Opinion

James Brown
Dream homes

He’s 33 and she’s 30. Friends of mine; both university educated, white collar and generating momentum in their professional services careers. And try as they might they can’t find their first home. More than that, they don’t believe they’ll find a home for their growing family any time soon. Their aspirations don’t seem exorbitant – they don’t want a swimming pool or expansive lawn. On their checklist is a parking space, three bedrooms, and some room for the accumulated belongings of their eight years together. Finally, and most important, they have to be within 20 minutes of the CBD by public transport, ideally with proximity to the airport, too, since one of them regularly travels interstate for work.

Theirs is a First World problem. After all, right now they can afford to rent a perfectly comfortable inner-city terrace. But still, after months of looking to buy a home, they’re coming up short, and nearly a decade of shifting their belongings every few years doesn’t look set to end in the near future.

But here’s the most important thing: financially, few people I know are doing better than these two. Among my circle of friends, this couple is earning more than most, at the start of what should be a period of peak earning in successful and sophisticated professional careers. They’re at the top end of town, and the inner-city housing market seems to be pushing against them.

Inner-city crunch

Real estate is a part of the conversation growing up in Sydney – it’s practically a sport. Every Saturday, teams gather all over the city, huddled on footpaths outside homes bedecked with inviting placards gratuitously describing interiors and features. They dart from property to property with lists gleaned from real estate websites. It’s a hunt, a game of musical chairs, but it feels like the music stopped some time back in the 1980s. The pages of online real estate sites are covered in lavish photos pregnant with the possibility, the dream, of a future life just a little bit better. But there’s a crunch happening in the inner city, and it has spread beyond just postcode-obsessed Sydney, where home prices have risen by 17 per cent in the past 12 months. In the inner bands of Melbourne, too, first-home seekers at multiple income levels are struggling to get a start.

A conflation of trends is driving this inner-city housing crunch. Australians love living in cities. We are more urbanised than most developed countries. Smalltown Australia hardly exists – more than 75 per cent of Australians live in a city that’s home to more than 100,000 people. Nearly 40 per cent of Australians live in our largest two cities, Sydney and Melbourne. By contrast, in Britain just 17 per cent of the population is clustered in the largest two cities. And according to the Reserve Bank of Australia’s analysis earlier this year, Sydney and Melbourne “have unusually low population densities compared with cities in other developed countries with similar populations sizes”.

While Melbourne still has inner-urban areas such as Fishermans Bend to develop, Sydney has nearly run out of new land near the CBD. In any event, new housing construction is lagging. Australian Bureau of Statistics figures released in March show national building approvals for the previous year were 188,070 – well short of the 300,000 new dwellings some property experts think are needed. Other factors constrain the availability of housing, too. The RBA’s submission to a current senate inquiry into housing affordability noted that “regulatory and zoning constraints, inherent geographical barriers and the cost structure of the building industry” conspire to throttle housing availability and affordability. There’s a limited supply of inner-city housing in Sydney and Melbourne, and Australians are competing for it with increasing vigour.

Changing lifestyles are also increasing the desirability of inner-city living. With more working mothers, worsening congestion and creaking public transport infrastructure, younger families are prioritising shorter commute times over suburban backyards. Increasing numbers of women in the workforce in the past three decades have been partly responsible for driving household disposable incomes 50 per cent higher. Record low interest rates mean buyers can borrow larger sums, driving prices even higher. Nationally, average home prices are now approximately 4.3 times annual income and 28 times annual rent, close to historic highs, according to Barclays chief economist Kieran Davies. Those figures are higher in the inner city.

Property investors

An intergenerational tussle is taking place as the old and the young alike compete for similar urban properties. Baby boomers looking to downsize are seeking the same thing as first-home owners – smaller apartments and homes with lower maintenance needs, close to amenities and transport. Those over the age of 55 are also able to unlock their superannuation to invest in the inner-city property market. Investors are piling into inner-city housing in Sydney and Melbourne – last year, finance approvals for investors in the Sydney market increased by 40 per cent.

Some of this investment money is coming from China, as investors there look to offshore wealth, expose themselves to Australia’s rising property prices, or simply accommodate family members studying at Australian universities. Australian real estate agents are now a regular presence at property investment fairs in Shanghai. When Sydney’s towering Central Park complex in Chippendale went on sale two years ago, apartments sold out quickly to mostly Chinese buyers, paying cash. Harried paralegals conducting settlements unexpectedly found themselves counting out tens of thousands of dollars, and then shuttling large amounts of hard currency across town in taxis. But the Chinese, though they may be piling into Sydney and Melbourne real estate markets, are far from the majority of the buyers. Most are Australians taking advantage of the extraordinarily generous concessions the government gives to property investors.

The Grattan Institute’s October 2013 report, “Renovating Housing Policy”, identifies that government policy favours property investors by $6.8 billion yearly through the provision of tax subsidies for negative gearing and capital gains. Grattan, and other respected economists, conclude that there is little evidence that negative gearing particularly does much to stimulate jobs in the construction industry, or the expansion of more affordable housing. Neither the Commission of Audit nor this week’s budget had much to say about ending the entitlement to negative gearing. AMP’s chief economist, Shane Oliver, thinks that to change negative gearing for investment property, or capital gains exemptions on homes, would be seen as “unAustralian”.

But there are tremors that suggest the growth of the housing bubble in Sydney and Melbourne is unsustainable, particularly as the mining boom subsides and government spending contracts with the new austerity budget. ABS figures released on Tuesday showed the number of home loans approved in March fell by 0.9 per cent, when expectations had been that they would rise by 0.5 per cent.

The value in housing underpins so much of the Australian economy, most important, the savings of ageing baby boomers, whose health costs are expected to rise significantly in the next decade. Organisation for Economic Co-operation and Development data shows Australia’s household debt as a percentage of income is higher than Britain, the US and Canada. First-home seekers should be careful what they wish for – a collapse in housing prices would increase the taxation burden on younger generations. It’s a vexing problem. More affordable housing might lead to even more significant problems for those in their 30s.

Senate report

In the meantime, young professional couples are doing what they can to get into the market. One couple I know bought small, renovating a tiny property in Sydney’s Darlinghurst. Another young lawyer stayed at home until his early 30s, saving up for an enormous deposit and forgoing the experience of shared living through his 20s. Now he has a first house, but no memories to put in it.

The Senate Economics References Committee will present its judgements next month on the steps it thinks necessary to make housing more affordable. It is unlikely inner-city first-home seekers are holding their breath waiting for the report.

This article was first published in the print edition of The Saturday Paper on May 17, 2014 as "Dream homes". Subscribe here.

James Brown
is the research director of the United States Studies Centre at the University of Sydney.