housing affordability – Page 10 – Digital Finance Analytics (DFA) Blog

Smashed Housing Aspirations

Australian politicians have sleepwalked into a housing affordability “crisis” because they were hooked on property taxes and votes, a think tank has warned.

Demographia, a global company based in the US, released an annual report this week that ranked Sydney as the second-most expensive city for housing in the world.

It divided Sydney’s median house price ($1.077 million) by its median household income ($88,000) to roughly estimate it would take 12.2 years’ wages to buy a home – better than Hong Kong (18.1 years) but worse than Vancouver (11.8), Auckland (10) and San Jose (9.6).

Using the same measure, Melbourne (9.5 years), Adelaide (6.6), Brisbane (6.2) and Perth (6.1) also made it into the top 20 of the 406 cities on the list.

Wayne Matthew, the Australian spokesman for Demographia, told The New Daily that our politicians are “only just starting to realise” the extent of the problem.

The report’s release coincided with the first press conference of newly appointed NSW Premier Gladys Berejiklian, who pledged on Monday to tackle housing affordability, calling it the “biggest issue people have across the state”.

On the same day, senior figures in the Turnbull government made it known that housing affordability will be an “extraordinarily high” priority in 2017.

Politicians have sleepwalked into the “crisis” because they initially saw no problem with the rapid increases in prices, or were too scared of voter backlash to intervene, Demographia’s Mr Matthew said.

“Initially, the Australian dream seemed to be paying fabulous dividends. People’s property prices were going up and they felt good about that. As prices went up, people were able to leverage the equity in the increased property to buy other properties as investments to rent out,” he said.

“That all looked good and enterprising, however it has now caught up with us, particularly in Sydney.

“There have been too many people benefiting from the investment wave, but the goose that laid the golden egg is becoming a millstone around the necks of young people.

“It’s going to create great chasms in our society, with young people being bitter that they can’t afford the home their parents had and that they can’t realise the same dreams. Australia has always been a country where people have had a right to a roof over their head that they could aspire to own themselves, but that great Australian dream is being smashed.”

There are two distinct sides to the debate over housing reform. There are those who argue for supply-side measures (often conservatives, such as the Liberal Party) and those who argue for demand-side measures (such as Labor, which has promised to reduce negative gearing).

Demographia’s argument, as a conservative think tank, is that land prices are high because of an artificial undersupply imposed by state governments, who fear voter backlash if they free up large plots of land for development or allow more high-rise apartments.

“State governments have been concerned about stepping into the market and offering lower-priced land on the basis that they’re fearful it could affect other property prices where investors are dependent upon equity to maintain a balance in borrowings they’ve undertaken,” Mr Matthew said.

“The reality is, and international experience has shown, that’s not what occurs.”
We need more than just more land, says one expert. Photo: Getty
Dr Ashton De Silva, an economist with expertise in the housing market, agreed that supply is “probably the most important factor”, but said Demographia’s data should be treated with caution.

The measure used by the think tank – median house price divided by median household income – is “problematic” because the way home loans are funded varies widely between countries, Dr De Silva told The New Daily.

“I’m very circumspect about this kind of report. I know that Sydney and Melbourne house prices are very high, and I know this causes a great deal of hardship in the community. However, I’m not sure if the problem is as extreme as they say.”

Professor Tony Dalton, a housing expert at the Australian Housing and Urban Research Institute, said supply is an “important” factor because of the nation’s high rate of immigration, but does not tell the “full story”.

Overly generous tax concessions for landlords, a lack of social housing, and a concentration of “good jobs” in the inner city are also crucial factors, Professor Dalton told The New Daily.

“There are very big differences between house prices in central city areas and the periphery. That’s because of the way we’ve organised and designed our cities. We’ve got all the good jobs, those with greater security and higher income, within a 10 to 12km radius of the central business district.”

To fix the problem, governments shouldn’t focus just on freeing up land. They should also curb negative gearing and capital gains tax concessions and invest more in outer suburb infrastructure and social housing, Professor Dalton said.

“We’ve got first home buyers bidding for properties alongside cashed-up, affluent people who are able to bid for properties for investment purposes.

“Meanwhile, most western developed countries have a social housing system that’s much bigger and more robust than Australia. We are a standout in terms of how little of that sort of housing we provide.”

Housing affordability on governments’ agenda

From The Real Estate Conversation.

Gladys Berejiklian and Malcolm Turnbull’s governments are seeking solutions to the housing affordability problem.

Both new New South Wales premier Gladys Berejiklian and prime minister Malcolm Turnbull have put housing affordability firmly on their agenda.

With Domain’s latest price report showing the national median house price soared 7.7% to $781,000 in the year to December 2016, and apartments prices soared 3.4% to $546,000, housing affordability has been flung back into the spotlight.

Though the picture varies across the country – Darwin house prices fell 10.5% in the year to December, and Perth prices were down 2.3% according to the Domain report – there are pockets of Australia where it is now well beyond the reach of average wage earners to buy their own home

Berejiklian told ABC News last night, when asked if she would consider abolishing stamp duty, “We’re certainly looking at all options.” She emphasised that supply had already increased under the current NSW government.

She said, “I want to make sure the average person doesn’t feel owning their own home is out of their reach,” saying she wanted to make is easy for residents to buy their first home.

Malcolm Turnbull has also turned his attention to housing affordability, with treasurer Scott Morrison in London to look at how Britain has enabled more people to buy their own home. Turnbull also last week appointed Victorian MP Michael Sukkar as Assistant Minister to the Treasurer with the main responsibility of addressing housing affordability.

Housing Affordability Still Under Pressure – Demographia

The 13th Annual Housing Affordability Survey – 2017 has been released by Demographia and it underscores the problem we have with affordable housing. All five of Australia’s major centres are rate “un-affordable on their scale.

The overall major housing market Median Multiple is 6.6. In 2004 (the first Survey), Sydney’s Median Multiple was 7.6, and has risen 60 percent since then.

Only Hong Kong, Sydney, Vancouver, Auckland and San Jose are less affordable than Melbourne. Adelaide has a severely unaffordable 6.6 Median Multiple and is the 16th least affordable of the 92 major markets. Brisbane has a Median Multiple is 6.2 and is ranked 18th least affordable, while Perth, with a Median Multiple of 6.1 is the 20th least affordable major housing market.

Outside of the major markets, 28 in Australia are rated severely unaffordable. The least affordable of these are Wingcaribbee, NSW (9.8), Tweed Head, NSW (9.7), Gold Coast, QLD (9.0) and Sunshine Coast, QLD (9.0).

Sydney in second place, after Hong Kong, with Melbourne also in the top 10.

Demographia’s ‘median multiple’ approach establishes a benchmark for housing affordability by linking median house prices to median household incomes. The ‘median multiple’ is not a perfect measure because it does not account for house sizes or build quality. But it is the only index that allows a quick comparison of different housing markets, and it is the best approximation of housing affordability measures we have to date.

The Median Multiple is widely used for evaluating urban markets, and has been recommended by the World Bank and the United Nations and is used by the Joint Center for Housing Studies, Harvard University. The Median Multiple and other price-to-income multiples (housing affordability multiples) are used to compare housing affordability between markets by the Organization for Economic Cooperation and Development, the International Monetary Fund, The Economist, and other organizations.

Historically, liberally regulated markets have exhibited median house prices that are three times or less that of median household incomes, for a Median Multiple of 3.0 or less.

The Survey covers 406 metropolitan housing markets (metropolitan areas) in nine countries (Australia, Canada, China, Ireland, Japan, New Zealand, Singapore, the United Kingdom and the United States) for the third quarter of 2016. A total of 92 major metropolitan markets (housing markets) — with more than 1,000,000 population — are included, including five megacities (Tokyo-Yokohama, New York, Osaka-Kobe-Kyoto, Los Angeles, and London).

There are 26 severely unaffordable major housing markets in 2016. Again, Hong Kong is the least affordable, with a Median Multiple of 18.1, down from 19.0 last year. Sydney is again second, at 12.2 (the same Median Multiple as last year). Vancouver is third least affordable, at 11.8, where house prices rose the equivalent of a full year’s household income in only a year. Auckland is fourth least affordable, at 10.0 and San Jose has a Median Multiple of 9.6. The least affordable 10 also includes Melbourne (9.5), Honolulu (9.4), Los Angeles (9.3), where house prices rose the equivalent of 14 months in household income in only 12 months. San Francisco has a Median Multiple of 9.2 and Bournemouth & Dorsett is 8.9.

A Recipe To Tackle Housing Affordability

KPMG has released a brief report “Housing Affordability: What can be done about the Great Australian Dream? They exhibit greater joined up thinking than recent Government outings, because they include tax reform, supply of affordable housing and shared equity options as part of a reform package. It also shows how complex the issues are. They say it should be a focus of public policy.

The missing piece of the puzzle though for me is property price sentiment. In a rising market, expectations of future price rises drive prices higher, and when two thirds of voters have direct interests in property and the wealth effect these price rises create, it would be a courageous politician who rocks the “magic pudding” boat! Rather they will tinker ineffectively at the margins.

There is no doubt that Australia is experiencing a worsening problem regarding housing affordability, a fact highlighted this week (24 October 2016) by the Federal Treasurer in a speech to the Urban Development Institute of Australia.

The driver of reduced affordability has clearly been the rapid increase in the price of housing, relative to a more benign adjustment in household incomes.

Many of the drivers of house price increases and affordability pressures on some households are occurring globally, are largely macroeconomic and are the product of a complex interaction of demand and supply side factors, and no single policy intervention will address the entire issue.

About a decade ago KPMG Economics completed a detailed review into housing affordability in Australia. At the time we found that the change in median house prices were mostly influenced by the underlying strength of the economy, the performance of the share market, and the proportion of housing being purchased by investors relative to owner occupiers.

We have just re-investigated the relationship of median housing prices in Australia to the key drivers identified a decade ago and found GDP and investor activity remain key influences, but the share market no longer had such an influential role. However, wages, interest rates and housing supply are factors whose influence on house prices have strengthened over the past decade.

Average access to intergenerational equity – being the average amount of time a generation has access to potential wealth via inheritance from the immediately preceding generation – is anticipated to be greatest for ‘Baby Boomers’, and least for ‘Generation X’.

We are now seeing a change in behavior by current generations regarding home purchasing which is new compared to previous generations. That is, some young people are now collaborating to buy, some are assisted by parents, while others are simply choosing not to buy because they don’t want to be committed to a location for 30 years of a mortgage.

Low income households are only able to afford housing stock that is located on the fringe of cities, and even then this has become more difficult. However, this outwards push of the urban fringe also creates broader issues for society around provision of infrastructure into these ‘greenfield locations’, and the false economies associated with cheaper housing but more expensive private and public transport.

KPMG recognises the challenges associated with resolving the problem of housing affordability are complex and they involve a range of both supply and demand side factors. We have offered a number of solutions that provide a way forward for housing affordability to be improved on a permanent basis.

These include:

1. CGT reduction: reducing the capital gains tax discount from 50% to 25%, thereby making property investment marginally less attractive
2. Aggregate property tax: abolish stamp duty on the transfer of residential property and conflate rates, land tax, insurance taxes and emergency service levies into a new Property Services Tax
3. Systemic reforms aimed at maintaining the supply and diversity of land and housing in established and growth areas, through:
a) Set targets: a stronger role for target setting for “net additions to stock” to drive Local and State Government planning schemes;
b) Affordable product: target setting would also focus on encouraging greater diversity of housing stock and deliberately encouraging smaller, well designed affordable products;
c) Streamline planning: making further improvements to the planning system to capitalise on the Government’s planned use of structure plans as a means of reducing the holding costs associated with planning delays – and providing developers in both the private and public sector with greater capacity and incentives to bolster supply at times when the market is under substantial demand pressure;
d) Empower public supply: supporting a stronger role for government land authorities to focus on housing affordability for middle income households within the context of a broader sustainability agenda.
4. Targeted Reforms aimed at improving access to those groups who are the most excluded from affordable home ownership. This package would focus on:
a) More low cost housing: the production of a greater volume of more sustainable, well-designed, lower cost house and land packages;
b) Improve assistance: better targeting of existing State first home owner assistance to increase the overall value and impact of that assistance;
c) Promote shared equity: the introduction of a shared equity program with a percentage of that equity exempt from rental interest charges for the life of the loan or a part of it to be provided by Government and/or the private sector.

KPMG also believes that the solution for Australia must involve all levels of Government working together, given the factors driving the problems are not under the remit of any one level of government. It should be a priority area of public policy.

ABC Lateline Does Housing Affordability

ABC Lateline included a segment on housing affordability, and an extended interview with Angus Taylor, Assistant Minister for Cities. His focus was on supply side issues, but he rejected the notion that investors, and their tax-breaks have messed with the market. He suggested the only way to examine the property sector was at an aggregate level, rather than looking at the behaviour of specific groups. We are not convinced!

Housing Affordability at ‘Crisis Levels’

From The Real Estate Conversation.

Shadow Treasurer Chris Bowen has spoken about the decline in Australia’s housing affordability, saying we are ‘a nation that can no longer house its own children.’

Shadow Treasurer Chris Bowen has delivered a passionate speech at left-leaning public-policy think tank, the McKell Institute, outlining the decline in the middle class in Australia, and listing worsening housing affordability as one of the main problems facing an increasingly pressured middle class.

In the speech, Bowen said Australians’ aspirations for home ownership were perhaps stronger than anywhere else in the world, but that it was becoming “an aspiration which, for far too many, is becoming a pipe dream.”

“Overall home ownership in Australia is at a 60-year low,” said Bowen.

“In 1982, 62 per cent of people aged 25-34 owned their own home. By 2012, this had collapsed down to just 42 per cent,” he said, citing the recent HILDA report.

People today are paying 15 times their annual income to purchase a new home, said Bowen, compared with five times 25 years ago.

“Young people unable to crack into the housing market strips them of one of the most fundamental wealth drivers through their lifetime,” said Bowen, concluding that housing affordability is at “crisis levels”.

Bowen says Australian who can not afford to buy their own home are cut off from an important source of capital, as many fulfill their aspirations by borrowing against the family home.

“For many it (home ownership) is a means to a broader aspiration, of access to the capital which is built into the family home,” said Bowen.

Bowen believes the government should be playing a greater role in improving housing affordability.

“At the Federal level, our tax system continues to provide very generous tax concessions to property investors and zero assistance to first home buyers,” he said, explaining that Labor’s changes proposed during the recent election campaign were designed to deliver more balance to home owner and investor incentives.

“Our policy to limit negative gearing to new properties puts first home buyers on a more level playing field with investors, provides a stimulant to new construction to add to supply and, together with capital gains tax reform, adds $37 billion to the budget over the next ten years,” he said.

The Property Council has welcomed the Shadow Treasurer’s commitment to make housing affordability a primary policy issue for the Opposition.

“Mr Bowen’s speech recognises a central tenet of the Australian success story: high rates of home ownership across all parts of Australian life are critical to social cohesion and economic security”, said Ken Morrison, Chief Executive of the Property Council of Australia.

Morrison said he agrees it’s important that the next generation is not priced out of the housing market, but said he disagrees with the Shadow Treasurer about the means to achieve this.

“While we have differences with the Opposition about its tax policy for housing, we take this speech as an invitation to explore other areas where we can encourage high rates of home ownership and increased housing supply,” said Morrison.

“Our concern about the Opposition’s current negative gearing policy is that it is not an answer to the worsening state of housing affordability,” said Morrison.

“The McKell Institute and the Grattan Institute are the Opposition’s biggest supporters of its negative gearing policy, but even they concede that the impact on house prices will be minimal. McKell argues it will curtail prices by a modest 0.5 per cent a year and Grattan argues a 2 per cent fall in the price of housing,” Morrison said.

Morrison said he believes that changes to stamp duties would be a more effective tool in addressing housing affordability.

“Our challenge is supply and finding sensible ways to reduce costs in the market place. It is worth noting that the biggest beneficiaries of high house prices are state governments who are collecting enormous stamp duty and land tax receipts,” said Morrison.

Home price growth sees affordability ease in June 2016 quarter – HIA

The HIA Housing Affordability Index shows affordability for home buyers eased back in the June 2016 quarter, according to the latest Affordability Report from the Housing Industry Association.

According to the HIA, affordability fell by 3.7 per cent during the June 2016 quarter and was 2.1 per cent less favourable than the same period a year earlier. The capital city housing affordability index fell by 4.3 per cent during the quarter, while regional market index experienced a 1.9 per cent improvement.

During the June 2016 quarter, improvements in affordability were observed in three capital cities with the largest improvement in Perth (+3.2 per cent), Darwin (+2.9 per cent) and Hobart (+2.2 per cent). Affordability worsened in the remaining five capital cities during the March 2016 quarter with the largest decline recorded in Melbourne (-7.4 per cent), followed by Canberra (-5.7 per cent), Sydney (-1.6 per cent), Adelaide (-1.3 per cent), and Brisbane (-1.0 per cent).

“Home price growth moderated in the early part of the year and the HIA Housing Affordability Index showed an improvement in affordability during the March 2016 quarter. However, in the June quarter dwelling price growth returned and the index reverted to the level we saw at the end of 2015,” explained HIA Economist, Geordan Murray.

“While there was a decline in the headline index tracking the national picture, there was substantial variation around the country – with substantial differences between states, and also differences between capital city markets and regional markets.”

“The geographic variation in affordability is most evident in the comparison between Melbourne and Perth. Over the last year, the median dwelling price in Perth has fallen by 4.7 per cent while Melbourne’s has grown by 11.5 per cent. This has seen the affordability index for Perth increase by 6.2 per cent over the last year, while the index for Melbourne has fallen by 6.2 per cent.”

“These differences in affordability align with the relative economic performance of these two states. The Western Australian economy is navigating the tail end of the mining boom which has seen conditions in the local labour market deteriorate and consequently the rate of population growth has fallen quite sharply. In contrast, Victoria has experienced a healthy level of growth in the labour force and continues to record the strongest rate of population growth in the country.”

NZ Housing risks require a broad policy response

Growing imbalances in the housing market require policy action on a number of fronts, New Zealand Reserve Bank Deputy Governor Grant Spencer said today. In an excellent speech he draws important links between the elements driving house prices, and also underscores the limits of the banks range of options, especially considering the target inflation range of 1-3%.

New Zealand is experiencing a housing market boom. House prices are increasing at 13 percent per annum nationally, and at 15-20 percent in Auckland and close-by regions. Evidence from housing cycles in several advanced economies suggests that the longer this continues, the more likely there will be a severe correction.

Speaking to the Wellington Branch of the New Zealand Institute of Valuers, Mr Spencer said that a range of factors had contributed to strong demand for housing, including record low interest rates, rising credit growth, and population increases.

While housing demand has been strong, the housing supply response has been constrained by rigid planning and consent processes, community preferences in respect of housing density, inefficiencies in the building industry, and infrastructure development constraints around financing and resource consents.

When the Bank had introduced LVR restrictions in 2013, they saw some markets slowing, but “House price pressures have re-emerged in Auckland following an easing in late 2015 and have also strengthened across other regions”.

New Zealand house price inflation began to accelerate again from around March 2016 as demand pressures intensified in Auckland. In the meantime, other regions were contributing to higher national house price inflation from mid-2015, particularly those areas adjacent to Auckland. Most regional centres are now experiencing annual house price inflation in excess of 8 percent. Similarly, sales activity increased across the country in the first half of 2016. Reflecting the underlying housing shortage, new listings have remained flat. Listings as a proportion of sales are now 40 percent below the previous low seen at the height of the pre-GFC boom in 2007.

He also highlighted an increase in investor purchases, and significant mortgage refinance, including increased interest-only and high debt-to-income lending. New mortgage commitments are also elevated, running at an annual rate of 35%. Debt servicing ratios are also elevated.

Supply is not meeting demand he concluded. This is a recipe for potential disaster.

The longer the boom continues, the more likely we will see a severe correction that could pose real risks to the financial system and broader economy.

Mr Spencer said a broad range of initiatives is necessary to increase the long-term housing supply response, particularly in Auckland, and to help ensure housing demand is kept in line with supply capacity.

The Reserve Bank has no direct influence over supply, but can influence housing demand through the credit channel. In this regard, we see the Reserve Bank as part of a team effort.

A dominant feature of the housing resurgence has been an increase in investor activity, which increases the risk inherent in the current housing cycle.

The Reserve Bank is considering tightening Loan-to-Value Ratios (LVRs) further to counter the growing influence of investor demand in Auckland and other regions, and to further bolster bank balance sheets against fallout from a housing market downturn. Such a measure could potentially be introduced by the end of the year.

Limits on Debt-to-Income ratios (DTIs) might also have a role to play but would be a new instrument that would have to be agreed by the Minister of Finance under the Memorandum of Understanding on Macro-prudential policy. Further investigation of this option will be undertaken.

A third option is a housing capital overlay. The Reserve Bank has already indicated that it will be conducting a full review of bank capital requirements over the coming year.

Consideration might be given to further reducing the tax advantage of investing in residential housing. Supply side issues also need attention. But much of this lays beyond the remit of the Central Bank.

He concluded that the causes of the imbalances are complex with a number of important drivers on both the demand and supply side. Addressing these imbalances will require policy action by a variety of agencies on a number of fronts. The underlying housing shortage needs to be urgently addressed, particularly in Auckland where population growth continues to outstrip housing construction. A step up in supply is required and finalisation of the Auckland Unitary Plan will be a key opportunity to facilitate such a step.

On the demand side, the key drivers are population growth and easy credit. The low cost of credit is making higher debt levels affordable, particularly for investors who can deduct interest costs from taxable income. Residential investors are accounting for an increasing share of house sales and new mortgage credit.

The Bank’s interest rate policy must have regard to financial stability concerns, but the global environment is likely to keep interest rates low for some time yet. Macro-prudential policy can assist in containing the growing risk to financial stability as the current housing market reaches new extremes. In light of the growing risk, the Reserve Bank is closely considering measures that could be progressed in the coming months.

Banks’ Mortgage Rate Rise hits Affordability – HIA

November’s increase in the major banks’ variable mortgage interest rate was a setback for housing
affordability, according to the latest Affordability Report from the Housing Industry Association.

Affordability deteriorated by some 6.4 per cent during the December 2015 quarter. Canberra saw the most unfavourable change in affordability (-11.4 per cent), with affordability worsening by 10.5 per cent in Melbourne and by 3.3 per cent in Sydney. Darwin was the only one of the eight capital cities to see improved affordability during the quarter. Just two of the seven regional markets covered by the report saw more favourable affordability during the December 2015 quarter.

“The unilateral increase in the major banks’ variable mortgage rates which came despite the absence of
any change in the official cash rate has delivered a significant blow to housing affordability,” noted HIA
Senior Economist, Shane Garrett.

“Combined with double-digit dwelling price growth in cities like Sydney and Melbourne, the shock jump
in interest rates has pushed home affordability to its least favourable position in over three years,”
Shane Garrett pointed out.

“The affordability challenge has been compounded by the slow pace of earnings growth which means
that the buying power of households has not kept pace with dwelling prices.”

“The increase in mortgage interest rates during November was an unpleasant surprise for homeowners, and housing affordability will be damaged even further if this tactic is repeated,” warned Shane Garrett.

“Governments must play their part too. Stamp duty is a huge source of woe for those trying to come up
with the funds for a home. HIA research has shown how the typical stamp duty bill of around $20,000
eventually costs homebuyers about $50,000 over the course of the mortgage due to higher LMI
premiums and mortgage interest costs. It’s time for this inefficient tax to be addressed,” concluded
Shane Garrett.