Why Aussie politicians are housing affordability liars

What chance does a political party promising to radically reduce home prices to improve affordability have of getting elected?

The electoral calculus is simple. There’s no chance. If they say they want to, they are lying. This reality is why the Federal Budget included policies to boost housing demand but do not expand the supply low-cost housing alternatives.

The reality is that the richest seven out of ten households own $7 trillion of housing wealth in Australia. That’s $7,000,000,000,000, or seven million-million dollars. Every single 1% price decline wipes off $70 billion from the balance sheets of these households.

Yet we find ourselves in the bizarre situation where politicians are obliged to talk like they want home prices to be lower and “more affordable” but must act in ways that support higher home prices. We can only conclude that our housing market is exactly where we Aussies want it.

Consider these figures from a recent working paper I produced with Josh Ryan-Collins. Bank lending for housing grew from 20% of GDP in 1990 to 80% of GDP today. Business lending for investment grew from 35% to 40%. We have used the power of banking to bid up house prices by trading them with each other while neglecting investment across the business community. No one saw a problem with this because it helped house prices grow.

While the media celebrated the ‘booming’ real estate market, during the 2010s homeownership rates fell from 70% to 65% – back to levels last seen in the 1950s. The main difference between now and then is that governments of the 1950s intervened strongly to get more people into homeownership with public loans for new homes, direct public land provision, and rent controls on landlords that prompted many to sell to owner-occupiers. The state also provided extensive public housing alternatives, with nearly 15% of new supply being public housing in the 1950s compared to just 2% across the past decade.

You can see why our housing situation is so attractive for the homeowning cohort by comparing the economic returns from housing to wages. In the seven years to June 2019, the median Sydney home earned as much from rent and capital gain as the median Sydney full-time worker! This is astonishing. Capital growth of all land, not just residential, went from 9% of GDP on average between 1960 and 1980, to 17% of GDP since 2000, roughly twice the relative return to landowners than just 40 years ago.

Reversing these trends will benefit younger generations who are resigning themselves to the fact that homeownership is beyond their reach. While the “bank of Mum and Dad” has helped shift some housing wealth down the generations, it has entrenched inequalities. Waiting for inheritances won’t work either. The average age of receiving an inheritance is 64 years.

Housing is a defining social issue of our time. We have many technical solutions in our working paper, but the sheer economic value at stake and the political realities of this mean that change won’t be easy.

The problem with making home ownership more affordable is not a small elite locking the majority out: a lot of us (ie homeowners) have a lot to lose if we want to share the joy of a home of one’s own.

This was first published at Sydney Business Insights.

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  1. Jumping jack flash

    Firstly, everything is “affordable” if the bank decides they can give you enough debt to buy it with. The problem is being eligible for the correct amount of debt.

    But suppose we decide there is actually something called “affordability” and “unaffordability” in the age of debt. There are a few simple reasons why houses cannot be made “affordable”. The UK discovered this the hard way with their affordable housing scheme a few years ago which was a total failure.

    Houses are valued, and the value of a property is basically a function of the values of all the houses around the one you’re valuing. The same rule applies with “affordable” housing’s value of course.

    So what happens in the case of affordable houses? Does the affordable house rise in price to match those around it (like they did in the UK’s failed scheme), or do the “unaffordable” houses around it fall in price to match the affordable houses?

    “Unaffordable” houses can’t fall in value too much because they almost always have debt attached to them. The owners of the debt wouldn’t like it, and at the end of the day the banks don’t like it either. So there goes that idea.

    That’s not to say there is no solution. There most certainly is one and it is not all that difficult. You simply build the affordable houses nowhere near the unaffordable ones with debt attached to them. Maybe 50 to 100Km away should do the trick.

    And then after they’re built you don’t want them to be desirable in any way, shape or form, so there must be absolutely no utility to these houses whatsoever. If there is, they will quickly become unaffordable, because sure as eggs, if there’s any kind of desirability about these houses, some downsizing retiree will surely splash a heap of someone else’s debt on one during their property liquidation phase, and there goes the neighbourhood.

  2. “The problem with making home ownership more affordable is not a small elite locking the majority out: a lot of us (ie homeowners) have a lot to lose if we want to share the joy of a home of one’s own.”

    That’s why the scam works so well. You bring in a huge amount of people.

    It’s also why the ultimate consequences are likely to be very severe, because so many people are so economically dependent on something clearly unsustainable. It’s hard to forecast anything that isn’t going to be ultimately catastrophic as a result.

  3. Good article Cameron.

    You have identified many of the reasons that housing was affordable circa 1950-1970
    expand the supply low-cost housing alternatives …
    governments of the 1950s .. public loans for new homes, direct public land provision, and rent controls on landlords .. extensive public housing alternatives, with nearly 15% of new supply

    However you left out a few. Govt of the 1950’s also:
    * restricted immigration to more reasonable numbers
    * established decent sized cities (no mega cities)
    * allowed virtually unrestricted “leapfrog” development on the outskirts of cities
    * built roads and rail with enormous overcapacity (used-up now)
    * tariffs and restrictions on imports – less competition and higher wages for ordinary workers

    The solutions to the housing disaster are quite simple:

    * put the foot on the immigration brake pedal
    * put the foot on the housing supply gas pedal

    Keep the pedal to the metal until rents fall so a decent house cost 1/3 an ordinary wage to rent.
    THEN and only then come up with a plan to limit population and protect what remains of our environment.

  4. ”’There are a few simple reasons why houses cannot be made “affordable”. The UK discovered this the hard way with their affordable housing scheme a few years ago which was a total failure.”
    It was a failure because it was undermined over and over by developers, local councils and complicit MP’s. New housing schemes, built by private developers of course had to provide so much affordable housing as a percentage of the build. These houses, but mostly flats were not meant to be sold but leased out to housing associations who then let them out to tenants. The builders went along with this until the late planning stages then pointed out to the council or whoever had the final aproval say-so that they could only provide 5 rather than 15 affordable flats/houses and 9x out of 10 they got permission for that. That basically is how the UK has been deprived of privately built social housing for decades. The UK also sufferers from the same corrupt practices that Australia suffers from, ie land banking and drip feeding the market, ‘help to buy’ scheme which is only for new-build houses, ostensibly to help increase the housing stock but in reality to top up building company profits which it does to the extent that one company, Persimmon, paid its CEO a £100 million bonus a few years ago, while each house created a full after-cost profit of around £57,000 each. This is more than double than a few years ago when the ‘help to buy’ scam was introduced (sound familiar)
    The only way round it in Australia is for newly zoned land to be sold at cost and not drip fed to the market. I remember looking at some land outside Melbourne about 5 or 6 years ago, then going back 2 weeks later for another look and they had added $30K onto each block. They tried to tell us it is all development and infrastructure costs but that was pure bs, then to top it off, every 3 years or so the size of each block drops 50sqm or so.

    • steve99,
      You have found the key to the problem – choked supply of land via zoning.

      Even with today’s environment-trashing rate of immigration we still could have cheap decent housing in Australia if the land zoning rort was reformed.

      There are many ways to reform it. Try these.

      * Only govt-owned land may be rezoned. Govt to buy land at its current-zoning price (eg farmland cost) and then rezone it and sell it directly to citizens to live on at a reasonable cost.

      * private land may be upzoned. Land owners must bid for the right to upzone. Hence unearned windfall goes to govt. Incentive for corruption gone.

      * land upzoning occurs based on a published formula. eg. Any land is allowed to be rezoned to 110% of the average of surrounding properties in a 500m radius. Rezoning limited to once every five years. Once rezoned, higher tax applies immediately.
      This would give us a smooth creeping density increase and no windfall profits and no corruption.

      • This is sort of what happened in the 1950s before the extreme monetisation of everything took over. SA in particular did this in the 1950s to enable the build up of industry.

  5. Governments will never do anything to lower house prices while it is loaded with taxes at all levels based on values increasing: Rates, land tax, stamp duty, GST.
    If rates and land tax were on a per property basis rather than value then their might be a chance.
    Increase the base of GST and remove GST on new property.
    Prices would then come down and the main instigator of price increases – the Govt – would be removed from the equation.