The
new NSW Premier Gladys Berejiklian has made housing affordability a commitment
of her government and our Federal Treasurer Scott Morrison has been to London
investigating alternative means to providing low cost and social housing, while
Opposition Leader Bill Shorten claims only Labor has the solution to housing
affordability. Politicians are starting to get the message, but is it all too
late? Has the affordability horse bolted, permanently?
It was ten years that a research paper I
wrote for the Residential Development Council first started doing the rounds of
various Parliaments in the country. “Boulevard of Broken Dreams” as it was
titled, warned – ten years ago mind – of the impending problem with housing
affordability. It got plenty of political attention at the time and the debate
over housing affordability was a key issue in the 2007 Federal Election. No one
can say there weren’t warnings back then. Here’s what it predicted at the time:
“While
much media and political attention is focused on the role of housing interest
rates, these do not explain the very high costs of housing in Australia. [Indeed
not – we now have record low interest rates and record high housing prices] The
root cause of worsening housing affordability lies squarely at the feet of
various public policy settings, identified in this discussion paper. If these
policy settings continue on their present path, there is no question that
housing costs will continue to spiral beyond reach of many Australians. As this
happens, dependency on rental housing will increase. Future generations of
Australians will not be able to afford a home of their own, and will
increasingly be consigned to rental housing - and rising rental costs.
Home
ownership will be in the hands of an increasingly elite group of Australians:
those wealthy enough to afford a home and those who bought into the housing
market before the affordability crisis reached a tipping point.
Housing
standards will fall - due to price constraints - and new homes will be built on
smaller and smaller lots, with cheaper and cheaper materials to stem the tide
of ever increasing government and regulatory costs.
The
signs of a deepening crisis are now evident, and industry groups are united in
voicing their concerns that present policy settings will only lead to a
worsening problem. Failure to act now will leave future generations of young
Australians a dismal legacy of housing stress - in a country which by any other
assessment should boast the highest standards of home ownership and
affordability.”
It’s worth a read if you want a reminder of
how ineffectual governments can be in dealing with the bleeding obvious, or of
ignoring good advice when there’s plenty of bad advice to be had. There is a
copy of “Boulevard of Broken Dreams” you can download
here.
Ten years have since passed and – as
predicted – the problem is now much worse. Which also means that remedies are
now more complicated since the problems are more deeply rooted. If we really
wanted to do something meaningful about housing affordability today, there are
quite a few more issues for politicians and policy makers to deal with. Here’s
a sample:
Are
we even measuring the right thing? The city wide
median house price is primarily a reflection of second hand (established)
housing in established urban areas. It’s the half way price point and can be
distorted by heightened activity at either end of the price scale. What this
doesn’t measure is the typical cost of new housing supply, being either
house+land, or apartments. Nor does it measure within established markets what
proportion of houses fall into the lower quartile, and whether these are
accessible to new entrants or lower income households. As a market wide
measure, the median has some use but in the affordability debate, it can tend
to disguise as much as it reveals.
Land
supply. It’s no longer a simple case of adding to
supply, given that new supply is more heavily taxed than second hand (established)
supply. Adding to land and housing supply with highly taxed and over regulated new
stock is hardly likely to make things instantly better – it just adds more
needlessly expensive stock to the market. So for improving supply to work the
distortionate tax system as it applies to new land and housing needs to be addressed
first.
Economic
concentration. There has been an increasing
concentration of economic opportunity in the inner urban regions of (mainly)
Sydney and Melbourne – which is also where the worst housing affordability is.
A report earlier this year noted that half the country’s new jobs were within a
couple of kilometres of the Sydney and Melbourne CBDs. Decentralising some of the jobs - both
government and private - into suburban business centres and into the regions
would remove some of this pressure cooker effect, but few seem willing to do
so. I’m with Barnaby Joyce on this one – if you want affordable housing and
views of Sydney Harbour, you’re being unrealistic. But without higher order
jobs and more of them, Barnaby is unlikely to be welcoming hordes of housing
refugees into Tamworth, where the housing is - like many regional towns and
cities - quite affordable if you have a job.
Regulatory
reform. Urban Growth Boundaries, introduced in the
late 1990s and early 2000s, sought to contain outward growth. “Sprawl” as it
was pejoratively called, was an evil that would lead to social decay,
dislocation, congestion, obesity, pollution, environmental degradation, loss of
farmland – pretty much a full catalogue of sins, most of them unverified. But
these growth boundaries immediately limited supply and saw land prices
escalate. To address housing affordability, especially of new housing, we’d
have to have a grown up discussion about the effect of urban growth boundaries,
which itself will be a challenge.
Planning
regulations. More regulatory reform, this time on a
host of planning regulations and prescriptive policies which can mean that even
a car port application can become a topic of council debate in some places.
There is too much planning and not enough doing but we are so attached to “having
our say” that the community now seems entitled to advise other property owners
what they should and shouldn’t do with their properties. There are regional
plans, state planning policies, council town plans, neighborhood plans, plans
for everything and the red tape and delays (and costs) that go with it. In the
history of this country, I struggle to think of one government at any level
which has actually left office with fewer rules and regulations than when it
entered, so hope on this front seems remote.
Industrial
relations. The militancy of building industry
unions is a matter of public record. This particularly affects multi-level or
large scale housing projects and adds significantly to the costs of new housing
supply. But our appetite for taming the excesses of building industry unions
doesn’t seem sufficient to achieve meaningful reform. Without it, new housing
will continue to cost more than it needs to.
The
GST. The GST adds directly to the cost of all new
housing and the cost is borne by the buyers while the tax revenue flows to the
federal government and is redistributed to the states. The GST does not apply
to established housing. This distortion remains little discussed but it does
mean that new housing is taxed at a higher rate than established housing. Talk of
reform to the GST seems to end in political apoplexy so we tend to avoid it if
we can. Fixing or countering this tax anomaly would be another component needed
in any moves to improve housing affordability.
Stamp
duty. As house prices rise, so does the money made
by State governments via stamp duty, to the extent that some governments become
addicted to it. The NSW Government is one that enjoys a very healthy stamp duty
revenue, much of it paid for by the very people it says it is concerned about
in terms of the high cost of housing. Paul Keating once warned you should never
stand between a State Treasurer and a bucket of money. He was right and Stamp
Duty is a good example. In NSW it is now a $9 billion per annum bucket. In
2011, it was $3.8 billion.
Land
tax. Argued by many economists to offer a more
equitable property tax base than stamp duty and other levies, the extension of
a broadly based land tax seems off the agenda for discussion, full stop. But
any meaningful discussion of housing affordability can’t be had without a grown
up discussion about property taxes, of which land tax is one.
Infrastructure
levies. Introduced mostly in the early 2000s as a
“user pays” approach to funding infrastructure associated with new development,
these quickly became usury and applied without a transparent connection to the
purpose for which they were raised. Councils and State Governments got away
with calling them a “developer tax” knowing full well that it was home buyers
of new housing that were paying. And pay they did – levies at one point
exceeded $100k per dwelling in some parts of NSW. The HIA and other groups
still say they can account for a quarter to a third of the cost of a new home.
Any serious moves to improve housing affordability must look at the equity of
these levies as part of the mix.
Negative
gearing. What a hot potato! If this was to be
reformed, how would you do so for just housing and exclude other investments?
Could you confine reform to limitations in just parts of the Sydney or Melbourne
markets, because if you limited this nationally, many struggling regional
markets would fall into even deeper holes. It was never intended that negative
gearing would see speculators holding large portfolios of rental housing and
outbidding new entrants to the extent that now happens, but how to contain what
has become an orgy of real estate speculation through negative gearing is now a
problem of monumental proportions. Good luck untangling this one.
Population
growth. We
could slow our immigration to a trickle and try ease demand pressure on housing
but this could come at a broader cost to the economy. Or migrants could be
directed to settle in regions to ease demand in capital cities, but without
regional jobs for them, what would this achieve? The demand side of the equation being
population growth is mostly fueled by immigration and until we can get supply
in step with demand, this also needs to form part of the discussion around
housing affordability. Good luck again with this emotionally charged policy
battleground.
Financial
reform. The banks, ah what can we say about these
great community institutions of conservative and moderate lending, restraint
and discipline. Maybe the less said the better. Reform of lending practices has
been debated, studied and investigated ad nauseum. While a contributing part of
the affordability problem through some of their less savory lending practices,
achieving meaningful reforms of mortgage lending practices could be a Sisyphean
challenge.
So there you go. If you’re a politician who
has worked your way through solving all of these issues, you’ve improved
housing affordability by making housing cheaper, through falling house prices.
Just think how popular you will be then… in a country so heavily vested in
seeing house prices continue to rise.
