An affordability time bomb?

The fuse was lit in the early 2000s, as housing affordability quickly began to deteriorate across Australia. But the fuse is a long one, and the real damage may not be felt for another 20 or 30 years when a generational change makes itself felt across Australian society. If the predictions are right, it could be very painful.

That there is a housing affordability problem in Australia should be beyond doubt. This issue is something that ought to be separated from movements in broad housing markets – typically measured by changes in median prices of established houses – because the affordability problem is not universal. Instead, it is felt most by young families in the early stages of family formation, and who are in average income brackets, trying to enter the housing market.

Making the bomb

For these households, the last decade has seen the price of new housing escalate rapidly – well ahead of any increase in their household incomes. Driven by restrictions on new land supply, exacerbated by the rapid imposition over a few short years of increasingly usurious upfront levies, and worsened by a dysfunctional and counter-productive planning system which adds costs and delays for no measureable benefit, the cost of new housing has been forced beyond the reach of many traditional purchasers. I am not talking here about the median price based on established houses in settled areas but the cost of new land for housing at the fringe. They are quite different markets.

These younger and typically lower income households are increasingly deferring their decision to buy a home of their own, either waiting for a change in their financial circumstance or waiting for prices to fall. They may be waiting a long time because what needs to happen for prices of new housing to fall is a wholesale reform of planning regulation and infrastructure financing. In short, less bureaucracy and lower taxes. Don't hold your breath. The Bligh Government's recent budget offer of a $10,000 grant for any new housing purchases under $600,000 is tokenism in the broad scheme of things. Plus it's only 6 months worth of tokenism.

For evidence of the impact of these failed policy experiments, you need look no further than the growth in the cost of new land for housing. According to the UDIA's 2011State of the Land Report, the cost of a typical block of land in south east Queensland has leapt from around $80,000 at the beginning of the decade to around $220,000 by 2010. That's almost a threefold increase in price. In the Brisbane Statistical Division – which takes in surrounding local authority areas where much of the land supply is located – new lots grew from $78,000 to $215,000 but shrunk in size over that time from 705 square metres to 615 square metres, meaning the cost per square metre jumped from $111 to $350 – a 300% increase. Average weekly earnings in that time grew from $800 to $1200 – a 50% increase.

There are some economists who still point the blame for high land prices at a demand side thirst for land, fuelled in part by high levels of population growth and low costs of debt. But that story ignores the underlying cost-push pressure on land, imposed directly by regulatory mechanisms. The UDIA report also identifies that the land acquisition cost itself is only $60,000 per lot for a typical city fringe subdivision. (That figure itself would be lower if there was more competition in the supply of land). But that $60,000 is doubled after taking into account the cost of preparing the land for the market (development works), then add the cost of government levies ($39,000 per lot), GST ($20,000 – which is money for the State Government remember), stamp duty and land tax and other costs, and you're up to $200,000. A significant chunk of that $200,000 number - $39,000 in levies, $20,000 in GST, $5,200 in stamp duty and land tax, and $12,000 in finance costs – is directly attributed to government and much of it delivered in the past decade. Finance (holding) costs, for example, are directly linked to the interminable delays in getting subdivisions approved – which have gone from a number of months to several years in that space of time.

Making the fuse

So with prices of new land being pushed up faster than the capacity of its typical consumers to pay (that is, younger and lower income households in the early stages of family formation), we get the inevitable result: lower levels of home ownership.

According to a recent and I think worrying report by REST Industry Super, one in four Australian households by 2036 will be retiring without owning their own home. That's a fall from 85% retiring with their own home today, to 75% in 15 years' time. Home ownership of Australians under 35 years of age has fallen from 45% in the mid 1990s to around a third today, and that reduction in home ownership will only work its way through the demographic cycle, as the REST report identifies.

But what's worse is that alternate future savings aren't what they could be. The same report notes that median superannuation fund balances for people aged 55 to 64 are a miserable $70,000.

Now do the maths here and if you're a policy maker with a long term view you should start to worry. In 15 to 20 years time, we may have a greater proportion of the population entering retirement and not holding title to their own home. Plus, superannuation balances are nowhere near what's needed to fund these people in their retirement years. The ageing of the population is going to mean more people in retirement relying on taxpayer support (the current boomers) but they are likely to be followed by another generation entering retirement with even less financial independence than their predecessors.

If you think that superannuation ever stood a chance of taking the place of the pension or aged welfare in the future, think again. And the situation's been made worse because we've denied a larger chunk of the current young population the chance to save for their own future via home ownership, by deliberately increasing the cost of new housing supply through introduced regulatory and tax measures.

Adding more combustible material

Now if all this wasn't bad enough, we've now got the anti-growth provocateurs claiming that our rates of population growth aren't sustainable, and that we need to effectively halt growth or the sky will fall in (or some equally nonsensical doomsday scenario).