In his famous 1942 "Forgotten People" speech, Sir Robert Menzies stated:
... one of the best instincts in us is that which induces us to have one little piece of earth with a house and a garden which is ours; to which we can withdraw, in which we can be among our friends, into which no stranger may come against our will.
Believing in the enduring value of home ownership in promoting social stability, the Menzies government created incentives for Australians to purchase their own piece of real estate. In the post-war years Australia was transformed into a land of owner-occupiers, with the home ownership rate rising from 53 percent in 1947 to over 70 percent by the 1960s. This great shift helped to cultivate a broadly middle class society during the second half of the 20th century.
Yet in recent years the so-called "Great Australian Dream" to own one's home has transmogrified into a nightmare, with home ownership rates free falling as prices have soared. This decline in home ownership is particularly acute among younger Australians. In 1981 more than 60 percent of Australians between the ages of 25 and 34 owned their own home. By 2014, this proportion had declined to below 30 percent. Nor are young people necessarily catching up over time, with substantial declines in home ownership rates recorded across all age groups. For young people, being locked out of home ownership has many negative effects - from instability and insecurity to delaying family formation.
While housing affordability has become a major national issue, there is little consensus on the causes of the crisis and how to tackle it. Frustrated by an affordability debate "weighed down on all sides by misinformation, vested interests, political timidity, and ideological blinkers", prominent businessman and philanthropist Dick Smith recently released a booklet designed to tell the full story on housing. Perhaps unique among his contemporaries, Smith isn't a player in the investment property market and is prepared to call a spade by its name.
In The Aussie Affordability Crisis, released through his new Fair Go Group, Smith notes that between 1975 and 2016 the average house price in Australia, after adjusting for inflation, increased by a whopping 333 percent, while the average wage grew by only 40 percent. Although this explosive increase has delivered easy wealth to those who already owned homes at the start of the boom, it has pushed prices far beyond the reach of many Australians and dramatically widened the gulf between the housing haves and have-nots. The Sydney and Melbourne markets have become almost completely inaccessible to young Australians. With the average price now over 12 times the average annual income, Sydney has become the most unaffordable housing market on the planet after crowded Hong Kong.
Even those 'lucky' enough to afford to enter the current market find themselves saddled with staggering levels of debt. Apart from placing many under huge financial stress, hefty mortgages are also a risk to our economy. Earlier this month, the IMF singled out Australia in its Global Financial Stability Report, stating that high levels of household debt and high house prices made the country more susceptible to interest rate shocks. As Smith observes, Australians have borrowed so much for housing that we have now the highest household debt levels in the world in relation to the size of the country's economy - around $2 trillion in household debt relative to $1.6 trillion in GDP. Policymakers seem strangely unconcerned that much of this borrowed money has come from overseas and has been channelled into unproductive assets i.e. housing rather than invested, for instance, in growing businesses.
So why is Australian housing, once affordable to even those of modest means, now among the most expensive in the world? Smith asserts that an extraordinary population surge, a tax regime that encourages property speculation, and overseas investment have been the prime drivers of runaway house price growth in recent years. Unlike many other contributors to the debate, Smith does not shy away from examining the role of immigration-fuelled population growth in the country's housing affordability disaster. Indeed, he puts the issue front and centre in his book in an effort to remedy the woeful lack of scrutiny it usually receives relative to the other causes involved. Smith criticises those commentators and politicians who spuriously claim that the supply of land for housing is the only factor governments can influence, whereas the demand caused by immigration-induced population growth is somehow beyond our control.
Smith writes: "Just like anything else, land and house prices depend on both supply and demand – and Australia's housing supply clearly has difficulty keeping up with our break-neck population growth. This is not surprising considering housing supply adjusts slowly to increased demand (with the many steps and constraints involved in building new housing stock) while we have the equivalent of five wide-bodied jet-loads of immigrants coming in every week."
To ease the housing pressure-cooker situation in our cities and give supply a chance to catch up, Smith advocates a substantial reduction in Australia's bizarrely massive immigration intake, presently running at well over 200,000 per annum. This, he argues, would also alleviate some of the strain on our groaning national infrastructure, lift wage growth, and put Australia on a more sustainable footing.
Additional reforms suggested in The Aussie Affordability Crisis include removing or reducing the 50 percent discount on capital gains from housing investment, overhauling negative gearing, and the introduction of a broad-based land tax to replace stamp duty. Smith also calls for higher taxes on foreigners buying Australian property in order to dampen demand and prevent locals being further priced out of the market.
Foreign buyers now account for about a quarter of new house purchases in New South Wales, with the Chinese comprising around 90 percent of that demand. This untrammelled foreign buying spree has raised concerns about dirty money being laundered in Australian property. Despite repeated warnings from the Paris-based Financial Action Taskforce, AUSTRAC and Transparency International that Australian property is a haven for laundered funds, Canberra has failed to clean up the sector. As Smith tersely puts it: "It's almost as if Australia would prefer to cooperate as a launderer of corruption than deal with the negative effects on young first-home buyers."
While offering a number of potential policy fixes to improve affordability, Smith warns that the road to reform is essentially blocked by powerful vested interests which benefit from a hyperactive housing market. Worse, industry, the media and the major political parties – the Coalition, Labor and the Greens – are, to quote Smith, "all 'Big Australia' allies in a code-of-silence on the role that population plays in our housing affordability crisis." Until this code-of-silence is broken, it seems the prospect of home ownership, particularly in our major cities, will become ever more remote for many Australians.