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housing affordibility « Previous | |Next »
July 24, 2007

My judgment is that many people who live in a capital city and, are on a good income, are suffering from housing stress. Financial stress from big mortgages is no longer exclusively a low-income problem. and though Sydney has become the world's sixth most expensive city, mortgage stress is no longer just a Sydney problem.

In the mid-1980s the median Australian house price was four times average annual earnings. Today, it's seven times. That's the fundamental reason housing has become so hard to afford.

HousepricesA.jpg
Sharpe

It is generally held in Canberra policy circles that low interest rates, demand outstripping supply, limited land-release processes and the cost of building are the causes of rising house prices. Peter Martin, in this op-ed in the Canberra Times, argues that it is more complex.

He refers to Macquarie Bank's housing specialist Rory Robertson, who talks in terms of "the elephant in the living room" ---the big trigger for the post-1999 surge in housing prices. In that year the Government halved the headline rate of capital gains tax. From then on any profit earned as a result of selling an investment, such as a house, was taxed at only half the rate as money made from employment, interest or dividends.

That means investors are still piling into housing, keeping prices high, thereby making it difficult for new home buyers to leave the rental market by buying their own home. Houses are becoming increasingly unaffordable for most of the Australians who don't already own them.

II'm not persuaded that this is the big trigger. What about our desire for better hiomes that are better located? Isn't that a central trigger? Sure halving of capital gains tax by the Howard Government in 1999 did prompt a lot of of negatively geared investment in rental properties which added to prices. But aren't markets basically about demand and supply? Isn't it a case of the consumer desire and demand for better located and better homes increasing prices, because demand is pushing against supply? Demand is greater than supply.

| Posted by Gary Sauer-Thompson at 3:02 PM | | Comments (9)
Comments

Comments

If investing is still "piling into" housing, what is the basis of complaints of housing shortages?
The feds often go on about the states not "opening up" enough land.
If we talk of housing shortages, are we talking about the same thing as accomodation shortages?
If state governments have to pay out for drains, roads etc, don't they have to keep taxes up to pay for these?
If state governments got more money off of Canberra, would states lowering taxes or being able to pay for infrastructure for new housing on the periphery help home buyers, since the costs of producing adequate housing are now beyond state economies alone?

By a curious conicidence Ross Gittins has an article;
"Housing crisis: we didit ourselves", in today's sydney morning herald.

Paul,
thanks for the reference to the Gitten article It's interesting:

I'll give it to you straight, as no politician would dare to: the difficulty people are having affording a home loan is largely of our own making.

Why so? Well lower inflation and interest rates gave us three options to choose from:
There were three ways we could have reacted to this favourable development. People could have left their mortgage payments unchanged, knowing this would mean they paid off their mortgage many years earlier.Or they could have cut their mortgage payments in line with the fall in interest rates, leaving them with more to spend on other things - a new car, or whatever.Or they could have greatly increased the size of their mortgage - roughly doubled it - without any increase in repayments and thus afforded to move to a better house.

Most people opted for the better house. But because so many people did this about the same time, the main thing they achieved was to bid up the prices of homes; more than double them, in fact.

That's right. It is also rational. We left some of the houses because they were so bad: small, dark and old. We wanted something better ---more modern--and better located. And we poured our money into it and this drove up prices.

Just a thought - What about negative gearing?

It encourages people to pour money into loss making ventures.

Why not change that like every other country in the world to something more sustainable. What about tax concessions for first home buyers like the US, where the entire loan taken out for your own home is tax deductable?

Paul,
I was at coffee shop this morning and I quickly glanced through the AFR that some kindly business man had left.

There was an article that linked housing stress to the Liberal marginal seats. My interest was in SA, which has had three marginal seats---Kingston, Wakefield and Makin.

The housing stress percentage ---for renters--- was 36.1% for Makin, 41.5% for Kingston and 41.6% for Wakefield. That's getting close to half of a household's income going on rent. It's struggle street. People are stressed.

Kingston is held by just 0.1% whilst Wakefield is held by 0.7%. I reckon the Liberals are gone in these two seats ---too much talk about big incomes for WA miners and not enough on the battlers in struggle street.

" We left the houses because some of them were...old. We wanted something more...modern...".
Poor bugger white fella. Wonder how much longer the real poor living in the slums of the "terrist" states will feel they have to starve their kids indulging precious, self absorbed westerners?.
Am in mind of that oxfam-ish add on telly a few years ago when the global poor rocked on the doors of rich Westerners to compassionately sarifice their rice money paying interest they owed the suffering yuppies of the West.
So touching.

Ramanuj,
yes, negative gearing works since 1999, but it has caused housing prices to increase.

Probably would need to put more money into public housing. It's gone out of fashion of late in favour of market solutions. But it does look as if it may need to be reivented given the effects of the market.

Nan's figures look pretty bad.

Paul,
well that's capitalism for you. I reckon my consumer desire account in a properous economy is a better explantion of increasing house prices than the Howard Government's (and IPA) account of it being due to a lack of land released on the fringes of the capital cities by the heavy handed and money grabbing states.

Gary,
the housing affordability issue is hotting up. The papers are saying that underlying inflation — the typical rise in product prices — shot up to 0.9 per cent in the June quarter, from 0.5 per cent in the two previous quarters.

The also say that consumer prices are rising. Fuel, food, housing and health costs all contributed to a 1.2 per cent price jump in the June quarter. Apart from the period around the introduction of the GST in July 2000, there has only been one quarter with worse inflation since 1995.

Financial markets now say the Reserve Bank is almost certain to push rates up by 0.25 percentage points when its board next meets on August 7.

A fifth rate rise would add to the Government's problems.