The debate over whether housing is, or isn’t ‘affordable' continues...
I’m know I’m not alone in feeling an immense amount of frustration at the circular debate amongst commentators in the mainstream media, that surrounds our first homebuyer demographic, and the question of ‘affordability.’
Last week, the November 2013 housing finance data was released showing continued strong demand in the mortgage market, with owner-occupier commitments 15.3% higher than they were a year ago - their highest level since December 2009.
Unsurprisingly, demand from investors continues to increase, rising 1.5% in November, and up by 35% over the course of the year - the highest level on record - whilst on the other hand, first homebuyers remain at record lows, with a recorded market share of just 12.3%.
Whichever side of the coin you sit, “first homebuyers” like “housing bubbles” make a good headline, and therefore, instead of productive advocacy into improving the housing market so it’s equitable for all - we’re left once again battling a ‘Looney Tunes’ debate over whether housing is, or isn’t ‘affordable.’
For those in denial all sorts of excuses are found – the most common of which is the accusation that first home buyers are just ‘spoilt and picky’ – or as was sent to me in email last week by a fellow contributor on “property Observer” - “you just have to save hard and start with a flat – isn't that how it's always been?
Well to some extent ‘yes’ – when there’s a budget, compromises need to be made. But how it’s always been? “No.” It’s not how it’s always been.
- Whilst in the late 1990’s a typical first homebuyer’s budget would have secured a modest family home, in a reasonably facilitated suburb, for 3 times median income. Today you’d be hard pushed to find accommodation on the fringes of our capital cities for a similar expense.
- Thirty years ago the land component of a house and land package represented 20% of the total cost – today it is more like 60%.
- Forty years ago, housing policy ensured land was ‘readily available at fair prices,’ with commonwealth funding provided for essential infrastructure. Today land prices have soared; unduly inflated by constrictive urban zoning policy, with infrastructure prices, loaded onto the upfront cost.
Furthermore, a CIE study commissioned by the HIA, demonstrated how imposed taxes on developments, when added together, come to 39% of the marketed house and land price.
By the time you add “necessary” ‘energy and safety standards,’ coupled with the cost of labour on top of already inflated land values, developers find it increasingly difficult to provide ‘affordable’ accommodation whilst still making a profit.
Glenn Stephens, Governor of the RBA, summed it up best in 2011, when, he addressed a Parliamentary Committee and exclaimed how he could “not understand why a country as big as Australia seemingly had a shortage of land” and could therefore not provide ‘cheap’ housing.
Notwithstanding, ‘we don’t’ have a shortage of land – we have poor housing policy driven by vested interests to keep inner city land prices high. I cannot find any other reasonable explanation.
Asking first home buyers to purchase into a market where, capital city house prices have been artificially inflated, from three times median income to nine times, should not leave us scratching our heads wondering why they don’t feel ‘OK” about it. It’s perfectly understandable.
Who is a first homebuyer?
According to the ABS, the average age of a first homebuyer is between “31-33 years,” and due to high entry costs, “partnering often precedes home purchase” (the majority of which already have children.)
Therefore unsurprisingly, only a relatively small proportion (19%) make up single households, and outside of those who pit themselves against stronger financial arm of the investment sector, to purchase an apartment, the options we’re currently providing our first homebuyers, fall dismally short of where that main demand centres – demand which often calls for more than tiny apartment which will last no longer than a year or so before an upgrade is necessary.
The data must be wrong…numbers can’t be this low?
Others challenge the data, with various claims that first home buyer numbers are only ‘significantly’ reduced, because a percentage are ‘slipping through the net,’ perhaps entering ownership as ‘investors’ or – due to dated brokering software – not being entered as first timers, unless applying for a state based grant or incentive.
On the latter point, I did speak to the ABS department of financial statistics directly about the notion that ‘significant’ numbers are missing, and further investigation is underway which I’ll follow up at a later date.
Albeit, currently they deny the implication, claiming it doesn't accord with APRA's instructions to lenders when collecting statistics - which stresses that a first home buyer, must be one in which ‘none of the borrowing parties has previously borrowed housing finance for owner occupation’ – making no distinction between an investor, or one who does, or does not, apply for the grant.
Therefore, outside of colloquial evidence, the above ABS statistics are the most accurate ‘current’ indicator we have of a downward trend in first homebuyer numbers – and for most ‘reasonable’ minds it should come as no surprise, considering we’re in an environment where the entry cost to obtain ownership is further impeded by rising prices, transaction taxes, and an uptick in unemployment raising concerns over job security.
Housing is ‘affordable’ because mortgage rates say so…
As Michael Janda pointed out in his excellent report last week - housing affordability should not be confused with mortgage serviceability.
Mortgage rates are set up with different structures, dependant on circumstance, and subject to interest rate changes influenced by the macro environment.
- They do not take into account the up front cost of a home and expenses incurred from associated utility costs.
- They do not question rising rental prices, falling vacancy rates, wage growth, unemployment figures, or changes in household demographics and structure.
- They make no distinction between the cost of building a home and the underlying value of land, or analyse constraints in supply, or make mention of the limited options available for low or single income households and families.
To assume on interest rates alone that housing is ‘affordable’ is lazy reporting and generally only applicable to existing owners
Those who fail to make the above distinction commonly come from the standpoint of vested interest – or entered ownership at the beginning of the lending boom (in the early 2000s or before,) and have benefitted considerably from a rapid period of inflation – which unsurprisingly enough, includes most of our politicians.
Housing is affordable because data from other countries says so…
Neither is it complementary to compare ourselves to international terrains which – having been through somewhat harder lessons than our own – are also battling to induce first home buyers out from underneath their ‘rental’ blankets.
Yet this is what Stephen Koukoulas attempted to do last week in Business Spectator when he ‘favourably’ compared Australia to Norway, Canada, Sweden and New Zealand.
All of these markets have suffered from large increases in levels of private debt whilst at the same time limits were placed on supply.
In Norway, Sweden and New Zealand, central banks have recently employed capital constraints in an effort to moderate demand, and Canada, with a household debt to income ratio of 163.7%, is being watched closely, as investors and economists start to voice alarm.
Letting house prices escalate, funded by a colossal amount of private mortgage debt, can be a dangerous game.
As I pointed out last week - in the USA prior to the sub-prime crisis, the median income in California was not enough to afford the average Californian home, or even a starter home. Once the financial crisis hit, rapidly falling prices quickly eroded any equity homebuyers had achieved.
Whilst on the other hand, states such as Texas, where house prices did not deviate from three times median income, values fell by only -2.5% (from the peak of 2007 to the trough of 2011,) and the state suffered far fewer foreclosures.
….The renters that Terry Ryder rudely labelled ‘generation whine’
Renters, on the other hand, have not benefited directly from low interest rates. Roughly 33% of Australia’s housing market is made up of tenants and since, 2006, rises in the median cost of rental accommodation has outpaced both wage growth and inflation.
In Sydney, where supply is particularly constrained, APM recorded a 5.4% yearly increase to the median rental price, and according to a new report compiled by the Northern Territory Council of Social Service (NTCOSS,) the average cost of rental housing in Darwin has risen by 7.9%.
Before we get into a further debate over whether or not rents are ‘affordable,’ it’s worth turning to a previous report from the now disbanded ‘National Housing Supply Council’ to highlight the real impact demand side policies like negative gearing have, when coupled with a gradual erosion of supply.
Reports highlight that the increase of rental accommodation in the private sector has not outweighed the decline in social housing – and from the stock added, most have rents outside of the affordable threshold for lower income households.
To assess this, the NHSC broke income groups into deciles, and demonstrated of the ‘affordable’ private accommodation available,’ supply is quickly soaked up, leaving 60% of low income groups, paying more than 30% of their income on rent, and 25% paying more than 50% of their income on rent
Gains from high land prices, do not trickle down they flow up. This is what the ‘National Housing Supply Council’ was trying to emphasise in their reports, and what I went to great pains to point out last week in trying to answer the questions over what exactly a ‘housing shortage’ means.
Our market is not just about buyers, it’s about renters too - and our Governments are elected to ensure that the price of land is not unduly inflated by either the monopoly of this resource, or undue restrictions placed on its development.
Worrying still – the arguments over affordability encourage us to lose sight of the real issue – which is not localised to the first homebuyer sector, but the general crowding out of low income residents across all demographics – some of which drift in and out of ownership
Reform is never easy, but there is a way to break the cycle and ensure land is fully utilized for the purpose intended, without prices blowing out to levels that can only be sustained through keeping interest rates low, or household debt high.
One way is through freeing the barriers hampering the type and supply of accommodation offered, and the other is through imposing a broad based tax on the underlying value land – of which I went into more detail here.
The focus of attack should be not those individuals who have advantaged from the system, but on the law that allows the system to operate – and in response, the commentary should not focus on defending what is plainly obvious, but advocating the policies we need to fix it, and ensure our house and land market is equitable for all.