Housing
Why housing is unaffordable
How low wage growth made housing unaffordable
To state the housing problem simply, over the last 35 years house prices have risen much faster than wages.
Per Capita’s report The lost decade: how low wage growth stopped young Australians buying a home goes into the wages side of this problem, drawing attention to the way, from around 2010 until the outbreak of the pandemic, the rate of growth of real wages halved. It’s a short report that pulls together data from publicly-available sources.
The break in real wage growth around 2010 is shown in the graph below, which has been presented in these roundups from time to time. The black trend-line from 2011 has half the slope of the trend line up to 2011.
Per Capita calculates that if this break hadn’t occurred the average full-time worker would be earning an extra $11 900 a year, putting young people in a much better position to pay a deposit on a home.
Per Capita notes that this turnaround in wage growth was associated with reduced growth in labour productivity.
That’s only part of the story: at the same time profits were growing at the expense of wages. This happened at the same time as the Reserve Bank, in a delayed response to the 2008 global financial crisis, pushed down interest rates, fuelling a demand-side escalation in housing prices.
The hard numbers on housing supply
Brendan Coates, Joey Moloney, and Matthew Bowes of the Grattan Institute, in a short report Housing is less affordable than ever, present the hard numbers on housing affordability. They show for each capital city and the rest of each state, how the ratio of median dwelling price to median household income has risen over this century so far. In much of Australia, including the biggest cities, that ratio has risen from about 4:1 to about 8:1.
In a positive feedback process, housing inequality contributes to wealth inequality, which in turn contributes to housing inequality.
A finding that may surprise many is that “Australia has one of the lowest levels of housing per person of any OECD country, and is one of only four OECD countries where the amount of housing per person went backwards over the past two decades”. Poorer countries, such as Bulgaria, the UK and Hungary have more dwellings per 1000 people than Australia, and on that indicator we have made no improvement over the last 20 years.
The Grattan researchers attribute most of the problem to a low rate of construction of new houses, which in turn they attribute to a failure of housing policy:
Australia’s land-use planning rules – the rules that dictate what can get built where – are highly restrictive and complex. Current rules and community opposition make it very difficult to build new homes, particularly in the places where people most want to live and work.
Another to take up the issue of the role of local government is Peter Tulip of the Centre for Independent Studies in a Joe Walker podcast: What will it actually take to solve the housing crisis?. (Walker provides a transcript of the 104-minute podcast.) Tulip believes that state governments have to take on local governments to force them to increase housing density. The discussion goes beyond the numbers and into nimby-ism and the aesthetics of densification.
The Coalition’s housing policy
In an eight-minute interview on Radio National the Coalition spokesperson Michael Sukkar describes the Coalition’s housing policies. He describes the Coalition’s policy of funding basic infrastructure for new housing – an idea the Coalition shares with Labor – that seems to be more about greenfields expansion than densification. But most of the discussion is about the Coalition’s idea that housing borrowers’ serviceability buffer should be lowered.
That is the buffer, specified by APRA, that requires lenders to apply a stress test on borrowers. Before a bank makes a loan, it should satisfy itself that the borrower could service it if the interest rate is higher – specifically three percent by the present rules. Sukkar gives an unconvincing argument in favour of lowering the buffer.
This idea is similar to the Coalition’s policy of allowing people to dip into their superannuation to fund housing deposits – a measure the Super Members Council believes would increase housing prices by 10 percent. It is another demand-side policy. The only beneficiaries would be the banks, mortgage brokers and real-estate agents (the Coalition’s much beloved “small businesses”), and the losers would be even more young people locked out of the housing market.
In the interview Patricia Karvelas does not challenge Sukkar on his policies. The ABC’s Jake Evans, however, in a post Coalition promises to relax home lending rules, against regulator's urging points out that APRA is not in favour of lowering the buffer.
Michael Yanda sounds a similar warning in his post: The Coalition's election promise to relax lending rules could lead to bigger home loans … and higher house prices. Only if APRA were to set a floor on the mortgage rate – he suggests 7 or 8 percent – could a modest relaxation of the buffer be justified.
But nothing can overcome the hard economic rule that giving buyers more access to funds in an industry with constrained capacity will inevitably lead to price inflation.
Alan Kohler and the Productivity Commission on housing and productivity
Alan Kohler writes that Labor and the Coalition are both dodging two things that matter most this election.
Those two things are productivity and housing.
Productivity and housing are closely linked in two ways. One is that improved productivity is necessary (but not in itself sufficient) for Australians to be able to afford housing. (This is covered in Per Capita’s report, linked in the segment two places above.) The other is that the construction industry, for reasons to do with regulation, diseconomies of scale, uncertain cash flows, and exposure to fiscal and monetary cycles, is characterized by poor productivity.
The Productivity Commission has just published its quarterly productivity bulletin, showing that in the year to December last year labour productivity fell by 1.2 percent. Hours worked were up 2.5 percent but output was up by only 1.3 percent.
These gross indicators based on hours worked and output have been distorted by developments during Covid and its aftermath. There was an artificial boost to productivity during Covid (if you take enough people out of the active workforce those who remain appear to be very productive). When it looks through that Covid bubble, the Commission tentatively concludes that labour productivity hasn’t improved in ten years.
To return to Kohler’s comments on housing, he couldn’t put a clearer case for significant public investment in public housing:
On housing, both parties steadfastly refuse to consider large-scale government-funded housing, even though private capital requires 6 per cent capital growth, and the whole reason that we now have unaffordable housing is that capital growth has been 6 per cent for 25 years.
Making housing affordable again requires investment returns that are far too low to attract private capital.
But because of our immature arguments about public finance, no government is going to do anything that increases the cash deficit, which is why the government has turned to second-best measures such as the Housing Australia Future Fund (HAFF) and its “help to buy” joint ownership scheme.
Kohler sees the HAFF as the government’s only worthwhile significant housing initiative, but it’s inadequate, and he criticizes the Coalition for promising to abolish it. He is also critical of the Coalition for overstating the effect cutting permanent migration would have on housing demand. Changing permanent migration numbers has only a small effect on net migration. Whatever the Coalition does to permanent migration would have little effect on housing demand.