Housing Affordability & the Public Interest
By: Steven Liaros
Tags: Debt, Cities, Housing Affordability, Housing, Economics

“No. Look, if housing were unaffordable in Sydney, no one would be buying it…” ~Treasurer Joe Hockey (Sydney Morning Herald, 9 June 2015)

It is difficult to believe such a statement could come from a Federal Treasurer. Is the government comfortable with the fact that only a small proportion of the population can still afford housing? Is it a satisfactory state of affairs that in order to access housing, the majority of the population must accept lifelong mortgage debt? Is the purpose of government to manage the economic conditions for all Australians or for the few who can still afford housing? What do we mean by housing affordability and how can we achieve it?

There has been much debate over the years about the affordability of housing and also about how to define unaffordability or housing stress. The Australian Housing and Urban Research Institute (AHURI), acknowledges that the debate is still open but notes that housing stress is commonly applied to households in the lowest 40percent of the income range who pay more than 30percent of their income for housing. You may or may not agree with the specific measures in this definition but what is abundantly clear is that housing affordability has little to do with the ability to buy a house but rather the ability to hold on to it. What is also clear is that housing affordability is not about whether anyone can buy and maintain a house, but whether everyone in our society should be able to satisfy the most basic of human needs, the need for shelter.

When assessing affordability then, we should be considering factors such as household debt, mortgage interest rates, risks to employment and also other costs such as for food and electricity. It is not an issue simply of supply. Read my blog on the Myth of Housing Supply Shortages where I discuss Assistant Treasurer Josh Frydenberg’s comment that house price rises are a “function of population growth, it’s a function of, you know, state governments not engaging in enough land release…”

Frydenberg also stated that “In the early 2000s, housing prices increased by 20 per cent for three years in a row and then were steady for a decade and there wasn’t a bubble that led to a major correction.” The fact that there wasn’t a correction after the housing boom of the late 90’s and early 2000’s means that current price increases still carry some of the risks from the previous boom making homes less affordable than if there had been a correction. This is because affordability relates to the level of indebtedness and risk of default. The debt levels have indeed stabilised since about 2006 but we are still carrying, within our current debts, the risks from the previous boom. This is evident in the Reserve Bank graph of household debt as a percentage of assets, which in the early 1990’s was at 10percent of assets and by 2010 had climbed to 30percent.

Debt as a percentage of household income has also tripled as shown in the graph below from the RBA.

These correctly illustrate the dramatic rise in household debt but would not be an accurate indicator of housing stress. This is because the absolute value of the most stressed households, those most likely to default, is significantly greater than the 150% of household income as shown in the graph. The graph measures debt across all households. From ABS Census data (2011, Sydney) we also know that about one-third of households have paid off their home and about one-third are renters. To better appreciate the level of housing stress, we should be measuring changes in debt levels for households averaged over those households that are still paying off their home.

The comparison of average household income to average house prices is a better indicator of affordability.

These were the indicators used in a briefing paper to the NSW Parliament (No 1/2014 by Andrew Haylen) House prices, ownership and affordability: trends in New South Wales.

The graph above from that briefing paper shows that up until the late 1990’s, house price rises tracked in line with the growth in average incomes. Since then, house prices have disconnected and are now almost doubled in real terms relative to incomes. This means that houses are funded by debt rather than earned income and that debt is not being repaid.

This trend should also be understood in terms of changes in attitudes to household debt. Until about the early 1990’s home loans were paid off as quickly as possible so that individuals could pursue business investments. As easy credit against home loans was introduced, we were re-educated to treat the home as an asset. Coupled with an increasingly mobile lifestyle, the price of a home was determined not by its liveability but primarily by its potential for capital appreciation. Borrowing was then based on our ability to repay the interest only, compared with previous bank requirements that lent money on the basis of a single income, where it could be demonstrated that the capital and interest could be repaid in a nominated period.

Housing affordability and housing stress is rightly understood as a social issue. We would prefer a just and equitable society, where everyone could access a reasonable home. Yet the Federal Government dismisses this at its — and our — peril because it is also a significant economic issue. We know, for example, that it was a housing crisis in the United States that triggered the GFC. Whilst we do not have the same financial preconditions and risks that existed in the U.S. at that time, the level of housing debt is significantly greater in Australia. There will be a time of reckoning.

In Tackling the Wrong Debt, I argued that if the government was, in 2014, concerned about a $300billion government debt, then a $1,840billion household debt poses a much greater risk to the economy as a whole.

To tackle the issue of housing affordability requires that we address the level of household debt. Of course the profits of the banking, development and real estate industries depend on high and increasing levels of debt but the public interest is served by reducing debt. These are opposing policy directions. I have previously blogged about productivity, to explain why increasing efficiency — and not increasing output — is the path to prosperity.

If we strive for increasing output, or economic growth, then this is measured in terms of economic activity. In a consumption driven economy this ultimately results in increased debt and increased stress. It appears self evident that the boom of the Howard years was powered primarily by housing debt and this has now plateaued. Future growth cannot be powered by more debt. It is the high level of debt that makes housing — and everything else — unaffordable.

Debt repayments siphon off assets from the economy. How does it benefit anyone if a significant proportion of our work achieves no other purpose than paying off debt? The public interest is best served by policies that aim to reduce household debt.