Woeful affordability thrust back under spotlight

By Leith van Onselen

The AFR has produced an alarming report on the rapidly declining levels of housing affordability across Australia:

Buyers with $550,000 to spend – the average first-buyer loan – could buy in just 20 Sydney suburbs last year, 10 per cent of Greater Sydney’s 202 suburbs, down from 40 in 2012, data from PRD Nationwide shows…

“For Sydney, the numbers are just amazing,” said Diaswati Mardiasmo, PRD Nationwide’s national research manager. “If you have $1 million you can afford 49 per cent of Sydney but if you cut it down in half to $550,000, you can only afford 5.4-10 per cent. That’s a massive drop in terms of affordability”…

Affordability has also worsened in Perth, Brisbane and Adelaide over the past two years…

The report goes on to show how $550,000 will purchase homes in just:

  • 22.4% of suburbs in Melbourne;
  • 42.2% of suburbs in Brisbane;
  • 27.5% of suburbs in Perth; and
  • 32% in Adelaide.

It’s a crazy country that we live in when $550,000 is considered the threshold for first home buyer affordability. In reality, this price level is still highly unaffordable, and yet it will buy you only 5.4% to 10% of homes in Sydney, and around one-quarter to one-third of homes in the other major capitals (a little better in Brisbane).

Seriously, anyone that still claims that housing affordability today is no worse than previous generations (I’m looking at you Malcolm Maiden), needs to have their head read. The evidence is irrefutable that current housing affordability levels are woeful.

Thankfully, peak community and housing groups recognise just how bad the situation has become, converging on Canberra this week to urge the Federal Government to work with them in developing a national housing strategy to address the worsening housing affordability crisis in Australia. From Pro Bono Australia:

The groups have released An Affordable Housing Reform Agenda – outlining reform priorities for an efficient and affordable housing system that they say strengthens productivity and participation.

Groups include the Australian Council of Social Service (ACOSS), National Shelter, Homelessness Australia, the Community Housing Federation of Australia and the National Association of Tenant Organisations…

The Affordable Housing Reform Agenda document says that although it is fundamental to economic participation, affordable housing is not currently considered by Governments to be part of the nation’s infrastructure agenda.

“As a result of this broader disconnect, many of the policies pursued by Australian Governments in the name of housing affordability serve to increase demand for housing, while failing to tackle the regulatory and cost barriers to housing supply,” the document said.

“These housing market failures need to be addressed if Australia wishes to increase national productivity.

“While the responsibilities for affordable housing and homelessness are shared between the three levels of Government, each level has historically looked to blame the others for the failures of the housing and homelessness system.

“This has contributed to policy paralysis and undermined efforts to collaborate and coordinate policy. The current review of the federation shines a spotlight on housing and homelessness policy and provides an opportunity to grapple with these complexities at a systemic level”…

“The reality is that the housing supply shortfall is becoming a serious brake on productivity. The current policy and tax mix distorts investment decisions, is a barrier to workforce participation and mobility and contributes to house price inflation leading to greater inequality and social exclusion.”

“There is a shortfall of 600,000 affordable houses across Australia and this will only get worse as the population grows,” CEO of Homelessness Australia Glenda Stevens said.

Spot on. We all know what needs to be done to fix Australia’s housing mess: abandon policies that artificially juice demand (particularly speculative demand) and free-up supply-side barriers.

The Federal Government obviously has control of the demand-side levers (e.g. tax rules, immigration policy, home buyer subsidies, etc) but it should also take the lead on supply. Given that the feds control the lion’s share of the nation’s tax take, they have ample opportunity to drive reform by offering incentive payments to the states to free-up land supply, relax planning, and build housing-related infrastructure. It is the federal government, after all, that has decided to run a high immigration program, so the least it could do is provide the states – the ones responsible for service delivery and infrastructure – with the means to cope with this growth.

None of this is rocket science. Time for action.

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Comments

  1. A median income household earns $75,000 pa before tax (ABS data 2013, collected 2011-12). The average income household earns $96,000 pa.

    Even earning $96,000, I don’t see where they’re going to find $20,000 per year to put aside after paying tax; housing costs (either rent or interest), and putting food on the table, but this is what they need to do for the next 28 years to pay for a $550,000 house.

    Inflation and wages growth can’t be relied on any more to “inflate away” the capital.

    • That’s why I’m asking. The interest at 5% on a $550,000 loan is more like $30,000, and you’d have to pay off some principal, so make it more like $40-50000 to service a mortgage like that. Just seems like a BIG mortgage.

    • When you use median household income, it means the household income takes a significant hit if they decide to have children.

    • Wages, or working for your prosperity, cannot be relied upon as a means to get ahead in life.

      That’s the signal that gas been sent.

      Even if Sydney nominal prices stay static, how many years before wage inflation takes price to income ratios (i.e real affordability measure) becomes reasonable?

      That’s multiple generations lost.

      Its now at the stage where endorsing anything other than a crash to restore prices is evil.

      • Its now at the stage where endorsing anything other than a crash to restore prices is evil.

        While I didn’t agree with this before and I still have my reservations, I think this is the only logical choice now.

    • Correct.

      Principal and interest on a 550k mortgage is currently around $3300 per month on a 25 yr plan. Lets say our 96k comes to 6k a month after tax, which is probably on the topside. That’s more than 50% of your take-home. Not sustainable.

      And lets assume a 50k deposit, so 600k budget. Not a huge amount is it.

  2. Affordability relates to price not serviceability. Fixes include:
    – limit borrowing to 3x after tax hh income
    – limit borrowing on each ip at 80%, 70%, 60%, 50% (subsequent)
    – increase mortgage rates, by levy or by ocr

    The only people this will affect are those who paid/borrowed too much (note: no-one is entitled to a return or profit from buying a home and/or using it as an ATM) and also those with recency bias issues (paper loss after bubble highs).

    This has been an issue since at least 1998. Well over due for addressing.

    • Wholeheartedly agree with higher LVR’s, especially higher and progressively burdensome LVR’s for subsequent investment properties.

      • I can’t tell you how disappointed I was (but not surprised) by APRA’s comment the other day about this not being their reaponsibility.

  3. “None of this is rocket science. Time for action.”

    I think they’re still playing with Lego and toy Linfox trucks, mate!

  4. The percentage of suburbs you can buy in each city with $550k seems a bit off to me.

    Adelaide in particular has a median house price somewhat south of $500k, so why does $550k only purchase a house in 32% of Adelaide suburbs?

    Anyone have any ideas?

    • Perhaps these suburbs are just larger and have greater number of houses, being away from the CBD?

  5. moderate mouse

    Bollocks. More like anyone who believes ‘freeing up supply’ in the Sydney/Melbourne Megaburb will improve matters needs their head read.

    $550K will buy you a beautiful home in regional Australia (Bathurst, Orange, Albury, Shepparton, Bendigo, Ballarat, Port Macquarie, Coffs Harbour, Armidale….the list goes on and on…). Lack of decent jobs in these areas is the problem, not housing affordability. Tax breaks for businesses to relocate outside of the Megaburb would go a long way to fixing the so-called housing shortage.

    This city-centric mindset that afflicts pretty much all commentators in this country is a big part of the problem. Continually failing to frame the true nature of the problem (everyone trying to cram into two cities – Sydney and Melbourne) means that people will continually fail to prescribe the right solutions.

    Wake up Australia.

    • @mm

      500K for a house in regional Australia is still extremely expensive by world standards even if you were earning the same. Once you get our of major financial centres overseas, the affordability increases rapidly.

    • ” $550K will buy you a beautiful home in regional Australia (Bathurst, Orange, Albury, Shepparton, Bendigo, Ballarat, Port Macquarie, Coffs Harbour, Armidale….the list goes on and on…). Lack of decent jobs in these areas is the problem, not housing affordability. ”

      Are you kidding me? You think a 550K home in the middle of nowhere is affordable?

      My god, what planet do you live on? Have you ever traveled abroad? Or do you just habitually bash anything that talks about increasing supply anywhere?

      • Yes, I did. 8 years in the US. Now, come back to the point, and answer my question.

        +1. IN fact the value proposition for someone still working in or close to a big city is ridiculously bad to live in the outskirts or country town.

      • moderate mouse

        8 years in the US hey? Not sure that qualifies you to call anywhere further than five kms from Smith Street or Surry Hills ‘the middle of nowhere’….

        Don’t know what question you’re expecting an answer to but I’ll choose the most reasonable one. Yes, I’ve travelled extensively for business and pleasure. You’re on the list, hipster.

    • “Continually failing to frame the true nature of the problem”

      But it makes it so much easier to apply economics 101 if you frame it naively. We don’t want to think, we want to be told how to think.

      /sarc

      • moderate mouse

        Economics 101? This from the guy who continually calls for interest rate rises…LOL. /Not sarc

      • I called for interest rate rises here on MB in 2011, at the Tim it was needed and I was against the grain but I think I’ve been proven right.

        Even I’d be reluctant to have them raised now

    • “Bollocks. More like anyone who believes ‘freeing up supply’ in the Sydney/Melbourne Megaburb will improve matters needs their head read.”

      It has worked beautifully in Texas, has it not, despite its bigger population and greater concentration of population in its major cities.

      Your whole “supply don’t matter” approach is ridiculous.

      • Oh dear Leith you are wearing meatpants. Here come boomer nimby and banana rabids, espousing how terrible Texas is (and should be).

      • @UE

        I agree that both supply and demand side factors are necessary, the facts that:

        “If you have $1 million you can afford 49 per cent of Sydney but if you cut it down in half to $550,000, you can only afford 5.4-10 per cent. That’s a massive drop in terms of affordability”…

        Strongly points to a demand side mania. It would be instructive to actually look at the distribution of house prices. My belief is that you will find a very strongly right tailed distribution even when corrected for land size and type of houses.

      • moderate mouse

        And what exactly are the tax breaks available in your beloved Texas for second, third and fourth properties? Hmmmmm……

        Texas is like America’s Darwin…..everyone gets a second chance. I’m sick of hearing about it (and I’ve got Texan blood).

    • Lack of decent jobs in these areas is the problem, not housing affordability.

      Sorry, what, exactly, is the difference?

    • +1 on incentivising business to move out to these areas

      A good example is Ballarat – was once a mecca of manufacturing due to some forward thinking from the Premier of the day (Bolte from memory)

      This whole idea of 4 million ppl getting up and heading in one direction for work is a debilitating mess

  6. Here we go on stamp duty vs land tax again. I noticed their paper is the usual superficial treatment. Anyone prepared to move beyond the usual blind group think consider the following :
    – In NSW&VIC investors pay stamp duty and land tax
    – Home buyers (PPOR) only pay stamp duty
    – The tax burden therefore is disproportionately borne by investors
    – ‘Broadening’ the land tax base and abolishing stamp duty means it will be proportionately the same for all
    – What’s the bet effect? Think about it……. shifting of some burden from investors to home buyers
    – Who’s the marginal buyer setting prices in today’s market? Think about it. …… the investor
    – What happens when you reduce their costs? Think about it….. That gets capitalised into prices. …

    No no. We’ll all just settle for some group think. We know how to spell dead-weight losses. Efficiency! We’re so clever!

    • I think you should spend some time actually thinking about it. Not just land tax but also the taxes currently are paid and utilised and why is “flipping” bad. think about it…. nobody “flips” if the prices are not rising especially if you are NG’d

      • See this demonstrates the lack of actual thought on this whole subject.

        Your statement is a bit garbled but are you suggesting that prices will fall from such reform? Explain why you think that would be?

      • See this demonstrates the lack of actual thought on this whole subject.

        Your thoughts on this started and stopped at it makes it easier for people to “flip”.

        Most advocates for land tax see it as the cornerstone of deep rooted reforms with land tax replacing upfront infrastructure levies and stamp duty to name a few. This will also ensure a stable income stream for local governments and hopefully leads to supply side reforms as well. In Germany for example, where land tax is the principle form of local gov revenue, they go out of their way to provide affordable housing with amenities.

        This will make it easier for people who want to change their houses to do so while not disadvantaging those that need to do so frequently thus resulting in a more mobile workforce.

        Targeting investors should not be done by making it more difficult for people to sell up!

        Your statement is a bit garbled but are you suggesting that prices will fall from such reform?

        Because it infuriates me to repeat and others to repeat ad nauseam the same thing.

      • The fact that your arguments are all just platitudes and regurgitated points without any systematic rational thought doesn’t make it worth my while to debate with you.

        I’ll just get back 3 word….. worse! 1 word slogans .

        Distortions! …..

        Efficiency! …..

        Deadweight losses!

        I read that in a paper!

        Sigh….

      • The fact that your arguments are all just platitudes and regurgitated points without any systematic rational thought

        On the contrary, I have thought about it long and as someone who has and will move regularly for their career, SD does place a very high and unfair drain on my financial resources.

        You on the other hand sound like someone that can’t get past the “the flippers”.

    • Land tax will reduce investors’ loan serviceability (it will be a know cost). Which means they get less loan amount approved.

      • Yes because our lenders are so prudent…. right …….

        Also, you didn’t address the question that the net amount goes DOWN for investors. Spreading the land tax thinner over a larger base means that the amount they save on stamp duty is more than the amount they now have to pay on land tax.

        Net effect they can afford to pay more for that next property!

  7. Couple of cheapies from Milwaukee to get everyone going

    94900 USD – 3 bedroom

    http://www.trulia.com/property/3151875213-3915-W-Roosevelt-Dr-Milwaukee-WI-53216

    94900 USD – 3 bedroom

    http://www.trulia.com/property/3135367988-6319-N-101st-St-Milwaukee-WI-53225

    or maybe this for 340K USD

    http://www.trulia.com/property/3167990851-River-Highlands-7304-N-Beau-Ave-Milwaukee-WI-53224

    That 550K you spend in Australia would get you this with change in Milwaukee too at 409K USD

    http://www.trulia.com/property/3168978845-2571-N-Terrace-Ave-Milwaukee-WI-53211

    and of course this one could almost be squeezed in on the same budget…..

    http://www.trulia.com/property/3193810577-Blakewood-1722-Blake-Ave-South-Milwaukee-WI-53172

    or maybe this one near where I work/drink in Geelong

    http://www.realestate.com.au/property-house-vic-geelong-118130167

    • Combine the salary advertised on Milwaukee job boards for my profession with the price of abode, and my family can have a very comfortable existence, with enough left over for a luxury car and annual holidays in europe. Instead of the shit sandwich we get served here.