Our failing housing market
“Surging housing prices raise concerns about affordability and financial stability. Structural reforms to boost housing supply and targeted support for low-income households are needed to improve housing affordability. Macroprudential policy should be tightened and lending standards closely monitored.”
That’s a quote from a special report on Australia by IMF staff: Staff Concluding Statement of the 2021 Article IV Discussions. They cover issues other than housing, including climate change – “broad-based carbon pricing” is their preferred way to deal with climate change – but their emphasis is on housing.
The ABC has a five-minute interview with the IMF’s Harald Finger on Australia’s economic prospects. He expresses the IMF’s concern not only with housing affordability, but also the risk to financial stability resulting from the prevalence of housing loans with high valuation-to-repayment ratios and the incursion of “investors” into the housing market.
The graph below, a presentation of the Reserve Bank’s time-series data on household finances, shows how household debt has been growing over the last thirty years. Of particular concern to most policymakers (but not those in the Commonwealth) is the recent uptick this year. While interest rates remain low the burden of debt may be tolerable: the same RBA data series shows that household interest payments, at 5.6 per cent of income, are the lowest they have been for 40 years. But any small rise in interest rates from their presently small base could prove to be most burdensome for highly-geared “investors” and for mortgagees who have bought at what may turn out to be the top of the market.
Also on housing the Grattan Institute has published its submission to the Parliamentary Inquiry into Housing Affordability and Supply: How to make housing more affordable. It calls for reforms to capital gains tax, an abolition of negative gearing and inclusion of owner-occupied housing in the age pension asset test. It also calls for reforms on the supply side, mainly to do with land-use planning and zoning laws, which are responsibilities of state and local governments. On the ABC’s Saturday Extra Geraldine Doogue interviewed Graham Hand of Morningstar and Shane Oliver of AMP Capital – Gen Y and millennials increasingly locked out of housing market due to affordability crisis. Hand draws attention to the strange situation whereby age pension beneficiaries can be living in a multi-million dollar property that will be handed on to their children. Can some of their pension be funded from the eventual sale of that property rather than from the public purse? Oliver shares Hand’s concerns with equity – our extreme inequity in housing can lead to social discontent in time – but he also suggests that much more can be done to dampen prices, on both the demand side through tax reform, and on the supply side through land management. There is something very wrong with the Australian housing market where price-to-income ratios are around 10:1 when they are around 4:1 or 6:1 in other countries.
The Inside Story article to which Geraldine Doogue refers is Asking the wrong questions about housing by Peter Mares. Mares is concerned that most attention at present is directed to supply-side issues, but he points out that increasing housing supply takes a long time to filter through to affordability for first home buyers, and even longer to help reduce rents. He fears that unless we address demand side issues, particularly tax concessions, home ownership will become a “dynastic privilege”.