Inequality and the housing bubble
Economist Nicki Hutley is both an expert commentator on the growing inequities of the Australian housing market and a case study of them.
Hutley, formerly a senior partner at Deloitte Access Economics, now an independent analyst and one of Australia’s best-known and respected economic commentators, has lived in the same house on Sydney’s lower north shore for nearly 25 years.
“I can tell you,” she says, “that I’ve made more from the capital gains on it than I have in my career. It is completely unfair. It’s unearned. It’s untaxed. And it’s really … it’s just such a massive problem.
“It’s frustrating that those of us who have worked in this space keep saying the same things over and over again, and yet, successive governments at all levels fail to act.”
The consequences of those failures have been apparent for decades. As the Australian Institute of Health and Welfare noted in a report last year, home ownership rates have fallen “for each successive [five-year] birth cohort since 1947–1951”.
Which is to say, in terms of access to housing today, young people, even middle-aged people, are worse off than their parents and grandparents. We are talking about massive intergenerational inequity – and to a significant extent, intra-generational inequity. The long boom in Australian residential property has made many older Australians rich, but also left many deeply in debt, and left many others out entirely.
Even a pandemic could slow the market only briefly; the most recent report from the property data firm CoreLogic recorded an average increase of 2.2 per cent in the prices of capital city dwellings – even Melbourne prices were up – and a whopping 4.7 per cent across the regions, in just three months to the end of January.
“The January movement takes Australian home values to a fresh record high. Housing values have surpassed pre-Covid levels by 1.0 per cent, and the index is 0.7 per cent higher than the previous October 2017 peak,” CoreLogic reported.
The group expects the market to keep booming for at least the next couple of years, as do various other players in the real estate sector. The Commonwealth Bank this week said lending had been accelerating for the past four or five months and it has forecast prices to rise by an average of 14 per cent across the nation’s eight capital cities in the next two years.
It seems to defy logic that this is happening as international borders remain closed, various states are sporadically placed into lockdown, and large sectors of the economy and regions remain deeply recessed. And while unemployment is expected to remain higher and wages flat into the indefinite future. The housing market’s snapback has certainly gone against expert predictions.
“It wasn’t that long ago,” says economist Saul Eslake, “that the bank chief economists and others were forecasting double-digit declines in property prices. And while I think peak-to-trough property prices in Melbourne fell by a bit under 5 per cent, and fell a little bit in Sydney, in the rest of Australia they have continued rising. Indeed, outside of the capital cities rising at an accelerated rate.”
Our political leaders celebrate this. Only last week, in an appearance with building industry leaders at a new residential development in Melbourne, Prime Minister Scott Morrison boasted about his government’s success in further inflating the real estate bubble. The renewed boom, he said, was “a product of the right policy settings”.
That’s not how Eslake sees it. Like Hutley, he is an independent economist, having previously worked as chief economist for the ANZ Bank and Bank of America Merrill Lynch, among others. By dint of age, he’s been on the property escalator for decades. He’s also a long-standing critic of government policies that have made the Australian dream of home ownership unattainable for an increasing proportion of the population.
Eslake notes that the most recent Census, in 2016, found that “for people under the age of 40, the home ownership rate was the lowest it has been since 1947”.
He fully expects the next Census, to be held on August 10 this year, will record a new record low.
No doubt Eslake would be happy to be proved wrong. But that seems unlikely, given the long-term trend. During the 25 years to 2016, ownership rates among those aged 30-34 fell from 64 to 50 per cent. Among 25- to 29-year-olds, it dropped from 50 to 37 per cent.
And that fall would have been bigger, says Hutley, were it not for the fact that many parents, enriched by the escalating value of their own homes, have been able to help their children buy property.
“The bank of mum and dad is helping a lot of young ones into the market,” she says. “I’m guilty of this myself, helping my kids with a deposit. But there are those who can’t – perpetuating that inequality.”
Note Hutley’s use of the word “guilty”. There is an element of embarrassment here, a sense that one’s good fortune has been paid for by others. I feel it, too, and hear it from my baby boomer friends. This goes to a broader dissonance, which recognises the unfairness of the situation, but makes solving it devilishly difficult.
“There are about 100,000 people who succeed in becoming homebuyers for the first time each year,” says Eslake. “And up until the moment at which they do, those 100,000 people would like governments to do things to restrain price increases. But as soon as they become home owners, they join the roughly 11 million people who already own at least one property.”
And these 11 million people don’t want the value of their investments to fall.
At the 2019 federal election, Eslake notes, the Labor Party, sure it would win, proposed policies that would have cut tax breaks on negative gearing and capital gains tax for new property investors. In short, changes that may have taken some of the steam out of the property market.
“But Morrison was better at negative campaigning,” says Eslake.
Labor’s loss, he believes, will cause the opposition to “go to water” and abandon what were good ideas.
And in truth, even if Labor had won and cut those breaks, it would have been only a partial solution to a complex problem.
Eslake ticks off some of the drivers of housing unaffordability, going back almost 60 years to when the Menzies government first introduced cash grants for first homebuyers after the 1963 election – an idea, he notes, that was strongly pushed by one rising young Liberal of the time, John Howard.
Before that, Eslake says, home ownership rates were similar among rich and poor Australians, although obviously the standard of accommodation differed. Now home ownership depends much more on income. Among 25- to 34-year-olds, home ownership among the poorest 20 per cent has fallen from 63 per cent to 22 per cent in a generation.
That inequality in housing, says Eslake, began with a shift in government policy away from the supply side – building houses – to the demand side, giving people money that often went to bidding up the price of existing houses.
“I’ve been a lifelong opponent of cash grants for the first-time buyers,” he says. “I call them second home vendors’ grants, because that’s where money usually ends up.”
He notes that Australia’s peak rate of home ownership – 72 per cent – was recorded at the first Census after this shift, 1966, and has been trending down ever since. Yet home-owner grants from both federal and state governments have proliferated, despite the evidence that they largely pump up demand, and prices.
“In some states you can get $45,000 from federal and state government grants,” he says.
Another key causal factor, largely attributable to local government, is restrictive planning laws. Eslake calls them “banana laws” – build absolutely nothing anywhere near anyone. Hutley also sees this as a big problem.
“The cost of land that is around anywhere between 30 and 50 per cent, depending which part of the country you’re talking about,” she says.
She points to the work of Peter Tulip, an economist formerly with the Reserve Bank, now at the Centre for Independent Studies, a libertarian think tank. “He’s talking about several hundred thousand dollars added to the price of a house in Sydney, because of constricting planning policies,” she says.
Professor Bill Randolph of the City Futures Research Centre at the University of New South Wales echoes the view that much of the problem with housing affordability is attributable to a “pivot” in government policy – away from directly subsidising housing supply and towards grants that encourage owners, and tax breaks to encourage investors. He adds another factor: deregulation of the financial markets. Cheap money poured into the property market and was capitalised into high house prices.
Whenever there was a downturn, Randolph says, politicians would cry, “Oh, we’ve got to stimulate housing … to keep the building industry going.”
Which, of course, is exactly what the Morrison government did in response to the Covid-19 downturn through its $2 billion HomeBuilder grant scheme.
“We’ve had 30 years of priming the demand side, and look where it’s got us,” says Randolph.
“Home ownership has been falling consistently and falling consistently more for younger ages. In Australia now, a third of the population live in rental property.
“We’ve subsidised the delivery, the supply of rental property through supporting private landlords. Low-income workers have been pushed out of the city into the middle and outer suburbs. We hear about congestion on the roads, the two-hour commute.”
The consequences of mushrooming housing costs are many and varied. A recent survey of nearly 90 economists by Randolph and some fellow academics found widespread concern that overinvestment in housing and the concomitant rising debt was “weighing down the broader economy”. It was a drag on productivity and growth, and, he says, an “incipient threat to economic stability.” Witness the global financial crisis.
It is not only governments and private banks fuelling the boom, either. Much of this is down to the actions of central banks over more than a decade, pumping enormous amounts of money into their economies at historically low interest rates. The result has been the same everywhere: New Zealand, Canada and Britain have all experienced a huge increase in housing prices.
“The extraordinary measures that central banks have taken around the world, creating lots of money by buying an awful lot of bonds, and creating lots of liquidity for banks to lend, are certainly fuelling asset price bubbles,” Eslake says. “And they’re doing it fairly unapologetically, I would have to say.
“The theory behind it is that it makes people feel wealthier, and therefore more inclined to spend.”
It has certainly made them more inclined to borrow, and to borrow large amounts, because money is cheap.
Eslake cites the most recent data from the Australian Prudential Regulation Authority (APRA), the statutory body that supervises the banking and finance sector, which showed record levels of leverage among homebuyers.
More than 40 per cent of people borrowed more than 80 per cent of the price of their new home. Just 18 months ago, only half as many loans were so leveraged.
A lot of these borrowers are first homebuyers. They currently make up almost a quarter of total mortgage finance, more than at any time in the past 30 years. Perhaps in the low interest rates, they see an opportunity to realise their aspirations, long frustrated by the competition they faced from cashed-up migrants and negatively geared investors.
If so, it won’t last. Housing sector analysts see investors re-entering the market in increasing numbers, chasing capital gains and they also foresee migrants returning in large numbers post-Covid-19.
The temporary disappearance of overseas money is but one effect of the coronavirus pandemic. Another, says Tim Lawless, head of research for CoreLogic Asia-Pacific, is that regional markets have outperformed metropolitan markets as people have come to realise that they can work remotely. Another related effect is that house prices have increased much more than apartments – 3.8 per cent growth nationally compared with 0.8.
Meanwhile, inner-city units in high-rise blocks – typically owned by investors and occupied by foreign students and other visa holders – have done poorly. Rents are down, Lawless says. The flip side is that interest in houses, particularly larger houses, is up.
Brendan Coates, household finances program director with the Grattan Institute, offers himself as an example of why people want bigger houses. He and his family live in Melbourne’s inner north, in a small three-bedroom house, from which he and his partner had to work during Melbourne’s long Covid-19 lockdown last year.
“Luckily, we’ve got this small three-metre by 2.1-metre annexe off the main bedroom that we’ve been using as our office. And if it wasn’t for that, we would have been completely stuffed.”
But owning a home, any home, is better than renting. In Australia, that is.
“Plenty of other countries get by without home ownership being the bedrock of their housing,” Coates says. “The reason declining home ownership is a problem in Australia is because so much of the rest of Australian economic life is set up around the presumption of home ownership.”
The age pension, for example, is adequate only for people who own homes. In fact, pensioners are less likely to be in poverty than younger Australians. “But if you’re a pensioner who rents, you’re in big trouble,” Coates says.
The typical home owner aged over 65 spends just 5 per cent of their income on housing, compared with nearly 30 per cent for a renter.
In the future, an increasing number of Australians will be renters into retirement. The trends suggest that by 2056 just two-thirds of retirees will own their homes, down from nearly 80 per cent today.
Another large cohort will reach retirement age still owing money on their mortgage, and will pay that off with their superannuation, thus thwarting its intent to provide retirement income.
So, what can be done?
Brendan Coates suggests increasing rent assistance by 40 per cent. That would cost just $300 million a year if it applied to pensioners, and another $1 billion a year if extended to younger renters as well.
He says governments should build more social and affordable housing, too. Increasing the stock by 100,000 dwellings would require additional ongoing public funding of about $900 million a year, or upfront capital expenditure of $10 billion to $15 billion.
And that would only house people at greatest risk of homelessness. Providing enough social housing to accommodate all renting pensioners, let alone all working-age Australians on low incomes, would be prohibitively expensive.
And, most controversially, Coates wants to see the family home included in the assets test, allowing a threshold of $500,000. Under the current arrangements, more than $6 billion in pensions is paid each year to people living in homes worth more than $1 million.
Done right, via a pension loans scheme, this would not force pensioners from their homes. It would, however, cut inheritances.
Other measures to improve housing affordability, from Hutley and Eslake: increase the supply of land, plan for greater density of housing, do something about the tax breaks that encourage speculation for capital gains.
Treasurer Paul Keating’s 1987 decision to restore the generous capital gains tax breaks he had cut two years previously is high on Eslake’s list of “dumbest tax policy decisions”.
And, in recognition that more people, older people with families, will nonetheless be renters, amend tenancy laws to give them greater security of tenure.
Good ideas, all, if we are to avoid a future of greater unfairness.
This article was first published in the print edition of The Saturday Paper on Feb 20, 2021 as "Safe as houses".
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