The failed politics of housing affordability: Catherine Cashmore
Housing affordability has been the name of the game this week.
We’re coming up to a general election and ‘lo and behold,’ much to the distaste of those who deny Australia has a housing affordability crisis – and first-home buyers are just being spoilt and picky – research by ‘Auspoll’ has revealed that 84% of Australian’s put housing affordability top of the charts when rating election issues by areas of importance.
The article which appeared last week across various ‘News Corp’ publications, focused on key electorates in which ‘housing affordability’ came streets ahead of other hot topics such as ‘education’ or ‘border control’ – accompanied with case studies in which 50% or more of family income is going towards mortgage or rental payments alone.
Cited within the report was a 2007 comment by the then Opposition leader Kevin Rudd, who in an attempt to boost his popular vote, told former Prime Minister John Howard that:
"Housing affordability is the barbecue stopper right across Australia."
It’s interesting to chart the political narrative regarding housing matters – because after years of lousy half-hearted initiatives, which have done nothing to markedly advantage the two most venerable demographics of our market – principally first-home buyers and renters – we have no sustainable interventions in place to affordably accommodate a rapidly expanding population, all of whom will need some form of shelter.
Australia has sailed the ship of good fortune, sheltered within a resource rich environment. Most families have adjusted their lifestyles to suit their income and never feel particularly ‘well off’, even when earning substantially more than the median income.
For those working at, or falling below the median, the cost of accommodation is an increasing drain on the economy and well being of our society, resulting in areas of socio-economic advantage and disadvantage in an English-style cultural or class divide.
Since 1974 during which Gough Whitlam aroused passions in his ‘It’s Time’ speech by pointing out:
“The land is the basic property of the Australian people. It is the people's land, and we will fight for the right of all Australian people to have access to it”,
political advocates from both sides of the playing field have weighed into the debate.
Policies such as the NRAS, the first-home buyer’s savers account and spruiked initiatives to increase infrastructure have all failed to make significant or sustainable inroads to either supply based concerns, vacancy rates, or first-home buyer percentages.
A few decades on and it seems whilst everyone wants to be popular and ensure housing is ‘affordable,’ - years of easy capital gains and tapping into the housing equity ATM machine, have made any contemplation that prices should drop - or even stabilise for a lengthy period of time - downright out of the question.
As John Howard worded it during prime minister’s question time approaching the end of our 2007 housing boom;
“A true housing crisis in this country is when there is a sustained fall in the value of our homes and in house prices”
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 bore the consequence of leaving our most inexperienced buying demographic in subsequent negative equity once it was stripped away.
Earlier this year, the question of housing affordability once again raised its political head, however this time it was in the form of ‘point-scoring.’
In a television program back in May, Joe Hockey made the call that house prices in Canberra would lose capital value under a Coalition Government:
"There is a golden rule for real estate in Canberra – you buy Liberal and you sell Labor".
The response from Kevin Rudd – the then 'former-PM' - who ‘championed’ the cause of first-home buyers with his ‘vendor boost’ (as Professor Keen aptly named it) was:
"Can I just say, Joe, I'm not sure that will go down well with all the voters in Canberra,"
Labor politician Andrew Leigh, who represents the Canberra seat of Fraser, was not slow to weigh in on the debate:
''When the Liberals came to office in 1996, they wiped $25,000 off the price of a Canberra home....Today, Joe Hockey proudly jokes about how he'll do it the same again.”
A comment that was promptly disputed by ACT Liberal Senate candidate Zed Seselja, who – whilst paddling frantically against any suggestion that prices might drop under a Liberal Government, cited the ‘moving annual median house price’ from the Real Estate Institute of Australia with the comment:
‘‘Prices dropped more in last two years of the Keating Government than they did under Howard’s first 1.5 years, and to its lowest point.’’
Woe unto any politician who suggests market prices may actually fall.
Far better it seems to burden buyers with cheap credit by way of grants, low interest rates and incentives, in a vain effort to mask rising costs under the false premise that residential real estate is getting ever more affordable – particularly in light of a construction industry that’s struggling to make any headway.
(hat tip @bullionbarron)
“Improving housing affordability does not mean reducing the value of existing homes, which are usually the primary asset of any individual or family,” said Labor's 2007 policy statement.
The policy of negative gearing, which was introduced and subsequently advocated to assist the lowly renter and reputedly ease the burden on social housing (waiting lists of which are increasing), coupled with the capital gains tax discount of 50% introduced by John Howard in 1999, resulted in a 30% increase in investment activity alone.
It’s been by far and away the best incentive for the individual investor, fuelling speculation into the real estate sector and consequently creating a massive bubble of undiversified private debt.
Whilst I am not against investment in the residential real estate market, it makes little sense to extensively encourage it from a policy perspective if it doesn’t achieve:
- An improvement in housing affordability and supply;
- An increase in vacancy rates;
- A substantial boost to new housing and consequently infrastructure in ‘growth’ suburbs; and
- Lower rents for the most venerable in our society
All of which negative gearing has failed to do.
As I pointed out in my column last week, whist it would be unfair to condemn individual investors for taking advantage of various tax incentives, any Government that puts in place policies to fuel speculation and subsequently inflate prices, is a Government creating a difficult paradox: how to advantage those who entered at the beginning of the lending boom (during which capital price to income was lower), compared to those who find themselves at the sticky end of housing’s historical journey in which mortgage debt has inflated fourfold.
Now we have a situation where household debt to income sits close to 150% with ‘Moody’s Analytics’ in a paper entitled “Trends in Australian consumer lending” demonstrating how Australian banks have the highest exposure to residential mortgages in the world.
It was years of dizzy speculation into the established real estate market which resulted in prices escalating to their current heights, with banks only too eager to create credit through the extension of mortgage lending which in the ten years to the GFC, increased in-excess of 450%.
And despite the innocent impression some try to imprint suggesting we have a stable and responsible banking sector.
Global measures to date, which aim to ensure a similar GFC crisis does not occur again, do not go far enough in ensuring financial institutions fund their investments with substantially more equity than current regulations dictate.
As Moody's Analytics managing director Tony Hughes and senior economist Daniel Melser suggest;
"Irrespective of the complacency of local analysts, who sound a lot like many US housing cheerleaders circa 2006, this exposure (to home loans) represents a major concentration risk for banks and the Aussie economy," comments not to be taken lightly.
The influence of investment into the property sector was noted as far back as 2003 in a Productivity Commission Inquiry on first-home Ownership submitted by the RBA.
The study concerned itself with the effect of “strong and rising house prices which were burdening new home owners.” And noted
“The most sensible area to look for moderation of demand is among investors.”.. “In particular, the following areas appear worthy of further study by the Productivity Commission”
The report noted some key investor incentives which in light of the comments above, could be moderated:
1.) “The ability to negatively gear an investment property when there is little prospect of the property being cash-flow positive for many years;”
2.) “The benefit that investors receive by virtue of the fact that when property depreciation allowances are 'clawed back' through the capital gains tax, the rate of tax is lower than the rate that applied when depreciation was allowed in the first place.”
3.) “The general treatment of property depreciation, including the ability to claim depreciation on loss-making investments.”
This was 10 years ago – and without putting too blunter note on it – we’re no further forward.
In addition – for those who continually suggest house prices are as high as they are simply because we have a ’shortage’ of accommodation, the same report highlights:
“At the macro level there is not much evidence to suggest that the growth in house prices has been due to a persistent shortage of supply of houses relative to underlying demand for new housing.”
There are plenty of initiatives which can be employed to ease affordability – albeit an active attempt to gradually ease investor demand in our established housing sector, whilst facilitating the construction sector.
A few days ago I read an interesting blog by R P Data investigating why the current upward cycle may be different and more tapered to the last.
The comment was made that first-home buyers ‘tend to push prices higher…. because their behavior can be more emotional than other segments of the market’ whilst investors are ‘more clinical’ when acquiring real estate.
It may seem a sensible assumption to conclude, as is often the case when assessing behavioral economics, that the reality can sit some distance away from the broadly held perception.
There has without doubt been a push in home prices from first-time buyers in periods during which easy credit has been offered on a plate by way of incentives and grants to the inexperienced proportion of our buying market.
However, without these dynamics, investors play (and have played) a far bigger contribution to price rises in Australia’s real estate market.
From my own anecdotal experience, seeing an investor pay over and above what a property is worth, (based on an educated assessment of recent comparable data,) is a work related Saturday pastime.
Compared to last year, all states are experiencing an investor lead boom.
Victoria’s numbers are up 11.3%, Queensland 4.3%, South Australia 8.3%, Tasmania a more modest 1.5%, ACT is up 11.1%, the Northern Territory up 28.5% with the outright winner Sydney, up 35%.
You don’t have to be Einstein to work out where all this is heading.
Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.