The housing affordability debate is being wrongly understood as just a supply problem. The real cause of house price inflation is excess liquidity and debt, combined with overly generous tax incentives.
Let me ask you a question. Would you like housing in Sydney to be more affordable? As this is like being against motherhood and apple pie I suggest you all correctly answered ‘yes’ to that question. Let me ask another. Would you be willing for the price of your home to go down the 30% required to make it more affordable for fellow citizens on average salaries? And will you crucify the politician who dared to take away the Sydney home-owner’s divine right to double digit house-price inflation?
Therein lies the policy and political problem of housing affordability – and not just in Australia. As house-price inflation is a policy problem for most successful economies, so too is it a political problem well beyond our shores. However, the difference may be that – to their credit – Australian politicians of all colours are at least calling this out as the key problem faced by our communities. The question is whether they will get to grips with the real sources of house price inflation? And more important still, will we let them?
I ask all this in a slightly world-weary manner as I’ve been here before. Not here exactly, but the UK between 2005 and 2010 where I advised 5 consecutive housing ministers on the economics and politics of housing. You may recall that period is known in Australia as the Global Financial Crisis – which didn’t really experience it – and ‘the crash’ in countries which did. In the UK housing delivery halved. However, interestingly, house prices also went down in real terms by over 15%. To repeat, housing supply went down and prices went down. In Sydney, after a bumpy period, annual housing delivery doubled since 2011 but the price has gone up 40%.
Affordability is not just a supply problem
These facts are part of why I am sceptical of the link between increased supply and increased affordability. Housing prices have increased with supply partly because what has also increased is access to cheap cash in a low interest rate economy, particularly by those who already own a home. So, multiple home ownership is growing while first time buyers cannot enter the market even though we are building many more homes. Guess how many homes Australia built in 2016? Over 140,000. And the UK? 150,000. Yes, that’s right, we built just about 2.5 times as many homes per head of population than the UK – and prices here accelerated faster than there. How many more homes do we need to build before the price drops? And by how much? And do we even want it to drop?
When you ask these questions, you realise that the housing affordability debate is not being properly framed in terms of the objectives of public policy. That is because it is being wrongly understood as only a supply problem.
Excess liquidity and distorting tax settings
It is better understood as a problem of asset price inflation due to excess liquidity and leverage flushing around the globe. In Australia, this is combined with an over emphasis in public policy on protecting the capital gains of existing home-owners on their journey to becoming rentier landlords. We are indeed becoming a nation of unproductive rentiers – or rather 65% of us are. The rest are just renters. This is now a zero-sum game.
From this perspective, building 35% more units a year in Sydney than at present by 2026– an emerging government target – may be socially necessary. I support it. But it will have little impact on affordability. I’d be interested to see the government modelling which proves otherwise. But then this returns us to what exactly is or should be the objective of public policy.
Key policy questions
I suggest the best framing of the policy objective, in the public interest, and to enable first time buyers to come back from the edge of extinction, is this. It currently takes 10-12 times average salary to afford a home on Sydney. It was 3-5 times in the ‘80s.
What interventions or policies by government would over time get us back to the levels of previous eras? Similarly, the long-term average annual price rise for homes in Australia before the explosion of the last 20 -25 years was 3-4%. It is now rising 13-15% per annum in Sydney. What would take us back to the boring but socially beneficial growth rate of the pre-bubble period?
In Sydney today, first time-buyers are below 10% of the market with investors cornering far more homes. Until the 90s they made up well over 20% of buyers.
What would enable us to rebalance the market to what it was? Beyond mere supply what about action to reduce house price inflation and the irrational exuberance around it as a money-making machine for rentiers, such as reducing tax incentives and shifting to a serious land tax regime. If we are not asking these questions, are we serious as a society about answering the affordability challenge.
However, and even more fundamentally, what if the genie of un-affordability cannot be put back in the bottle? What if this also means that the shift to multiple home ownership by those with leverage from their existing properties intensifies and leads to fewer and fewer rentier landlords owning more and more units but also accordingly to more and more renters?
Home-ownership is in dramatic decline already and that seems likely to continue. Not only could that mean politicians waking up to the fact that in such a scenario renters may have increasing clout and need looking after – greater consumer protection around leases and landlord obligations for example. It could also remind us that in most societies on the planet renting is the norm and locking so much capital in bricks and mortar is viewed as restrictive on the movement of labour and unproductive economically in comparison with other uses for investment. From that perspective, reducing the national and divisive obsession with property is about raising capital and investment for jobs in the new economic future of Australia.
Prior to joining the Committee for Sydney as CEO in late 2011, Dr Tim Williams was the senior Special Advisor to a number of UK cabinet ministers in the Department of Communities and Local Government, where he helped develop what became the early UK City Deals. Tim is an adjunct professor at both WSU and UTS, has a Ph.D and is a qualified barrister.
He has advised State and Federal governments in Australia and London Mayors Ken Livingstone, Boris Johnson and Sadiq Khan. He is currently on the international expert panel reviewing the New York Regional Plan.