The McMansion: Photo by Jared Rice on Unsplash

Like most of us, I’ve watched the housing market go up and down (mostly up) for decades. And without exception, one thing that happens, again and again, is the RBA keeps interest rates too low for too long and too high for too long. 

They have one eye firmly fixed on inflation and the other eye totally obsessed with it. As if that’s their only obligation—both legally and morally. 

And our politicians, well, they simply don’t want to be the ones who crash the property party, deflating their constituents’ prized asset via a policy change that sets off a voter exodus.

And there are all kinds of reasons for rising house prices: it’s all about supply and demand, not enough land released etc. None of which consistently add up. So, we opt for yet another inquiry….

This one will be led by Liberal Party MP Jason Falinski, appointed to chair the Inquiry into Housing Affordability and Supply in August this year. Mr Falinski recently stated that, according to the evidence, housing subsidies and tax concessions have a negligible impact on house prices.

And that the “research points to limitations on land and restrictive planning laws as the major causes of shortages in supply. As consistently noted by the RBA and others, regulatory settings are directly responsible for the unresponsive nature of housing supply in Australia”.

Sounds logical enough, but if that’s the problem, why can’t our politicians solve it? Unless, of course, they don’t want to. Or it’s more complex than it appears?

What’s really driving house prices sky high? Not just in Australia but across the planet?

It’s not immigration, because that’s been on hold for more than a year and a half. It’s not rising wages because they have only increased at an average of 0.60 per cent a year, in real terms, over the last decade. And have slowed even further to 0.49 per cent a year over the last five years.

Digging a little deeper, first up, I thought I would look at the nitty-gritty of vacant land and building a brand-new house. So I called a few land developers to get an idea of land availability on the Sunshine Coast (an hour or so North of Brisbane). 

The first salesman I spoke to was selling land in an estate called Harmony, a stone’s throw from the coast and so well sought after. Even so, what I discovered surprised me. The most recent land release was on the weekend just gone. It was first in first serve, and buyers had camped out front of the land office overnight. Blocks sold out in a matter of hours.

The next developer I called was gearing up for a similar weekend sale. Their system consisted of a ballot—a lucky dip of sorts. You register your interest in three blocks from your most preferred to your least preferred and go into a ballot, with no guarantee of getting anything. The market was in a frenzy!

We’re building the biggest houses in the world. So much for downsizing!

As I investigated further, I was reminded of an additional caveat, all these estates were governed by similar building covenants. Houses had a minimum size to maintain the neighbourhood’s prestige. The bigger the house, the greater the profit and prestige. 

According to CommSec, new houses built in 2019/20 averaged 235.8 square metres, a 2.9 per cent increase on the previous period. Comparatively, over the 2019 calendar year, the size of new houses in the US fell for the fourth consecutive year, down three per cent to 233.1 sq m. 

The ACT continues to build the biggest homes with an average floor area of 256.3 sq m; Victoria runs a close second at 250.3 sq m; NSW comes in third at 235 sq m; Western Australia fourth at 232.5 sq m, Queensland fifth at 226 sq; and Tassie the smallest at 179 sq m. So much for downsizing—let alone sustainability!

The experiment: what if we ditched size for going green? 

With all this in mind, I set forth on an experiment: how big was big enough? For us, there’s me, my wife, and two kids. The kids, a girl and a boy, are at that age when sharing a bedroom is not an option. So three bedrooms was the minimum.

The first thing was to design a house, a home, to live in rather than thinking of it as an exercise in wealth-building. The idea of trading up for something bigger and better in four or five years would not be part of the brief. 

From this perspective, and I think everyone has designed their dream home at some stage in their lives, I came up with the design below. It needs some refining, it’s a bit unconventional, but the gist of what we need is there.

Small but not so tiny house

I threw in a splash pool as an extravagant afterthought and something of wishful thinking. There’s no laundry; placed the washing machine under the three-metre-long all-purpose table in the living/kitchen area that doubles as storage underneath. 

Three bedrooms, the master with ensuite, all a reasonable size with built-ins, plenty of opposing windows for good ventilation and natural light was all we needed. 

A 6.6kW solar system with a 13.5kW battery backup and a water collection system with two 2000-litre water tanks would do the job. A north to north-easterly aspect, a small veggie garden in the backyard, and the right trees in the right spot would top it off. Going green, at least partially, wouldn’t be that hard.

Our dream home came in at 120 sq m, about half the average size of houses being built in Australia today. Which, more or less, halves the build cost.

Mindful that families are now averaging less than two children per household at around 1.74 kids. So, we’re going big because, well, I have no idea but think it’s about future value and building wealth.

Of course, the strict covenants imposed by real estate developers would never let me build such a small, unimposing house, even if I threw in the 5 x 2 metre splash pool. Covenants are just another part of the burgeoning bureaucracy that pushes up house prices. 

So, in the context of new land developments, and land close to good amenities is scarce, building a relatively small and sustainable green home is fundamentally prohibitive.

But hey, what if we ditched size for going green?

Go green or go home: who cares about keeping up with the Kardashians?

Navigating the home ownership travesty to go at least semi-green and off-grid brings to the fore two main anomalies. 

First is the sustainability issue: don’t build bigger than you need! Use recyclable materials and use the minimum by going “smaller”, which means the proverbial McMansion is out. It’s no longer fashionable in a sustainability sense to go big. Who cares about keeping up with the Kardashians?

Second, and this one’s even more important, the bigger the home, the more costly it is to heat and cool. With energy prices going through the roof worldwide, smaller, well-designed homes with very efficient passive heating and cooling and ventilation systems are the new de rigueur in home design. 

We just need politicians, planners, and property developers to get onboard.

A bubble is a bubble!

The last time residential housing was caught up in such a state of FOMO was in 2006. It was just before the housing bubble burst, setting off a global recession. And although this one’s a bit different, prompted by a pandemic, driven by low interest rates, and fuelled by massive amounts of debt, “a bubble is a bubble”.

Enter Australia’s principal prudential regulator, the Australian Prudential Regulation Authority (APRA). Missing in action until just recently.

In an endeavour to cool the market, APRA has just this month instructed the banks to raise the serviceability buffer by 0.5 percentage points—from 2.5 per cent to 3 per cent by October 31. This is added to a loan’s interest rate to hypothetically stress-test the borrower’s capacity to repay the loan and withstand a future move to higher interest rates.

Although APRA and the RBA are both spectacularly slow off the mark, it’s the latter that compounds the problem of rising house prices.

The RBA: the usual suspects?

In his address to the Anika Foundation last month, the Governor of the Reserve Bank of Australia, Philip Lowe, restated the RBA’s position declaring that higher house prices were “outside the domain of monetary policy and the central bank”. 

Mr Lowe put it plainly: “Our job is to achieve the inflation target and support the return to full employment in Australia. The package of policy measures we have put in place has us on a path to do that.” 

I have three main gripes with this:

1. Interest rates influence the residential housing market more than anything else, so to completely ignore their impact on house prices by the authority that regulates them is ludicrous.

2. When have we ever had “real” full employment?

3. The cheap money central banks have pumped into the global economy, including by the RBA, has encouraged investment as intended but also significantly inflated asset prices, particularly residential housing. 

In this way, the pandemic set the latest surge in residential house prices in motion, but the world’s central banks fuelled the rise. Throw in a decent dose of FOMO to get the “animal spirits” racing, and you have a raging residential housing market on a global scale.

Mindful that although the RBA is prima facie an independent institution, it must consult with the federal government and is accountable to parliament. 

Reform, or risk a rising tide of discontent

In his address to the Anika Foundation, Governor Lowe did say something pertinent, albeit something of a disclaimer:

 “More broadly, society-wide concerns about the level of housing prices are not best addressed through increasing interest rates and curbs on lending. While monetary policy is contributing to higher housing prices at the moment, the way to address these concerns is through the structural factors that influence the value of the land upon which our dwellings are built.” 

Which makes sense, but where does that leave us? 

It does place the ball back in our politician’s court, which, naturally, is a good place for reform to start. And reform post-haste is the preferred option as opposed to a revolt?

Shane Oliver, from AMP Capital, recently reiterated as much on the ABC’s Saturday Extra: “I think it’s grossly unfair … We can’t organise our property market in a way that makes it affordable for younger people without massive amounts of debt. This is a major social problem. The longer we leave it, it will lead to rising discontent, and we’ve seen what that leads to in the US.”

So, will the latest inquiry into housing affordability lead to “genuine” society-wide reform—affordable and equitable housing—or do the politicians presiding over the housing dilemma continue to risk a rising tide of discontent?

Dr Stephen Dark has a PhD in Climate Change Policy and Science. He has lectured at Bond University in the Faculty of Society & Design, teaching Sustainable Development and Sustainability Economics. He is a member of the UDIA (Urban Development Institute of Australia) and author of the book Contemplating Climate Change: Mental Models and Human Reasoning.

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