According to the Reserve Bank of Australia, measures of housing affordability have improved since the onset of the global financial crisis. But that is little relief for prospective first home buyers who have fled the market as prices have boomed.
In its submission to the Inquiry into Affordable Housing, the RBA suggested that housing affordability has improved over the past six years. It is unconcerned about recent housing speculation and believes that construction costs are the driving force behind high house prices.
However, housing credit has picked up recently (after never declining during the global financial crisis) and speculative activity in Sydney is at unprecedented levels. I’d go so far as to say that investors are almost entirely driving price growth in Sydney and stopping prices from falling in most other capital cities. At the very least, house price growth is out of step with the broader economy.
With the housing market valued at $5 trillion, and accounting for around 60 per cent of household net wealth, I wouldn’t be as quick as the RBA to downplay the potential financial stability risks of a housing downturn. Despite the global financial crisis, the Australian economy really hasn’t been hit with a proper downturn in over two decades and our lending and borrowing behaviour has become based around those risk-free good times.
On the issue of housing affordability for first home buyers, the RBA effectively acknowledges that having wealthy parents is a great way to get into the housing market. It notes that there is an increasing share of first home buyers relying on parental assistance to enter the market. Unfortunately, the same assistance is often not available to the children of renters.
The RBA can tell us that housing affordability has improved as much as it likes, but actions speak louder than words. The simple fact is that first home buyers across most states have irrefutably declared that housing is unaffordable. With the labour market deteriorating they want absolutely nothing to do with the housing market. Perhaps they just need richer parents?
But it doesn’t necessarily have to be that way. There are many reforms on both the demand and supply side that could help. Supply-side reforms are necessary to address long-run affordability issues but demand-side measures could immediately lower prices.
First, state governments should scrap stamp duty. Stamp duty places a massive and unnecessary cost on home buyers who have already been stretched to save for a mortgage deposit. There are better and more efficient alternatives, such as a small annual land tax that would apply to all home owners.
In addition, stamp duty simply makes it harder to move. Harder to move next door, across town or interstate. It creates a barrier to labour mobility and that can only be inefficient for both the housing market and the broader economy.
Second, we should end the inefficient wealth redistribution vehicle we know as government housing policy. According to estimates from the Grattan Institute, owner occupiers and investors receive over 90 per cent of government funding directed towards the housing market. More disturbingly it has failed to raise the level of housing ownership; instead it simply redistributes wealth from renters towards home owners and investors and in the process increases house prices.
According to the RBA, the bulk of the cost of a new dwelling is due to construction, rather than government charges or land. However, the RBA estimates of land prices are well below other measures of land prices and land prices have accounted for most of the increase in house prices over the past couple of decades. Construction costs on the other hand have increased at a fairly modest pace. Addressing land supply and increasing the speed at which newly released land can be utilised appears to be a key to addressing the long-term supply issues that have pushed prices higher.
The RBA doubts that there is much you can do to “reduce prices by enough to bring home purchase within reach of many additional households” but a defeatist attitude is not the way forward. Improving housing supply might be difficult and time-consuming but there are simple demand reforms that could improve affordability immediately. Ending stamp duty and redirecting government funds from owner-occupiers and investors towards those who need it are two simple methods to improve affordability for the poor – and isn’t that what a housing affordability inquiry is all about?
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