How to make housing affordable

Cross-posted from Martin North’s DFA Blog:

Digital Finance Analytics (DFA) welcomes the current inquiry into the affordability and accessibility of housing in Australia. We wish to make the following submission.

1. DFA is a boutique consulting and research company, specializing in the financial services and housing industry. We execute primary consumer research, segmentation and industry modelling. As well as completing research for our clients, we post regularly to our blog .
2. We believe that the current long term trends in housing are detrimental to Australians, and this is having a significant negative impact on the economic performance of the country.
3. We are not in a housing bubble, but we have a chronic problem. This is because the rapid growth in prices in recent years has not kept pace with many households ability to pay, forcing significant numbers into high debt to income ratio’s, the selection of properties in less accessible and less convenient locations and the exclusion of considerable numbers from the market. In total 2.3 million households are not active in the property market at all.
4. In addition, discretionary spending has been blotted up by higher housing costs. Households are highly leveraged today, and if interest rates were to rise, mortgage stress would become more significant.
5. Banks have grown their balance sheets in-line with growth in demand – especially supporting high levels of investment loans, and as a result they are not adequately providing reasonable lending services to a considerable number of small and medium enterprises, who could create economic value to the country. This is influenced by the relative capital costs of housing lending versus commercial lending under the Basel rules. Lending ever more loans to households to purchase property does not create real growth, it just inflates prices.
6. We believe there are significant supply-side issue, with at least 200,000 properties required to meet current and expected demand. A significant proportion of these should be aligned with the needs of the large number of “Want-to-Buy” households, who cannot access the market today. Today 1.2 million households are directly excluded from the market. Many of these are younger, less well-off and in rental property at the moment.
7. Local government policies and reliance on stamp duties are part of the problem, together with planning restrictions and high development fees and charges, all leading to poor supply of affordable homes. The proportion of high-rise developments is increasing.
8. Many First Time Buyers are only able to access the market with direct financial assistance from family or friends. The focus of First Time Buyer incentives being aligned to new-builds is welcome, but we believe that these incentives actually lift prices, and do long term harm.
9. In addition, we note there is considerable demand from both local and overseas investors, contenting with potential First Time buyers.
10. Ultra-low interest rates are not helping because it is stimulating demand from the investment sector, lifting the size of loans, and negatively impacting affordability. Note that the banks rightly utilize buffers to test for affordability, so low rates do not flow into greater loan availability.
11. Negative gearing has been one of the most significant incentives for many investors, but it is widely accepted as a costly tax advantage which has pushed up prices, and driven First Time Buyers from the market.
12. For many, property has ceased to be primarily a place to live, it is rather an investment first and foremost. This is a concerning trend. Self-Managed Super Funds are also accessing investment property, thanks to the attractive tax sheltering which exists today.

Details of our research have been published in our report “The Property Imperative” which is attached as appendix 1. There we go into significant detail by customer segment, leveraging our primary research.

B. Suggested Policy Options

DFA recommends the consideration of the following to help address affordability and accessibility of housing in Australia.

1. Australia should develop a strategic housing plan which guides ongoing development, be it in current centres, or expansion into new towns. Current tactical plans are not sufficient. The plan should specifically address the supply of affordable housing.
2. Strategies should be devised to increase land supply. State governments should reduce the current high levels of access fees for new development and revise planning criteria and processes. This has the potential to create considerable economic growth.
3. Overseas investors should not be able to access first-time buyer incentive schemes, and the Foreign Investment Review board rules should be strengthened to reduce the impact of foreign investors on the local market.
4. The RBA should have a direct multi-segmented housing affordability metric within its measurement framework. Affordability should be targeted at trend average, not rates experienced since the debt explosion of the 2000 onwards.
5. Macro-prudential policies should be employment to control the growth in lending. In line with the recommendations from the Bank of International Settlement debt to income servicing ratios should be employed as the policy tool of choice.
6. Negative gearing should be tapered away and removed for new transactions.
7. Joint equity schemes like the UK’s Help to Buy Scheme should be considered as a tactical step to assist some of the “Want-to-Buys.”