The Housing Affordability Challenge

Judy Yates

September 12th, 2007

Presentation based on results from AHURI NRV3 Final Report and associated Research Papers from research program on Housing Affordability for Lower Income Australians led by Judith Yates with Mike Berry, Terry Burke, Michelle Gabriel, Vivienne Milligan, Peter Phibbs, Simon Pinnegar and Bill Randolph.Reports available or forthcoming on AHURI website (www.ahuri.edu.au)

Outline

1. What’s the problem?

2. How did it come about?

3. What can we do about it?

What’s the problem?

At individual/household level increasing costs of access to home ownership large numbers in mortgage stress declining home ownership rates amongst young large numbers in housing stress in private rental significant homelessness

At economy wide level spatial segregation labour market inefficiencies intra and intergenerational inequities potential macroeconomic instability

Income and house price trends Australia 1960 - 2005

0

20

40

60

80

100

120

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Inde

x

Real house prices

Real house price trend

Real per household income trend

Source: NRV3, FR

HIA Affordability index:repayment to income ratio measure

Source: HIA-CBA Affordability Report, various years

$0

$100,000

$200,000

$300,000

$400,000

$500,000

1984 1988 1992 1996 2000 2004 2008

50

100

150

200

250

Median FHB house price (LHS)Housing affordability index (RHS)

$0

$100,000

$200,000

$300,000

$400,000

$500,000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

-100

0

100

200

300

400

Rat

io (

%)

Median real house prices ($2006) Australia (LHS)

Deposit gap/income (AWE) (RHS)

Declining access to home purchase:deposit gap/income (AWE) ratio

Source: NRV3, FR; NRV3 RP11

Implications: age specific HO rates

Source: census data, special tables

40

50

60

70

80

1971 1976 1981 1986 1991 1996 2001 2006

(%)

25-29 years 30-34 years 35-39 years

Key message 1

Housing affordability problems are structural began 30-40 years ago (when inflation switched focus

on housing from providing shelter security to providing wealth security)

exacerbated by changes in CGT (in 1986 favouring owner-occupiers; in 1999 favouring investors)

What’s the problem?

Housing serves a dual role Consumption – provides shelter Investment – provides wealth

Affordability problems arise because Role as asset for wealthy crowds out Role of shelter for less well off

0

20

40

60

80

100

0 100 200 300 400 500 600

Numbers in stress ('000s)

Inci

de

nce

of s

tre

ss (

%)

Lower income private renters

Lower income purchasers

Moderate income purchasers

Moderate income private renters

Housing stress

Source: NRV3, FR

Key message 2

Housing affordability problems are greater for renters than for purchasers

What’s the problem?

At individual/household level increasing costs of access to home ownership increasing mortgage stress declining home ownership rates amongst young large numbers in housing stress in private rental significant homelessness

At economy wide level spatial segregation labour market inefficiencies intra and intergenerational inequities potential macroeconomic instability

Change in low income private renters: Sydney, 1991 to 2001

Source: Randolph and Holloway (2007)

Segregation

Source: Randolph and Holloway (2007)

Change in low income private renters: Melbourne, 1991 to 2001 Segregation

Inefficiency

Source: NRV3, RP5

Inequality

0

500

1,000

1,500

Q1 Q2 Q3 Q4 Q5 All

Net worth quintile

Mea

n ne

t w

orth

($'

000s

)

Other net worth

Other property

Owner-occupied housingSource: NRV3, RP10

Inequality

0

200

400

600

800

1000

15-24

25-34

35-44

45-54

55-64

65-74

75+ All

0

200

400

15-24

25-34

35-44

45-54

55-64

65-74

75+ All

Other net worth

Other property

Owner-occupied housing

Owner-occupiers

Others

Source: NRV3, RP10

Instability

Source: NRV3, RP4

How did it come about?

From demand pressures increasing number of households (population growth +

decreasing household size) increasing incomes increased availability of mortgage finance increasing wealth assisted by lack of capital gains

taxes on owner-occupied housing spatial concentration of demand (in urban and coastal

regions)

How did it come about?

On supply side increasing cost of land time taken for release of new land move to user pays for infrastructure financing increasing scarcity value well located land displacement of FHBs by rental investors (encouraged

by taxation incentives) reduced supply of affordable private rental housing declining supply of social housing

Dwelling price gradients, 1992 to 2002

Sydney

Melbourne

Source: PC (2004)

Source: 2001,06 census tables (20680-x49, i20)

Change in no. dwellings by size: 2001 to 2006

-5.0

0.0

5.0

10.0

15.0

20.0

0 1 2 3 4 5+ All

Number of bedrooms

Gro

wth

20

01

-20

06

(%

)

Source: 2006 census tables (20680-t18), CPI adjusted

Distribution of private rents, 1996, 2001, 2006

0

5

10

15

20

25

0 100 200 300 400 500 600 700

Rent ($2006 pw )

% o

f re

nta

l dw

elli

ng

s

1996 2001 2006

Key message 3

Many established home owning households have benefited significantly from increases in house prices through increases in value of owner-occupied housing

and through increases in value of rental housing

Demand for well-located housing from established and well-off owners has fuelled affordability problem for newly formed and renter households

1. Make investment by wealthy less desirable by reducing scarcity of desirable land

Increase supply desirable land (infrastructure, transport etc)

Reduce desirability of scarce land (decrease tax incentives for owning land; increase density)

What can we do about it?

2. Increase housing available for shelter (and investment) for low to moderate income households

Increase supply affordable rental housing

Help marginal purchasers stay in their homes

What can we do about it?

Specific policy ideas?

1. Develop a national affordable housing strategy

2. Better targeting of housing assistance to low and moderate income households

3. Strategic use of infrastructure investment

References

Berry, M. (2006) Housing affordability and the economy: A review of macroeconomic impacts and policy issues, NRV3 Research Paper 4, AHURI

Berry, M. (2006) Housing affordability and the economy: A review of the labour markets impacts and policy issues, NRV3 Research Paper 5, AHURI.

HIA-CBA (various years) Affordability Report (courtesy HIA)

Productivity Commission (PC)(2004) First Home Ownership, www.pc.gov.au

Randolph, B. and Holloway, D. (2007) Commonwealth Rent Assistance and the spatial concentration of low income households in metropolitan Australia, AHURI Final Report No. 101.

Yates, J. (2007) Affordability and access to home ownership: past and present, NRV3 Research Paper 10, AHURI forthcoming.

Yates, J. et al (2007) Sustaining Fair Shares: The Australian Housing System and Intergenerational Sustainability, NRV3 Research Paper 11, AHURI forthcoming.

Yates, J. and Milligan, V. (2007) Housing Affordability: A 21st Century Problem, Final Report, National Research Venture 3: Housing Affordability for Lower Income Australians, AHURI forthcoming.