The Australian Population Research Institute has released a new report entitled Sydney and Melbourne’s Housing Affordability Crisis: No End in Sight, which accuses the Turnbull Government of “monumental insensitivity” on the issue of housing affordability, and pins the blame for Australia’s poor housing affordability on the combination of negative gearing, the capital gains tax discount, rampant immigration, and shortsighted planning by state governments.
The report also claims that the Coalition has its “head in the sand” on negative gearing, and argues that Labor’s proposed reforms are “part of the solution” that would “take some of the heat out of the housing market”.
Below are the key extracts from the executive summary. More detail can be found in the body of the report.
The purpose of this report is to document the seriousness of the housing affordability crisis in Sydney and Melbourne and to show that the assumptions undergirding Commonwealth and State Government policies to deal with it are not working and cannot work.
The urgency of a rethink on these policies was revealed during the debate in late February 2016 on the Labor opposition’s proposals to abolish negative gearing concessions on established residential property from 2017. The Prime Minister, Malcolm Turnbull, declared, to a chorus from the property industry, that this would reduce the value of housing.
The PM’s stance reveals a monumental insensitivity to the social catastrophe flowing from record high housing prices for the next generation of home seekers in Sydney and Melbourne. Prices have to drop if the consequences are to be dealt with. They include a leap in the proportion of young households who have to rent, with Sydney leading the way. By 2011, 42 per cent of partnered persons aged 30-34 in Sydney were renting as were 36 per cent of those in Melbourne.
Two sets of policies are at issue. The first set is the macro-economic settings of the post 2013 Coalition Government and second set is the assumptions guiding the NSW and Victorian government planners responsible for their respective metropolitan housing policies.
When the Coalition came to power in 2013 it faced, in its words, an ‘extraordinary period of transition with investment in resources projects shifting from being the key driver of growth towards becoming a significant detractor from growth’.1 Its interim solution was to promote the housing construction industry. The May 2014 budget projected dwelling investment would increase by 7.5 per cent in 2014-15 and 5.5 per cent in 2015-16.
The strategy to achieve this boost was to leave intact the pre-existing incentives to housing purchases for owner occupiers and investors. These included the longstanding negative gearing and capital gains concessions. The Government also, in effect, provided a guarantee of continued growth in housing demand. It did so by stating that it would maintain net overseas migration (NOM) at around 240,000 a year. This was in a context where it was well known in the property industry that about half of all new migrants were locating in Sydney and Melbourne.
Our projections show that, on these demographic assumptions, new migrants will add about 64 per cent to the need for extra dwellings in Sydney over the decade 2012 to 2022 and 54 per cent in Melbourne.
For its part, the Reserve Bank, which has likewise fretted over the downturn in resource investment, sharply lowered interest rates.
These policy settings meant that the Commonwealth Government was making the gigantic assumption that it could solve the already serious housing price situation in Sydney and Melbourne at the same time as adding a very large extra source of housing demand from migration.The results are the opposite of what was promised. Over the last few years there has been a speculative boom in housing prices in Sydney and Melbourne that has worsened the affordability crisis. Most of the huge increase in investor purchases has been in established houses. Investors are in effect transforming potential owner occupiers into renters.
To the extent the Commonwealth Government’s policies have promoted dwelling construction it has mainly been in the form of high-rise apartments.
The blame for this latter outcome is partly attributable to the NSW and Victorian planners and the housing commentators that have promoted their strategies. The two governments and their planners suffer from the same hubris as the Commonwealth Government. They have claimed that their policies will fill the backlog in the supply of dwellings already obvious by 2013 and, in addition, provide for the needs of the extra migrant households.
Their strategy has been to open up opportunities for urban renewal in inner city areas and for infill (low rise apartments and units) in established suburbia. To this end the planners have rezoned vast areas of the inner cities of Sydney and Melbourne for high-rise apartments and diminished the opportunities for municipal councils and resident action groups to oppose infill development.
These planning policies are based on the assumption that most of the demand for new housing in Sydney and Melbourne will come from one- and two-person households who will welcome the new opportunities to locate in inner city apartments or infill in established suburbia.
These assumptions are wrong. Most of the growth in the need for extra dwellings in Sydney and Melbourne will come from young resident households entering the family formation phase of their lives and from new migrant households who for the most part will also be entering the same phase. Their priority is family friendly two or three bedroom dwellings with some protected external space…
By 2016 housing prices in Sydney and Melbourne were amongst the most expensive in the developed world. Prospective home buyers have been forced to search ever further outwards for affordable housing. They are not finding it anywhere in Sydney, even on new fringe estates. They can find such housing on the fringe of Melbourne, but have to move 30 to 50 kilometres from the CBD to procure it. The consequence is a sharp spike in the number of renters.
There are increasing numbers of high-rise apartments available in both cities. But these are totally unsuitable for those looking for family friendly housing.
The great hope of the planners was that infill would provide the solution. It has not happened…A time of reckoning approaches. The extent of mortgage debt in Australia is enormous. It has reached $1.4 trillion and is growing by $100 billion a year.
The average level of debt per Australian household (most of which is mortgage debt) is equivalent to 160 per cent of the mean annual income of each household. This is higher than almost all other developed countries. It is unlikely to be sustainable. A recession or a rise in interest rates would undermine the capacity of mortgagees to service their debt, with profound wider economic implications.
But, more likely, the impending glut of high-rise apartments will disrupt the housing market. The main casualties will be the tens of thousands of investors who have purchased apartments off-the-plan…
Australia’s financial authorities have much to answer for. They have allowed, indeed facilitated, the housing bubble by letting it rip without constraints on investor engagement.
The Australian Prudential Regulation Authority has belatedly introduced restrictions on the rate of growth of investor purchases in residential property and acknowledged the seriousness of the mortgage debt overhang. For its part, the Reserve Bank has admitted that its low interest rate regime has facilitated the bubble.
But this action and recognition is too late. The boom has occurred and the flood of high-rise apartments is in the pipeline.There is an obvious need for a thorough review of the demographic assumptions and policies undergirding urban development in Sydney and Melbourne. Yet none of the state governments, or their planning bodies, shows any willingness to confront their failures or revisit their strategies to deal with the housing crisis.
They are reluctant to admit that their policies have not increased the stock of family friendly housing to anywhere near the level required given the high levels of immigration occurring in both cities. Nor have they faced the fact that the boom in high-rise apartments is producing housing that is largely irrelevant to resolving the housing affordability crisis in both Sydney and Melbourne.For its part, the Coalition Government has its head in the sand. The abolition of negative gearing incentives for established dwellings has to be part of the solution. When removed, this will take some of the heat out of the housing market. The Government’s strategies to promote housing are part of the problem rather than the solution. This includes its migration policies. To add ever more households searching for family friendly housing in a context where there is already a serious shortage may be good for the housing rich but it is a disaster for the housing poor.
You can read the full report here.
