There’s an opinion page on the ABC News page about the increasing rise in house prices (and the subsequent fall in housing affordability). The solution presented: build more housing (not necessarily houses – apartments are okay too), thus increasing the supply. Unfortunately, that won’t help.
(All figures and quotes come from the ABS, particularly their Housing Occupancy and Costs, Australia, 2005-06, which was released about 2 years ago; they update on a three-year cycle)
In 2005–06 there were approximately 19.9 million people, or 7.9 million households,
living in private dwellings in Australia, up 13% on the number of people in private
dwellings in 1994–95. There was a larger increase in the number of households over this
period (up 21%), reflecting a decrease in the average household size from 2.69 to 2.51
persons per household. The average dwelling size increased over this period from 2.88
to 3.06 bedrooms per dwelling.
So what we see here is that utilisation is going down. We have more people living in smaller households – fewer people to a house. This is caused by a combination of factors – a wave of young adults leaving home being the main one, especially the young adults who live alone. Curiously, if we had a supply problem, you’d see the other trend: people living in family groups longer.
The proportion of Australian households that own their own home with or without a
mortgage has ranged between 69% and 71% over the period from 1994–95 to 2005–06.
Over this period there was a decrease in the proportion of households that owned their
dwelling outright, from 42% in 1994–95 to 34% in 2005–06. There were increases in the
proportion of households that owned their dwelling with a mortgage (from 30% to 35%)
and in the proportion of households that were renting privately (from 18% to 22%). The
decline in outright home ownership may, in part, reflect increasing uptake of flexible
low-cost financing options which allow households to extend their existing home
mortgages for purposes other than the original home purchase.
The last bit in that quote is speculation, but it seems credible. Another possibility would be people trading up – selling, buying a more expensive property, and taking a mortgage for the difference.
One important point to note is that the percentage of renters has gone up. In 1966, owner-occupied housing accounted for 71.4% – in 2006 it was 69.8.
High house prices aren’t a problem for people who own a house – if they buy another house, there’s a good chance that they are selling their current one. So the main problem is the barrier to entry. That’s the point of the First Home Owner’s Grant. But the grant doesn’t help that much – the vendors just put up the price accordingly. Also, banks use it as a deposit, allowing people to get even deeper in debt, by borrowing more – often a lot more than the grant. (Case in point – I bought a house earlier this year. For various reasons, I don’t qualify for the Grant, even though I wasn’t a home owner. Had I qualified, I could have borrowed another $40,000. In the end, I didn’t borrow anywhere near my limit, so that didn’t matter).
Banks are a large part of the problem – the percentage of income they are willing to take as repayments is very high (as a single-income family, every bank I saw was willing to take over 50% of my income), even with interest rates historically low (e.g. when the rates go up, it will be an even bigger share). This in turn encourages people to borrow too much, which drives higher prices. Between 1995 and 2006, the average weekly housing costs of first home buyers (FHBs) rose by 39%, while their real gross household incomes rose only 33%. So in a period where interest rates trended down, the cost of servicing a new mortgage went up – a very bad sign, and one largely attributable to banks being willing to loan on much looser grounds than before.
But the real part of the problem isn’t the banks. It’s the people who want more than one house – landlords. Contrary to what John Symonds says, rent money isn’t dead money – the landlord is probably investing it, probably in buying up more houses. This has several knock-on effects: having more investors chasing houses (as opposed to owner-occupiers) means that prices go up; high mortgage costs and lack of alternatives removes pressure from rents, which means they go up; high rents consume savings that could otherwise be directed at purchasing housing.
A mortgage, generally, goes down as a portion of your income over time; your income will generally rise due to inflation-related increases if nothing else, while the variability of interest rates becomes less important as the loan shrinks. As a result, home owners end up with more disposable income over time. Renters don’t. Lower-income renters in particular are in a bind.
Simply increasing the supply won’t help. We don’t have a supply crunch. Other remedies suggested (such as increased land tax – which discourage people buying land cheap and holding it until it goes up in value, as well as encouraging more high-density accommodation) would help, but really what we need to do comes down to a few basic points:
- Force banks (via regulation) to restrict loan size to a lower portion of household income. Cap it, say, at 40% for single-income households and 30% at dual income households (which would allow for couples to start a family and have less pressure on needing both incomings)
- Find ways to assist first-home-buyers – preferably ways that don’t have cascade effects. One possible example: provide a discount to stamp duty for people who sell to FHB. Another: the First Home Owner’s savings scheme that’s already being looked at.
- Widen first home owner support to people who have been renting for an extended period. (Personal pet peeve)
- Put pressure on rent prices. I like using market forces for this, so do it by providing government-owned rental accommodation which is leased at a low point. Supply will help here – abundant cheap rental would keep rent prices down. This in turn would discourage rental investment, which reduce a source of demand and lower house prices. Don’t want to do it with cheap prices? Link it to the savings scheme: say, 10% of all rent in these government units actually goes towards credits to be applied against expenses of owning a house (such as stamp duty, rates, and so forth). (This would also probably reduce random damage by tenants – they would have more to lose, and would be more invested in their rental accommodation). If you go this route, though, please – don’t concentrate the government housing geographically. Spread it around so that you avoid particular areas getting a bad reputation.
If we want to improve housing affordability, we have to lower the barrier to buying houses, make it easier to afford the house just bought, and keep investors from speculating in residential real estate. It’s a simple concept, but there’s no simple execution.
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Software is too expensive to build cheaply.... 
Heh – just noticed that the post id for this was ‘666’… 😉 Should have thrown in a spontaneous metal interlude
A root cause for all of this is that local councils are hell bent on making it as expensive as possible for new land and houses to be created. All but the most ambitious projects — those with enough volume to make it worthwhile — are priced out of the market.
This means that the budget end of the market is extremely tight (to both rent and buy) since there is very little to choose from.
Your points would become moot if councils simply reduced contributions charges (you’d be surprised at how significant they are) so that more land and houses can be created, and (therefore) sold/rented for less.
As for the ‘bank’ problem: other countries have similar lending criteria, and don’t have these issues. Certainly 90%-100%+ LVR loans are pretty ludicrous, but I suspect that (FHOs aside) those are the exception rather than the norm. Regulating the retail end isn’t the solution and is an ugly kludge that restricts banks’ ability to bring new products to the market.
Perhaps higher equity reserve requirements for banks (thereby reducing the chance of them going bust and destroying the economy), and leaving them determine their own risk profile would be the simplest (and almost free-market) solution.
Local councils want their cut, of course, and why not? I can state with a high degree of confidence that new house prices would still be as high as they are if the councils gave the land away – the developers charge what the market can bear. If councils charged less, you still wouldn’t see development proposals for low-income housing – there’s less profit. This is an area where the free market fails. While prices for established homes are high, prices for new homes will be high.
As for the banks – the problem isn’t the equity/loan ratio. It’s the income/loan ratio. The banks are deliberately enticing people to take out loans that the borrowers won’t be able to sustain when interest rates go up. This is what’s caused the crisis in the prime market in the US. The free-market’s solution to this? Foreclose the loan, sell the house, take what’s owed, and kick the family to the street. Property market depressed so you can’t sell for enough to cover the loan? Well, that’s where it’s handy to own the mortgage processor as well. Heck – drag the process out anyway; the fees add up.
As far as I’m concerned, let the banks go bust. Spend “bailout” funds cushioning the blow – for example, by buying and servicing the contracts, not the business. That way, the US wouldn’t be seeing the companies they bailed out paying multi-million dollar bonuses to their executives for the last financial year.
There is no free-market solution to low-income or first-home-owner housing; it’s an area that requires government intervention to stop the money flowing to the rich, because the consequences of allowing that are too high. The family home is the only significant asset most families ever have – but nearly a third of all households, at current projections, won’t even have that when they hit retirement age. That means that their superannuation will get eaten up by rent – hastening the day that they become fully reliant on government support.
We already have a big stinker of a house price bubble here in Australia. Something that started since at least the late 1990s.