Housing affordability 'problem' a measure of economic success
In May I thought it was worth writing about the so-called "housing price bubble" in the big cities in the eastern states, and also the vexed issue of housing affordability.
You are correct if you are thinking that they are pretty much the same issue.
But apart from bumping up interest rates, population growth slowing or declining or our economy going into recession, property prices in Sydney, Melbourne and Brisbane, while likely to slow after a long boom, are not likely to fall.
My position on property is built around very basic common sense.
We have a rapidly growing population in Australia and globally.
Obviously with our tiny proportion of the world population of about 23.7 million the numbers are not as vast, but Sydney and Melbourne, for example, will have some 500,000 new residents in the next five years. Clearly this creates demand.
The other problem for both house prices and hence housing affordability is the success we have had as a nation. To put it bluntly, we are rich, very rich.
Last years Global Wealth Report puts us as the second richest people on the planet, with average wealth of nearly $500,000 a person.
Switzerland is easily the richest at $749,000. The global average is $70,400.
What is really good news is that the "median" Australian - that is the person right in the middle of our population, with some 11.8 million Australians richer than them and 11.6 poorer than them - is worth an impressive $320,000.
In the US this median person is worth only $69,000. That means the rich in the US have most of the money.
It also means than some 170 million Americans have wealth of less than $69,000. That is not a recipe for social harmony.
We all know that many Aussies do it really tough. That is shown in the report: 11% of Australians have a net worth of under $US10,000 or $13,000.
We would all like this to be better. But we have low wealth inequality.
In the UK 22% of citizens have less than $13,000 net wealth and it is a really nasty 35% in the US.
If you are starting to realise why Australia is regarded as a lucky country, on top of this we also have low unemployment, great wages by any global standard, low interest rates and stability.
Now let me add this up: a wealthy, growing population, cheap money and a scarcity of arable land in our mainly desert continent, meaning demand is high and supply is low. As we are, on average, so rich, we also live in house triple the size of 50 years ago, with much smaller family numbers.
Seems to me that property prices are going to be high!
The difference in the "affordable housing" debate, though, is that government policy can make a difference here.
As a society we can chose to direct tax revenue to different areas. Trouble is we have budget deficits, meaning we already spend more than the government raises in taxes, so more money to help with affordable housing has to come from somewhere.
It causes huge angst but selling older public housing in inner-city locations to build far more with the money raised is one option.
Millers Point, in Sydney, is an example of this. A single terrace house can be sold for multi-millions and the money can be used to build many new homes. The impacted tenants are really unhappy, I get that but there are times when the broader community good has to be the most important issue.
A government can direct tax incentives and penalties. We property owners in growth locations are indeed fortunate.
Should or would we be willing to share a small part of our good fortune in a small land tax on our homes to help with social housing?
Negative gearing is much debated, and I know readers of this magazine are not happy when I say that this tax advantages higher income earners who are blessed with money knowledge.
We allow super funds to borrow to buy existing residential properties.
Even in the most robust of debates, we could not possibly argue that big tax incentives from the public purse assists a home buyer. They are clearly hugely disadvantaged.
So affordable housing, where the majority of the population want to live, is a truly vexed issue. Housing is unaffordable because of the outstanding success of our economy, a rapidly growing, wealthy population and the relatively limited parts of our country that are appropriate for high-density living.
I do feel that we should, like all other first world economies, provide more incentives for the genuine homeowner and less for investors, in particular into existing homes.
I also agree that if supply matches demand more closely, then that will put less pressure on prices.
I may not know much but I do understand supply and demand, whether it is the price of bananas when our crop is wiped out after a cyclone, or housing!
The myriad of local council, state and federal taxes are a burden on new home prices. The time and expense to open up new tracts of land can be improved.
We can, as is happening, expand the stock of social housing.
Government policy can also direct incentives to investors and developers to build appropriately affordable housing.
But the price and hence the affordability of housing is not a simple matter. Ironically, the "problem" is a measure of our success.