The start of 2017 has been amazing, with so much good news happening. Yet, we have questions coming up again about the challenge that Australians are having in owning a home.
I personally believe that home ownership is the foundation to wealth for most people. People who own their homes statistically have more wealth at retirement age than those who don’t. Governments know this and if the citizens have a certain level of wealth they are less likely to need government support for the remainder of their lives – this is one of the reasons why incentives have been offered to people to invest in property. Another reason is that investors can provide housing for the rental market, meaning the government does not need to spend so much on public housing. Yet these incentives, including negative gearing, are once again under attack.
A recent report, Demographia Housing Affordability Survey (The whole report is here – Demographia) was published declared that Sydney was the second most expensive city in the world to live, with Australia’s other mainland capitals all featuring in the top 20 of that list. It is an interesting collection of numbers that delve in to where housing it expensive globally when compared against median household income.
Australia does figure highly on this list and has done so for many years, though the recent East Coast prices boom has pushed Sydney & Melbourne closer to the top of that list. Though I wonder exactly how these figures are collated and interpreted – I’m not sure they are entirely accurate. I have spent time in San Francisco, New York & Los Angeles and I have lived in London & Hong Kong for a year – all of these are top ranked cities. You will know that one of my favourite pastimes is investigating real estate markets wherever I am. I can assure you that the real estate prices in these cities make Sydney & Melbourne look like absolute bargains. This is one reason why we have had so much foreign interest in our property in recent years.
So while I’m not entirely sure on the accuracy of these figures, there is no denying that Australian property is expensive by world standards. And with a land mass that is so huge, 7.6M sqkm, and a population density of just 2.6 people per sqkm (compared to the USA at 31.6 or China at 138.6) one could wonder why prices are so high when we have so much land and so few people to populate the land? Even considering that 18% of Australia is officially desert and a total of 35% of the land has little or no rainfall, we still have about 5M sqkm to fill if we wanted to do so. That land mass is bigger than India, (3.3M sqkm) which has well over a billion people living there.
So clearly prices have nothing to do with how much land there is available. Some say it’s all about supply and demand. Well supply is limited by available finance and our planning system while increased demand comes down to population growth. If measures to make housing more affordable are introduced without measures to increase the supply of housing, prices will simply continue to rise. A good example of this was when the First Home Owners Grant of $10,000 was introduced, overnight prices went up by that and more.
There are so many factors that go in to what makes up the price of housing and what influences them, the solution to housing affordability will not be an easy one. I’m not even sure if it can ever be solved, in fact if you were to ask your parents how hard is was for them to buy a home, I’m reasonably sure that they could have a few stories for you about how tough it was back in the day.
But are there some answers?
Yes, there are many, however they are unlikely to be acted on. There is simply too much to do and not enough political will or favour with the vested interests for real solutions to be provided.
I have been thinking this over and studying the issues for a long time now and I have some definite ideas about exactly where Government needs to begin. A combination of these ideas implemented swiftly could well engineer lasting results.
Let’s see what you think:-
Firstly, let’s look at the demand side – these measures will affect demand to buy housing.
- Superannuation – what is superannuation for if not to provide wealth upon which people can live once they have finished their working lives? With over $2 Trillion in assets in personal and industry super funds, surely first time buyers could be given access to draw what is required for a 20% deposit to buy the home? The only requirement be that the drawn amount should be repaid to the fund over say a 20 year period and thus be available to provide retirement income. Industry super funds will howl about the money leaving their control and it would mean a burst of people setting up their own super funds – demand increases.
- 50 Year mortgages – people are living longer and working until their 70’s. The traditional 30 year mortgage was based around the retirement age of 65. Having longer dated mortgages will drop monthly payments, meaning more people could afford to buy and make those repayments. The Japanese have 100 year mortgages that go with the home and the family that owns the home – inter-generational – demand increases.
- Immigration – there are many who believe that if we cut immigration levels that demand for housing would drop and this is logical. However, I think that this country needs immigration to continue to grow its economy over time. Look at Japan which has stagnated economically for the last 20 years, mainly due to almost now population growth and the aging population. We need more people of working age to work and pay taxes. We could require immigrants to initially locate themselves in rural or satellite cities rather than capital cities which could ease demand. If immigration were lowered it needs to be only a short term thing while Government sort out the supply side issues – demand drops.
- Taxes – I have seen reports that show that Federal, State and Local government taxes can make up to 40% of the price of new housing. Can you imagine what would happen if each arm of Government reduced what they take by 50%? That would theoretically mean that housing could become 20% cheaper overnight. More housing would be bought and built and jobs created, meaning that more taxes could be earned by governments through higher volume, perhaps offsetting some of the “lost” revenue – demand increases.
- Relocate – the sad reality is that many people will not ever again be able to afford to buy a home to live in the city of their choice, particularly if that city is Sydney or Melbourne. As a society we need to ask if that is ok? Does everyone have the right to own a home where they want to live? A solution could be to move to a smaller city, buying there and try to build enough equity to get back to where they really want to be. Or choose to “rentvest”, which is rent in the city in which you choose to live & work and invest in a city in which you can afford. Wealth could be built that way – demand increases.
Let’s have a look at the supply side:-
For mine, supply of land is the major issue that could even out the price of housing – we simply need more land more quickly. A great example published by the Wall Street Journal, showed that the developed area in Atlanta grew 200% between 1980 and 2010, while house prices only increased 14%. In contrast, San Francisco-San Jose increased its developed land by 30% and had house price increases of 188%. In Texas, which is one third the size of W.A. and has a population exceeding that of all of Australia, new land subdivisions can be ready for sale less than a year from the land being zoned for residential use. In Australia, that can be many years.
- Planning reform – the single most important factor that could increase supply of land is how local councils approve land developments. In many states there are statutory time limits in which development applications must be addressed by council. However, council staff are usually less than that required to cope with the level of work. I have seen many times delaying tactics used to “restart the application clock”. In Victoria, all the council needs to do is ask a few questions to the development applicant within 28 days of an application being made for the clock to reset. The councils know that the applicant face a current seven month wait to apply to VCAT (planning tribunal) to get a hearing, so there is no real hurry on council officer’s behalf to get anything done. Having said that development planning for zoning of land is usually done at state level, which is a much smoother process that private land owners banding together to try to get change underway. Reform as to how council handle planning application is required, together with some liberalisation with all of the myriad rules around land development could help smooth, quicken and streamline timelines to bring land to market. If necessary remove planning powers from local councils and nationalise control or let it be handled at state level – supply increases.
- Council Funding – If planning powers are to remain at local council level, instead of incentives being given to first home buyers, why couldn’t funds be directed to council in growth zones which pay them to increase the throughput of approvals to create more land and housing?
- Funding – create a national housing bank, funded by the Federal Government, which actively sought to lend money to developers to develop new land and more housing. Stipulations around the amount of affordable housing, housing reserved for public housing and even buyers being limited to first time buyers could be introduced. Currently the major Australian banks have pulled back massively on funding and developers cannot produce more housing for buyers, they just can’t get the money to build – supply increases.
- Negative Gearing – this is something that was repealed in 1985, resulting in massive increases in public housing lists. Investors simply went elsewhere and governments quickly realized it would cost them money to provide public housing and less people would be investing to growth their own wealth, with a negative effect on future pension payments – negative gearing was re-introduced 18 months later. The negative white noise from some sections of politics and the media for negative gearing to be dropped because it is forcing up the price of housing is unfounded. Incentives to investors increase the supply of housing, which is important to the more than 30% of the population who either need to or choose to rent.
- Land Taxes – I am very much of the opinion that we need less taxes rather than more. However, it might be necessary to levy much higher taxes on landowners who sit on developable land that is needed for housing – supply increases.
Something that is neither supply or demand focused, but nevertheless an absolute necessity, is the concept that we need to be able to provide more affordable land and that there is plenty of it. Some 5 million or so square kilometres of it in Australia. London has a major housing cost issue and it began to deal with that many years ago by connecting fast rail to regional cities & towns. Many people working in London have a pleasant 1 hour daily train journey from towns more than 100km from London. These towns that have effective connections have been proven very popular due to a better lifestyle and more affordable rural lifestyle. There are so many towns and small cities like this in Australia – our regions need a boost and our people deserve to opportunity to own a home.
I wrote about a new superfast 400km/h train line last year here that is proposed to connect Sydney, Melbourne and later Brisbane. Nodes could shoot off this line in to existing towns and new ones could be created. Imagine the economic boost for our country and the enormous supply of new land for housing?
There are no simple solutions to Australia’s housing affordability challenge. We should acknowledge that the problem it is not new, it’s been ongoing for many decades. Nor is Australia alone – it is a global issue, however particularly so in developed Western nations where the standard of housing is high.
The first thing to do is the first thing to do – any one of these above ideas could help housing affordability. This is something that is important to our nation and its people.
We just need to make a start. Now.