No Quick Fix To The Affordability Crisis

The Age

Saturday September 22, 2007

Ben Schneiders

HOUSING affordability has worsened in recent years as first-time buyers have been hit by a double whammy: escalating prices and rising interest rates.

But it is not just a recent trend. Affordability really started to worsen at the turn of the decade when the property boom kicked off and prices in most major capital cities soared. One guide to the level of discomfort is the amount first-time buyers are now borrowing. In July the average first home loan in Australia was a record $247,800, according to the Bureau of Statistics, a near doubling on the $135,400 in January 2000.

Meanwhile, industry surveys point to record amounts of household income being spent on servicing mortgages.

But while most agree affordability is at or close to crisis point, the cited causes for the problem vary. There appear to be some broad factors at play, once you strip out the shrill voices of the vested interests.

Firstly, demand for housing has increased, helped by a robust immigration program, rising wages, low unemployment and the first-home buyers scheme. Also investors have become more aggressive, helped by a cut to capital gains tax in 1999 that made housing investment, or speculation, more attractive.

Competition is another factor as lenders, particularly non-banks, push the limits on what they will lend out.

Then there is the supply issue. Not enough houses are being built to meet the strong demand of a growing population. The Federal Government and groups such as the Institute of Public Affairs have blamed state governments for not releasing enough land. But, as The Age revealed today, there is another supply issue, namely aggressive developer stockpiling or landbanking, in which much more land is being bought by big developers than is released on the market.

ANZ chief economist Saul Eslake argues this crisis in affordability is different to the one in the late 1980s when interest rates were at 17 per cent. Then the simple solution was to cut rates - as happened over the next decade. Now with rates more than half the levels of the late 1980s the solution is to cut house prices, Eslake says.

Which is political poison. Not only do you alienate about 70 per cent of households that currently own their home, but you smash the profits and margins of the powerful property industry.

Eslake argues that a long period where demand has exceeded supply is to blame. The solution is not measures that boost demand further - rather ones that boost supply.

Eslake believes the most disastrous decision for first-time buyers was the cuts to capital gains tax in 1999 by the Howard Government, which he says helped fuel heightened speculation and prices.

© 2007 The Age

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