Housing affordability - is there

something they’re not telling us?

It’s a hot topic at the moment, and why wouldn’t it be. Everyone needs to live somewhere and Australians have always preferred to own their own home. In fact years ago we used to boast of having the world’s highest levels of home ownership.

Today statements, such as those below, are common.

“Housing affordability as measured by the HIA-Commonwealth Bank Affordability Index is down 40% from 167.5 in 1996 to 97.8 today”.

Both the ACT and Federal Governments are concerned. The ACT Government recently launched a package of measures designed to improve affordability and the Federal Government has called on the States and Territories to take action. But most of these actions have been on the supply side, build more houses, release more land, ease regulations and reduce property taxes.

The Federal Treasurer, Peter Costello, was quite adamant on the 7:30 report (Wednesday 11 July, 2007). He stated, categorically, that it was a supply issue and only a supply issue.

Any economist will tell you that prices are determined by the interaction of supply and demand. What about demand? It never seems to be discussed as a contributor to housing price inflation. Housing demand is driven by factors such as population increases, household formation, changes in household structures (single parent families as opposed to traditional family units) and incomes. There is no doubt that all of these are increasing but by nowhere near enough to explain the large inflation in housing prices. Over the last 15 years population has increased by something like 1.3 to 1.5 per cent per year. Incomes have increased by around 4.0 per cent a year.

For example data from the 2001 and 2006 censuses report that in Belconnen median monthly mortgage payments in Belconnen have increased by an average of 9.2 per cent a year from 2001.

However, median incomes have only increased by 4.3 per cent per year over that period. Therefore, mortgage repayments have outgrown income by 4.9 per cent each year from 2001 to 2006.

Median housing prices increased by 93.9 per cent in Belconnen from 2001 to 2006, or 14.2 per cent per year. The increase for all of Canberra was 15.0 per cent.

So what is causing this blow out in housing prices?

For the great majority, the purchase of a home can only be done with borrowed money. Data from the Reserve Bank of Australia on housing finance provides a clue. Over the fifteen years from 1991 to 2006 the amount of money made available for housing finance has increased by 14.9 per cent a year! Much more than consumer price increases, income increases or population increases. The old adage of inflation being caused by “too much money chasing too few goods” is apposite. In a market awash with money housing price inflation was inevitable.

The Reserve Bank data also shows another factor that seems to have been overlooked. Residential housing is becoming much more of an investment commodity. In 1991 16.5 per cent of housing finance was for investors, the rest going to owner occupiers. But by 2006 the proportion going to investors jumped to 33.5 per cent, just more than double. Furthermore, the annual rate of increase in housing finance for investors over the period 1991 to 2006 was a massive 20.4 per cent.

These trends certainly impact on the demand side of the housing price equation, yet no policy response to them appears to have been discussed or suggested. Today the Reserve Bank exercises monetary policy by targeting the short term interest rate. Before de-regulation in the 1980s monetary policy was conducted through a number of direct controls on banking and financial activities, including housing finance.

While we may not want to go all the way back there, it seems that unless the flow of housing finance can be restrained there will not be a resolution to this important problem.