Housing’s Budget

For almost a year now I have been warning about the Australian market. It became clear quite some time ago that the falling rate of credit issuance towards housing and the demographics of Australia where going to lead to downward pressure on prices. Most recently I have been stating that I can’t see any new drivers for credit towards housing and that without some form of new government stimulus or a sudden influx of “cashed up” immigrants I can’t see this changing any time soon.

So while watching the budget I was certainly on the look out for any signs that the government was about to step in and intervene once again in the housing market. There was certainly no announcements that you would call direct stimulus but there were two things that could have affects on the market. The first is the increase of the skill migrant program by 6000 extra people. This has the potential to drive up rents in some regional areas, however it must be noted that the number of people emigrating from Australia each year continues to rise so this increase may just be the government’s attempt to offset this rise in emigration.

The other announcement that has the potential to effect housing is changes to the NRAS program. These changes are ….. errrrr …. a little odd. I will let the HIA explain.

Australians looking for relief from high home prices found little help in last night’s budget, with some groups saying the lack of action on housing affordability was ”absurd” and ”nonsensical” as household costs rise. In the budget for 2011-12, the government slashed the number of affordable homes to be built under the National Rental Affordability Scheme (NRAS), left negative gearing untouched, while increasing the intake of skilled migration by 16,000.

By lowering the NRAS target to 35,000 a year from 50,000 a year, with priority for diaster-affected areas, the government pocketed $345.1 million over five years, which it said would be used to help rebuild flood-hit areas.

But the Housing Industry Association labelled the NRAS decision “disappointing and nonsensical.”

“Given the budget’s emphasis on cost of living pressures, it’s absurd that programs that address Australia’s extremely poor housing affordability be trimmed back,” said HIA economist Matthew King.

“What we badly needed last night was increased investment in the NRAS scheme and a hastening of its implementation,” he said. “We needed swift and decisive action in the short term, instead what we got was a delay.”

Amid record high prices for houses – the national median home price hitting $455,000 in March – the federal government lifted the overall increase in the permanent migrant intake to 185,000 from 168,700 places, with the majority aimed at regional areas.

Now as my readers would well know I am always concerned about vested interests talking their own book, but you don’t have to be a tin hat wearing fringe dwelling lunatic to find these changes odd. I am not sure that, as the HIA suggests, we need an increase in NRAS houses but a cut in a program that supplies lower cost housing to save a mere $70 million/year for five years seems very strange. Made even more odd by the fact that the treasury managed to find $222 million to put chaplains in schools.

So what is the NRAS program

The National Rental Affordability Scheme (NRAS) is a long term commitment by the Australian Government to invest in affordable rental housing.

The Scheme seeks to address the shortage of affordable rental housing by offering financial incentives to the business sector and community organisations to build and rent dwellings to low and moderate income households at 20 per cent below-market rates for 10 years. NRAS aims to:

  • increase the supply of new affordable rental housing;
  • reduce rental costs for low and moderate income households; and
  • encourage large scale investment and innovative delivery of affordable housing.

That is correct. While the government has left the sacred cow of negative gearing untouched, it has cut funding to a program that directly supports new housing supply. The Australian government has shown multiple times over many years that ‘housing affordability’ is not on its agenda and now there is downside pressure on the housing market I am not surprised at all to see a cut to this program.

But the logic isn’t hard to follow. In Australia housing is not just shelter. It is also an investment vehicle developed by the government in the 90s in an attempt to create superannuation for a massive number of baby boomers who did not have enough savings to support themselves into retirement. By doing this the government has shifted this generation’s dependency from the national pension system to the housing market. So until these people actually retire and manage to convert their assets into cash it is all “perceived wealth”.

You can see from the example given yesterday by The Prince how this has played out. On a personal note that example is not too different from my own parent’s balance sheet 2 or 3 years ago, they have since retired and sold all of their investment properties, in the same way that hundreds of thousands of boomers behind them plan to. The following graph shows the estimate growth by age group in family composition that will occur in Australia over the next decade, you can see that is heavily weighted towards the Boomer generation for the next 10 years.

The ABS has estimated that the mining boom will generate $76 billion in investment this year. That it is a large amount of money, but compared to the $4 Trillion dollar housing market it is quite small. It would only take a house price fall of 2% nationally to wipe out that investment boom. I’m not saying this is a one to one correlation of course. One is capital investment and the other an asset value supported by debt.  But you get the sense of what falling house prices will do to households sense of prosperity.

So while the housing market has been rising sharply in the last few years the perceived wealth of the boomer generation has moves with it, and the same will be true for any fall. RPData’s recent index claims that in Queensland housing is off 6.8% in the last 12 months. If we say Queensland is 15% of the nation market then this is a loss of $40billion dollars in wealth over the past 12 months in Queensland alone. Obviously these are rough estimates, but you can see that economies of scale are much larger in housing than they are in other industries and therefore even small fluctuations in value can have very large offsetting wealth effects for the nation.

And that outlines the government’s challenge. The assets held by the large numbers of people on the right hand of the demographic chart need to be transferred towards the left, either via local credit expansion or via foreign capital transfer. The problem is that there is already large amounts of credit in the domestic banking system and much of it towards the left  of that graph. According to the RBA there is already $1.1 Trillion in mortgages in Australia. However without some significant increase in national wealth outside of housing, another large rise in credit or a sudden influx of rich migrants, that transfer simply cannot take place at a price that will see the boomers happily into retirement.

That is why in 2008 you saw them institute the First Home Owners Grant boost when the market looked as if it would fall, and now you are seeing them lowering supply in wait of the mining boom, which I assume they think is about to increase national wealth enough to keep the market alive.  If you believe the governments forecasts then they may be able to pull it off. However it is dependent on four things on top of those rosy estimates.

  1. A willingness by younger generations to take on even more debt on housing, or accept an increase of foreign purchasing of local housing assets.
  2. Ensuring the boomers don’t panic and all try and sell at once.
  3. Fiscal and monetary policy that supports the transition.
  4. Having enough spare capital left over in the economy to transform it away from credit driven housing so that the younger generations don’t realise they are being sold a lemon.

The latest SQM Research stock on market suggests that they may not be succeeding in their task, which is why I am still on the look out for even more housing stimulus.


  1. Great analysis DE – the internal machinations of the budget are fascinating. It seems like Treasury is trying small measures (since large ones that would have a positive impact on housing valuations – new FHBG etc are verboten for now) to prop up the market.

    I don’t think I’ve anyone draw a comparison between the wealth lost due to house prices vs the “one in a gazillion years investment boom” meme that seems to cloud the consensus.

    Australia’s notional wealth is in housing – some $3 trillion or so, repeatedly pointed out by the bullhawks.

    Even NZ style declines in values across the nation wipe out any wealth created by the mining boom.

  2. The NRAS is being cut because it’s chronically undersubscribed, and therefore a failure. The money is being reallocated to flood relief in Queensland.

    Or it’s a conspiracy to keep real estate prices up. Take your pick.

    • I’ll take conspiracy.


      Anything to do with housing is as corrupted as they come. Most of the people in positions of power are boomers with very large IP portfolios and that includes the RBA.

      If you are naive enough to believe the rhetoric then that is your own issue. Make no mistake nearly every single person making decisions about housing policy owns an investment property.

      Great work DE.

      • “Make no mistake nearly every single person making decisions about housing policy owns an investment property.”

        you might want to check openaustralia.org where MP’s declare their interests. Pretty much 90%+ have only have the one or two properties including PPOR (most have a pad in Canberra)

        • MP’s ?????

          You have obviously never worked for the government. MP’s don’t make decisions, bureaucrats make decisions.

          And I can tell you the top echelons of government deparments are full of IP owning boomers.

  3. DE,

    Another very nice piece of work. I concur that the government’s tweaks to migration policy have nothing to do with propping up house prices.

    The intiatives (extra 16,000 places in RSMS, Enterprise Migration Agreements & Regional Migration Agreements) are all targeted at regional areas.

    The EMA in particular is interesting – never seen anything like it before – a visa program designed for a specific industry (resources) to try and keep that party going as long as possible.

    Another interesting tweak in migration is the new skilled migration selection model (coming in July 2012) which effectively creates a further processing choke point for migrants (noting that applications often takes years to get processed anyway). The effect of this I think will be a lower number of applications and ultimately lower processing outputs.

    So yeah, in summary, my assessment is there’s nothing in the budget migration wise that will do anything to stop falling captial city prices as we’re seeing.

    • “(CBA’s) Rate Saver Three Year Special Variable home loan remained the most popular product among brokers”

      So the teaser rate loan is the most popular. Hmm..

  4. There is no market based solution when the market is the problem. You can’t make a killing on selling your house and have cheap housing for your kids.

    Of course government could do something about providing long-term affordable housing for citizens . . .

    We could set up a trust for those dying without anyone to leave their house too. This could be rented long-term for cost plus a margin to buy more housing. This creates an increasing pool of housing relatively out of the reach of the market and government.

    • The problem, Evan, is that most people think housing is an asset class where one can make a “killing”. It should be a low-risk, lower-return class sitting somewhere between equities and bonds.

      This mindset has come about as a result of loose credit, bad negative gearing policies and restrictive land use regulation.

      The market isn’t the problem, it’s the rules that it must operate by. The market will fix it though – just keep watching real estate prices.

  5. The government must be desperate! They have spent $222million on chaplains in an attempt to bribe God into giving them some divine intervention.

  6. However without some significant increase in national wealth outside of housing, another large rise in credit or a sudden influx of rich migrants, that transfer simply cannot take place at a price that will see the boomers happily into retirement.

    Rise in global credit is a matter of timing i.e. when the EU and US realized that they cannot keep interest low and print liquidity QE-style forever. It could be months or years so conceptually the property booms-party can keep going on with those excess liquidity from overseas till the music stops.

    Influx of rich migrants ? In this area, I have big dis-agreement with most readers. Most of readers and blogger here somehow doubt that the influx of rich migrants are limited in the near future.

    First, we should define what is considered “rich migrants”. I agree that not all skilled professional migrants are rich / wealthy coming to Australia, they may have skill but not necessarily enough wealth to easily buy a house in Australia (including myself). But, people tend to forget the other source of rich migrants, i.e. the overseas students from Asia (esp from China, Malaysia, Indonesia and India) who are mostly from rich / privileged family in their country and those Asian countries are having the biggest boom-times in their economy in the last decade or more. Do you know that that to earn a Bachelor degree in Australian uni which on average takes about 3 years, the parent of one overseas students must at least spend AUD 40-50k just for study costs and with another AUD 75k for living costs ? I knew some rich Asian family can send not one, not two but three or four of their children to Australian uni almost at the same time. The richer family can even afford to buy home and car for their kids studying here. And once they finished study, some will want to stay and become “skilled-migrant” statistics. Sometimes, their parents also join later as part of “family migration” statistics having no problem to pay around AUD 30k each or AUD 60k for couple (mom and dad) to jump normal family migration queue.

    Well, you think that story is exception and very rare. I see the opposite, there are many of them in those Asian countries…they are rich business families but facing harsh opressive / corrupt government regimes, they choose to migrate to Australia looking for better life. Yes, everything is expensive in AUD for them but most of them have accumulated enough wealth in their home-countries before moving here so buying house is no problem … I see many examples of those kind of families buying one apartment for each of their 2 or 3 children in Sydney with cash (no mortgage required).

    So, I am not really sure whether this bubble will burst once the government trying its best to prop it up by opening the migration gate. The skilled migrant is not so much problem but the biggest problem is the rich overseas students who will eventually become rich skilled migrants when they finished their study.

  7. 400 000 ‘permanent’ departures per year! I didn’t realise it was that many. I wondered if that includes the ‘permanent’ departure of the eternal kind too? The kind where you can’t take your assests with you no matter how liquid or illiquid they may be?

  8. I must say I am most impressed in how DE, Leith and others on MB are explaining the housing market in structural terms.

    May I suggest you guys research closely the Texas housing markets where housing overall in its metros is about 2.5 Median Multiple overall with the Australian ones at about the 6.3 MM overall (according to this years Demographia Survey Sept qtr 2010 data).

    The “churn rates” are hugely important and you will find that in bubble markets these explode as they inflate and crash on the downside. Enormous “bubble equity” is injected in to these bubble markets as they inflate, leading of course to the illusion of prosperity and increasing government revenues and expenditure. The public sector love it.

    The reverse of course happens when the bubbles deflate, creating massive deficits (e.g. California and NZ as just two examples of many).

    By my rough calcs there is in excess of about $A2 trillion of bubble value to wipe out of Australia – and Aussies have loaded themselves up with about $A500 billion of excess bubble mortgages to house themselves.

    How housing inflation triggers general inflation requires urgent research and reporting.

    The SMH stories of recent days explaining how households on $A150,000 pa are “struggling” is laughable – if it wasnt so destructive. Australia is hugely uncompetitive. Imagine a Sydney manufacturer having to compete with one from Houston internationally now.

    The costs and consequences of these unnecessary housing bubbles are simply horrendous.

    I suspect it is going to be a hard and fast road back to reality for the Australian housing market.

    Keep up the great work guys!

    Best regards,
    Hugh Pavletich
    Co author – Annual Demographia International Housing Affordability Survey
    New Zealand

  9. CharlieChaplin

    Wasn’t there news recently about the government being in discussions about cutting back negative gearing?

  10. First post:

    I was interested to see in the Budget, that the Government seemed to stay well away from introducing another outright stimulus for first home buyers.

    Do they deserve credit at all for recognising that it simply drives prices up? Or is it simply a case of not enough people with outside property interest making enough noise about property prices falling.

    It seems that with all the usual statements from the media about prices are sound, lack of supply, immigration, mining boom etc that the government won’t introduce another stimulus.

    I’d be intersted to know what thoughts are that would trigger another / if any at all?

    With the fall in prices in the US / UK / Ireland, apart from slashing interest rates, have any of these countries introduced similar measures in a falling market?