row of houses with for sale sign

In a chaotic time for the nation’s economy, some will find reassurance in one unchanging facet: Australian governments of all kinds, and the Reserve Bank, are committed to policies that will raise home prices.

Promoting inflation in the price of residential property seems to be the formal aim of public policy. It certainly has that effect, along with another direct consequence – that of rendering home-ownership unachievable for at least a third of the population.

And, despite rhetoric and some incentives from all governments about incentivising home ownership, the reality is very different. On current trends, the majority of Australians aged 25-39 will be renters, not owners, within 20 years, possibly sooner.

When Covid hit a year ago there were signs that the housing market would be devastated. Prices of all homes did initially drop by March 2020, as did the supply of homes. Prices had actually softened before Covid – encouraging some first time buyers into the market – but then supply also declined before the pandemic as developers build less when prices go down (and, of course, only build more when prices go up).

In 2016, Australia built almost 230,000 homes. But by January 2020, the forecasts were for 170,000 to be built, even as the population was growing at 1.5 per cent per annum. When Covid hit, some forecasts were as low as 110,000 homes to be delivered in 2020. In fact, over 150,000 homes did actually get built across the nation thanks largely to significant government financial market support and incentives, combined with the Covid related income subsidies. So, what happened to prices?

By September, sales prices were more or less back to the pre Covid trend, though there was already  less appetite for flats and more for stand alone homes than before. From September to date, prices have been rising dramatically with standalone homes in Sydney overall going up 3-4 per cent a month and even more than that in desirable suburbs. This is at a time when Sydney is not growing at its usual 90,000 people a year, let alone the 125,000 per annum we had been seeing in Melbourne before Covid.

That is to say, despite the population stalling (rising demand from population growth is the usual reason people give for rising home prices) and despite a significant rise in unemployment, a radical decline in GDP and continued economic anxiety and uncertainty, Australia has returned to its default model of high house price inflation.

Whether or not this model is the best from a macro-economic point of view is debateable. While it shores up the wealth effect for millions of home-owners and helps provide employment directly and indirectly – from tradies through retailers and banks – there are two problematical consequences.

The first is that the guaranteed property-inflation of Australia helps to divert investment from potentially more productive and innovative parts of the economy, bearing in mind that in Australia, 80 per cent of bank loans go towards property. By comparison, in Germany – one of the world’s more innovative economies with a strong industrial sector – 50 per cent is invested in commercial and industrial lending, often to SMEs.

The second is that ever-rising home prices and rising wealth for existing homeowners created by public policy results in a permanent property-less underclass that increasingly is not just the poor but those on average incomes.

Remember, before Covid, Sydney was in the top four cities globally for unaffordable homes, with average earners needing eight, nine or 10 times their salary to get a mortgage, when in the 1980s it took three or four times. As Covid subsides in Australia and finance pours into homes, Sydney can only move further up that unaffordability league table.

Finance is the source of the problem and in Australia, the incentives are uniquely there to promote multiple home-ownership. Cheap money in the form of historically low interest rates does only one thing: it stokes asset price inflation.

And subsidies such as HomeBuilder haven’t just shored up home-building but actually reinforced inflation simply by enabling more money to be offered for a home. Add to this that such subsidies are mostly exploited by those in secure employment, just as negative gearing disproportionately benefits existing home-owners, and you end up with a perfect storm of unaffordability that ends up enabling large numbers of Australians to own multiple homes while others cannot buy one.

Indeed, I would go further. Public policy is not just ensuring house price inflation: it is ensuring that a growing minority is able to leverage their ownership to access more borrowing to always outbid first time buyers.

This is surely the central paradox of public housing policy: by enabling those who have homes to buy more homes we are preventing those without homes from getting their first. This looks like an iron law to me: if someone has two homes there needs to be someone without one to rent them. Multiple homeownership in Australia is creating the supply of renters.

The answer to this is not to attempt to build more homes. Firstly, as I have explained, the private sector developers’ business model does not enable them to build so many homes that the price drops. So they never do. They actually build more when the price goes up. So increased private sector housing supply cannot deliver affordability.

It’s a delusion held by governments who don’t understand the sector. The answer – if the objective is to help more first time buyers into ownership – can only come from outside the private sector.  Only leadership from the public sector can provide the missing link in the Australian housing market so that homeownership can be extended to those on average incomes.

This is not an ideological left-right matter. Governments of all persuasions have always intervened in the housing market, most recently to incentivise home-ownership through tax incentives and subsidies. The problem is this is now leading to the exclusion of first time buyers.

Governments, at both state and federal levels, need to accept this reality and start working together, using their power, land and investment to provide a new model in the market for first time buyers only.

Yes, I mean we need to see a massive program of public housing like we haven’t seen since the early post-war period in Australia, but, echoing some of the programs from the past, we need to find imaginative ways to enable such public homes to be acquired over time by their tenants.

Singapore enables all citizens, as a right, to have access to public housing and also enables them to become owners over time – and they have none of the house price inflation of Australia or the inequality of access to housing equity. And yet, they are one of the world’s most productive economies.

Such models need to be looked at urgently here – or we should just give up the pretence that we want all to be part of a home-owning democracy and carry on as we are, building a society in which all are equal but some are more equal than others.

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  1. As soon as an idea relies on government action, I know we are headed into the socialist echo-chamber. More government is the problem. Government needs to get out of incentives that boost housing value and therefore prices, for sure. First off it could slash the multiple overlapping subjective approvals processes. If land is zoned for homes that should be the end of it. Make roads and build. Rates then fund infrastructure rather than the buyers in up front costs.
    Our immigration rates drive demand without the prior organic supply capacity, so crowding the market. But immigration makes the gross economy figures look good and appeals to the warped internationalism of the wealthy (or would be/wanna be) but is an impediment to ‘ordinary’ Australians’ aspirations.
    Then, market demand for flash houses is also a problem and this is driven to some extent by councils’ inflexibility…planning again in the way.

  2. Great summary of the issues in the housing market Tim. I think the massive program of public housing needs to also be intelligently designed with precinct scale, circular economy infrastructure.