Housing affordability is firmly on the policy radar in 2017. This crucial policy topic may not always be accurately discussed, but it is pleasing to observe its elevation.
As with all aspects of the housing industry, discussion around the subject of housing affordability often occurs in a generalised manner. However, housing affordability means different things to different people and different segments of the market.
Around 60 per cent of Australian households own their own home, either outright or with a mortgage. These two different sub-groups of households hold different perspectives on affordability, with a further differentiation arising depending on whether or not these households are assisting younger generations of their family enter the home ownership market.
Around 40 per cent of Australian households are renters. Some of these households have made a conscious decision not to enter the home ownership market or to delay entry voluntarily for lifestyle reasons. This latter group of course includes some first home buyers (FHBs) who have entered the housing market by becoming an investor before becoming an owner-occupier. The significant number of Australian households who rely on the provision of affordable public and social housing represent another key element of the rental market.
There are also a considerable number of potential FHBs who either rent or still live at home with their parents or other family members, who desire to enter the housing market. They can’t afford to get on the Australian residential property ladder and feel left out of the great Australian dream. This is one of the key areas where Australia’s housing affordability challenge resides.
The above groups do not represent an exhaustive list of Australians who are affected by or have a perspective on current housing affordability conditions in Australia. These various household groups do serve as a reminder that housing affordability is a complex policy challenge. To borrow a much-used but accurate term, there is no ‘silver bullet’ to address Australia’s housing affordability challenge.
In this regard, it can be disturbing when policies to amend Australia’s current negative gearing provisions and capital gains tax concessions are implied to be, or touted as, a panacea for the nation’s housing affordability challenge. That is inaccurate and misleading. With regard to the current policy on the table in relation to negative gearing and capital gains tax (for which there is admittedly little detail and scant modelling available for scrutiny), there is actually a strong argument that the policy would lead to a further deterioration in housing affordability.
Any consideration of housing affordability needs to recognise the diversity of ‘stakeholders’ involved, the complexity of the issue, and the interaction of demand and supply factors. This is not occurring in Australia to any large extent at present due to the simplicity of the debate.
Ensuring adequate housing supply is often noted as being the key to addressing Australia’s housing affordability ‘problem.’ Sydney is a classic example of the importance of adequate supply. New housing supply may have been rising for over four years in Sydney, but that follows a decade of massive under-building and broader housing market under-performance. Furthermore, it was only half way through the current up cycle that construction volumes started to hit healthy levels, yet a subsequent down cycle is expected to emerge from 2017.
In the last 13 years Sydney has only come close to building what is required to house its growing and ageing population for two and a half years. As the new home building sector enters a cyclical downturn, the city is well short. Supply has come nowhere close to making up for a lost decade.
Is that the only reason why, according to many measures, including the HIA Housing Affordability Index, Sydney is the least affordable jurisdiction in Australia? No, but it’s a very big part of it.
Of course, ‘more supply’ is no panacea and as a housing (un)affordability solution, it’s too simplistic. It’s still very important, though.
The core focus around housing supply (in Sydney and elsewhere) is the cost of that supply.
In Sydney, it can take over 12 months for residential land to become titled. That’s way too long (as well as being ridiculous). Some aspiring buyers, including FHBs, walk away from their first choice of wanting to build because of this cost constraint. That just places pressures in other parts of the housing market.
Similarly in Sydney, 44 per cent of the final price of a house and land package goes back to federal, state and local governments in the form of taxes and charges. Stamp duty - Australia’s most inefficient tax - is one of the most prominent costs, and can cascade through the new housing system in terms of being levied more than once along the chain.
If you think Sydney is the odd one out, think again. When all taxes are included, the taxation on a new house in Perth is 41 per cent of the final price. For Melbourne, the figure is 38 per cent and for Brisbane, the figure is 36 per cent. The percentage is 38 per cent in Albury and Adelaide, 37 per cent in Townsville, and 36 per cent in Wodonga.
The cost for younger home buyers of financing the extra amount of a home due to taxes can equal around one third of their after-tax incomes.
That environment of huge (and inefficient) taxes (cost) on new housing is a substantial reason for Australia’s overall housing affordability challenge.
Any policy to address housing affordability needs to include a strategy for addressing these costs if is to have any chance of succeeding.