The big answers to Australia’s massive affordability problem

Housing affordability is a huge problem in Australia.

Nobody disputes this anymore. There are many ways to define and measure housing affordability. My favorite is probably comparing the median home price to the median income. It’s a quick and intuitive way to understand local home prices. We can compare historical trends in this way or compare housing affordability in Australia against international benchmarks.

The American think tank Demographia annually compares median incomes and house prices in 92 urban housing markets in eight countries. It turns out that Sydney is the second least affordable housing market on the list – only Hong Kong was less cheap. Sydney home buyers had to pay 15.3 median annual income to buy an average Sydney home.

The researchers at Demographia consider an income-to-house-price ratio of more than five to be severely unaffordable. Even the more affordable markets in Brisbane (7.4) and Perth (7.1) are nowhere near the cheap rating.

Things are going badly now, but surely we don’t have to worry much longer about housing affordability? After all, we have federal elections next week, and both major parties claim they will tackle the affordability crisis.The big answers to Australia's massive affordability problem

Before imagining yourself in your affordable dream home, we examine the proposed solutions. Let’s look at Labour’s flagship policy, the Shared Equity Scheme, as current polls point to an Albanian victory.

Macroeconomic factors and policies obviously affect the cost of housing. The first home buyers scheme is an example of policies that inadvertently pushed house prices. The free market soon learned that first home buyers had more money in their pockets, and prices were adjusted upwards.

A cure that made things worse

The money invested in this scheme did not make housing more affordable but put public funds in the pockets of sellers and developers. Similar nonsensical methods should be avoided.

Other factors that drive up housing costs are largely beyond our control. If global free trade continues to slow and the global supply chain grinds to a halt as Chinese cities and ports lockdown and import prices rise, Australian politicians can do nothing.

In my opinion, increasing the housing supply is the most pragmatic way to tackle the affordability crisis. This is something governments can encourage or directly influence. I am happy if a housing policy encourages more housing to be built.

The big idea that Labor brought to the table for this election was the Shared Equity Scheme. In this model, home ownership is split 60/40 between the home buyer and the government. This means you will need to apply for a much smaller mortgage.

After all, your $500,000 home will only cost you $300,000. The remaining $200,000 will be purchased by the government. Since the arrangement only requires you to make a two percent down payment, a modest $6,000 savings will make you a (partial) homeowner. You can even buy back the government share in your house in the long run. The number of places in the program is capped at 10,000 per year, and income testing ensures that only low- and middle-income households benefit from the scheme.

I have to admit that this sounds like an innovative solution at first. Housing affordability is a big issue in Australia right now, and any off-the-shelf solution is welcome and generally worth experimenting with.

However, there are some major problems with the Shared Equity Scheme.

It makes the government an investor in the private real estate market. Now the government has the incentive to raise house prices. The average home price of the 10,000 homes in the scheme could be $500,000. The government directly invests in the private real estate market, owning 10,000 pieces of homes worth $200,000 each.

Drive up house prices

That’s $2 billion of the housing market that the government puts on the books every year. The longer the settlement lasts, the more interested the government will be in driving up house prices. Over time, the government’s investment portfolio will grow.

Remember Demographia’s affordability measure? The Shared Equity Scheme would further spiral out of the median income-to-home-price ratio. Since the scheme is not limited to the new construction stock, we have to conclude that it will not increase the housing supply or decrease house prices.

So, what am I suggesting? I see a few systemic issues that we could address. Big solutions to a big problem.

First, we don’t provide enough land. This is largely the responsibility of the local authorities. Local governments are elected by the current population rather than the future local population. That’s why it’s easy for local governments to listen to the NIMBY (Not In My Back Yard) voices blocking local development.

I’ve seen too many municipalities block social housing developments because residents campaigned against them. Compaction? No, thank you. How could this problem be addressed? It requires nothing less than taking power away from local governments. And why not? We manage national population growth at the federal level by setting migration levels, guaranteeing health care to extend longevity, and encouraging or discouraging childbirth through incentives.

However, the population can only move to where housing is available. Neither the states nor the federal government has enough power to channel population growth into the desired areas. What about allocating certain growth quotas to local governments? This would not be run by politicians but by an independent panel.

Local government areas would receive quotas of land to be made available. In such an arrangement, the decentralization of the population could be managed centrally. If local governments do not follow the rules, funding will be withheld.

However, don’t worry too much about that solution. I don’t think any political plan that requires 550 local governments to give up powers will ever get off the ground.

What else could work?

Another major solution we desperately need is establishing a social housing developer. A public developer can build and sell homes at lower prices because the land is cheaper (no taxes) or free (all levels of government own quite a bit of land) and because they can take away the profit incentive.

The developer would operate only on the low margins of the market, providing social housing and housing for key players in expensive markets. The only social housing is theof any development would be sremaining (discount) sales to key workers to help fund further developments.

The need for more social housing is enormous, and the idea is not new. Singapore has been working like this for a long time. European countries also have public developers. Recently, the idea received a lot of press coverage in Australia, branded as HouseMate. This would mean the government is messing with the private real estate market. Unlike the Shared Equity Scheme, this interference would push house prices down rather than up.

The third big solution would be universal free TAFE. We lack craftsmen and builders to build all the homes we desperately need. If there is not enough Labor available, the high margin of the housing market will always be served first,. Hence,the bottom of the market has to endure unaffordable housing even longer.

Free TAFE increases the number of homegrown crafts. The rest has to be imported through the skilled migration scheme, and it’s harder than you might think to attract the right type of traditions and channel them to the right locations.

However, I see no need to tackle housing affordability through big solutions. Plaster solutions such as first home buyer schemes or equity schemes will continue to be pushed, ratherthan discussing system changes.

Expect Australian cities to fare even worse in next year’s edition of Demographia’s ranking of housing affordability.

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