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.”


35 Responses to “ “How to make housing affordable”

  1. Phroneo says:

    It’s interesting how many people who are arguing that house prices are too high / unaffordable and need to come down, also maintain that we are not in a bubble.

    I don’t know what to make of this. Are they saying that house prices are sustainable at these levels barring any change in policy? It’s an attractive thought except that people wouldn’t be negative gearing if they house prices didn’t go up. Likewise, interest-only loans would make no sense instead of being the hit they currently are.

    Are people having their own definitions of bubble?

    • coolnik says:

      I think it may have been a strategic ploy in order to get readers go beyond first few lines. For most australians, anyone calling this a bubble is a lunatic, but if someone asserts that this is not a bubble, then he/she may be seen as more trustworthy.

      This is how unhinged we have become.

    • speculator says:

      when a sentence starts like “We are not in a housing bubble, but …” you don’t have to read the rest

      • md says:

        Apart from the “we are not in a housing bubble…” the submission is very excellent. I don’t know why so many commentators in the public eye are afraid of the “b” word. Blind Freddy can see we’re in a bubble.

    • b_b says:

      Housing can be expensive but not a bubble.

      Cigarettes in Australia are expensive by global standard, (price / income) but are not a bubble.

      • speculator says:

        @ b_b

        how about rents? is buying cigarettes expensive relative to renting them?

        your parallel is stupid, not funny

      • coolnik says:

        b_b, I did not know cigarette is as essential for people as the housing. I must be living in a bizarro-world.

        Seriously, you need to do better. Plebs may start seeing through your endless spruik :)

      • Phroneo says:

        Perhaps another analogy might be more appropriate. Let’s say, luxury cars with the luxury tax. I think the problem with housing is that the high price stretches budgets and distorts the whole lending, spending and investing economy.

        When you need parents to help you get a deposit. When you start getting 30 to 40 year loans. Or simply, when a basic necessity is rising in price much faster than wages and people DEPEND on this pace of appreciation in order to keep investing. Yes, that sounds like a bubble to me.

      • spleenblatt says:

        Why can residential housing (as opposed to say listed equity or some other tradeable commodity) not be a bubble? Do bubbles exist at all in your worldview ?

      • b_b says:

        Coolnick – cigarettes are very essential when you are addicted.

        Speculator. Rents are a function of cost of production. When cost of production rises so to do rents (eventually).

        My point on cigarettes is that taxes also lift the cost if production.

        Perhaps the analogy was too subtle.

      • md says:

        b_b, so what if taxes lift the cost of cigarettes? Who cares? And what point are you trying to make with relevance to the cost of housing? Cigarette prices to the moon, I say!

      • dumb_non_economist says:


        Ciggies not in a bubble you reckon. Well, I reckon the price is supported by tax, remove the support and the price will fall. :lol:

        Remove the support for RE prices, like NG and introduce a LVR and see whether prices go up or down.

    • Rocksteady says:

      Bubble is just a word with a very vague definition.

      Really everything is either overvalued or undervalued at any given time if you look closely enough. What matters is the scale of it.

    • OMG says:

      People may have their own definitions

      I don’t see there being a bubble, a bubble for me would be a situation where you have teaser rates that rise a year or two into a loan and would leave a substantial percentage unable to pay their loans and then foreclose

      Here we don’t have that, people can obviously afford to buy as they are buying houses, if you go to an auction you will notice actual human beings, most likely folks with jobs and savings are buying homes, so it must be affordable to some

      • speculator says:

        85% of all mortgages in USA were 30 years fixed rates, they were all able to pay until they lost jobs. Can that happen here?

      • Monkey says:

        Banks do offer introductory rates and discounts (teasers if you want to call them that), although generally the borrower can repay when the discount period ends.

        I think there is a risk if the official rate starts rising, because a lot of people have worked out their repayments based on historically low interest rates. Yes, people can afford at the moment, but with mortgages now running for decades, the risk is that they won’t always be able to repay if rates go back to the historical average.

    • Pfh007 says:

      Best not to start the ‘is it a bubble Dave?’ debate.

      We can do that after the event with much fewer words.

      Would he nice to avoid the god awful affordability debate, for as someone noted above, if there is a buyer and seller, someone thought it affordable.

      Lets focus on market dysfunction as everyone except a few quaint folk, planners and greenies mostly, seem to accept that the market is constipated and in desperate need of a good plunger.

  2. interested party says:

    Housing will never be really affordable while we have bloody great ticks(banks) hanging off our bellies sucking cash out of our lives.
    Public owned bank for housing.
    Public owned energy supply.
    Public owned government.

    That may sound socialistic….not the intent…..but the private everything system is failing us. Something has to give.

    • Free_Market_Delusion says:

      This is my single biggest gripe with politics in general.

      Boils down to:

      Private Owned Good
      Publicly Owned Bad.

      Its not true and its non nonsensical but that is the mantra.

      There are numerous essential services that should be publicly owned and run.

      What this country needs is an open, pragmatic and honest look at what should be privatised and what shouldn’t be.

      • PhilBest says:

        We need to get a bit more subtle about the distinction between free markets and crony capitalism. A lot of the “privately owned” stuff that is actually not especially beneficial, has been granted a position of relative freedom from competition.

        It is more often the case that free markets haven’t been tried, than it is that they have “failed”.

        The housing affordability problem most definitely is due to the absence of market freedom. It is market freedom, and only market freedom, that keeps affordable housing markets affordable. In most such cities it involves that developers can even incorporate a kind of municipality of their own and raise infrastructure finance on bond markets, secured against the eventual residents local tax payments.

        It is risible to suggest we have anything like a free market in new housing development here.

      • Pfh007 says:

        Yep – only a few market types talking property reform, mostly hard baked greenies and NIMBYs making common cause with property owning conservatives doing their best to let the crazy shine on.

  3. speculator says:

    impose 90% speculative tax on capital gains for properties sold in less than 10 years and problem solved.

    • interested party says:

      That may induce the RE market to mass sell before the ruling comes into effect……thereby making housing more affordable……to a dwindling pool of buyers as many bankruptcies could surface, along with some/many SME’s that levered of high RE prices to get funding for the business…as the banks call in the debts prematurely.
      Not pretty….but prices are down..

      • speculator says:

        prices would not fall if our housing situation is not speculative bubble, but rather result of shortages and income growth

      • Ino says:


        As opposed to today which is “shortages and no income growth”

      • speculator says:

        @ Ino

        haw about no shortages and no income growth

      • interested party says:

        makes no difference in my mind as to what you are saying on no shortages or no income growth.
        If this thing goes over the cliff then selling begets selling until we run out of sellers…end of story. Not to say that we are going over the cliff. It will need to be pushed by some outcome, such as your 90% speculation tax. It is a moot point though, not going to happen while most Australians have some level of vested interest in high prices.

      • PhilBest says:

        Japan got up to some pretty incredible CGT rates to try and stem their 1980′s bubble – none of the attempts worked. As long as there are still gains to be made, even if there are taxes to be paid on them, mania can prevail.

        You need to structure the market so there are not gains and there are not manias. It is perfectly possible; dozens of urban land markets in US cities work that way.

    • md says:

      There are all sorts of things that could be done to pop the bubble. But first the government has to acknowledge the existence of the bubble. Or even that real estate prices are too high. And they have to acknowledge that that’s a bad thing.

  4. nexus789 says:

    They failed immediately for me as they mentioned that naughty word – plan.

    The nimrods don’t need to plan anything as the mythical free market and voodoo economics will ride to rescue.

    • PhilBest says:

      You mean like “….the mythical free market and voodoo economics….” that actually, concretely in real life, keeps house price median multiples down around 3 in dozens of US cities?

      • nexus789 says:

        A free-market is a nebulous and meaningless concept. You would have more chance of seeing a Unicorn than operate in a free market. House prices are driven by multiple factors that are not explained by the mind numbingly and simplicity of neoclassical economics. I guess the property crash passed you by along with the widespread and fraudulent reasons for the collapse.

        Free markets are a myth. All markets are manipulated, regulated, fraudulent, etc. Many examples – JPMorgan corralling physical stock of Aluminium, the banks holding back housing stock to prevent over supply, LIBOR manipulation, manipulation of multiple commodities (food, oil, etc) and so on.

        The US is driven by ‘crony capitalism’ and this results in a perverse allocative outcomes across multiple markets. It is a system where failed businesses (banks) cannot fail. By stopping this failure occurring the system as a whole will invariably fail.

        Have a nice day.

      • PhilBest says:

        The US property crash did NOT pass me by. It is you who lacks knowledge about it, not me.

        Like the fact that dozens of cities had no price bubble at all in the first place.

        The reason being that there was not the political interference in housing supply, that there is in all the cities where prices did bubble.

        When you have no urban growth boundaries, and developers can build whole new cities almost anywhere if they want to, and those regions had no price bubble, only a total numbskull would dismiss the obvious conclusion that the free market working properly was what prevented a price bubble in all those locations.

        I agree with you about all the evils of crony capitalism and the evils of all the examples you provide. But it takes two to tango, and if the politicians did not have the grossly excessive power of “bailing out”, there would be no “too big to fail”.

        Government CAN be a force FOR attaining the benefit of free markets; regulations should aim to minimise economic rent as well as prevent anti-competitive behaviour – and in fact there are plenty of such laws. The biggest problem we have today, is with regulations and politically-driven government actions that increase economic rent; especially urban planning, and especially fractional reserve banking and QE. If the USA’s Founding Fathers could see the status quo they would certainly not advocate Statism as the solution; they would remind Americans that they wrote a Constitution that aimed at limiting the power of politicians to enable corruption.

  5. tonydd says:

    I read once that a first necessary step toward progress on any issue was ‘giving things their right name’ or words to that effect.

    I agree and can see the the attraction of the ill defined meaning of bubble in economic terms.

    To communicate the circumstances the term ‘ponzi’ best fits the bill.

    I suggest this should be used at all times when referring to our current house price debacle.

    Also GDP is similar, should be GDP per capita and adjusted for inflation as measured by a trusted non stakeholder.

    Show the masses that they are only maintaining lifestyle due to increasing debt.