Lamont, Chris --- "Unscrambling the decline in housing affordability" [2009] ALRCRefJl 39; (2009) 94 Australian Law Reform Commission Reform Journal 40

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Reform Issue 94 Summer 2009

This article appears on pages 40–41 of the original journal.

Unscrambling the decline in housing affordability

By Chris Lamont*

Newspapers, radio and television often feature differing opinions as to the reasons for the decline in housing affordability.

These reasons include: negative gearing, bigger houses, the first home owner grant, urban sprawl, greedy builders and developers and the unrealistic expectations of generation X and Y. In sighting these issues there is a tendency to rely on the ‘vibe’ of the issue—a concept brought to prominence by the Australian movie The Castle.

In reality, no single issue explains the decline in housing affordability. Like other complex issues, there are multiple factors that need to be assessed in detail. Population growth, quantity of existing housing stock, annual residential construction starts, wage growth, tax regimes, cost and impact of regulation, availability of residential infrastructure, and the supply and price of skilled labour are just a few of the issues that impact on affordability.

What is clear is that the decline in affordability is closely related to restrictions in housing supply (as demand for housing grows).

A snapshot across Australian capital cities shows a disparate situation in respect to property taxes, infrastructure charges and planning laws. Not surprisingly there is an inverse relationship between the quantum of these taxes and charges and housing affordability. For example, a house and land package in Sydney worth $550,000 comprises taxes and charges levied by the federal, state and local governments in the order of $140,000. The same house and land package in Adelaide is subject to $42,000 in taxes and charges.

This example provides part of the explanation on the supply side of the equation. The other factor is the different planning schemes that exist in each jurisdiction. Delays and complexities associated with the New South Wales and Queensland planning schemes mean it takes at least twice as long (on average) to prepare a new residential development. The impact of delays in these states mean that holding and associated costs in the order of $30,000 are incurred for each new dwelling, pushing the price just that much further out of reach for many first home buyers.

Why is it important to examine the supply of new housing in explaining the issues associated with housing affordability? Because without an efficient supply of new housing a growing population is forced to compete for existing housing stock.

The bulk of the house price boom occurred between 1999 and 2004. The median house price for the period rose by 67% (after general inflation) or $162,300. During this period there was strong wage growth and very strong growth in Australia’s population, driven primarily by immigration.

Immigration, particularly skilled immigration, remains a necessary and important measure required to drive the Australian economy, but unfortunately there has been little attempt to assess the net size of Australia’s net annual immigration programs and the corresponding impact on housing demand. A detailed and accurate assessment would look at all forms of immigration (both temporary and permanent) and assess the corresponding level of housing demand.

Australia’s private rental market has a national vacancy rate approximating 1.5%. Many experts would consider 3% to be the market clearing rate. In view of the record low in private rental vacancy rates, it is hardly surprising that rents have grown over the past four years at a rate of more than 10% in most capital cities.

Some say the increase in house prices (and thereby rents) is due to investors taking advantage of negative gearing and other taxation incentives. But investment in the private rental market has declined in recent years despite falling vacancies and growing yields. If negative gearing is a cash bonanza for property investors in the private rental market, why have private investors not met the growing demand for private rental accommodation?

Econometric assessments undertaken by ACIL Tasman and the Housing Industry Association (HIA) have looked at the impact of a range of tax changes on property prices including negative gearing. The study concluded that the impact of negative gearing on house prices was statistically insignificant. This was in contrast to the impact of restrictive and complex planning and zoning policies, which were found to have driven up the price of land and artificially constrained the supply of housing in both infill and outer areas.

The combination of restrictive planning and onerous tax and charging regimes has stifled investment and the supply of new housing. This has occurred over a number of years and today there is a chronic shortage of housing. The National Housing Supply Council, established by Prime Minister Kevin Rudd, was tasked with assessing the current shortage of housing and identifying the expected shortage to the year 2020. The Council’s first report conservatively estimated a national housing shortage of 85,000.^[1]

Of some concern is the Council’s projection on the shortage of housing over the next few years. Based on a medium demand and supply assumption, the supply gap in housing is expected to grow by 46,000 dwellings in the next two years. By 2013 the Council estimates Australia will be 203,000 dwellings short of required demand.^[2] This projected shortage, if realised, will have significant implications, not just for vacancy rates and housing affordability, but also for the number of homeless Australians.

The above estimates should then be viewed against predictions of 30–40% reductions in house prices. There are those who refer to what happened to house prices in the United States and conclude that the Australian housing market is about to collapse and house prices will soon experience wholesale price reductions. Those seeking to use the US as a reference for making projections for the future of Australian house prices would be well advised to look at the oversupply that existed in the US housing market immediately prior to the drop in prices and the relatively stringent lending requirements that exist in Australia.

Housing affordability has improved in Australia in 2009, but this has not occurred on account of a drop in house prices. Indeed there is some evidence to suggest that house prices in the ‘entry level’ segment of the market have experienced some modest price growth in certain areas of Australia.

Significant reductions in interest rates have delivered improvements in housing affordability for owner occupiers. The HIA–Commonwealth Bank of Australia First Home Buyer Affordability Report revealed a 14.6% improvement in affordability for the March 2009 quarter, which came hot on the heels of a 40% improvement at the end of 2008. The primary contributing factor in this improvement is the 4% saving in the standard variable mortgage rate.

In the longer term, however, further reductions in interest rates will not sustain the improvement in affordability. Interest rates have reached the end of the downward cycle and upward pressure is already being experienced.

Addressing supply shortages and bottlenecks is the only means of providing an acceptable level of housing affordability. For many it will be obvious: unless the supply of housing roughly approximates the level of housing demand there will be a price movement.

For more than a decade in Australia, housing demand has exceeded supply. The National Housing Supply Council predicts that this will continue and hence the prospects for housing affordability in the year 2020 are sobering.

There is not only a requirement to boost the supply of housing to address housing affordability, but in the current economic climate there are employment and economic benefits. No other industry sector can generate as much activity or employment as quickly as the residential construction industry. Activity in the sector provides employment in manufacturing, law, business, sales, and of course, construction.

Removing onerous tax and charging regimes is the first step in providing more affordable housing. Improving planning, land supply and zoning processes will also increase both the number of new residential dwellings constructed and housing affordability.

The most unaffordable housing in Australia is generally found in areas that have the most complicated and inefficient planning systems, high levels of taxation and infrastructure charging on housing. Unless these issues are addressed, affordable housing for many Australians will be nothing more than a pipe dream.

* Chris Lamont was the Chief Executive—Association, Housing Industry Association at the time of writing this article.

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[1] National Housing Supply Council, State of Supply Report (March 2009), 64

[2] Ibid.