The housing market seems locked into some vicious circles at present. And there seems little chance that market forces can correct it while governments have so much control.
The predictions are pretty grim. Another one came in this week from economic forecaster BIS Shrapnel. It follows predictions from the Housing Industry Association and figures on what is happening now from the Australian Bureau of Statistics.
They point in the same direction. Not enough dwellings – especially houses – are being built to meet demand, even with the slight surge in approvals reported this week.
For at least the next three years it is unlikely that construction, running at less than 150,000 dwellings annually, will meet the demand of about 165,000 new households.
It means rents are going up. The vacancy rate is less than 2.5 per cent in all capitals – just enough to take care of people moving house. In short, it is a full house. When a commodity is scarce the price goes up.
Usually, such a market results in more producers entering the market to take advantage of the high prices that scarcity brings.
But that is not happening with housing for several reasons.
The first is that rent is only part of the return on investment in housing. The other part is capital gain. Most investors think that the recent boom has already extracted all the capital gain there is to be had for the next several years. So even if rents go up by 25 per cent that will only increase the return on investment by one percentage point to about 5 per cent.
Only investors who bought long before the boom will get the benefit. The rent increases will not attract too many new investors.
The second reason is that governments add to low investment returns by imposing high property taxes.
Incidentally, I have to declare an interest here because I pay rates and land taxes.
Governments are showing little indication of lowering these taxes significantly because they carry little political opprobrium, despite all the hand-wringing over affordability.
People pay stamp duty only a couple of times in their life, so it is not a continuous sore. The landlords who pay land tax are seen as fair game. In any event, in this tight rent market they can, and do, pass the tax on to tenants. Tenants do not think to blame the government when they can moan at the landlord.
Chief Minister Jon Stanhope said recently he would not move on land tax because landlords got huge capital gains – but the gains are no longer there. He had the temerity to say the ACT had cut land tax, when all he did was the old trick of handing back some of the bracket creep and calling it a cut.
I prefer the Australian Bureau of Statistics view on this. When issuing the September quarter CPI figures the bureau said property taxes were a significant contributor to inflation.
“Property rates and charges rose in all capital cities with increases ranging from 4.2 per cent in Brisbane to 17.2 per cent in Canberra,” it said.
Far from being cut, Canberra’s property taxes are rising more quickly than anywhere in Australia.
Not only do the taxes themselves make housing less affordable, but their contribution to the inflation rate is contributing to rising interest rates, making housing even less affordable.
True, Victoria cut stamp duty this week, but only from the rapacious rate of 6 per cent to the horrendous rate of 5 per cent.
The third, and perhaps most important, reason the market cannot break these vicious circles is that governments control the supply of the land upon which the dwellings are built. They control it either because they own lots of vacant land that could be released for housing or because they control planning and zoning regimes which could covert land for more dwellings.
Governments are reluctant to release a lot of land because it might cause prices of existing dwellings to fall, causing vote-affecting consternation all round. Moreover, governments like to boost revenue through higher prices for the land they sell or rezone.
True, the ACT Government has announced land releases in Forde and Molonglo, but there is plenty of land in and around Canberra which could be released to cut prices.
The causes of poor affordability are land, planning and property taxes, not construction costs. Construction costs over the past 30 years have risen by less than inflation – about seven or eight fold. Land has gone up by 25 times in Canberra and 50 times in Sydney. Planning costs have gone up 100 fold. Stamp duty has gone up 40 fold.
A problem created by Government meddling can only be fixed by Government changing its ways.
Tragically there is a social cost to this. Young people cannot get into their own homes — so much so that a growing number of them do not see home ownership as important. Worse, they are spending their money instead on consumables thus fuelling inflation and interest rates which make housing even less affordable.
The percentage of home ownership in Australia is falling and the percentage of people owning a house with a garden is falling even faster. Renting a unit used to be an interim measure for many. For more it is becoming the permanent housing option.
It must add to obesity and other social and health problems and must add to the sense of insecurity and detract from the social connection that comes through home ownership.
If Governments are not willing to address the supply side by freeing up more land, cutting property taxes and reducing planning costs, they should at least address the demand side by discouraging population growth, particularly immigration.
The trouble is the states control the former and the Federal Government the latter – allowing for the shifting of blame and responsibility for the creation of the vicious circles.
So don’t expect housing to become more affordable soon. And never expect it to be as easy to buy a house as it was when the now-retiring baby boomers set out on adult life — even though there is ample land to go a long way to achieving that result.