[This is an extract from Alan Kohler's new book, The Great Divide: Australia's housing mess and how to fix it]
Why has a succession of inquiries and reports, along with a museum full of academic papers and journalism on the subject, never led to serious, effective action to improve housing affordability?
In my view it’s because all the work has been both aimless and unsupported by a national consensus. Solutions by the dozen have been proposed to increase the supply of dwellings through better zoning and planning and/or to reduce demand, usually by knocking off one or more tax breaks. But what’s the aim, exactly? And more importantly, what’s the real national mood, and therefore the politics?
The politics of it is both simple and difficult: housing is a cartel of the majority, with banks and developers helping them maintain high house prices with the political class actively supporting them.
Everybody involved in this game – homeowners, banks, property developers and state and federal politicians – wants house prices to rise for their own reasons. Renters don’t stand a chance.
Australia’s 27 million people live in 10.8 million dwellings, of which 65% are owned and 35% are rented. That is the lowest rate of home ownership in twenty years, but it’s still a big majority. Two-thirds of the population is therefore in favour of restricting the supply of houses to maintain the value of their own and they are supported in that by banks and developers.
Banks make more profit as higher house prices increase their assets and interest income, developers make more money if the price of their product is high, state governments make more stamp duty, and greater wealth supports the national economy and keeps federal politicians in power.
It means that any genuine attempt to deal with housing affordability and the shortage of rental accommodation would have to contradict the interests of both the majority of citizens and those with the most power. There is lip service paid to the problem of affordability and ‘promises’ to build a certain number of houses to ease it, but these are usually not fulfilled, and are never actual promises to build anything, just aspirational forecasts – like the latest one from the Albanese government to ‘build’ 1.2 million houses over five years.
I’ll get to that in a moment, but first, if there is ever going to be a housing policy that means anything, it needs to have an explicit aim. All the work on this subject, including the latest project initiated by Julie Collins and now led by Clare O’Neil, is like a journey with no destination. What are we trying to achieve? And does anyone who matters really want to achieve it?
In my view, the aim should be simple and easily stated and understood and should refer to the problem … that the price of housing is now twice the multiple of income it used to be. It was three to four times average weekly earnings, now it’s seven to eight times. Any serious effort to deal with housing affordability should be explicitly aimed at getting that ratio down and keeping it there.
Expressing that as the aim of policy and then providing leadership towards a national consensus around it must be the start of any genuine plan. Any government policy also needs to acknowledge that the two most important factors in housing affordability have little to do with housing and won’t ever be part of any housing policy: interest rates and bank regulation.
Only two things have ever resulted in a (temporary) improvement in housing affordability: higher interest rates and, in 2016–17, a crackdown on bank lending to real estate investors. But neither of those things was aimed at improving the affordability of housing; interest rates rise and fall according to what the Reserve Bank thinks the economy needs, and the Australian Prudential Regulatory Authority is concerned with the stability of the financial system. Neither has a mandate to do anything about the price of houses and their actions won’t be influenced by any government policy designed to improve housing affordability.
But perhaps there’s an even more fundamental bridge that needs to be crossed before we look at solutions: is the big rise in house prices since 2000 good or bad? Economists refer approvingly to a “wealth effect,” and Australia has had that in spades: per capita wealth has increased fivefold in thirty years. Whenever the ABS releases the latest survey of wealth, I get reports from economists writing that it’s a very good thing. The economy has got stronger due to the increase in wealth, and the majority of Australians are happier.
The value of other assets – shares, infrastructure and commercial property – has also been increasing more rapidly than incomes, but that is unequivocally a good thing, except when it gets out of control and turns into a bubble that bursts. Superannuation accounts, mostly without residential property, have been increasing at a clip of about 9% per annum, about three times the rate of wage growth, and any fund that only manages to return the rate of wage growth is likely to go out of business.
The difference with housing, of course, is that it’s also where you live, and as a result there are losers as well as winners with high and rising prices. And while the winners outnumber the losers two to one, and in a democracy that would normally be the end of the matter, sometimes the right thing for a society isn’t necessarily what the majority wants. Many people, myself included, used to enjoy smoking, but governments decided it was bad for society and worked on cutting it back through advertising bans, labelling and taxes.
Half of Australia’s homeowners are locked in a wealth-creation partnership with a bank. Real estate is such an effective accumulator of wealth because you can borrow at least 80% of the value, often more, and the leverage means that every dollar you invest is multiplied fivefold when the price increases. That’s usually a risky, speculative thing to do in investing, but with real estate it’s safe because there aren’t 50% crashes in residential property as there are on the share market about every ten years, or not for 130 years anyway, so banks are happy to lend much more than they are with shares. And bank executives build their wealth alongside their customers; they are not only very keen to lend against housing but also keen to make sure that house prices keep rising.
It’s not just the house-owning majority who think about housing as wealth-creation as well as, or even instead of, shelter – everybody regards housing as an appreciating asset. Renters talk about getting on the ‘property ladder’; they’d prefer it to be easier to get on, but they want it to be a ladder once they’re on it. We’re all so used to house prices always rising that it’s hard to imagine life any other way.
And the biggest tax dodge of all, of course, is that if you live in the house there is no capital gains tax at all. I know families that have grown their wealth by moving every two to five years, buying, renovating and selling for a tax-free capital gain. Tough on the kids and their schooling, but it works a treat!
So the number one blockage to dealing with housing affordability is that there is no consensus that there is a problem at all, let alone how to fix it. Academics, economists and journalists all say it’s a crisis, and millennial renters complain bitterly because they cannot buy a house, but the majority of home-owning Australians are happy to shut up and keep growing their wealth – and banks, developers and governments are all happy to make sure it happens.
My view, and the basis of this book, is that there definitely is a problem and that the high price of housing is undermining social cohesion and the proper functioning of the economy and the nation. The doubling of house prices in relation to incomes has distorted Australian society over the past twenty-five years and focused wealth creation on an unproductive asset. Something must be done about it even though most people may not like it.
Moreover, there is no point making a small change, say by trying to keep the housing-to-income ratio where it is, or down from the current seven to eight times average weekly earnings to six to seven times, or even five to six times. To achieve anything in life you have to aim high. If there is to be a genuine effort to improve housing affordability, the aim must be to return the ratio to three to four times average weekly earnings, as it was twenty-five years ago.
The latest national median house price is $740,668. The current average full-time adult wage is $1,907.20 per week, or $99,174.40 a year – call it $100,000. For the house price-to-income ratio to be what it was twenty-five years ago, the national median price would have to halve, to $370,000. But that’s not going to happen, of course, and it wouldn’t be a good idea even if it could. Even if the government could pull that off, which it couldn’t, there’d be a riot and, as there was in the United States in 2007/08, an economic collapse.
More realistically, house prices need to stay put for a while and allow incomes to catch up. Average weekly earnings are currently rising at about 4% a year. For the national median house price of $740,668 to be 3.5 times income, the average wage would have to be $210,000, more than double what it is now. At 4% growth in incomes per year, that would take about eighteen years.
The only time house prices remained unchanged for that long was from 1930 to 1949 – that is, during the Great Depression and the period of price controls in the war. Even after the recessions of 1982 and 1991, it took less than half that long for prices to start rising again.
So 15-20 years of static house prices would be unprecedented, but that sort of time frame might also get Australians out of the habit of thinking that house prices always rise and that housing is the best way to build wealth. And if housing affordability is to be properly dealt with, we have to change that mindset, because house prices won’t stop rising at twice the rate of incomes unless we stop expecting them to.
If the government were serious about housing affordability, it would announce an affordability target like the one that I am suggesting, of something like three to four times average incomes, and would say: “We’re going to achieve that target by doing everything we can to ensure that house prices stay where they are for eighteen years, to allow incomes to catch up.”
So how would that be done? It’s easy: by ensuring that there was enough supply to meet demand, and since it’s probably working against two enormously powerful forces that are doing their own thing – monetary policy and bank marketing – that means both sides of the equation, demand and supply, must be pressed into service … And every tool in the shed must be put to work.
This is an extract from Alan Kohler’s new book, The Great Divide: Australia’s housing mess and how to fix it.
Alan Kohler AM is the Founder of Eureka Report, finance guy on the ABC news and columnist for The New Daily.