Waking up to a great Australian nightmare

16 Jun 2006

With no shortage of ideas for providing affordable housing, it’s only the political will that’s missing, argues John Spoehr

YOUR house might be worth a lot more today than it was a few years ago but will you be able to afford the repayments if interest rates and petrol prices continue to rise? Will future generations of middle and low income earners be able to afford to buy a home if housing costs continue to rise faster than incomes? If recent trends continue, thousands of households will be spending around a third of their income on the average mortgage. Meanwhile thousands of others seeking relief from rising rents in the private rental market are waiting years on public housing waiting lists. The great Australian dream is a nightmare for a growing number of Australians.

The nightmare is one where housing prices and rents escalate and your income stagnates. It is a nightmare where property speculators driven by the promise of large capital gains, dominate the housing market, pushing up property prices and crowding out low and middle income earners. It is a nightmare where incomes determine postcodes, forcing low and middle income earners to commute longer distances from home to work.

Some of the dimensions of the affordability nightmare were spelt out by Dunstan Fellow, Professor Julian Disney, at a recent Affordable Housing forum organised by the Don Dunstan Foundation at the University of Adelaide. Alarmingly there are around 1.5 million Australians living in housing they can't afford. Over the last decade average house prices have risen by around 100 per cent while average mortgages are 50 per cent or ($500 per month) higher. While increasing property values provide home owners with some comfort, interest rate hikes are making housing less affordable and debt servicing less sustainable for many.

One measure of the housing affordability crisis is the proportion of households in ‘housing stress’ - that is households paying 30 per cent or more of their income on housing costs. A recent study by Professor Judith Yates found that around 862,000 low income and 164,000 moderate income households in Australia were experiencing housing stress.

According to the OECD Australia’s capital cities are now among the least affordable places to live in the world. The Paris based organisation concluded that Australia had the most overvalued houses in the western world. The study of fifteen countries showed that housing prices were 52 per cent higher than rental prices justified. The OECD says that the price of housing relative to incomes is 50 per cent higher in Australia compared to the other countries studied.

Australia’s capital cities are among the least affordable places to live in according to a recent international housing affordability survey (47)(PDF) undertaken by Demographia. The survey ranked the affordability of around 100 cities in Australia, Canada, New Zealand, the United States, Britain and the Republic of Ireland. While it concluded that the most severely unaffordable housing could be found in cities in the United States, it argued that Australia had “the most pervasive housing affordability crisis”. Sydney, Hobart and Adelaide were ranked the most unaffordable housing markets. Sydney ranked number 7 while Hobart ranked number 15 and Adelaide number 18. Each of these cities were characterised as severely unaffordable. Demographia reported:

“By reducing the share of households that can afford to buy homes, high (housing prices) inevitably lead to greater income disparity. Thus, to think of rising housing prices as a good thing while ignoring the incomes that support them is to miss the point completely. The reality is....that the more affordable markets are the better performers by virtue of the higher standard of living they facilitate for more households”.

Compounding the housing affordability crisis is a 15 per cent decline in the availability of low rental housing. One of the major contributors to this is the decline in Australia’s public housing stock, driven by the federal government’s declining financial support for the sector. There are around 30,000 fewer houses in the public housing stock in Australia than a decade ago.

The current housing affordability crisis requires a dramatic increase in the stock of affordable housing in Australia. This includes boosting investment in public housing and introducing innovative financing schemes to support the purchase and retention of affordable housing. An increase in federal budget outlays to the states through the Commonwealth-State Housing Agreement is unlikely under the Howard government given its preference for rental subsidies over investment in public housing. A national commitment to new ways of financing affordable housing in Australia is urgently required.

At the Dunstan forum, Professor Mike Berry proposed a so called ‘consortium bond model’ of financing housing. The model involves leveraging private sector investment through the use of government bonds. Berry estimates that the scheme would attract five dollars of private investment for every dollar invested by government. He argues that it is the most simple and cost effective method of raising funds for investment in affordable housing.

Providing access to affordable housing is one challenge. Another is ensuring that the affordable housing stock remains affordable over time. This is the problem with selling off public housing. It erodes the size of the affordable housing stock. To overcome this problem and tackle the housing affordability crisis more generally, Hugh Stretton sketches out the details of a new national housing program in his latest book Australia Fair. The goal of the program is to finance and build 40,000 new houses a year. It would be financed largely by the national government and conditional on the states making at least half their share of new houses for sale, rental purchase or rent. The sales would be coordinated through a state agency and require modest deposits “with annual interest at the rate of inflation or at 3 per cent whichever is lower”. Homebuyers would only be able to sell their houses to the agency that made the house available, ensuring that properties financed through the program remain part of a growing affordable housing stock immune from property speculation. Stretton’s proposal could help ensure that fewer Australians experience the nightmare that is the current housing affordability crisis. It is time for national policymakers to wake up to the need for action.

John Spoehr is executive director of the Australian Institute for Social Research. A version of this article appeared in the Adelaide Review.

Publication Details
Published year only: 
Geographic Coverage