Housing Affordability:
has the great Australian
dream ended?
Judy Yates
University of Sydney
Outline
Current situation (and why different from US)
How did we get there?
Implications and explanations of changes that
have occurred
What is needed for a fairer housing system?
What can we do about it?
Current situation
In Australia
• House prices declining - but
• Initial house price correction occurred in 2003-04
• Current and anticipated shortage of supply
Factors specific to US house price declines
• Excess supply of housing
• Expansion of home ownership to ‘underserved’
minorities
• High proportion sub-prime lending
• Different financial system
• Non-recourse lending
• Fixed rate lending, widespread use of MBS
• Weaker regulatory system
Inflation (% pa)
US and Australian real house price
inflation
25
20
15
10
5
0
-5
-10
-15
1990
USA(C-S)
1995
2000
Australia (new index)
2005
2010
Australia (old index)
Source: US:http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_History_022445.xls
Aus: ABS : http://www.abs.gov (641601.xls)
Australia:
Demand-supply balance as at 2008
Component
Estimated dwelling gap
Dwellings required to address homelessness
- sleeping rough
- staying with friends and relatives
9,000
35,000
Dwellings required to house marginal
residents of caravan parks
13,000
Dwellings required to increase vacancy rate
to 3%
26,000
Estimated gap
83,000
Rounded to nearest 5,000
85,000
Source: State of Supply, 2009, National Housing Supply Council, Table 4.5
Australia:
Increase in gap over 5 years to 2013:
Supply projection: production of dwellings
Demand projection:
Underlying demand
Low
Medium
High
(number of dwellings)
Low household
growth
194,000
45,000
-83,000
Medium household
growth
267,000
118,000
-10,000
High household
growth
367,000
218,000
90,000
Source: State of Supply, 2009, National Housing Supply Council, Table 4.10
Australia: FHB Affordability index
$500,000
Ratio
2.0
$400,000
1.6
$300,000
1.2
$200,000
0.8
$100,000
0.4
$0
1990
1995
2000
2005
0.0
2010
Median first home price (RHS)
Affordability index (LHS)
Affordability Outcomes (2003-04)
Lower income
private renters
Incidence of stress (%)
100
Lower income
purchasers
80
60
Moderate income
private renters
40
20
Moderate income
purchasers
0
0
100
200
300
400
500
Numbers in stress ('000s)
Source: Yates and Milligan (2007) Housing Affordability: A 21st Century
Problem, AHURI NRV3, FR
600
Real rent inflation (Aus CPI rent)
(%)
6
4
2
0
-2
-4
1990
1995
2000
Source: Aus: ABS 641605.xls; rent component, CPI adj
2005
2010
Median weekly rents, June quarter 2008
Capital City
Sydney
Melbourne
Brisbane
Adelaide
Perth
Hobart
3 Bedroom
Houses
$/week % change
pa
17.9
330
n/a
n/a
12.1
325
8.0
270
16.7
350
7.4
290
Source: REIA Market Facts, June quarter 2008
2 Bedroom
Other Dwellings
$/week % change
pa
15.2
380.0
n/a
n/a
14.3
320.0
15.0
230.0
16.4
320.0
19.0
250.0
Distribution of private rents: 1996 - 2006
% of rental dwellings
25
20
15
10
5
0
0
100
200
300
400
500
600
700
Rent ($2006 pw )
1996
2001
2006
Source: State of Supply, 2009, National Housing Supply Council, Figure 5.8
Rental affordability for lower income
households: 2006
Income
House- Affordable Affordable
holds dwellings
and
available
Shortage
Low
(bottom
20%)
237,000
91,000
35,000
202,000
Lower
(bottom
40%)
600,000
830,000
349,000
251,000
Source: State of Supply, 2009, National Housing Supply Council, Table 5.1
Social housing
Decrease in social housing dwellings 1996-2008
500,000
480,000
460,000
440,000
420,000
400,000
380,000
360,000
340,000
320,000
300,000
Shortfall
Crisis
Indigenous
Not4Profit
Public
90,000 units
Source: State of Supply, 2009, National Housing Supply Council, Figure 5.7
Current state - summary
Affordability for FHBs has improved in the past 6
months but is still worse than a decade ago
Affordability problems worse for lower income
renters
• Associated with affordable housing
shortages
How did we get there?
Experiences of 3 generations of FHBs
• 1950s-1960s
• 1970s-1980s
• 1990s-2000s
Implications and explanations of changes that
have occurred
1950s -1960s
•
•
•
•
Median house price: $7,500
Average earnings: $2,000 pa
Maximum loan:
$9,000
Deposit gap:
-ve
Dream: owner-occupied housing provided shelter,
security and stability
Reality: housing affordable
1970s – 1980s
•
•
•
•
Median house price: $32,000
Average earnings: $ 8,000 pa
Maximum loan:
$25,000
Deposit gap:  annual income
Dream: wealth accumulation
Reality: access problems emerging
1990s – 2000s
•
•
•
•
Median house price: $350,000
Average earnings: $ 50,000 pa
Maximum loan:
$200,000
Deposit gap:  3x pa income
Dream: ???
Reality: housing unaffordable
Key factors: 1950s – 1960s
Economic:
• Stable, steady growth
Social
• Family focus, single male breadwinner
Financial
• Regulated housing finance sector
• Significant government provision
Role of housing
• Shelter, security, stability
Key factors: 1970s-1980s
Economic:
• High unemployment and high inflation
Social
• Move to two earner households
Financial
• Increasing interest rates, emergence of
deposit gaps
• Decreasing government involvement
Role of housing
• Savings requirement, plus inflation
highlighted wealth accumulation
Overview:
FHB Median house price ($2008)
$500,000
$400,000
$300,000
$200,000
$100,000
$0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
FHB
price ($2008)
Source: HIA FHB median house Median
price data
fromhouse
1984: average
capital cities, CPI adj
Extrapolated back with scaled BIS Shrapnel data
Access to home purchase
house price/income ratio
(multiple)
8
6
4
2
0
1960
1970
1980
1990
2000
Median FHB house price/annual AWE income
2010
Access to home purchase:
deposit gap/income ratio
(multiple)
8
6
4
2
0
-2
1960
1970
1980
1990
2000
Median FHB house price/annual AWE income
Deposit gap/annual AWE income
2010
Key factors: 1990s-2000s
Economic:
• Labour market deregulation, income
polarisation
Social
• Delayed marriage and child bearing
Financial
• Financial deregulation and liberalisation
Role of housing
• Tax advantaged investment
• Need for inheritance for FHBs
Current situation:
FHB Median house price ($2008)
Index (1960 = 100)
800
600
400
200
0
1960
1970
1980
1990
Median FHB real house price
2000
2010
Real AWE
Source: HIA FHB median house price data from 1984: average capital cities, CPI adj
Extrapolated back with scaled BIS Shrapnel data
Access to home purchase
house price/income ratio
(multiple)
8
6
4
2
0
1960
1970
1980
1990
2000
Median FHB house price/annual AWE income
2010
Access to home purchase:
deposit gap/income ratio
(multiple)
8
6
4
2
0
-2
1960
1970
1980
1990
2000
Deposit gap/annual AWE income
2010
Access to home purchase
Two periods where access has declined
1. 1970s: Structural – has not been reversed;
associated with
• rise in inflation and interest rates from 1970
through to 1990
2. 2000s: Structural or cyclical? associated with
• divergence of rise in house prices from rise
in incomes from 1990; exacerbated by
rises from 2000
• reduced cost and increased availability
finance
Key point 1
Current housing affordability problems are
structural (as well as cyclical)
• began 30-40 years ago (when inflation
switched focus on housing from providing
shelter security to providing wealth security)
• exacerbated by changes in CGT (in 1986
favouring owner-occupiers; in 1999
favouring investors) and financial
deregulation and liberalisation that
increased availability of, and access to,
housing finance.
Implications
Housing serves a dual role
• Consumption – provides shelter
• Investment – provides wealth
Affordability problems arise because
• Role as asset for wealthy crowds out
• Role of shelter for less well off
Implications: age specific HO rates
(%)
80
70
60
50
40
1971
1976
1981
1986
25-29 years
Source: census data, special tables
1991
30-34 years
1996
2001
2006
35-39 years
Real
400 net wealth per head ($2003-04)
Net private wealth per person ($ 000s)
350
300
250
200
150
100
50
0
1960
1965
1970
1975
1980
Dwelling assets
Source: Treasury Roundup Summer 2004-05
1985
1990
1995
Other net wealth
2000
2005
Real net wealth per household ($2008)
800,000
$ per household
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
1988
1993
Dwellings
1998
2003
2008
Other
Source: RBA Bulletin Statistics, Table B20, divided by estimated number of households
Household net worth by age, 2003-04
800
Net wealth per household ($'000s)
700
600
500
400
300
200
100
0
15-24
25-34
35-44
45-54
Owner-occupied housing
55-64
65-74
Other property
75+
Other net worth
All
Household net worth by age, 2003-04
($'000s)
1000
800
Owneroccupiers
600
400
200
0
($'000s) 15-24 25-34 35-44 45-54 55-64 65-74 75+
1000
All
800
Other
households
600
400
200
0
15-24 25-34 35-44 45-54 55-64 65-74 75+
Owner-occupied housing
Other property
All
Other net worth
Key point 2
Within family intergenerational transmission of
wealth is inequitable
• Children and grandchildren of owners can
be assisted
• Children and grandchildren of non-owners
can’t be assisted
Household net worth by wealth quintile, 2003-04
2,500
Mean net worth ($'000s)
2,000
1,500
1,000
500
0
Q1
Q2
Q3
Q4
Q5
All
Net worth quintile
Owner-occupied housing
Other property
Other net worth
Key point 3
Within family intergenerational transmission of
wealth is inequitable
• Wealthiest households have
disproportionately greater capacity to assist
their children and grandchildren
A fair housing system?
An adequate supply of dwellings for all
households within their capacity to pay
• With market focus, outcomes will reflect
inequalities of income and wealth
• Within housing framework, can assist only
by making housing assistance fairer
A fairer housing assistance system?
Outright owners
• nothing
Purchasers/would be purchasers
• address failures that result in marginal
FHBs paying more
• provide insurance to protect marginal FHBs
• funded by purchasers or lenders
• no rationale for deposit assistance to assist
wealth accumulation by advantaged
households
A fairer housing assistance system?
Renters
• rent assistance for those unable to meet
costs of minimum acceptable standard of
housing available
• ensure adequate supply of affordable
housing
Landlords
• subsidise provision of affordable housing
Score card for new policies
Direct
 ?Incentives for investment in affordable rental
housing – tax credits (NRAS) $500m
 public housing stimulus package $6.4b
Score card for pre-existing policies
Direct
? First Home Owners Grant (~ $1b pa until
stimulus which will add an ~extra $1.5b in
this financial year)
 Commonwealth Rent Assistance (~ $2b pa)
 Public Housing (< $1.5b pa until stimulus
which has added an extra $6.4b over
coming 3 years)
X Land taxes
Score card for pre-existing policies
Indirect
X Tax exemptions for home owners (>> $21b pa)
• No capital gains taxes
• No tax on dividends (rents)
• Offset by no deductions for costs
X Tax incentives for landlords (> ~ $1.2b pa)
• Negative gearing
• Depreciation allowances
• Offset by State taxes
Score card for non-current policies
Marginal or non-existent
X Mortgage insurance schemes to protect
borrowers not lenders
• Small scale state based schemes exist
• Could be a role for shared equity
X Incentives for investment in affordable rental
housing
 Targeted depreciation allowances
 Planning incentives
 Institutional support for institutional investment
X Land trusts
Conclusions
Pre-existing system of housing assistance is
generally perverse
New initiatives generally in the right direction
Conclusions
Has the great Australian dream ended?
• Yes for many if emphasis remains on
wealth accumulation
• Not necessarily if emphasis returns to
shelter and stability
Real income and real house prices
Index
300
Real house prices
250
Real average household income
Real house price trend
>30%
Index
200
150
100
50
0
1972
1976
Source: Treasury
1980
1984
1988
1992
1996
2000
2004
2008
What can we do about it?
1. Make investment by wealthy less desirable by
reducing scarcity of desirable land
•
Increase supply desirable land
(infrastructure, transport etc)
•
Reduce desirability of scarce land
(decrease tax incentives for owning land;
increase density)
What can we do about it?
2. Increase housing available for shelter (and
investment) for low to moderate income
households
•
Increase supply affordable rental housing
• Help marginal purchasers stay in their
homes
Thankyou for your attention