Written by Christopher Chew
Monash University
JOURNALIST:
Treasurer, do you accept that housing in Sydney is unaffordable and the only way we’re going to make it affordable is if real house prices in real terms actually fall over the near term?
TREASURER JOE HOCKEY:
No. Look, if housing were unaffordable in Sydney, no one would be buying it…it’s expensive.…but, having said that…a lot of people would much rather have their homes go up in value…
JOURNALIST:
You say that housing is affordable…what about for first home buyers…people that don’t have access to equity in other properties?
TREASURER JOE HOCKEY:
…the starting point for a first home buyer is to get a good job that pays good money… you can go to the bank and you can borrow money and that’s readily affordable…
Source: http://jbh.ministers.treasury.gov.au/transcript/144-2015/
Recent careless comments made by Australian Treasurer Joe Hockey during a radio interview (see above) have provoked a firestorm of media outrage and scorn, with accusations of being ‘out of touch’ and elitist. In all fairness, more has been made of these comments than is likely warranted – though the Treasurer’s enviable property portfolio, including an AUD$5.4 million primary residence, a history of previous embarrassing gaffes hasn’t helped.
Indeed, rising housing prices and alleged unaffordability have lately been a source of bubbling tension in Australia. In particular, first-home buyers (and indeed their parents) have found it difficult to ‘get a leg on the property ladder’, and worry that they are being priced out of the market by greedy investors. Yet, traditional wisdom holds that rising house prices are a sign of prosperity, and something that is good for the market and the country as a whole – and that “smashing housing prices”, as the Treasurer has frantically accused his critics of desiring, will be an unmitigated disaster.
Rising house price and unaffordability
It is undeniable that overall housing prices in Australia, like in much of the developed world, has increased significantly over the past few decades, and has also rapidly outpaced growth in annual wages over this same time period.
Does this mean, however, that housing is unaffordable? The Treasurer certainly doesn’t think so, attempting elsewhere to separate the issue of house prices and housing affordability. His argument, taken charitably, is that as long as the ability to borrow rises in line with house prices, then purchasing a house is no less unaffordable.
Yet something seems to be wrong with this defense of affordability. While interest rates on home loans are certainly at historical lows, there are other important considerations – rising house prices necessitate a larger upfront deposit to obtain a mortgage (which are typically a fixed percentage of house price); other costs, including the stress of overhanging debt and meeting repayments; and that debt must be eventually repaid. Housing cannot be equally affordable if you now have to leverage yourself to the hilt in debt to afford it.
It seems more reasonable, then, that despite the Treasurer’s protestations to the contrary, housing in Australia is certainly becoming less affordable as prices rise.
Should we be concerned about rising housing price (and unaffordability)?
But wait! Aren’t higher house prices good? After all, it means that mom-and-pop have been able to sit and watch the value of their house skyrocket, making us all richer and wealthier. And it probably means more investment in the property market – and more investment and economic activity is a good thing, right?
In truth, it depends on what’s driving the market higher and whether this additional investment is actually productive. Some rise in housing prices is essentially inevitable and natural – population growth, a fixed supply of land (particularly inner-urban) and supply-and-demand dynamics see to that. Yet concerns center on other factors contributing to the rising market.
A significant contributor to the housing boom has been increasing borrowing and speculation by investors, with a large and rising proportion of housing loans that go towards funding investment properties. There are also indications that a significant proportion of the housing boom has been fueled by debt, as seen by the dramatic rise in borrowing to cover housing costs (from 47% of total household debts in 1990, to 75% in 2013).
There are few indications that this increasing investment is more speculative than productive. The expected increase in construction and housing supply has failed to materialize (and may indeed be contributing to skyrocketing prices). Furthermore, there are risks that the market has become a ‘bubble’, fueled by excessive debt – and the ‘bursting’ can be sudden and painful (as in the US during the GFC). Supposed benefits also come from the ‘wealth effect’, where a perceived increase in the value of their properties causes people to increase spending and stimulate the economy. This is rather difficult to show – and indeed sounds suspiciously like a version of ‘trickle-down economics’.
Furthermore, asset speculation tends to exacerbate inequality. Rapidly rising property markets disproportionately benefit the wealthy, who can afford to invest more heavily in the market. This, of course, includes older “mom-and-pop” homeowners, who are no doubt delighted at the increasing wealth under their feet. Yet these benefits come at the expense of more vulnerable sections of the population – poor or struggling families, and young first-home buyers, who do not have the financial resources to sustain the high levels of borrowing required to enter the market.
These discussions, of course, depend on a view of housing simply as another disposable asset that should be at the mercy of market forces – ignoring that affordable housing is, potentially, a social good, and desirable in its own right. A right to a roof over one’s head is codified in the Universal Declaration of Human Rights, and housing is also identified by the WHO as one of the key social determinants of health and wellbeing. Homelessness (and even simply mortgage stress) has immense negative effects on individuals and community cohesion, and is more costly for governments to ‘treat’ than ‘prevent’.
What is to be done?
I have argued that it is not immediately clear that the booming property market in Australia has been beneficial, all-things considered. Furthermore, this comes at the cost of increasing inequality at the expense of vulnerable groups, and ignores the possibility that housing is a social good. Rising prices should not come at the cost of rising unaffordability.
Where to from here? It is clear that something needs to be done to cool the housing market. Government intervention and regulation would be anathema to prevalent free-market orthodoxy, and may have unforeseen consequences. But perhaps a useful middle-ground would be to remove or adjust existing policies that effectively incentivize property investment through taxpayer dollars (i.e. tax write-offs) including negative gearing and discounts on capital gains tax. These are regressive, benefiting investors (who tend to be wealthier) and those in higher tax brackets (and thus have higher incomes).
A broader question, and one that cannot be answered here, however, is whether we should treat housing as just another investment, to be left to the fickle whims of the market; or as an essential social good that should be affordable and accessible to all, regardless of wealth, or lack thereof.
Sources:
Housing Occupancy and Costs, 2011-12 (Australian Bureau of Statistics) =
Australia has third highest house price-to-income ratio in the world: IMF (ABC News)
Australia’s housing boom in five graphs (Australian Financial Review)
House price metrics headed to new highs (Sydney Morning Herald)
Housing boom is out of control (Australian Financial Review)
Australia’s housing market problems laid bare (ABC News)
Dwelling Prices and Household Income (Reserve Bank of Australia)
Research discussion paper – Is Housing Overvalued? (Reserve Bank of Australia)
The history of Australian property values (Macrobusiness)
The facts on Australian housing affordability (The Conversation)
The myth of ‘mum and dad’ property investors (ABC News)
The Social Determinants of Health (Australian Government Department of Health)
The determinants of health – housing (The World Health Organization)
Good post – this issue is one of biggest socioeconomic problems of our age. It does receive some attention but compared with the 18th century, when the problems of correcting the distortions of property ownership and rents dominated political economy, it is now believed to be natural phenomenon that cannot be altered.
I know the reasons why it is not implemented, but the gradual movement away from taxing income, savings and spending to much greater taxes on property would ultimately lower property prices before tax; make it considerably more difficult to avoid and evade tax; be a far more transparent way of collecting tax; prevents families and corporations from becoming excessively property rich; encourages people to live in smaller houses with less land; encourages property owners to rent or sale their property instead of leaving it empty; discourages second home owners; stabilises property prices which prevents speculation; is a stable source of tax income; greatly reduces social security expenditure because housing benefit payments would be negligible; and would enable the economically disadvantaged to be properly housed. Have you spotted the reasons why it will not be implemented?
The main drawback, it is argued, is that the appraising of property for the purpose of taxation is expensive. I doubt that it would costs more than all the aggressive tax avoidance and evasion we have under the present system. It is also much easier to do this than it was because, as is available on the net, property valuation software is already very accurate and could be greatly improved if it were the main tool of tax assessment. Of course there are numerous other reasons given for not doing it, but they are usually something to do with it not being good for the rich.
I have had investment property when I was younger, but am retired now and the rules have changed. Any investment property, be it positively or negatively geared, is not an attractive consideration for an Aged Pensioner, nor is it a proposition to have ANY investments or assets, OR to continue to work and have an income. All of these situations have become economic burdens with the present government’s policies making ANY work ethic a disincentive. What I have worked hard my whole life has become a penalty to me under this LNP government – my savings turned into government funds to be squandered by greedy, inept politicians. And to think I voted for these dispassionate sods! NEVER AGAIN!
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