There are no quick fixes to the housing affordability conundrum: Catherine Cashmore

Like many others, I was somewhat taken aback by the comments put forward by Margaret Lomas last week in relation to negative gearing – significantly, the suggestion that any change from the current status quo would lead to ‘600,000’ homeless individuals and an ‘investor exodus.’

The comment attracted a range of responses - some humourous in particular, Fairfax Media reporter Chris Vedelago who suggested rather accurately on Twitter, that Margaret Lomas had derived her research from the ‘Magic Stat Tree.’

And whilst I agree that a sudden and complete retraction of the policy would be foolish – favouring a slow wind-down whilst other policies are implemented – in particular strategies to aid development and increase supply - the notion that touching the ‘golden egg’ of negatively geared property assets in a way which may dissuade buyers from ‘banking’ on the established market to fund their retirement would be disastrous - seems to be one that’s culturally ingrained in the real estate fraternity.

I won’t go into detail on why I feel the policy of negative gearing needs to be altered; it’s an issue I have detailed in previous columns and therefore feel I’ve made my opinion clear.

However, I do feel it is worth touching upon the obsessive preoccupation with real estate investment in general, which has played a prime role in pushing the price of property to ever escalating levels, resulting in the yearly assessment made by a number of publications – most recently The Economist – that Australia’s property market is ‘overvalued’ - with many off shore and local analysts speculating a fall in prices will eventuate in either the near - or distant ‘post mining’ future.

Even the RBA, which recently gave a speech entitled “Housing and Mortgage Markets: The Long Run, the Short Run and the Uncertainty in Between” have not ruled out a ‘major housing downturn’ at some distant point - stating:

“We certainly can’t rule out the possibility of a major housing downturn in the longer-term future. It is hard to know exactly what the outcome would be because it depends on how we got to that point.”

The paper makes an interesting read, because it highlights just how ‘uncertain’ the RBA are of... well, ...anything much at all:

“We don't have a strong view about whether the ratio of prices to income should be mildly rising, falling or constant from here”... “we think it is very unlikely to return to its 1970s levels, or to rise rapidly once again.”

Leading one to speculate that if the sophisticates at the RBA are so unsure about the longer term future of Australia’s housing market in a lending environment of which they have marginal control – so much less the rest of us.

And it’s easy to look at the sub-prime crisis in the USA – wag a finger – and preach the safety of our arguably ‘regulated’ Aussie banks.  However, whilst the sub-prime crisis played a role in the great American property bubble – it was not the cause.

The rapid escalation in both prices and private debt was born from a culture of expectation that the future would look like the present or as Alan Greenspan, an American economist who served as Chairman of the Federal Reserve from 1987 to 2006, put it in the publication of his 2007 book The Age of Turbulence:

“'Flippers' – speculators in places like Las Vegas and Miami.. would use easy credit to load up on five or six new condos aiming to sell them at a large profit even before the apartments were built.”

Albeit, for readers feeling a little nervous at the above revelations, a few sentences later he provides at least some reassurance:

“I would tell audiences that we were facing not a bubble but a froth – lots of small, local bubbles that never grew to a scale that could threaten the health of the overall economy”.

And as we’ve seen in Australia – irrespective of lending rates which reached close to 9% in the lead up to the onset of the GFC – when such an attitude takes hold, it is remarkably difficult to break or 'deflate'.

For example in China, despite strict measures such as preventing unmarried couples purchasing more than one residence, or requiring higher deposits for second homes coupled with an increase in the capital gains tax when selling, it has done little to suck air out of a country which has few investment options for individuals outside of real estate.

And in Australia – regardless of the recent comparative blip to property prices since the peak of 2010 (when compared to Europe or the USA) – we remain a nation completely obsessed with housing.

You only have to turn on the TV to be bombarded with programs from The Living Room to The Block, which make everyone feel like a rookie renovator able to ‘tap into’ the wealth of their property investments with a quick makeover or fuel the perception that you can pick up a good property ‘below its intrinsic value’ and ‘add value.’

And yet bubbles when/if identified are undoubtedly unhealthy from the broader perspective of society, leaving a widening gap between owners and renters as speculation pushes prices northwards which, following decades of poor planning for population growth, leave governments firing shots at the market in the form of short term first-home buyer grants as the only ammunition they have to reverse the trend – which of course leads to the intended side effect of pushing the market higher still.

As John Howard declared back in 2007 during prime minister’s question time (and good on him for being honest because without exception, I would think most other politicians from all sides of the table would view a ‘crisis’ in similar terms):

"A true housing crisis in this country is when there is a sustained fall in the value of our homes and in house prices”.

And perhaps it’s worth mentioning that Howard’s response was in reply to a question challenging the plight of first-home buyers from soon to be elected Kevin Rudd – who upon taking office less than 12 months later promptly inflated the market three fold with his first-home buyers ‘boost,’ which had the consequence of leaving many new owners in subsequent negative equity once it was stripped away.

And indeed it is a conundrum.  Considering the levels of private debt – mostly leveraged against housing, and the long term acceleration in the investment sector, which currently makes up around 44% of Australia’s buying market, prices are once again moving northwards as a number of social and economic factors collide.

Increased confidence, availability of cheap credit (such as our current low interest rate environment) and more importantly, the continuation of a cultural illusion that forgoes any financial prudence as investors pull their finances out of savings accounts before it’s purchasing power is diminished completely – in an attempt to beat the well contained genie of inflation and shore up future security in an environment where basic living costs are high and growing.

There are no quick fixes to the housing affordability conundrum. In light of our high private debt ratios it would be extremely damaging to the economy if there were a crash. High levels of debt, when followed by downturn in house prices, generally result in a greater reduction of economic growth and subsequently an increase in unemployment.

And yet, negatively geared investors, mortgage lenders, leveraged home owners, future state and federal budgets are all counting on rising house prices for future spending needs and long term security.

So the question remains, how much higher can prices possibly go at the expense of a new generation of renters (or as they put it in the UK ‘Generation Rent’) who have long given up on the Australian dream?

It can’t be solved with short term thinking, however, neither are we sitting in a revolving chorus of ‘There’s a Hole in my Bucket’ –  our economy is strong and there are plenty of sustainable long term policy decisions that would benefit a structured plan to allow a greater number to take ownership and contain inner city inflation.

The key of course is to slowly unpick the current distortions that tie up the established market such as negative gearing as one example, and first-home buyers grants as a second, whilst at the same time employing policies to increase supply and raise the dollars needed to fund essential infrastructure through (as suggested by economist Leith Van Onselen) bonds, or encouraging large superannuation funds, who are clearly open to the idea, to fast track some of our major projects.

What we can’t afford to do is kick the can down the road and continue with the same obsessive lines of limited thinking.

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.