Housing Affordability: has the great Australian dream ended

1
Housing Affordability has the great Australian
dream ended?

• Judy Yates
• University of Sydney

2
Outline

• Current situation (and why different from US)
• How did we get there?
• Implications and explanations of changes that
  have occurred
• What is needed for a fairer housing system?
• What can we do about it?

3
Current situation

• In Australia
• House prices declining - but
• Initial house price correction occurred in
  2003-04
• Current and anticipated shortage of supply
• Factors specific to US house price declines
• Excess supply of housing
• Expansion of home ownership to underserved
  minorities
• High proportion sub-prime lending
• Different financial system
• Non-recourse lending
• Fixed rate lending, widespread use of MBS
• Weaker regulatory system

4
US and Australian real house price inflation
Source UShttp//www2.standardandpoors.com/spf/pd
f/index/CSHomePrice_History_022445.xls Aus ABS
http//www.abs.gov (641601.xls)
5
AustraliaDemand-supply balance as at 2008
Source State of Supply, 2009, National Housing
Supply Council, Table 4.5
6
AustraliaIncrease in gap over 5 years to 2013
Source State of Supply, 2009, National Housing
Supply Council, Table 4.10
7
Australia FHB Affordability index
8
Affordability Outcomes (2003-04)
Lower income private renters
Lower income purchasers
Moderate income private renters
Moderate income purchasers
Source Yates and Milligan (2007) Housing
Affordability A 21st Century Problem, AHURI
NRV3, FR
9
Real rent inflation (Aus CPI rent)
Source Aus ABS 641605.xls rent component, CPI
adj
10
Median weekly rents, June quarter 2008
Source REIA Market Facts, June quarter 2008
11
Distribution of private rents 1996 - 2006
Source State of Supply, 2009, National Housing
Supply Council, Figure 5.8
12
Rental affordability for lower income households
2006
Source State of Supply, 2009, National Housing
Supply Council, Table 5.1
13
Social housing
90,000 units
Source State of Supply, 2009, National Housing
Supply Council, Figure 5.7
14
Current state - summary

• Affordability for FHBs has improved in the past 6
  months but is still worse than a decade ago
• Affordability problems worse for lower income
  renters
• Associated with affordable housing shortages

15
How did we get there?

• Experiences of 3 generations of FHBs
• 1950s-1960s
• 1970s-1980s
• 1990s-2000s
• Implications and explanations of changes that
  have occurred

16
1950s -1960s

• Median house price 7,500
• Average earnings 2,000 pa
• Maximum loan 9,000
• Deposit gap -ve

• Dream owner-occupied housing provided shelter,
  security and stability
• Reality housing affordable

17
1970s 1980s

• Median house price 32,000
• Average earnings 8,000 pa
• Maximum loan 25,000
• Deposit gap ? annual income

• Dream wealth accumulation
• Reality access problems emerging

18
1990s 2000s

• Median house price 350,000
• Average earnings 50,000 pa
• Maximum loan 200,000
• Deposit gap ? 3x pa income

• Dream ???
• Reality housing unaffordable

19
Key factors 1950s 1960s

• Economic
• Stable, steady growth
• Social
• Family focus, single male breadwinner
• Financial
• Regulated housing finance sector
• Significant government provision
• Role of housing
• Shelter, security, stability

20
Key factors 1970s-1980s

• Economic
• High unemployment and high inflation
• Social
• Move to two earner households
• Financial
• Increasing interest rates, emergence of deposit
  gaps
• Decreasing government involvement
• Role of housing
• Savings requirement, plus inflation highlighted
  wealth accumulation

21
Overview FHB Median house price (2008)
Source HIA FHB median house price data from
1984 average capital cities, CPI
adj Extrapolated back with scaled BIS Shrapnel
data
22
Access to home purchasehouse price/income ratio
23
Access to home purchasedeposit gap/income ratio
24
Key factors 1990s-2000s

• Economic
• Labour market deregulation, income polarisation
• Social
• Delayed marriage and child bearing
• Financial
• Financial deregulation and liberalisation
• Role of housing
• Tax advantaged investment
• Need for inheritance for FHBs

25
Current situation FHB Median house price
(2008)
Source HIA FHB median house price data from
1984 average capital cities, CPI
adj Extrapolated back with scaled BIS Shrapnel
data
26
Access to home purchasehouse price/income ratio
27
Access to home purchasedeposit gap/income ratio
28
Access to home purchase

• Two periods where access has declined
• 1970s Structural has not been reversed
  associated with
• rise in inflation and interest rates from 1970
  through to 1990
• 2000s Structural or cyclical? associated with
• divergence of rise in house prices from rise in
  incomes from 1990 exacerbated by rises from 2000
  
• reduced cost and increased availability finance

29
Key point 1

• Current housing affordability problems are
  structural (as well as cyclical)
• began 30-40 years ago (when inflation switched
  focus on housing from providing shelter security
  to providing wealth security)
• exacerbated by changes in CGT (in 1986 favouring
  owner-occupiers in 1999 favouring investors) and
  financial deregulation and liberalisation that
  increased availability of, and access to, housing
  finance.

30
Implications

• Housing serves a dual role
• Consumption provides shelter
• Investment provides wealth
• Affordability problems arise because
• Role as asset for wealthy crowds out
• Role of shelter for less well off

31
Implications age specific HO rates
Source census data, special tables
32
Real net wealth per head (2003-04)
Source Treasury Roundup Summer 2004-05
33
Real net wealth per household (2008)
Source RBA Bulletin Statistics, Table B20,
divided by estimated number of households
34
Household net worth by age, 2003-04
35
Owner-occupiers
Household net worth by age, 2003-04
Otherhouseholds
36
Key point 2

• Within family intergenerational transmission of
  wealth is inequitable
• Children and grandchildren of owners can be
  assisted
• Children and grandchildren of non-owners cant be
  assisted

37
Household net worth by wealth quintile, 2003-04
38
Key point 3

• Within family intergenerational transmission of
  wealth is inequitable
• Wealthiest households have disproportionately
  greater capacity to assist their children and
  grandchildren

39
A fair housing system?

• An adequate supply of dwellings for all
  households within their capacity to pay
• With market focus, outcomes will reflect
  inequalities of income and wealth
• Within housing framework, can assist only by
  making housing assistance fairer

40
A fairer housing assistance system?

• Outright owners
• nothing
• Purchasers/would be purchasers
• address failures that result in marginal FHBs
  paying more
• provide insurance to protect marginal FHBs
• funded by purchasers or lenders
• no rationale for deposit assistance to assist
  wealth accumulation by advantaged households

41
A fairer housing assistance system?

• Renters
• rent assistance for those unable to meet costs of
  minimum acceptable standard of housing available
• ensure adequate supply of affordable housing
• Landlords
• subsidise provision of affordable housing

42
Score card for new policies

• Direct
• ?Incentives for investment in affordable rental
  housing tax credits (NRAS) 500m
• public housing stimulus package 6.4b

43
Score card for pre-existing policies

• Direct
• First Home Owners Grant ( 1b pa until stimulus
  which will add an extra 1.5b in this financial
  year)
• Commonwealth Rent Assistance ( 2b pa)
• Public Housing (lt 1.5b pa until stimulus which
  has added an extra 6.4b over coming 3 years)
• Land taxes

44
Score card for pre-existing policies

• Indirect
• Tax exemptions for home owners (gtgt 21b pa)
• No capital gains taxes
• No tax on dividends (rents)
• Offset by no deductions for costs
• Tax incentives for landlords (gt 1.2b pa)
• Negative gearing
• Depreciation allowances
• Offset by State taxes

45
Score card for non-current policies

• Marginal or non-existent
• Mortgage insurance schemes to protect borrowers
  not lenders
• Small scale state based schemes exist
• Could be a role for shared equity
• Incentives for investment in affordable rental
  housing
• Targeted depreciation allowances
• Planning incentives
• Institutional support for institutional
  investment
• Land trusts

46
Conclusions

• Pre-existing system of housing assistance is
  generally perverse
• New initiatives generally in the right direction

47
Conclusions

• Has the great Australian dream ended?
• Yes for many if emphasis remains on wealth
  accumulation
• Not necessarily if emphasis returns to shelter
  and stability

48
Real income and real house prices
Index
Source Treasury
49
What can we do about it?

• 1. Make investment by wealthy less desirable by
  reducing scarcity of desirable land
• Increase supply desirable land (infrastructure,
  transport etc)
• Reduce desirability of scarce land (decrease
  tax incentives for owning land increase density)

50
What can we do about it?

• 2. Increase housing available for shelter (and
  investment) for low to moderate income households
• Increase supply affordable rental housing
• Help marginal purchasers stay in their homes

51

• Thankyou for your attention