By Catherine Cashmore, a market analyst and journalist with extensive experience in all aspects relating to property acquisition. Follow Catherine on Twitter or via here Blog.
Do we have a housing shortage?
It’s a well spruiked ‘fact’ that Australia has a ‘housing shortage.’ I frame the word in italics because of the general misunderstanding that surrounds the concept.
People imagine a shortage of housing at an aggregate level, to mean not enough homes to meet the demands of an active buying market, and whilst this may be evident in various tightly held localities – in popular schools zones for example – the evidence used to substantiate a national housing ‘shortage’ means nothing of the sort.
Last week the ABS released its dwelling approvals data for the month of November 2013, showing modest fall of 1.5%, which follows a similar decline of 1.6% in October.
On a ‘trend’ basis, the overall direction of dwelling investments is positive – some 22% higher over the year – the highest level since September 1994. However, as Callam Pickering correctly asserts in Business Spectator, on a population-adjusted basis, approvals are at best, weak.
For example, between 1947 and 1961, housing stock increased by 50% -compared to a 41% increase in Australia’s population, and between 1961 and 1976 there was a further increase of 46%, compared to a 33% increase in Australia’s population.
This was a continuing pattern until the early 1990s, after which the growth in dwellings started to slow, and since 2007; the former has outpaced the later.
Did a shortage cause the rise in house/land prices?
1996 was the point at which land prices started to rise, and from 2001 onwards they skyrocketed. Whilst it’s hard to draw an exact correlation between the fall in stock and a rise in prices, supply, when produced must be suited to need – being both affordable and well serviced with infrastructure. Get the ingredients wrong and a surplus can quickly amass. Therefore, it would be wrong to assume a shortage of effective supply means a shortage of ‘roof space’ – it doesn’t.
However, when evidence shows a gradual reduction of demand for new dwellings, during a period in which population growth and a resilient economy should have dictated otherwise, coupled with land values that have grown from 3 times median income in the early 1990s, to their current 6-9 times median income in 2013 – (dependent on location of course,) alarm bells should be ringing in the offices of our housing ministers.
So what does the term ‘housing shortage’ mean and can it prevent a housing bubble?
Obviously there cannot be more households than homes, and whilst in the private sector, homes can only be constructed if there is demand from the consumer market, it is important to understand what a housing ‘shortage’ means.
Firstly, it covers the total housing system, both private and public, therefore, it should not be used – as it so often is – as evidence Australia can’t suffer a significant downfall in prices, or produce a ‘bubble.’ It certainly can.
In fact, it should be fairly obvious that the effects of a housing crash are far more severe in areas where high levels of private debt have been used to service inflated home values, due to a shortage of affordable home buyer supply, coupled with heightened speculative activity – as is the case in the most populated areas of Australia.
To be clear – it’s not a shortage of homes that prevents a housing crash, but a shortage of buyers – buyers unwilling, or unable to service high household debt due to broader economic conditions.
There are plenty of international examples of this – most recently in the USA, in states such as California and Los Angeles.
Both areas had a ‘critical housing shortage’ in the early 2000s, with speculative demand and lack of affordable supply disproportionately inflating values in the lead up to the sub-prime crisis.
When the (unforeseen) bubble burst, rapidly falling prices quickly eroded any equity homebuyers had achieved, and for those with non-recourse loans, where the mortgage balance greatly exceed value, there was little incentive to avoid foreclosure.
On the other hand, states such as Texas where – despite rapid population growth, – had structured housing and supply policy to maintain prices at no more than 3 times median income. Values fell by only -2.5% (from the peak of 2007 to the trough of 2011,) and the state suffered far fewer foreclosures.
What was the role of the National Housing Supply Council and was it needed?
When Rudd established the National Housing Supply Council in May of 2008, just prior to the last Senate enquiry into housing affordability in June of the same year, it should have been a step in the right direction, however the council’s role was broadly mis-understood by many main stream commentators who often failed to read the reports in full.
(For those interested, thanks to the Brown Couch blog, here’s a link to the archived website)
The council was given the role to assess the difference between supply and ‘underlying demand’ – in other words, the amount of extra housing needed per annum over the past decade, ‘if’ (using ABS data,) Australia had continued to produce enough homes for a rapidly growing population of home buyers and renters, based on existing household composition figures.
Whilst the findings showed a dramatic shortfall of 228,000 dwellings (as of 30 June 2011) the figure was hotly debated and in many cases, concerns were justified. However, in the council’s defence, it should be noted that planning for population growth is not an easy task, it’s predictive in nature and makes many assumptions along the way.
Whether you agree or disagree with the methodology or the resulting recommendations contained within the report, it’s essential we undertake some type of detailed analysis, if only to chart demographic changes and readdress growing community needs.
This is no different to studies conducted in other countries suffering similar concerns. For example – the latest UK data shows 221,000 additional households are formed in England annually, yet only 108,000 homes were built in the year to September 2013.
If the goal is affordability – a vital part of which is supply side policy – we must address the reasons ‘why?’ Only in doing so, can we have a valid base for discussion on housing policy initiatives within the political arena.
However, supply wasn’t the NHSC’s only area of concern, it also instructed to produce a comprehensive evaluation of Australia’s affordability problems which included the status of those impacted most – homeless, renters, first homebuyers, low wage families, and tenants in the public and social housing system.
For example, reports showed utility costs such as electricity, gas, water, and sewerage, have been increasing at more than 10 per cent per annum. They gave a good statistical overview to show a dramatic shortfall of affordable rental accommodation for low-income families – (details of which I’ll examine in another column) and clear evidence that our housing crisis is embedded within the fact that we don’t produce enough affordable and feasible options for low-income households across the sector – both public and private.
Despite this, the Abbot government – with the rather weak excuse that its role is ‘no longer needed’ – recently disbanded the NHSC along with their website and archived findings, and in doing so, have made it quite clear that affordable housing is not part of their political agenda.
Why do we have a shortage of affordable supply?
Issues surrounding housing affordability are at a peak predominantly because town planners, along with state and federal governments, have failed to adequately cater to the demands and needs of a rapidly increasing population.
If you didn’t know better, you’d be forgiven thinking there’s been a “vested” conspiracy to keep inner-city inflation high, with everything possible done to prevent a fall in established house prices by way of generous tax incentives for investors favouring old over new – or intermittent policies to inflate the prices of new housing by way of Mickey Mouse incentives.
Infrastructure sparse fringe land prices are inflated due to ‘false scarcity’ imposed by constrictive urban zoning policy.
However, it hasn’t always been this way – in the post-war population boom, the Commonwealth ‘State Housing agreement’ was concentrated on building rental accommodation and affordable housing for low-income families.
Under the Whitlam Government, land commissions were set up in each state and territory, and in agreement with the commonwealth, were instructed to ensure land and housing was ‘readily available at fair prices,’ with commonwealth funding provided for essential infrastructure.
However, in the 1990’s (the point at which demand for new housing started to diminish and prices began to balloon,) the game plan changed, key infrastructure agencies once corporatised were required to show “a return on investment.”
Stricter zoning regulations were imposed in the name of, ‘urban consolidation,’ land values increased, and larger developers needing to maximise profit, carefully controlled the timing of newly released plots in response to consumer demand (land banking.)
I know sprawl is not a popular word with many Australian’s – however it should be understood, that to create affordable supply in inner city brownfield land, is extremely difficult when land values – already high – prompt the chase of profit over community need.
Hence why we have so many poorly constructed high-rise monstrosities, with 2 bedroom apartments, offering little more than 60sqm in floor area, with high vacancy rates (in excess of 10% in some cases) and banks unwilling to take a gamble and provide first home buyers with finance due to fears of oversupply. This is why they are generally marketed to investors fooled (by rental guarantees) into thinking they can get a positive yield.
Further more, they do nothing to produce affordable accommodation for our largest demographic of buyers, families with children who require 3 bedrooms and some resemblance of a private outdoor area. If anything, this is an appalling and inappropriate waste of valuable inner city land.
In the NHSC’s final report in 2012/2013 it stressed “Underpinning much of this work will be the understanding that tackling the housing shortage is not simply about increasing the number of homes being built; it is also important to build a diverse range of dwellings. Producing the right mix of homes contributes to developing sustainable communities that work for the population at large.”
As I’ve said previously – it’s not about creating endless sprawl, it’s about building communities and this can only be achieved with investment into infrastructure supported by long term funding measures, which include consideration of bond financing and a more equitable tax system that assists the cause.
The subject deserves deeper analysis, but the above touches on some of the issues that should be debated and acted upon. And it can only be hoped, that any future senate enquiry into housing affordability, endeavours to do so.
Catherine Cashmore
