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

US and Australian real house price inflation

Source: US:http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_History_022445.xlsAus: ABS : http://www.abs.gov (641601.xls)

-15-10

-505

1015

2025

1990 1995 2000 2005 2010

Infla

tion

(% p

a)

USA(C-S) Australia (new index) Australia (old index)

Australia:Demand-supply balance as at 2008

Source: State of Supply, 2009, National Housing Supply Council, Table 4.5

Component Estimated dwelling gap

Dwellings required to address homelessness - sleeping rough 9,000 - staying with friends and relatives 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

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

$0

$100,000

$200,000

$300,000

$400,000

$500,000

1990 1995 2000 2005 2010

0.0

0.4

0.8

1.2

1.6

2.0Ratio

Median first home price (RHS)

Affordability index (LHS)

0

20

40

60

80

100

0 100 200 300 400 500 600

Numbers in stress ('000s)

Inci

de

nce

of s

tre

ss (

%)

Lower income private renters

Lower income purchasers

Moderate income purchasers

Moderate income private renters

Affordability Outcomes (2003-04)

Source: Yates and Milligan (2007) Housing Affordability: A 21st Century Problem, AHURI NRV3, FR

-4

-2

0

2

4

6

1990 1995 2000 2005 2010

(%)

Source: Aus: ABS 641605.xls; rent component, CPI adj

Real rent inflation (Aus CPI rent)

Median weekly rents, June quarter 2008

Source: REIA Market Facts, June quarter 2008

Capital City

$/week $/week

Sydney 330 380.0

Melbourne n/a n/a

Brisbane 325 320.0

Adelaide 270 230.0

Perth 350 320.0

Hobart 290 250.0 19.0

n/a

14.3

15.0

16.4

% change pa

15.2

16.7

7.4

17.9

n/a

12.1

8.0

% change pa

3 Bedroom Houses

2 Bedroom Other Dwellings

Distribution of private rents: 1996 - 2006

0

5

10

15

20

25

0 100 200 300 400 500 600 700

Rent ($2006 pw )

% o

f re

nta

l dw

elli

ng

s

1996 2001 2006

Source: State of Supply, 2009, National Housing Supply Council, Figure 5.8

Rental affordability for lower income households: 2006

Income House-holds

Affordable dwellings

Affordable 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

300,000320,000340,000360,000380,000400,000420,000440,000460,000480,000500,000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Shortfall

Crisis

Indigenous

Not4Profit

Public90,000 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

Experiences of 3 generations of FHBs• 1950s-1960s• 1970s-1980s• 1990s-2000s

Implications and explanations of changes that have occurred

How did we get there?

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)

Source: HIA FHB median house price data from 1984: average capital cities, CPI adjExtrapolated back with scaled BIS Shrapnel data

$0

$100,000

$200,000

$300,000

$400,000

$500,000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Access to home purchasehouse price/income ratio

0

2

4

6

8

1960 1970 1980 1990 2000 2010

(multiple)

Median FHB house price/annual AWE income

-2

0

2

4

6

8

1960 1970 1980 1990 2000 2010

(multiple)

Median FHB house price/annual AWE income

Deposit gap/annual AWE income

Access to home purchase:deposit gap/income ratio

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)

Source: HIA FHB median house price data from 1984: average capital cities, CPI adjExtrapolated back with scaled BIS Shrapnel data

0

200

400

600

800

1960 1970 1980 1990 2000 2010

Inde

x (1

960

= 1

00)

Median FHB real house price Real AWE

Access to home purchasehouse price/income ratio

0

2

4

6

8

1960 1970 1980 1990 2000 2010

(multiple)

Median FHB house price/annual AWE income

Access to home purchase:deposit gap/income ratio

-2

0

2

4

6

8

1960 1970 1980 1990 2000 2010

(multiple)

Deposit gap/annual AWE income

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 19902. 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

Source: census data, special tables

40

50

60

70

80

1971 1976 1981 1986 1991 1996 2001 2006

(%)

25-29 years 30-34 years 35-39 years

Real net wealth per head ($2003-04)

0

50

100

150

200

250

300

350

400

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Net

priv

ate

wea

lth p

er p

erso

n ($

000

s)

Dwelling assets Other net wealth

Source: Treasury Roundup Summer 2004-05

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

1988 1993 1998 2003 2008

$ pe

r ho

useh

old

Dwellings Other

Real net wealth per household ($2008)

Source: RBA Bulletin Statistics, Table B20, divided by estimated number of households

Household net worth by age, 2003-04

0

100

200

300

400

500

600

700

800

15-24 25-34 35-44 45-54 55-64 65-74 75+ All

Net

wea

lth p

er h

ouse

hold

($'

000s

)

Owner-occupied housing Other property Other net worth

Owner-occupiers

0

200

400

600

800

1000

15-24 25-34 35-44 45-54 55-64 65-74 75+ All

($'000s)

0

200

400

600

800

1000

15-24 25-34 35-44 45-54 55-64 65-74 75+ All

($'000s)

Owner-occupied housing Other property Other net worth

Otherhouseholds

Household net worth by age, 2003-04

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

0

500

1,000

1,500

2,000

2,500

Q1 Q2 Q3 Q4 Q5 All

Net worth quintile

Mea

n ne

t w

orth

($'

000s

)

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

IndirectX 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-existentX 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

0

50

100

150

200

250

300

1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

Index

Real house prices

Real average household income

Real house price trend

Source: Treasury

Inde

x

>30%

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

What can we do about it?

Thankyou for your attention