Overcoming the housing affordability crisis

Overcoming the housing affordability crisis

Housing affordability – rarely out of the news – was given another airing by the Treasurer last week, saying, it must be a priority for both state and federal governments.

I would agree – and it prompted me to delve back into the archives of KPMG Economics’ research.

Back in 2007, just before the Global Financial Crisis, we issued a paper on this very subject. It’s interesting that so many of the issues remain pertinent almost a decade on.

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.

As part of our earlier study, using detailed empirical modelling techniques, 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.

Today – almost ten years on – we found GDP and investor activity remain key influences, though the share market no longer had such an influential role. But housing supply is a factor whose influence on house prices has strengthened over the past decade.

My assessment is that the two principal forces behind current housing affordability problems are restrictions on residential development and the growth in low-wage and part-time employment. Local land use regulations that limit lot size and density have also driven up housing prices and rents relative to incomes.

Another issue intuitively understood, but not often discussed, is the impact of our ageing population on the housing market.

While housing wealth acts as a store of value for households, it has the capacity to do this inter-generationally as parents die and pass on the family home to their children via inheritance.

However, with improvements in health outcomes, which are enabling individuals to live longer, intergenerational access to housing wealth is being delayed, and potentially eroded.

Put bluntly, Generation X will not only access family wealth relatively later in life, but it may also be of lesser value, relative to the inheritance ‘Baby Boomers’ received from their parents.

So, what to do?

Some types of interventions worsen the situation rather than improving it. For example, increasing access to finance can produce demand side pressures which, if not combined with an increase in supply, can lead to an escalation in prices and a decline in affordability levels.

In our submission to the Commonwealth Treasury in July 2015, KPMG outlined tax reform recommendations that would contribute to alleviating the problem of housing affordability.  These proposed reforms included:

reducing the capital gains tax discount from 50 percent to 25 percent, thereby making property investment marginally less attractive; and

abolishing 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.

In terms of supply, we need systemic reforms:

a stronger role for target setting for “net additions to stock” to drive local and state government planning schemes; target setting should also focus on encouraging greater diversity of housing stock and deliberately encourage smaller, well designed affordable products; 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.

We also need targeted reforms aimed at improving access to those groups we have identified as being the most excluded from affordable home ownership including: 

the production of a greater volume of more sustainable, well-designed, lower cost house and land packages;

better targeting of existing state first home owner assistance to increase the overall value and impact of that assistance;

and 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.

No single policy intervention will address the entire issue because, as the Treasurer rightly acknowledged in his speech, ‘there is no single housing market in Australia’.

Australia’s housing affordability is a long-standing issue. Waiting and hoping that the economy strengthens and wages grow is no longer good enough. Only concerted action will solve the problem.

Written by Brendan Rynne, Partner, Chief Economist, http://newsroom.kpmg.com.au/?p=4643