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A Fresh Lens on Housing Unaffordability – The Problem and its Causes

Posted by on June 16th, 2015 · Affordability, Housing supply, Planning reform

Paper presented at the Urban Conversations event 10 June 2015 hosted by the Australian Graduate School of Urbanism at UNSW Built Environment, Cox Richardson Architects and Planners and the NSW Architects Registration Board

By: Prof Bill Randolph, City Futures Research Centre, UNSW Built Environment

Part 1: The Problem and its Causes

It is surely a basic expectation of life in an advanced economy such as Australia that everyone needs to have a home suited to their needs and at a price they can reasonably afford. Long ago we broadly accepted that access to an affordable health service and education were basic expectations of a modern advanced economy. And quite right too. But unlike health and education which remain predominantly provided by publicly accountable agencies, housing has been effectively cut away and allowed to become essentially a market driven commodity, albeit heavily supported by tax and subsidy systems which add considerable distortion into the housing system.

Markets allocate according to capacity to pay. But in a market so patently distorted as ours has become, with inherent benefits and subsidies flowing disproportionately to the better off, it is not surprising that many find themselves at a distinct disadvantage. It is in this context that housing affordability has once more forced its way up the policy agenda. While most Australians are well housed and, indeed, continue to prosper from escalating property values, there is a mounting recognition that for a growing minority the ability to afford a decent home at an affordable price is slipping away.

First up, it needs to be stated that the housing affordability problem is highly complex – this is no place for thought-bubble policy responses. However, where do you start? It’s this complexity – and the way individual property ownership has become centrally welded into the very fabric of the contemporary social settlement – that undermines any objective approach at resetting the policy framework to move us out of the seemingly never-ending spiral of housing unaffordability. It is in every sense of the word, a very ‘wicked’ policy problem.

But what exactly is the housing affordability problem? I would argue that there is not one, but at least three, affordability issues facing the Australian housing system. Each demands a considered, if interrelated, response from governments at both Federal and State levels.

Firstly, there is a problem facing first time buyers in affording to compete in ever escalating housing markets. We hear a lot about this issue in the media and from politicians.

Second, there is an affordability issue for older home owners in larger or otherwise unsuitable houses who might want to trade down to more appropriate housing restricted by the limited affordable options in their neighbourhood. We hear something of this in the media, albeit largely in terms of their over-occupation of now redundant family homes.

Third, there is a numerically much larger issue of unaffordability in the private rental market for tenants able to pay the rent only by going without essentials, or by tolerating unacceptable conditions such as overcrowding or disrepair. Newly published research has highlighted the scale of this problem, especially for the growing low wage workforce. But we hear very little about this in the media, given its fixation with house prices and the dwindling scope for middle income twenty-somethings to ‘get a foot on the property ladder’.

To better understand the complexity of the issues facing any policy maker dealing with housing unaffordability, several other key structural factors about housing need to be put into the mix:

1. Housing has two intrinsic values: its ‘use value’ as shelter and a place to call home, and its ‘exchange value’ or its monetised value as a financial asset. Before mass homeownership, tenants consumed the use value, while landlords consumed the exchange value. The two were effectively split. Home ownership neatly conflates these two values – home owners have, in effect, become landlords of their own property. And thereby hangs a significant part of the problem. We are now all speculators in our own slice of the Great Australian Dream! And this issue has really come to the fore in the last 20-30 years as the tax advantages of investing in domestic property have become pre-eminent.

This has now spilled over into the national obsession with property investing. Untangling this conflation is one of the necessary precursors to developing a coherent approach to addressing the affordable housing issue, particularly through taxation reform. Arguably, we need to shift government intervention away from subsidising exchange values to supporting use values in housing – to support the building of housing people actually want, in the places they want houses and at a price they can afford, not to speculate on.

2. All these factors have very clear spatial outcomes across our cities. Housing is by its very nature both a very costly commodity – hence the structures of housing provision we call tenures that have emerged to allow us to produce and consume them – but also a ‘spatially fixed’ commodity.

Where you own a house has now become part of the great wealth creating machine that private property ownership has created. More than ever before, the location of your housing asset will determine not just your life-style expectations (living near a beach or near a motorway), but also your overall wealth accumulation over your life course and your ability to capitalise on this to leverage further asset accumulation through further property purchases, not to mention your ability to spill your accumulated asset wealth to the next generation though inheritance and gifting.

So where you live in the city is now a key determinant of your current and future wealth. This is having major impacts in terms of social polarisation across the city that is surely a highly undesirable development as our cities are increasingly spatially divided between those with accumulating property wealth and those without. A fractured city is not an easy city to govern or live in.

Arguably, this wealth machine has now become an unsustainable juggernaut that will eventually need to be redirected into more productive forms of investment, not least into supporting more affordable housing outcomes. One day a Federal government will have the courage to tackle this, but it will take time and also a bi-partisan agreement over successive governments, as indeed was the long term support for both home ownership and, at least until relatively recently, public housing, after World War 2.

3. Joe Hockey actually put his finger on a key issue last week with his admonishment for first time buyers to go out and get a good secure job with a good salary, and then they would be able to afford to buy a home. Of course – it really is that simple!

The problem is that we live in a globalised economy which over the last thirty years or so has sought flexibility for our labour markets in order to drive productivity and efficiencies in the workplace. Now this might be a good for the macro economy, but a flexible workforce also translates into increasing numbers of people on casual, temporary, short term and, at best, inconsistent wages. These are not the characteristics Mr Hockey is looking for. The fact is that a large proportion of workers – and Gen Y first home buyers fit fairly and squarely into this category – now lack the kinds of jobs that make them good risks for mortgagors or the wherewithal to save for the 10% deposit and other costs (including stamp duty) for even a modestly priced home. No wonder they are falling out of the housing market and into Generation Rent – or if they are lucky, actively joining the landlord class by buying a cheaper investment property in place they would never want to live themselves.

So the unacknowledged issue for policy makers is not that we have a simple housing supply problem, but that we have a structural and long term housing demand problem. Forty years ago, someone on average wages could afford to buy an average priced property. Now they can’t. There are simply not enough younger home buyers out there with sufficient incomes to afford the costs of home purchase, without help from their parents. In large part, their position is now exacerbated by the influx of cashed up Baby Boomers and others piling into the investment market, especially in our biggest cities.

OK, so much for the growing structural impediments to achieving better housing affordability outcomes. Let’s now look at the bete noir of the current debate on housing affordability – the planning system. How might planning reform act as a driver for improving housing affordability through increasing supply? The Property Council has just released its Report Card on planning system performance. This presents some useful options for reform but basically argues that the planning system places too many barriers on housing supply. Reform the planning process will, it is argued, bring greater supply forward more quickly:

“The only really effective way to make housing more affordable is to build more homes, build them faster and at lower cost. Our planning processes are the key to all these solutions.”

However, think through the logic here. To make housing more affordable requires one of two things. Either incomes have to rise substantially relative to the price of housing, or the price of housing has to fall relative to incomes.  I’ve discussed the income side of the issue already – for too many in our flexible labour market, incomes are falling far behind housing costs and may never catch up. So the solution is not going to come from rapid wage growth.

Reducing the costs imposed by the planning system may indeed reduce the production costs of new housing. However, as any developer will tell you, the price charged for new housing is set by the overall housing market, not the costs of housing production – the latter simply puts a constraint on how much a developer is willing to pay for the land on which the development takes place. So where would those cost saving be recouped – in lower prices for new homes (i.e. noticeably cheaper than those for existing dwellings), increased margins for developers, or siphoned off by land owners? And how might we tell?

Second, the analysis as to exactly how much more housing supply has to increase to make a noticeable impact on housing prices across the market and hence on overall affordability is largely inconclusive, even assuming the development industry could gear up fast enough. The highly respected 2004 Barker Review of housing supply in the UK estimated that in 2001 an additional supply of 70,000 new homes would be needed nationally every year (total output was then around 140,000 per annum) to reduce UK house price inflation from the prevailing 2.4% to 1.8%. While certainly an improvement, this still represents an increase in prices and only if incomes steadily outperformed prices would housing unaffordability be significantly cut back. In the event, despite reaching 180,000 housing starts in 2007, the UK housing market remains mired in the aftermath of the GFC with just 133,000 starts in 2013/14, while average earnings have not changed greatly in real terms since 2001. The latter is arguably more important than the planning system in driving the UK house price to earnings ratio up from 3.5 in 2001 to 5.15 today.

Finally, the idea that increased supply would lead to better affordability in terms of reduced house prices is clearly a non-starter. No developer would willingly develop if they thought prices would fall. We are left to the boom and bust cycle to do the job for us – which is the only real break on property prices that the market can offer. That’s not satisfactory for anyone, let alone the development industry. So while housing supply is clearly important in determining housing prices, there is more to this than simply reducing planning constraints.

As any housing economist will tell you, housing prices are set by a complex range of factors, including land supply, building costs, and any of the other supply side factors that impinge on housing production. But markets also need a demand side – that means you and me and financial markets that provide us with the money to buy property and the structure of subsidies and taxes that assist us to do so.

Clearly the volume and price of housing finance is a critical factor. Without engaging with the whole complex story of historically low real interest rates and financial liberalisation, egged on by negative gearing (a peculiarly Australian fetish) and capital gains tax relief for investors, and low yields on retirement annuities and other alternative secure investment options, it is clear that the present housing unaffordability crisis in our cities is being fuelled by a rampaging investment sector, both from home and abroad. It’s one the development industry is milking for all its worth, with blocks of apartments sprouting across our cities – and who can blame them given the uncertainties of developing in a market context.

But this is not the same as supporting a housing system that meets local housing needs. Arguably none the three key housing affordability issues I outlined earlier is being addressed by this investment-led boom. For my own shopping list on how to transform our housing system to better meet Australia’s needs, stand by for my next post!

One Comment so far ↓

  • Glen Searle

    If planning were prepared to zone a bigger housing and supply and ignore the likely greater externalities (e.g. GHG; loss of agricultural land) this would generate, then over a period of years this would reduce greenfield prices that developers would have to pay (as seen in most US cities). This would eventually translate into lower dwelling prices in greenfield developments, even if developed captured a large part of the cost savings. Urban economic texts such as O’Sullivan’s and Evan’s make it clear that preventing the urban fringe to expand to the degree demanded by the market means that prices in the zoned urban area become higher. But it must be emphasised that the higher prices are the cost of internalising the externalities of sprawl via planning restrictions on urban expansion.

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