Australian houses are now the most overpriced houses in the world and above their correct value by 48 per cent according to a study in The Economist based on OECD figures (estimated as of the third quarter 2005). The international dishonour of topping this league table should be recognised as a national disgrace. For Australia’s current generation of first home buyers it is having a significant negative impact on their lives and effecting a major change for Australian society.
A recent research paper (Macquarie Equities Research Daily Essentials, January 2006), on the difference in demand for childcare in the US versus Australia, highlighted how high house prices are changing the lives of this generation of Australian families. As financial research papers tend to do, it cut straight to the facts. Young Australian families face a much greater financial burden from mortgage repayments on their overpriced houses than their American counterparts. So much so, it found, that for many young Australian families there is now no way to afford a home without having both parents working full time and putting their children in care. In contrast, in the US, because house prices are lower, there is far less need for both parents to work so less need for the children to be placed in care.
So for young Australian families buying their first homes, mum and dad will be working full time, with the kids in childcare, whether they, or their parents, like it or not. In addition, families will be burdened with sky high debt levels and repayments that take an onerous percentage of their income with the inevitable associated stress and family breakdowns.
This is a very significant social change being brought about because of our overpriced houses. As a nation we need to ask whether this is where we want to go. I would argue that it is not and that it is critical that we aim higher. We need to ensure that childcare is a choice, not a necessity, and that having both parents working flat-out is not a prerequisite to owning the roof over their heads. If the Americans can do it, then it is fair to ask, why can’t we?
So far young buyers have knuckled down and worked harder than any previous generation to try to afford a home. But there is only so much working long hours that families and the social fabric can take, or should have to take. It is time to look at making houses more affordable rather than finding ways of making families work ever harder.
What is not needed are schemes that take away the chance to fully own a home by having a business partner in on the mortgage and split any capital gains. Such schemes would only increase the amount people could borrow and so further push prices up, while putting full ownership further out of reach. Allowing people to dive into their already under funded super to fund their deposit would have a similar effect, with the added disadvantage of decreasing their retirement savings and thereby shifting this burden onto taxpayers.
Recent backbencher moves to double the first home owners grant are also a step in the wrong direction. Increasing the amount that first home owners have available as a deposit would further pump prices and, more dangerously, would allow first home buyers to access larger mortgages than they otherwise could, again leaving them, and the economy, more vulnerable in the future.
What is needed is a correction in house prices, and the sooner the better. That local housing prices are the problem is breathtakingly obvious when we compare them with other countries. The longer that prices are allowed to stay at unrealistic levels the more young families will find themselves risking negative equity when pricing reality eventually returns. Further, a delay will also increase the number of families who will be unable to cope with the inevitable upswing of interest rates at some point. If those who cannot cope become a significant percentage of the population this will be an economic and social disaster and could put the economy permanently on the precipice of recession and increase the volatility of the economic cycle.
Normally bubbles of the housing market would be dealt with by interest rate hikes, but due to a combination of economic circumstances the Reserve Bank has been unable to raise rates for some time and this situation looks set to continue.
This, however, is not the only lever available to the Government. Given the precarious predicament of the housing market, recent economic research (Macquarie Equities Research Daily Essentials, January 31, 2006) has suggested that just moderating the immigration intake would be enough to do the trick.
The current level of immigration is effectively pumping demand and preventing the normal supply and demand pricing mechanism from operating to lower prices. The resulting prices unfairly disadvantage the current generation of Australians trying to afford what we should aim to have as a basic right.
Both the Government and the Opposition are quietly ignoring this crisis of a generation as most voters own their homes: a case of “I’m all right Jack”. But this housing and social crisis is bound to have political consequences. It will not be enough simply to create more childcare places and hope for the best. At some point families will figure that so much of the money they and their children are sacrificing to earn should not be going to housing.
Managing the excesses of a housing market is a valid political goal for any government interested in a society where families can own their own homes without tearing themselves apart. Political initiative anyone?