in three of every households, their combined income means a price to income multiple of eight times. They are pretty much stuffed, still.

Household Incomes

	Brisbane	Sydney	Melbourne
< $52,000	32.8%	32.2%	34.3%
$52,000-$78,000	15.5%	14.1%	15.5%
$78,000 to $104,000	12.3%	11.3%	11.8%
$104,000 - $156,000	18.1%	18.0%	17.1%
$156,000 - $208,000	7.7%	8.7%	7.3%
> $208,000	3.6%	5.5%	3.8%
Not Stated	10.1%	10.3%	10.4%

Source: Urban Economics

Hang on, isn’t it more relevant to focus on the demographic that’s more likely to be trying to get into the property market, because older people and retirees, who already own or are paying off homes, may skew the figures? Absolutely: this is the key demographic, especially if you’re a developer of new detached housing product - which is what this cohort mainly wants to buy to raise a family in (as opposed to the apartment they might rent while pre-children).

Personal income profiles of the 25-34 year old age group are pretty much in line with the Australia wide picture. More than half earn less than $52,000 and roughly eight in ten earn less than $78,000 per annum, which means eight in ten of this age group – who are at the peak of their family formation potential – would be faced with a price multiple of more than 5 times incomes on a $400,000 property, and more than half would be faced with a price multiple which is eight times their income, or more.

Personal Incomes 25-34 year olds

25-34year olds	Brisbane	Sydney	Melbourne
< $52,000	55.2%	52.9%	56.2%
$52,000-$78,000	23.1%	21.7%	22.9%
$78,000 to $104,000	9.3%	10.0%	8.4%
> $104,000	5.6%	7.4%	5.4%
Not Stated	6.8%	8.0%	7.0%

Source: Urban Economics

None of this is great news. For developers trying to provide affordable new housing in new greenfield estates in urban fringe locations, the reality of these income profiles can’t be escaped. I had the privilege of visiting one such estate in south east Queensland recently and what I saw was absolutely first class product at very good entry level prices in a very well designed environment. No ‘McMansions’ here – just quality new detached three and four bedroom homes, on small lots, priced from around $350,000 - and in some cases less.

But even at $350,000, only around 15% or so of the target 25 to 34 year old demographic could afford to get in with a price multiple of less than 5 times an individual’s income. That proportion would rise taking into account combined incomes for this age group, but it won’t rise beyond around a quarter or a third.  The reality is that more than half this age group would find an entry level $350,000 home would be six times their combined incomes or more. It would be tough going.

Granted, interest rates are currently very low and some governments are offering stamp duty and other concessions to first time buyers. But these are having next to no impact on this market. Rates of first home buyer activity are at generational lows.  And interest rates won’t stay this low forever. A significant rise in variable home loan rates could tip a substantial number of families in this age group from the ‘just making it’ basket into the ‘we’re stuffed’ basket.

Since the ‘do nothing’ policy approach doesn’t seem to be working, what could be done to turn the situation around? Basically, it’s a simple formula between incomes and prices. You either increase incomes or reduce prices. The first probably isn’t an option unless incomes can gradually creep up with inflation and with productivity gains over time.

But what could also happen is the cost of supplying new housing (not referring to existing stock) could be reduced. New housing is heavily taxed and over regulated (the same cannot be said of existing stock). Something like a quarter to a third of the cost of the new home in an urban fringe location is due entirely to various taxes, charges and compliance costs (which do not apply to existing stock). It is also affected by the rapid escalation in land costs due to policy induced supply constraints in areas of ample available land (the same can’t be said of existing stock in mostly built-out inner or middle ring areas). Most of these additional costs of supply owe themselves to policy changes made since the early 2000s – precisely the time when the affordability gap began to widen.

It does seem a compelling place to start.

We should aspire to a more competitive Australia but this policy effort cannot just focus on labour costs because our incomes, while high by competitor standards, are now generally insufficient to cover one of the basic necessities of life: shelter. We have made this happen because policy makers have deliberately increased the cost of delivering new housing with new taxes, charges and compliance costs, all justified on esoteric planning or sustainability principles but impossible to justify on social equity or economic grounds.

These policy changes were made to suit political agendas at the time: they were not needs-based or market-based policy changes. (It also has to be said the political agendas at the time were in the hands of Labor State governments, starting with Bob Carr in NSW but which spread rapidly to other jurisdictions. Why Labor Governments introduced policies which hurt people on working wages is as mystifying to me as to why Liberal Governments have continued to maintain the same policy positions, with minimal amendment).

The gap between the cost of supplying even relatively basic housing on the urban fringe, and the incomes of the people who in past generations could afford it, will continue to widen unless regulators and policy makers begin to grasp the wider economic consequences of policy-inflated costs for new housing supply.

Footnote: why a five times multiple? There is no strong reason. The authors of the global housing affordability report Demographia will argue that affordable housing should be around three times incomes. Moderately unaffordable they define as between 3 and 4, and between 4 and 5 is defined as ‘seriously unaffordable.’ The multiples of 7 or 8 times incomes, which we’re seeing in Australia, are off the scale. But for the purpose of argument, if even relatively high (by international standards) multiples of 5 times incomes seems like a utopian dream, it illustrates how far incomes need to rise or costs of new supply should fall before we get even close to the situation that prevailed for most of our history. It’s a big challenge.

In praise of accidental cities

Most of the built form we know as our cities of today was built before complex town planning regulations were developed. The irony is that it is the accidental parts of our cities – the parts developed during periods of the least regulation – that we now seek most to protect.

An increasingly urbanised world is placing pressure on governments and policy makers to more carefully control the use of land within recently defined urban boundaries. But this is, in terms of the history of our urban development, a largely modern construct. Regulatory town planning itself is largely a post-war concept, first notably embodied in the UK Town and Country Planning Act of 1947.  There had been previous ‘town planning’ Acts prior to this in the UK but the 1947 Act significantly overrode land ownership and required virtually all proposals to seek planning permission from the local authority.

Given the post-industrial state of much of urban Britain in the pre and inter-war period, it’s not surprising that regulators sought more control over how land was used and for what purposes. Well intentioned urban planners sought to segregate housing from industry and to carefully define and control how future urban expansion occurred. Higher standards of living, less pollution and the pursuit of a more equal society were among the motives. (The extent to which these hopes were achieved is open to much debate).

Fast forward some twenty or thirty years and to the antipodes, and Australia’s turn was to come. Our urban development history had largely been a free enterprise model until perhaps the mid 1970s but certainly by the mid 1980s regulators were having more say in land use policy and controls over private land. Prior to this, the 19th century had seen industrial and housing uses develop in close proximity, often centred on transport nodes such as sea or river ports. It was a walkable society back then because there was no other choice, expect the horse, which wasn’t so much needed when the factory or wharf was only a few blocks from home. Tiny workers’ cottages and terraces sprung up in amongst the tanneries, warehouses and factories of industrial pursuit.  

The 20th century witnessed a gradual transformation of work from blue to white collar. Australia by the 1960s was a very different nation – with a rising middle class, white collar employment and the post war baby boom in full stride (or should that be ‘crawl’ under the circumstances?). Suburban development took hold and an upwardly aspirant middle class quickly embraced the quality offered by modern brick homes with flushing toilets and fancy kitchens (by their standards), with yard space for children to play – all features which had largely been absent from the homes they and their parents had grown up in.  Land was developed for suburban use with minimal regulation or control. Cities expanded and entire city administrations had relatively small building divisions with perhaps a few city engineers to ensure what minimal standards existed were met. The notion of town planning departments was something new, and novel.

But as growth continued and society progressed, governments found themselves under increasing community pressure to control and regulate this growth. By the time comprehensive land use regulation took hold, most of the structure of our urban form - including major transport routes, suburban housing development, centres of industry, of white collar employment, the locations of hospitals and schools – all had largely been developed and delivered, as if by accident.

There is no question that modern town planning has helped deliver some very high quality outcomes. Witness in particular the large swathes of urban renewal projects which have leveraged private capital to transform brownfield and largely abandoned inner city industrial land into high quality (and high priced) inner urban housing and commercial developments. 

But the point should be remembered that there are limits to what regulation can provide and there are benefits of enterprise-driven development which are too quickly forgotten. ‘Accidental cities’ has become a derogatory term used by those who see benefit in increased planning control over public and privately held land. The price of not intervening through fine grained regulation, the argument goes, is inefficient cities which lead to inefficient economies.

For me though, this has a touch of Stalinism about it. There are huge sections of cities globally which are now feted for their character, and they are invariably parts which developed ‘by accident’ through free formation of common interests and private capital, unrestrained. Often messy, sometimes disorganised and invariably hectic, they are nonetheless the places that feature in tourist brochures. Think of Singapore’s Chinatown, or Hong Kong’s night markets. Think of Venice’s canals, New Orleans’ French Quarter, or New York’s many ethnic enclaves like Little Italy.

I struggle to think of many places elsewhere in the world which were created under the rigid guidance of regulatory planning, which we’d like to mimic or replicate. To me it seems very much the accidental parts of cities that are somehow more ‘real’ and less reconstituted. It’s as if we can tell the difference, without even really thinking about it.

So it should come as no surprise that it’s also these parts of our cities that we tend to want to preserve. They aren’t necessarily just historical structures or places – sometimes, like the laneways of Melbourne’s CBD – they can be uses which have sprung up as if despite of – or in defiance of - the regulator’s rule book.  

What this means for modern town planning is that the efforts to control and command in fine detail the nature of urban outcomes – even down to deciding what type of retail shop should be allowed in one place or another for example – is actually counter-productive. It stifles competition and smothers creativity. 

There is a balance between the planned and the accidental and to find where that balance lies first means appreciating that accidental cities, or the things that are allowed to happen without intervention, can have as much appeal as those parts which have been carefully planned, controlled and documented. 

Perhaps once we begin to appreciate the design dividend that is delivered through accidental aspects of urban development, we might as a community become less wedded to the idea that only more regulation can achieve the quality urban outcomes we most admire.