Young & Invested: No end in sight for Australia's housing crisis
Political parties battle the housing crisis as the federal election looms closer.
Welcome to my column, Young & Invested where I discuss personal finance and investing for Gen Z and Millennials. This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.
Last week I discussed the viability of millennials owning their own home and ran an exercise on the salary required to comfortably do so. Unsurprisingly, this number was significantly higher than the median millennial’s wage highlighting the growing necessity of dual income households.
Young people feel failed by governments who hold their fair share of responsibility for the crisis we are now facing. Housing provides stability and benefits society at large. Governments should ensure that homeownership remains an accessible option for those who choose to pursue it. Given my view and using this criteria, I believe young people are largely entitled to the frustration over public policy failings that have led to the current inaccessibility of the market.
This anger can often be misdirected at older generations who benefitted from lower income to house price ratios and are now witnessing significant price appreciation on these assets. In this article I aim to provide an unbiased analysis of the current situation and assess the likelihood of either political party enacting policies that would make a meaningful difference.
Edition 5
A political game
As of last week, the federal government has temporarily restricted foreign purchases (including temporary residents and foreign-owned companies) of established dwellings. This group has often weathered the brunt of blame for house price appreciation. However, in 2022-2023 (latest available data), foreign home purchases accounted for less than 1% of all property sales.
Whilst there is some merit in policy signalling a shift away from foreign property investment, the ‘temporary’ nature of the ban indicates there is no commitment to a larger, significant change. Much like throwing a wet rag on a wildfire, a two-year ban virtue signals enough to quell election-induced angst and grab votes but leaves little benefit in the period following the two years. For the moment, there is no indication of future structural reform on foreign investments to help tackle this issue.
The misdirected blame game of selecting groups to villainise is a saturated political tactic we are seeing across the globe. With rhetoric amplified on an election stage, one must consider the psychological jump rope being played to absolve our leadership of any responsibility for this crisis.
It appears neither party is currently inclined to enact tangible change or policy redirection to solve Australia’s housing problem, and perhaps it is not currently in their political interest to do so. However, if property growth continues outpacing wage growth, the voter dynamic will shift, and lacklustre solutions will not suffice.
Loosened lending criteria
Mark LaMonica’s recent article on whether a mortgage is good debt outlines how Australian lending rules have loosened in the past few decades. In 1970 when the average Sydney house was 4.5x the average income, banks were not inclined to lend more than 2.5x a person’s salary meaning deposit requirements were significantly higher. The average person in 1970 would be paying a little more than 17% of their pre-tax annual salary on mortgage payments. Nowadays, banks have capped borrowing capacity at around 30% of pre-tax income which equates to over 4x the annual average salary. Mark highlights that it is unclear why banks now find it prudent to increase borrowing limits.
Undoubtedly, loosening lending criteria and the recent decade (prior to 2022) of lower interest rates has characterised the crisis we now have on our hands. Increased borrowing capacity for most Australians has driving up house prices in response. With Treasurer Jim Chalmers recently announcing that banks can disregard student debt from mortgage assessments, there appears to be no thought behind the implications of this continued easing. It appears that the focus of our government revolves around a temporary remedy rather than a productive cure to the housing crisis. Whilst increased lending capacity allows for more market entrants, it creates an inverse effect which exacerbates the demand and therefore continues to drive up prices.
The superannuation band-aid
As the Coalition continue to campaign on a super-for-housing policy, their attempts are imprudent at best. Not only does it undermine the purpose of superannuation but also encourages poor investor behaviour. The concept only accommodates a surge in demand which will consequently lead to an increase in house prices – a band-aid on a bullet hole.
It is arguable whether this can even be considered as a band-aid policy – rather a packaged slap to the face of those already struggling to enter the market and now must stake their retirement funds to do so. Shani Jayamanne recently examined the impacts of this policy in her article super should not fund housing. The reality is that those with lower levels of financial literacy will withdraw funds and then be left with significantly lower retirement balances.
A similar situation arose in New Zealand when the government introduced a policy in 2010 where citizens could withdraw the majority of their superannuation to buy a home. A report from the Australian Super Members Council deduced that the scheme didn’t address the systemic decline in homeownership for young Kiwis. Furthermore, in the decade before introduction, house prices rose 7.6%, whereas the decade after saw house prices grow 9.2%. Latest statistics show that 77% of first-home buyers are withdrawing their retirement funds to help with a house deposit. This simply indicates a snowball effect where house price acceleration leads to increased levels of withdrawals to remain competitive.
The super-for-housing policy simply isn’t the homeownership quick fix that its proposed to be.
Crippling supply and the immigration dilemma
The Australia housing crisis is characterised by a complex web of factors that may explain the price appreciation we’ve experienced over the last few years. The local supply and demand dynamics play a huge role in determining the current housing environment.
The current crisis can be partly attributed to persistent supply issues, amidst surging demand from immigration which accounted for 83% of last year’s population growth. The nation is already falling short of the federal government's goal of constructing 1.2 million extra homes by 2029, now predicting approximately 1 million new builds to be delivered by that date.
Furthermore, according to a new Productivity Commission report, housing productivity has dropped over 50% since 1995. This means that for the same number of hours worked in the sector, half as many houses are now being completed. The report attributed this to the dwindling approvals process, lack of innovation, domination of smaller building firms and the difficulty of attracting and retaining skilled workers.
Master Builders Australia projects that by 2029 there will be an approximate shortfall of 166,000 properties. The maths is simple, with Australia failing our minimum requirement of 240,000 homes per year and the ABS reporting that net overseas migration was 446,000 in 2023-24, it is clear to see why the numbers simply don’t add up.
The table below compares the total number of new dwellings commenced and the net overseas migration to Australia over the last five years. It paints a clear picture of the steep supply deficit that falls short of the number required to house just new arrivals. Certainly – it is true that only 7% of recent arrivals purchase homes annually, however the remaining 93% proliferate the demand for rental properties creating a supply squeeze and further increasing prices.
Importantly, this is not a Trump-esque call for mass deportation. Given declining birth rates, Australia still needs immigration to address work force shortages and bolster economic growth. However, it is critical for our leadership to consider temporary tightening on new entrants until our supply market catches up.
A note from our Kiwi cousins
A few years ago, New Zealand had among the least affordable housing market in the OECD. Between 2003 and 2021, inflation adjusted house prices rose 230% compared to the median household income rise of 114%.
So, what did they do? To begin, in 2021 Auckland upzoned 75% of its urban land to authorise apartments and townhouses in areas that previously favoured single-family homes. Furthermore, density restrictions were eased, and height limits were raised with financial rewards to councils that consented for more housing through a GST revenue sharing agreement from new builds. Ultimately, this led to an increase in building consents and a slow but steady move towards lower house prices. The QV House Price Index measures house price movement throughout New Zealand. The chart below shows the country’s average house price over the last five years.
What can we learn from this? In Australia we are similarly stifled by council bureaucracy and regulation stalling supply. I explored this more in depth in a recent article on investment properties. If our government implements a similar housing reform to reduce bureaucracy, incentivise councils and revise regulatory restrictions, we will reap similar benefits to our Kiwi counterparts.
Besides zoning reform, November 2021 saw the New Zealand Reserve Bank imposed a series of loan to value ratio restrictions for owner occupiers and property investors. This was done to reduce risky mortgage lending and bring house prices back to a sustainable level. The restrictions stipulated that banks could not lend more than 80% in the case of a property bring the principal place of residence and 60% for property investors. These were later eased in 2024 after a consequent fall in new loan commitments as shown in the chart below.
The New Zealand case provides an apt demonstration of how a housing crisis can be efficiently addressed.
Conclusions
The primary failure within both political parties resides in their focus on appeasing existing homeowners through policy that has continued to increase prices.
This strategy, designed to appeal to the masses, enables individuals (who previously couldn’t afford to buy) in an expensive market gain access. In turn, the move reinforces prevailing price appreciation, therefore temporarily appeasing both existing homeowners and prospective homeowners.
It's no secret that the national home ownership rate has been falling, however we are still at the level where over half of Australians own a home. If this trend is to continue, eventually this dynamic will shift to a majority that do not own a home due to financial constraints. Once the scale has tipped towards non-owners, this may change.
Australians have long called for a social license to change. We should not have to commit to multi-generational mortgages to live the Australian dream. The current vested interest of politicians results in favour of them reinforcing the norm and delaying any fundamental public policy changes. With the predominant voting demographic skewing to homeowners, it is not currently in politicians’ best interests to support policies that could lower the asset prices which have significantly contributed to the wealth appreciation of the voting base.
For the moment, it does not appear like housing affordability will become easier in the near future. This goal is out of reach for many younger people which has led them to pursue other pathways to wealth. In my column next week, I will discuss why I am investing instead of saving for a house deposit.
