Australian housing stuck between a rock and a hard place

Extract from The Guardian

Housing affordability

Grogonomics

Greg Jericho

The most promising policy measures have least political appeal; the palatable ones won’t do much

@GrogsGamut

Tue 6 Mar 2018 04.00 AEDT Last modified on Tue 6 Mar 2018 04.02 AEDT

‘Increased housing density, capital gains tax on primary residence, abolishing stamp duty, and limiting negative gearing have least political appeal’. Photograph: Lukas Coch/AAP

Anyone in the mood for discovering the end result of short-term, politically driven economic policy coruld do worse than read the Grattan Institute’s latest report on housing affordability. It is a report that shows the result of 30 years of policy geared towards surging housing prices which has left people increasingly locked out of the market. And it leaves us with little hope of reversing the trend of declining affordability unless politicians embrace policies that are mostly politically unpalatable.
Here is how the Grattan Institute’s John Daley and Brendan Coates summarise the state of housing in Australia: “Today, home ownership largely depends on income, and how wealthy your parents are. Housing is contributing to widening gaps in wealth between rich and poor, old and young. Lower income households are spending more of their income on housing, and are under more rental stress”.

But you know, apart from that ...
In 2001, the median Sydney house price was 5.8 times the median household income; now it is 8.3 times. In Melbourne the ratio has gone from 4.7 to 7.1. And this issue is not limited to just Sydney and Melbourne – all regions have seen a massive decrease in affordability:

 

At this point you’re likely to hear those who have owned a house for some time suggest that actually things were tougher in the old days because interest rates were much higher.
And yes, they were. Heck, the 1990s and the 17% interest rates were absolute killers (they certainly killed the economy), but that period of horror aside, the cost of paying off a new home loan has stayed around the 25% of household income level for much of the past 30 years:

But if housing affordability was mostly about being able to pay off your home loan, then you would not expect to see a drop in the percentage of home owners, and yet there has been – a massive drop.
And the drop is biggest for those younger than 45 – that is, those who were unable to get into the housing market before affordability really became an issue at the turn of the century:

And for those in the housing market, even the low interest rates are not doing much to help out in the long-term – all it is meaning is that fewer Australians are paying off their mortgage.
20 years ago 68% of households aged 55-64 owned their home outright; now it is just 42%:

That has major repercussions given the importance of the family home during retirement.
And the issue is not merely linked to age. Income has become a key determinate of housing affordability. The Grattan Institute’s report found that since 1981 the biggest falls in home ownership is among young people and low income earners of all ages:

As Daley and Coates note, “home-ownership rates are falling among all Australians younger than 65, especially those with lower incomes”. A big reason affordability has declined so much for lower incomes is because the price of lowest-cost houses and apartments has actually risen the fastest over the past decade.
From 2003-04 to 2015-16 the price of the cheapest dwellings has actually risen more than have the most expensive:

So what is to blame, and how can it be fixed?
The reports notes the issues include both demand and supply.
On the demand side there has been in increase in immigration growth over the past 10 years:

The report notes that reducing the growth would likely improve affordability. The problem is it would likely be at the cost of reduced living standards.

The authors argue that “reducing immigration would reduce demand, but it would also reduce economic growth per existing resident”.
And this is where demand and supply should link together. The authors note that “first-best policy is probably to continue with Australia’s demand-driven, relatively high-skill migration, and to increase supply of housing accordingly”.
But the authors are also realists. They note that “Australia is currently in a world of third-best policy: rapid migration and restricted supply of housing, which is imposing big costs on those who have not already bought housing”.
Such is the pathetic state of Australia politics that the authors in effect argue to tackle housing affordability we most likely will need to pursue a policy which they also argue will reduce economic growth.
Also on the demand side is negative gearing (which the authors argue should be abolished) and the 50% discount for capital gains tax, which they argue should be halved to 25%.
But in our current housing market, removing those two taxation policies would do little to lower housing prices – reducing them by around 2% compared with what they would be with the current settings in place.
The big problem is supply – Australia has fewer homes per resident than do most advanced economies – and crucially in the past decade the supply per resident has fallen:

And a major reason is Nimbyism – most people think increasing housing supply is a good idea, they just don’t want it to happen in their neighbourhood, either because of worries about traffic congestion, “loss of street appeal”, or they “don’t want the existing mix of people to change”:

Daley and Coates note, with particular and justified cynicism, that because “no single level of government owns the challenge of managing population growth in our biggest cities” it means “no government is responsible for the serious consequences of failing to plan for growing populations”.
The consequence of this is that “more housing will be built on the urban fringe where there are no existing residents to object, but it will be far from jobs and existing infrastructure. And house prices will keep rising”.
And such has been the case for 30 years – to the point now where they note “owning a home increasingly depends on who your parents are” as first-home buyers become more dependent on loans from families and friends:

It also means that younger people are taking longer to purchase their first home and thus will be less likely to have paid off their home by the time of retirement:

Will it change? Probably not.
The authors note that the measures which will have the most impact – such as increased housing density, capital gains tax on primary residence, abolishing stamp duty, and limiting negative gearing – have the least political appeal. Whereas measures such a first-home buyer grant, regional housing development, or a tax on empty dwellings are politically palatable, but will have little impact.
After 30 years of policy designs to increase housing prices, the housing market is very much in the hands of those who also have the power in the electoral market.