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Housing Affordability: has the great Australian dream ended? Judy Yates University of Sydney 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?

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outline
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?
current situation
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
us and australian real house price inflation
US and Australian real house price inflation

Source: US:http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_History_022445.xls

Aus: ABS : http://www.abs.gov (641601.xls)

australia demand supply balance as at 2008
Australia:Demand-supply balance as at 2008

Source: State of Supply, 2009, National Housing Supply Council, Table 4.5

australia increase in gap over 5 years to 2013
Australia:Increase in gap over 5 years to 2013:

Source: State of Supply, 2009, National Housing Supply Council, Table 4.10

affordability outcomes 2003 04
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

real rent inflation aus cpi rent
Real rent inflation (Aus CPI rent)

Source: Aus: ABS 641605.xls; rent component, CPI adj

median weekly rents june quarter 2008
Median weekly rents, June quarter 2008

Source: REIA Market Facts, June quarter 2008

dist r ibution of private r e nts 1996 2006
Distribution of private rents: 1996 - 2006

Source: State of Supply, 2009, National Housing Supply Council, Figure 5.8

rental affordability for lower income households 2006
Rental affordability for lower income households: 2006

Source: State of Supply, 2009, National Housing Supply Council, Table 5.1

social housing

Decrease in social housing dwellings 1996-2008

Shortfall

500,000

Crisis

480,000

460,000

Indigenous

440,000

Not4Profit

420,000

Public

400,000

380,000

360,000

340,000

320,000

300,000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Social housing

90,000 units

Source: State of Supply, 2009, National Housing Supply Council, Figure 5.7

current state summary
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
how did we get there
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
1950s 1960s
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
1970s 1980s
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
1990s 2000s
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
key factors 1950s 1960s
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
key factors 1970s 1980s
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
overview fhb median house price 2008
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

key factors 1990s 2000s
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
current situation fhb median house price 2008
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

access to home purchase
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
key point 1
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.
implications
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
implications age specific ho rates
Implications: age specific HO rates

Source: census data, special tables

real net wealth per head 2003 04
Real net wealth per head ($2003-04)

Source: Treasury Roundup Summer 2004-05

real net wealth per household 2008
Real net wealth per household ($2008)

Source: RBA Bulletin Statistics, Table B20, divided by estimated number of households

owner occupiers
Owner-occupiers

Household net worth by age, 2003-04

Otherhouseholds

key point 2
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 can’t be assisted
key point 3
Key point 3
  • Within family intergenerational transmission of wealth is inequitable
    • Wealthiest households have disproportionately greater capacity to assist their children and grandchildren
a fair housing system
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
a fairer housing assistance system
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
a fairer housing assistance system41
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
score card for new policies
Score card for new policies
  • Direct
    • ?Incentives for investment in affordable rental housing – tax credits (NRAS) $500m
    • public housing stimulus package $6.4b
score card for pre existing policies
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 (< $1.5b pa until stimulus which has added an extra $6.4b over coming 3 years)
    • Land taxes
score card for pre existing policies44
Score card for pre-existing policies
  • Indirect
    • Tax exemptions for home owners (>> $21b pa)
      • No capital gains taxes
      • No tax on dividends (rents)
      • Offset by no deductions for costs
    • Tax incentives for landlords (> ~ $1.2b pa)
      • Negative gearing
      • Depreciation allowances
      • Offset by State taxes
score card for non current policies
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
conclusions
Conclusions
  • Pre-existing system of housing assistance is generally perverse
  • New initiatives generally in the right direction
conclusions47
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
real income and real house prices
Real income and real house prices

>30%

Index

Source: Treasury

what can we do about it
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)
what can we do about it50
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