Housing
At last good news on housing but it presents problems
Last Friday I was phoned by a market survey company, and asked if I had confidence in the housing market. I replied “yes”, because I believed that house prices in our big cities have peaked and have started their long trek back to affordability.
I was obviously a misfit, and I suspect my response was categorised into the “confused” pile.
In a time when we are so concerned about inflation, surely it is good news that house price inflation may be ending. Data is patchy, but the PropTrack home price index for April shows small price falls in what were the most recently inflated markets, Sydney and Hobart. Similarly CoreLogic data reveals that in the three months to April dwelling prices have fallen a little in Sydney and Melbourne. (0.1 and 0.2 percent respectively in April).
Bush revival – Junee railway station
There are significant regional differences in house prices: in all large capitals house prices seem to have stalled in inner suburbs while they are still rising in outer suburbs and in non-metropolitan regions.[1] Apartment prices are falling relative to prices of free-standing houses.
It is possible that there may be some regional levelling of house prices. While prices in Adelaide and Hobart have risen strongly in the past few years, prices have risen more slowly in Sydney and Melbourne and are now flatlining. Prices in many non-capital smaller cities have also risen strongly.
Consistent with such a development, figures on regional population released by the ABS last week show falls in Sydney and Melbourne populations in 2020-21. This could be a reaction to inflated housing prices in big cities. Or perhaps it reflects the loss of foreign students and immigrants during the pandemic, and flight out of cities to escape the pandemic. It may also reflect the growth of options for many people to work at home, away from their employer’s urban location. The ABS maps that can be accessed from the link above show that our large cities are experiencing strong growth in outer-suburban regions, but hardly any growth or stagnation in urban regions close to CBDs.
The politics of housing
In spite of early indications that house price inflation may be ending, in the election campaign the two main political parties are putting forward policies that would shore up housing demand and retard the modest market moves toward affordability. The Coalition proposes to raise the value of houses eligible for the Home Guarantee Scheme, an arrangement that allows first home buyers to enter the market with a deposit as low as 5 percent. Labor has announced its shared equity scheme, capped at 10 000 properties.
Rachel Ong ViforJ has a description of both parties’ policies in The Conversation, going into some detail to describe Labor’s shared equity scheme. Well before Labor made any announcement on housing, Brendan Coates of The Grattan Institute wrote in favour of shared equity funding, noting that it caters for a segment of the population not covered by schemes directed to young first home buyers, and would have only a modest impact on house prices.
Absent from both parties is an acknowledgement that in recent years housing has become transformed from a basic human need to a financial commodity. While this may align with the Coalition’s perverted Weltanschauung, it is disappointing that Labor, as a social-democratic party, has not acknowledged this transformation. Rather than proposing a fundamental re-alignment of policies, its policy is to fiddle at the margins in a structurally unfair market.
Fearful of a repeat of Morrison’s 2019 scare campaign, Labor is silent on the Coalition’s policies on capital gains tax and negative gearing that subsidize speculators and contribute to housing unaffordability. It is left to the Greens to put forward a housing policy that focuses on restoring housing to its traditional place and that addresses supply rather than fuelling demand. (In passing Clive Palmer’s promise to cap home interest rates at 5 per cent is worth a mention: it would be hard to outdo it for stupidity.)
There is a good case for public investment in housing supply, starting with the most needy. Because all housing prices are linked, a supply boost starting at the low end of the market can help affordability generally. If the most desperate – the homeless – can be housed, there follows a little easing in market conditions for those who have basic but unsatisfactory shelter, and so on up the line, until housing becomes more affordable for first-home owners. This is hardly radical economic theory: as Andrew Scott, Heather Holst and Sidsel Grimstand point out in The Conversation, More affordable housing with less homelessness is possible – if only Australia would learn from Nordic nations.
To be fair to the main parties, both promise to invest more in “social and affordable housing”: Labor $10 billion over 5 years, and the Coalition much less – $2 billion without a time commitment. These are small in relation to the housing market, particularly if immigration is to resume at high levels, but in his Q+A session on Thursday night Albanese indicated that Labor would extend the provision of low-cost housing more widely.
Economic consequences of a deflating housing bubble
While it is possible to criticize Labor for retaining tax breaks and the First Home Guarantee Scheme, it is possible that a sudden withdrawal of demand-side measures could precipitate a rapid and destabilizing fall in housing prices. It may be better to let the market deflate slowly, with the benefit of rising nominal wages (even while real wages don’t rise) reducing the liability of mortgage debt (which is fixed in nominal terms).
A fall in house prices will help solve the problem of affordability, but it has two economic consequences – a “wealth effect” and stress on over-indebted mortgage holders.
The “wealth effect” refers to the way home-owners feel better-off when the market value of their property rises. There are now 3 million more millionaire households in Australia – households with more than $1 million in assets – than there were ten years ago, largely thanks to rising house prices.[2] When people feel wealthier they are more likely to spend, and when people feel less wealthy they become more frugal. This effect is generally irrational; house price movements are simply another form of inflation and deflation. In fact houses generally deteriorate in value over time: the wealth effect makes sense only for those few who are considering moving to somewhere where housing is cheaper. But even though it’s irrational to be influenced by the changing value of one’s house, it does influence behaviour.
If falling house prices result in people feeling less wealthy and spending a bit less, irrationality may be economically beneficial in reducing inflation in our over-heated economy.
The effect on over-indebted mortgage holders is more serious. It’s covered in an article by ABC business reporter Nassim Khadem: With interest rates about to start rising, experts estimate almost 300 000 mortgage borrowers are at serious risk of default. Her article starts with a story about a heavily-indebted lady, lured into over-commitment by three government programs that have brought house buyers into an inflated market – Home Builder, first home buyer grants, and permitted superannuation withdrawals for housing. Khadem then goes on to the general problem posed by these policy settings that have allowed such high-risk borrowing to occur, drawing on the opinion of finance experts. The general conclusion is that APRA and the government, having expected that the Covid-19 recession would cause a sharp drop in house prices, over-reacted to prevent such a fall, and when in fact prices rose sharply, were too slow to withdraw incentives and the temporarily relaxed lending criteria.
The financial regulators, APRA and the Reserve Bank, are generally not too fussed about the situation, however. If one plods through the latest Reserve Bank Financial Stability Review, and its supplement on high debt-to-income and loan-to-value lending, it appears to be fairly relaxed. It notes that there has been a strong growth in high debt-to-income lending, and high loan-to-value lending, but overall the vast majority of borrowers can absorb a rise in interest rates and many are well ahead in their mortgage re-payments.
That’s all valid, and it reflects the fact that the concern of APRA and the Reserve Bank is for financial stability – the robustness of the whole financial system. Consumer protection is another issue, picked up only in regulations on lenders. When banks are overloaded with cash, and when borrowers are motivated by a fear of missing out and overestimate their capacity to repay, there are huge forces making for over-commitment.
The other group disadvantaged by high housing prices are renters – those for whom renting is a medium-term convenience, those who are trying to accumulate funds for a mortgage deposit, those who have given up trying to buy, and those who are thrown onto the rental market through family breakdown or a severe loss of income. Anglicare’s Rental Affordability Snapshot paints a dismal and worsening picture of the rental market. Across Australia there are essentially no rental properties available for people dependent on Youth Allowance, JobSeeker, the Disability Support Pension, the Age Pension or someone on the full-time minimum wage.[3] Anglicare calls for more social housing and termination of taxation breaks favouring speculators.
The broader picture
The 2019 election demonstrated that even modest and economically responsible policy proposals to reform the housing market will be met with a hysterical scare campaign by the Coalition and its supporters in the real-estate business. It is understandable that Labor is now cautious about housing reform.
Housing has become so unaffordable in Australia, and household debt has become so high, that it is a problem requiring more than tweaks to existing programs and changes in tax regulations. Affordability is just one easily quantified indicator of a much broader ill. To quote from Per Capita’s comprehensive report Housing affordability in Australia: tackling a wicked problem:
… a poorly functioning housing market exacerbates a range of problems in ways costly to individuals, families, communities and the country at large. Poor quality, insecure housing leads to degraded mental and physical health. Hot local property markets are driving people away from their jobs, reducing labour market efficiencies, and at the same time breaking up communities and families.
1. PropTrack and others confusingly use the term “regional” to refer to everything outside our big capitals. This classification, used by many in Australia but not in other countries, tends to blind policymakers to the diversity of regions within our big cities. ↩
2 See Table 2.3 of ABS Household Income and Wealth. Data is in constant 2019-20 prices. ↩
3. Minimum wage earners are the most fortunate of these: of 45 992 rental listings, only 720 or 2 percent were affordable for someone on the minimum wage. For all other groups only 1 percent or less were affordable. ↩