A rare dose of honesty in the housing affordability debate

Cross-posted from Online Opinion:

In his famous 1942 “Forgotten People” speech, Sir Robert Menzies stated:

… one of the best instincts in us is that which induces us to have one little piece of earth with a house and a garden which is ours; to which we can withdraw, in which we can be among our friends, into which no stranger may come against our will.

Believing in the enduring value of home ownership in promoting social stability, the Menzies government created incentives for Australians to purchase their own piece of real estate. In the post-war years Australia was transformed into a land of owner-occupiers, with the home ownership rate rising from 53 percent in 1947 to over 70 percent by the 1960s. This great shift helped to cultivate a broadly middle class society during the second half of the 20th century.

Yet in recent years the so-called “Great Australian Dream” to own one’s home has transmogrified into a nightmare, with home ownership rates free falling as prices have soared. This decline in home ownership is particularly acute among younger Australians. In 1981 more than 60 percent of Australians between the ages of 25 and 34 owned their own home. By 2014, this proportion had declined to below 30 percent. Nor are young people necessarily catching up over time, with substantial declines in home ownership rates recorded across all age groups. For young people, being locked out of home ownership has many negative effects – from instability and insecurity to delaying family formation.

While housing affordability has become a major national issue, there is little consensus on the causes of the crisis and how to tackle it. Frustrated by an affordability debate “weighed down on all sides by misinformation, vested interests, political timidity, and ideological blinkers”, prominent businessman and philanthropist Dick Smith recently released a booklet designed to tell the full story on housing. Perhaps unique among his contemporaries, Smith isn’t a player in the investment property market and is prepared to call a spade by its name.

In The Aussie Affordability Crisis, released through his new Fair Go Group, Smith notes that between 1975 and 2016 the average house price in Australia, after adjusting for inflation, increased by a whopping 333 percent, while the average wage grew by only 40 percent. Although this explosive increase has delivered easy wealth to those who already owned homes at the start of the boom, it has pushed prices far beyond the reach of many Australians and dramatically widened the gulf between the housing haves and have-nots. The Sydney and Melbourne markets have become almost completely inaccessible to young Australians. With the average price now over 12 times the average annual income, Sydney has become the most unaffordable housing market on the planet after crowded Hong Kong.

Even those ‘lucky’ enough to afford to enter the current market find themselves saddled with staggering levels of debt. Apart from placing many under huge financial stress, hefty mortgages are also a risk to our economy. Earlier this month, the IMF singled out Australia in its Global Financial Stability Report, stating that high levels of household debt and high house prices made the country more susceptible to interest rate shocks. As Smith observes, Australians have borrowed so much for housing that we have now the highest household debt levels in the world in relation to the size of the country’s economy – around $2 trillion in household debt relative to $1.6 trillion in GDP. Policymakers seem strangely unconcerned that much of this borrowed money has come from overseas and has been channelled into unproductive assets i.e. housing rather than invested, for instance, in growing businesses.

So why is Australian housing, once affordable to even those of modest means, now among the most expensive in the world? Smith asserts that an extraordinary population surge, a tax regime that encourages property speculation, and overseas investment have been the prime drivers of runaway house price growth in recent years. Unlike many other contributors to the debate, Smith does not shy away from examining the role of immigration-fuelled population growth in the country’s housing affordability disaster. Indeed, he puts the issue front and centre in his book in an effort to remedy the woeful lack of scrutiny it usually receives relative to the other causes involved. Smith criticises those commentators and politicians who spuriously claim that the supply of land for housing is the only factor governments can influence, whereas the demand caused by immigration-induced population growth is somehow beyond our control.

Smith writes: “Just like anything else, land and house prices depend on both supply and demand – and Australia’s housing supply clearly has difficulty keeping up with our break-neck population growth. This is not surprising considering housing supply adjusts slowly to increased demand (with the many steps and constraints involved in building new housing stock) while we have the equivalent of five wide-bodied jet-loads of immigrants coming in every week.”

To ease the housing pressure-cooker situation in our cities and give supply a chance to catch up, Smith advocates a substantial reduction in Australia’s bizarrely massive immigration intake, presently running at well over 200,000 per annum. This, he argues, would also alleviate some of the strain on our groaning national infrastructure, lift wage growth, and put Australia on a more sustainable footing.

Additional reforms suggested in The Aussie Affordability Crisis include removing or reducing the 50 percent discount on capital gains from housing investment, overhauling negative gearing, and the introduction of a broad-based land tax to replace stamp duty. Smith also calls for higher taxes on foreigners buying Australian property in order to dampen demand and prevent locals being further priced out of the market.

Foreign buyers now account for about a quarter of new house purchases in New South Wales, with the Chinese comprising around 90 percent of that demand. This untrammelled foreign buying spree has raised concerns about dirty money being laundered in Australian property. Despite repeated warnings from the Paris-based Financial Action Taskforce, AUSTRAC and Transparency International that Australian property is a haven for laundered funds, Canberra has failed to clean up the sector. As Smith tersely puts it: “It’s almost as if Australia would prefer to cooperate as a launderer of corruption than deal with the negative effects on young first-home buyers.”

While offering a number of potential policy fixes to improve affordability, Smith warns that the road to reform is essentially blocked by powerful vested interests which benefit from a hyperactive housing market. Worse, industry, the media and the major political parties – the Coalition, Labor and the Greens – are, to quote Smith, “all ‘Big Australia’ allies in a code-of-silence on the role that population plays in our housing affordability crisis.” Until this code-of-silence is broken, it seems the prospect of home ownership, particularly in our major cities, will become ever more remote for many Australians.

Comments

  1. I wonder if Dick Smith would sing the same tune if he was at the receiving-end of the gravy train…. i.e. a politician?

    • Does it matter?

      It’s one thing to use character assassination to derail someone’s otherwise valid points, but to use speculative character assassination is so far removed from an argument it’s hard to understand what your point is

  2. You Australians don’t realize that a large proportion of your population:
    – Will never afford houses
    – Are governed by a small land-owning elite
    – Are badly educated, with your educational standards dropping fast.
    – Your Internet speeds are slower than many third world countries.
    – You will battle to prevent blackouts this summer.

    Your country is becoming third world, as Dick Smith warns.
    The average Australian does nothing about it and resembles your old main export, sheep.

    • Why is it that looking at Australia from abroad these things are crystal clear yet the average punter here is either in denial or confusion?

      • reusachtigeMEMBER

        What a load of un-Asutralian rubbish! These foreigners keep getting the same sh1t about us wrong over and over again. If this country wasn’t as way great as it is all the imported human capital wouldn’t be choosing to come here. Everything that other person above wrote is the opposite of the truth. Our nation pretty much dominates the top of most good ladders. And we’re rich because of it. You must be poor, and a bludger!

      • Why is it that looking at Australia from abroad these things are crystal clear yet the average punter here is either in denial or confusion?

        Because one of the many ways we are eagerly emulating the yanks is the idea of “exceptionalism”.

      • Absolutely Reusa – I am one of those imported human and have bought a few properties at good prices to ensure good looking investors making good money And I like to keep them empty too to avoid them being tainted with undesirables

  3. You should not use net immigration figures (200,000) when talking about houses. You need enough houses to house all incoming immigrants (700,000+), including those on temporary visas. You cannot assume people leaving the country dispose of their property (especially since FIRB doesnt check). They may keep that house empty permanently, use it as a holiday house, or simply have purchased it solely to landbank. So people in minus people out does not equal number of houses needed.

    • If it is a “Supply and Demand” problem, how come we have a supply problem when I am in an auction looking at baby boomers buying their tenth property while the small family there in the corner staring at the price tag?????

      I think the “Supply and Demand” dogma should be kicked out of the window.

      • @crash
        The small family don’t count, or matter. They are Ireland and should be renting. That’s why investors are in the market – for the small family.

    • reusachtigeMEMBER

      Legend, seriously! See, good young people with a positive go-getting attitude are still out there. Rather than masturbate in his parents home watching porn and playing video games this dude has built his property portfolio and ended up with a really hot wife. If he’s really good he probably has even hotter girlfriends too. This is what all young people should aspire to!

      • Absolutely, it’s a sausage sizzle in here, just talking about Dick all the time. We should be out there as #Winners with Hot Wives, hosting fabulous seminars.

  4. No doubt what so ever about a code of silence on the massive immigration intake.
    There’s an even larger code of silence on the racial make up of this massive intake, with more than 80% of the permanent immigration program made up from non caucasian stock.
    It used to be called asianisation, then multiculturalism and now the elites have deemed diversity the proper terminology.
    I think this is the reason The Greens (refugee party) and the Labor Party (greens lite party) keep their traps shut regarding reduced immigration intakes.The Liberals are doing what you might expect, filling the the country with consumers to fit their neo-liberal ideology.

    • They’re all complicit in this and that’s why none of them deserve to be voted in. I only hope Sustainable gets enough votes to make people sit up and notice.

  5. Thank You Dick Smith for revealing this problem and doing such an in depth study on this issue.

    In addition to everything above, the issue is further amplified by the “interest groups” in politics and by levels of corruption in Australia that i have never witnessed before. Interestingly all corruption here happens on the “higher level” with councils saying “no” for application to add a garage on existing properties but “yes” to a 8 plus story apartment blocks on the property next door. But obviously it doesn’t end there… Infrastructure projects and major tax reforms is where the “real money” is made by our “honest” politicians and their lobbyists. Their “cuts of the infrastructure pie” have never been bigger as all projects blow the budgets and take the taxpayers to the cleaners while corporations are enjoying consensus on lower tax rates or loopholes to avoid taxes. Reluctance of implementing any decisions that are beneficial to the majority of Australians is staggering.

    The are 2 main types of corruption opportunistic and systematic. In Russia, for instance, corruption is “opportunistic”, with government structure remaining in somewhat fluid state, in Australia it is systematic. In plain English, in Russia politicians who manage to “earn” their money in unethical and illegal ways rush to move their assets to the foreign banks and soon change the place of residence, whereas in Australia there is no such rush to move anywhere, as corruption is systematic and wide spread and there is no risk for the individuals to be investigated and evicted from the “club”, so the same people are getting reelected from the same pool of “talent” and the same “pies” are getting shared over and over again. So opportunistic corruption is better in the way that system, in time, is getting fixed to present less opportunities, whereas in Australia system remains corrupt to the core. I am sure many voters find it difficult to put a line between parties and policies especially when it comes to their implementation. Sadly it is much easier to overcome “opportunistic corruption” rather than revolt against “systematic corruption”.

    The last but not the least, the GDP is a very poor indicator of general health of economy and related statistics no longer have a fair representation of the economy either. If we take an approach of top 30% and bottom 70% we will quickly realize that there is a very substantial difference in wealth, job stability and financial stress between these classes. So far majority of bottom 70% have managed to live up to a modern definition of “success” on the streets of their choice by buying expensive houses via excessive borrowing which they will never be able to repay. Given that the divide between asset rich and asset poor (but debt rich) classes is almost at all time high we might witness some major changes in political landscape. It will be very interesting to see what happens to “The Block Economy” next year when house prices will further extend their losses and turn the entire bottom 70% into have nots… “When people have nothing to lose they lose it”.

    On a positive note, every crisis presents us with endless opportunities, and this one will surely deliver once in a lifetime (128
    years to be more precise) event. 1890 all over again, this time not just in Melbourne but all across Australia… The favorite disclaimer comes to my mind: – ” Past performance isn’t an indicator of the future performance”. Indeed we have all the stars aligning to make make it something very special this time around.

  6. Why the best workers are fleeing Sydney – NZ Herald

    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11942702

    There has never been a better time to be a highly skilled worker in search of a corner office, but new data shows tech and finance employees are eager to leave Sydney.

    Economist at jobs site Indeed, Callam Pickering, recently conducted an analysis of job seeker behaviour and found around nine per cent of clicks by STEM (science, technology, engineering and mathematics) job seekers in New South Wales were for jobs posted in other states.

    “By comparison, only six per cent of clicks for New South Wales STEM job postings were coming from job seekers living in other states,” Pickering said.

    “With the exception of South Australia, STEM job seekers in NSW are the most likely group to search for work interstate.” … read more via hyperlink above …

    … Following New Zealand … housing affordability becoming the dominant political issue in Australia …

    From boom to gloom: how rising house prices have become a worry … Sydney Morning Herald

    http://www.smh.com.au/comment/from-boom-to-gloom-how-rising-house-prices-have-become-a-worry-20171103-gzeh8r.html

    … extract …

    … The latest Ipsos Issues Monitor, which asks respondents to select the three most important issues facing the community, shows housing has jumped from sixth place in Victoria to second place since 2014.

    In NSW, housing has topped the list of concerns for the past three quarters. Half of NSW respondents now rate housing as one of the nation’s most important challenges compared with less than a third in 2014.

    Other polls have drawn attention to the growing public unease about housing costs. An Essential Vision survey that asks respondents nationally to nominate the “three most important issues for government” shows housing affordability climbed from sixth ranking to second between 2014 and 2017. … read more via hyperlink above …

    … Late January report …

    Five Aussie cities named ‘worst in the world’ for affordable housing | The New Daily

    http://thenewdaily.com.au/money/property/2017/01/24/housing-affordability-demographia/

    Australian politicians have sleepwalked into a housing affordability “crisis” because they were hooked on property taxes and votes, a think tank has warned.

    Demographia, a global company based in the US, released an annual report this week that ranked Sydney as the second-most expensive city for housing in the world. …

    … Wayne Matthew, the Australian spokesman for Demographia, told The New Daily that our politicians are “only just starting to realise” the extent of the problem. … read more via hyperlink above …

    • Lol only just starting to realise how screwed we are is more like it. Heads in the sand for years. No excuses.

  7. That snippet of Menzies’s speech makes you wonder about the approach required today to produce social stability for his forgotten people and how much that varies from today’s policies. And what policy changes are available to support the upcoming generation’s reasonable aspiration to do as well as their parents’ generation without crashing markets.

  8. It’s simple, if you want a stable society, Mr and Mrs Average, or Mr and Mr Average and so on need a stable home environment in which to raise children.Couples working full time, stressing over the rent or mortgage, not being able to afford holidays to keep a spark in the relationship is not conducive to a good environment in which to raise tomorrow’s citizens. We need, as a nation, to ensure ordinary people can afford somewhere to live and raise children..