Housing has reached unprecedented levels of unaffordability

Affordable housing is crucial. Without it, people are impoverished, families and communities eroded, jobs lost and the economy weakened. Affordability is now at its worst-ever level. Prices almost doubled during the past decade, even allowing for increases in household income.

The number of first-home buyers dropped by one third, accelerating a longer-term decline in home-ownership rates. Average repayments on new mortgages rose about 50 per cent ($500 a month). Housing debt soared beyond the levels of almost every developed country.

Some people claim these increases are just part of the normal ups and downs of housing markets. Everything will correct itself, they say, as the market cools.

But the increases have been much greater, more widespread and prolonged than the 1980s "boom" which held the previous record. House prices, for example, have risen at least three times as much.

For at least the past 50 years house prices have trended inexorably upwards, punctuated only by relatively brief and modest falls. After the 1980s boom, for example, they fell by only a few per cent.

The unprecedented current upsurge may be followed by an unprecedented collapse. But even a huge fall would leave new homebuyers facing much higher prices than a few years ago. And it would severely harm recent homebuyers and the economy.

The affordability problem is by no means confined to homebuyers. Indeed, some of its deepest impacts are on low-income renters in private or public housing.

Rent levels have risen relative to income for many lower-income households. Government rent assistance has not protected at least 300,000 recipients from unaffordable housing costs. 

The supply of low-rent accommodation has fallen by at least 15 per cent and opportunities to obtain public housing have been cut even more. Each night, more than 100 families with children are turned away from emergency housing for lack of room. For many lower-income Australians, then, the so-called housing "boom" has already been a "bust". But they are also at special risk from future falls in house prices or economic growth.

Those who have taken on unaffordable mortgages for fear of "missing out" will suffer more when interest rates inevitably rise. They may incur substantial losses from forced sales.

Many low-income renters will suffer as landlords raise rents to compensate for declining capital gains and higher interest rates. More lower-income people will have to move even further away from job opportunities or family networks.

The creeping crisis in affordability has been developing for many years. There is considerable agreement about the key causes, although opinions differ about their relative impacts. The great increase in paid work by women over recent decades has enabled many households to bid more for homes, especially to be close to their work. More recently, general economic growth has boosted many incomes and competitive escalation of prices.

Higher prices have also been fuelled by financial deregulation, making housing loans and other forms of credit much more readily available. Competition between banks and new lenders like Aussie has cut mortgage rates and deposit requirements. Deregulation has also helped investors move funds between the housing and share markets. This increases the risk of busts in one market triggering booms in the other. Share market collapses have played a key role in fuelling each of the last two housing booms.

Population growth contributes to higher housing demand and prices. This applies especially where urban sprawl and infrastructure costs lead governments to restrict new housing. But the recent price boom followed a period of unusually low growth in population. Larger house sizes have tended to increase average prices. But the recent price increases mainly reflect higher land values, despite smaller block sizes, rather than construction costs. The proliferation of McMansions is now being partly offset by growth in apartment living.

Major tax concessions for investment in high-rental property have generated huge price increases through the growth of "negative gearing". They are much more generous than in other countries, especially since our capital gains tax was weakened in 1999.

When the US share market collapsed in the following year, the concessions triggered a stampede into rental investment. Their design encouraged over-bidding for expensive properties while failing to improve the supply of lower-rent accommodation.

A growing number of people believe that the current exemptions for homeowners from capital gains and land taxes are damaging affordability. The price of houses now reflects their status as tax-free havens for wealthier buyers rather than their intrinsic value as homes. The exemptions undoubtedly favour many current homeowners, especially those who are older or wealthier. But recent reports suggest they are pricing many other people out of the market, thereby contributing substantially to the fall in overall home ownership. 

Opinion is divided on whether stamp duties and land taxes have been major causes of recent price inflation. They have tended to rise substantially as prices have risen, while remaining a relatively small proportion of overall costs. Recent relief for first homebuyers should help. Some prices have been affected by requiring developers to help meet government spending on necessary infrastructure. The trend reflects governments' excessive reluctance to borrow so that costs can be shared more fairly across the community and future generations.

What can be done to improve affordability ? 

First, it is crucial to acknowledge the gravity of the current situation and the longer-term outlook in the absence of vigorous action. Refusals to heed warning signs more than a decade ago have already caused severe and possibly irreparable harm.

This damage must not now be aggravated by further denials of reality and continuing lack of political integrity. The economic and social problems caused by the current crisis make it as great a problem as any facing Australia's long-term future.

Some of the more readily achievable improvements would be of greatest benefit to lower-income renters. In any event, they have been suffering from unaffordable housing for very lengthy periods. And help for them could relieve pressure higher up in the rental market. 

The supply of low-rent housing could benefit greatly from targeted tax incentives or other subsidies to attract large financial investors. Processes for keeping the housing affordably occupied by low-income people would need to be strengthened, especially by expanding the use of non-profit housing managers, as is common in Europe. 

Public housing can be a highly cost-effective way of helping low-income renters. There is a strong case for restoring funding to the levels of a decade ago. This should enable wider availability for working families, even if for limited periods, rather than increasing confinement to the most desperately disadvantaged people.

A high priority for boosting affordable home purchase is strengthening regional growth centres through longer-term planning and public investment. A new version of the Building Better Cities program would help develop the necessary infrastructure and job opportunities. Opinions vary about the merits of different housing taxes and charges, and the wisdom of reducing their inflationary impacts now that the market is slowing. But the need for substantial reform is compelling, even if changes will need to be phased in at length.

From these and other options, the National Summit on Housing Affordability will seek to identify the top priorities for action. It is perhaps symbolic that it was held in Parliament House after the winter migration of politicians had left. Even though the affordability problem has become unprecedentedly severe, they seem unwilling to acknowledge the gravity of its damage and dangers let alone responsibly address them.