WEEKEND READ: The two elephants in the housing-affordability argument


NEW NSW Premier Gladys Berejiklian is ignoring the two elephants in the housing-affordability argument.

Ordinary people should be able to buy in Sydney, she said this week. Housing affordability was her number-one priority as Premier, she assured us.

The problem is more political than economic. You can tell that by the way the problem is being stated. Politicians, like Berejiklian, always use the term “affordability”. If you got rid of the Orwellian doublespeak, they have to be saying, “We want house prices to fall.” How else do you make something more “affordable” in an economy where wages are stagnant and interest rates are rock bottom?

But if a politician said they wanted house prices to fall, dwelling owners (who make up the majority of voters) would squeak blue murder.

So they use the sugar word “affordability”.

No politician wants house prices to fall. Nor do dwelling owners (residents or investors). Only a few young renters want that.

The second elephant is that Berejiklian and the other Premiers and Chief Ministers have little or no control over housing affordability. It is all in the Federal Government’s hands.

The principal cause of housing unaffordability is population growth and the principal cause of that is high immigration. Immigration quotas are set by the Federal Government. The great majority of immigrants go to Sydney and Melbourne where the highest dwelling prices are to be found.

Yet Premiers rarely if ever tell the Feds to rein in the immigration quotas so they can have some hope of keeping up with demand for housing, schools, roads, hospitals and so on. Bob Carr did it once or twice while Premier and then silence.

So let’s now turn to a couple of reliable sources who know what they are talking about: a major property developer and the Reserve Bank. They both tell us that immigration is by far the biggest factor in pushing up the price of housing.

All that stuff about red-tape, planning and environmental concerns is a smokescreen put out by the building and real-estate industries.

If only they could be called out. What if the states opened up swathes of farmland for housing and banged through any poorly designed rubbish developers wanted and at the same time the Feds slashed immigration? Housing prices would plummet. They would become very affordable indeed. But banks would have to start calling in loans as mortgage levels rose over the value of dwellings.

Every owner, developer and builder would denounce the politicians who delivered “affordable” housing to the young hopeful renters.

So let’s first go to our property developer, the founder of Meriton, Australia's most prolific apartment developer, Harry Triguboff.

He was quoted in the very reliable Australian Financial Review late last year as dismissing concerns that there might be an over-supply of apartments.

Triguboff was asked, “But might rents fall in Sydney and Brisbane when all the new apartments are completed in the next two years?”

He responded, “Then I will bring in more migrants.”

Whoops, I must have got in wrong when I said above that the Federal Government sets the migrant quotas. Apparently, property developers set migrant targets in Australia. Or at least federal politicians are so beholden to them and their donations that, in effect, they determine migration quotas.

But, you might say, Australia has had high population growth since World War II but housing prices only went up enough to cause people to start talking about an “affordability” crisis in the late 1980s and early 1990s, so how can you be sure that cutting immigration will do the trick.

Well, we can look at some work done in 2015 by the Reserve Bank and some other statistics to tell us about the elements of the housing crisis.

It started in the 1980s with financial deregulation. So instead of people begging a bank manager for a loan at a regulated rate, the bank managers went out drumming up as many deregulated loans as possible.

In the mid to late 1980s tariffs fell and trade was made freer. This is an important and little-discussed cause of high housing prices.

From that time prices of cars, footwear, clothing, electronic equipment and a myriad household items either fell or did not rise, while wages and inflation went up.

In 1989 the average annual wage was about $30,000 and a good family car cost a bit over $40,000 – 1.3 years’ wages. Today, the car costs the same but the average wage is more than $80,000. So the car costs 0.5 years’ wages.

It has been the same for virtually everything else. TVs, cameras, clothing, music, furniture, and so on.

It meant, of course, that people had more money to spend on housing. And they did. They increased the size of their houses, but that extra cost was small. Mostly, they put their extra money into competing with other people to buy housing. And as more and more people came to Australia the competition for housing got stronger and stronger, especially for the quite finite amount of housing close to the centre of Sydney and Melbourne.

From 1975 to 1990 the real price of housing (after adjusting for inflation) rose only 1.4 per cent a year. In those 15 years the real money made in housing was watching the debt burden of the mortgage being eroded away by inflation, even with relatively high interest rates.

From 1990 to the mid-2000s housing prices shot up to 4.5 per cent a year (after adjusting for inflation). That was caused by a perfect storm of compounding reasons: high population growth caused by immigration; idiotic government policies (like tax breaks and first-owner grants); fewer people per dwelling; lower inflation; lower interest rates; laxer lending policies; more competition in the mortgage market; a willingness to take on more household debt; and sheer investor greed.

In the past decade, housing prices have gone up about 2.5 per cent a year, still quite high by historic standards. But it is still high enough to obey the rule investment occurs as long as the expected return is above the cost of investment.

That will change only if you get rid of the tax breaks and, more importantly, reduce immigration.

Then you would have a saner housing market. But you would have to do it gradually to avoid the disruption of the resulting fall in housing prices to levels that are, dare we use Premier Berejiklian’s word, more “affordable”.