Contributed by Joe Montero
Housing affordability has been a critical issue in Australia for some time. The real estate industry might by happy about continuously rising prices. Everyone else gets to pay the price. Both buyers and renters are forced to hand over an ever growing proportion of their income in order to keep a roof over their heads.
As the graph below shows, the long-term rise has been much greater than the average for similar income countries.
This is leading to lowering living standards and is a major cause of rising number of people sleeping rough or couch surfing.
Something needs to be done to make housing more affordable. The problem is that a succession of governments not only failed to act, they helped to create the problem.
The International Monetary Fund (IMF) warned last week that Australia must act to curb runaway prices, which have doubled more than 20 percent over the last year in major cities and 18 percent across Australia. This is no surprise. The IMF also called for “structural reforms,” which is far more telling.
From this came a call to change. For the government to step in and boost the supply of homes for those facing a housing affordability problem. The downside is that there are no real suggestions as to how this can be achieved, other than more government control over lending and providing support to financial institutions, to enable the sale of more properties.
By being wedded to market solutions for everything, the IMF is incapable of seeing past this. It blames rising house prices a low interest rates and a supply shortage. Low interest is real. The supply shortage is not. and this is only part of the picture.
Similarly with the Reserve Bank of Australia. It is now looking at proposals to manage debt from the viewpoint of the lenders. Why? Because a housing market collapse would hit banks and other lenders hard, and this would send a shockwave through the whole economy. The details about how this could be achieved, however, have not been made public.
The Reserve Bank does make an important observation. The cost of housing is rising faster than wages, and this cannot keep on without it all eventually coming undone.
If there is going to a be a solution to the problem, it will not rely on a market solution. The distortion of housing cost is not just about a low interest rate. Other important drivers are capital gains offsets and negative gearing providing a handy tax dodge and easy money for the well to do. These can removed in stages – to limit the shock.
The biggest problem though, is that rising property prices are mostly caused by expectations of a quick return by investors in an economy in trouble. Real estate serves as protection against the squeeze on profit in other areas. In other words, it is an alternative source of profit. This is the reason it is institutional and corporate investors that are driving up prices and not home buyers.
See the graph below.
Source: Australian Bureau of Statistics (ABS)
Long-term share of housing finance has seen that of owner occupiers falling and that of investor owners rising. This trend has not shifted since 2017.
Further evidencing of this shift towards business has been the rise of apartment blocks throughout Australia’s cities.
The rise of corporate housing goes a long way to explain why housing prices have continued to soar through the pandemic.
Source: CoreLogic/ANZ Property
An easy fix is for the government to limit the number of properties a business entity can own.
Australia has the biggest private debt level on the world, and mostly comes from the cost of housing. And this debt bubble is a major threat to the Australian economy. It can only be removed by bringing down the cost of housing.
Source: ABS, AMP Capital
Subsidies to lenders and perks to investors are not the answers. The problem is not a shortage of supply. The lack of affordable supply is the problem. Measures can be taken to overcome this. Government investment in a lot more public and community housing, combined with rent control.
This will lower the cost of housing is a fairly short time.
And no, this will not wreck the economy. It will begin to take the debt pressure off it and provide incentive for investment to go to other places.