Housing affordability keeps on going downhill

Contributed by Jim Hayes

Major ratings agency Moody’s, has just found that the housing affordability crisis in Australia is getting worse.

The agency’s report says that in addition, the level of debt is at a record high, leaving borrowers at a high level of risk of defaulting. Existing on the edge brings greater vulnerability to sudden changes in the housing market and other economic shocks.

Housing unaffordability has increased the most in Brisbane and Melbourne, but Sydney continues to head the nation as the least affordable city to live in. There is plenty of property development finance in Melbourne available, but unfortunately many developers seem to want to invest in Sydney.

Australia now has the world’s second highest level of household debt, now at 193.7 percent of income.

According to Moody’s the average household is now paying 28.7 percent of its total income on mortgages, up from 27.4 percent in September last year. It must be remembered, that the actual proportion paid by those on mortgages is much higher, because an average, spreads out to include households without a mortgage. At the same time, the broader based data indicates the extent to which the whole economy is exposed to the debt problem, which makes more homeowners try to look at refinance mortgage options available to them.

If there is a burst in the housing bubble, the mix with the high debt level will mean a much more severe impact, as falling prices will not be matched by a corresponding fall in debt. This will have a severe impact on the financial position of those who are hit directly and it will feed through the economy, causing more loss.

There will be a secondary impact on other investments that have a link to the real estate market. One of them is superannuation.

Such a level of crisis has not arrived yet. But Australia is getting close enough to start up a lot of worrying.

Even the Reserve Bank is showing deep concern and warning about “payment shock” forcing the dumping of properties onto the market, which at a high enough volume, would threaten the tumbling down of prices and put the banking system at great risk.

The Reserve Bank is also concerned by the increase in the number of multiple property investors. Those owning 5 or more properties have increase in number by 7.5 percent in in the 2014-15 financial year and this has not slowed down. Ten percent of all investors now own more than two properties.

Correcting the problem is a challenge and Australia’s federal and state governments have taken minimal action. The trouble is the longer this goes on, the worse and more intractable the problem becomes. It should have been dealt with years ago.

There are signs of rising anger within the Australian community. Many are being hurt by the burden of putting a roof over one’s head and there is a sense that much more can and should be done by our political leaders.

It is no secret that action to bring about an end to negative gearing is popular. This would certainly discourage speculative investment and using the property market to avoid tax obligations by those who can afford to take advantage of it. It would return the market to those who intend to live in the property they buy, as distinct from those who just buy to invest. The absence of negative gearing would put back into the market an existing large number of vacant properties. At present it is more profitable to leave them this way.

The absence of negative gearing would certainly lower property prices. The difficulty is that the system is now so ingrained that too quick a move would be too severe a shock. Change would have to occur over time.

This means that other measures must be considered as part of a package.

The most immediate and easily possible initiative would be for the government to introduce protection for those who are facing default on mortgages through no fault of their own. This is just a matter of regulating so that financial institutions can change the terms of repayments and provide a debt moratorium if the situation makes it necessary.

Doing this, is only a stop gap that will give those in the worst position a breathing space. It is necessary. At the same time, if the problem of housing unaffordability is to be tackled, there must be a longer-term plan.

The available housing stock must be increased significantly. It requires a major injection of social funding. The market has obviously failed to cope in a way that meets peoples’ needs. The only alternative is government intervention as a housing supplier. An obvious part of this a major new public housing building program.

In addition, there should be assistance to expand the broader scope of social housing. This is housing that is not privately, but community owned.

Public housing and the broader scope of social housing have the advantage providing housing that is based on the level of income of the tenant. Extending both will reduce rents across the board and this will also pull prices downwards and reduce how much needs to be borrowed to get a mortgage.

Setting maximum rents in the private housing market would provide further help.

All of this will cost government dollars. A fair portion of this can be offset by savings as negative gearing is wound down. A tax could be imposed on multiple property ownership. Another tax should be put on properties that are not tenanted within a reasonable period.

Covering the cost of the balance is then a matter of social priority. Surely, the right of all citizens to have access to reasonable housing and which is affordable should be somewhere at the top of the list and regarded as a human right.

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