It was US President Ronald Reagan who spoke an enduring truth when he said, “If more government is the answer, then it was a really stupid question.’’
This has once again been proved by Australia’s housing market, which is celebrating a long period of intense government interference by ushering in even lower affordability.
The latest example is a shiny new policy that allows first home buyers to purchase houses with just a 5% deposit.
Since it was introduced, prices have gone up along with the size of home loans and affordability has absolutely tanked.
A report from property data firm Cotality shows the extent of the damage over a period in which governments at all levels made rash and so far largely unfulfilled promises about dramatically increasing housing supply.
Prices Keep Rising as Supply Lags
Since March 2020, home values have climbed by 47.3% – lifting the median or “middle” dwelling value by $280,000 to $872,500 – according to the latest Cotality annual Housing Affordability Report.
Over the same period, the median annual household income increased by just 15% to $104,390.
Unsurprisingly, three of four indicators Cotality uses to measure affordability have hit record highs.
These measures are the price-to-income ratio, years to save a deposit and the share of income needed for rent which have all reached an uncomfortable peak.
The only measure to move down slightly – the portion of income required to service a new mortgage – dropped just slightly down to a still staggering 45% cent of household income.
RBA Delivers the Only Sliver of Help
For that very slight fall we can thank the Reserve Bank’s three interest rate cuts this year, which momentarily eased the squeeze on those with large mortgages—although anyone buying in since the latest ineffective first home buyer’s scheme will undoubtedly have compensated for that by borrowing more.
In simple terms, the shift in relativity between income and property prices has produced a structural change in which sections of the community can buy their own house.
Home Ownership A More Elusive Dream
The dream of buying your own home has been drifting up the wealth spectrum until even children of the quite well off need to hit up their parents for a big gift or loan to get a property purchase across the line.
It is instructive to look at the several factors Cotality identifies as causing the sharp rise in housing demand and prices and consider which can be laid at the feet of state and federal governments.
They include the pandemic-era stimulus, low interest rates, government incentives for first home buyers and a rapid bounce-back in net overseas migration after border closures were lifted.
New Home Supply Keeps Tanking
On the supply side, governments also feature heavily, armed with a forest of red tape that prevented strengthening demand being met by greater supply, despite plenty of rhetorical promises to build thousands of extra houses and units.
Construction sector insolvencies, rising material costs and changing preferences for larger homes and smaller household size all played a part.
The end result was that more a million new households were formed in the past five years—a figure that was met with an underwhelming 880,000 new dwellings completed.
With property prices rising so strongly, existing home owners and investors were able to use their large capital gains to wade back into the housing market, further boosting price hurdles for first home buyers, particularly those without access to the bank of mum and dad.
It is hard to see how the widening affordability gap will be closed without a significant boost in housing supply or a weakening in demand.
Saving for Decades to Get a Deposit
In a city like Sydney, it now takes an extraordinary 35 years for an average wage earner to save a 20% deposit on a median house in the eastern suburbs.
Then, after clearing that hurdle, it would take a superhuman one-and-a-half times their income to service the mortgage.
Somewhat bizarrely the only sign of hope in the Cotality report came courtesy of that other bugbear about governments—their ability to stack on taxes.
Higher taxes to the rescue?
In Victoria, the state government’s spendthrift ways during the many Covid lockdowns meant a higher and broader land tax was introduced which has led to an exodus of landlords and has supressed property prices compared to other states.
That has helped relative affordability in Melbourne, although it has also led to a tightening of the rental property stock as investors sell up – often to first home buyers,
The increased taxes on investment properties in Melbourne brought the median dwelling value to 7.1 times higher than income, compared with a multiple of 10 in Sydney.
Canberra was the only other location that showed relatively better affordability due to a combination of new apartments entering the market and a slower rate of internal migration.
In both cases the relative improvement in affordability was more due to accident than design, once again proving the accuracy of Ronald Reagan’s quote.
Governments better at taxing than stimulus?
Perhaps they also show that government actions are more effective when they look to reduce activity through new or higher taxes rather than stimulating activity through new purchase programs that only drive prices and debts higher.
Anything that makes houses and units less of a financial asset and more of a purchase of needed shelter would seem to fit the bill.
It might seem counterintuitive but perhaps first home buyers should be asking governments for higher property taxes to help them out rather than fancy new programs to stimulate demand.
Then again, perhaps the ideal situation would be for governments at all levels to simply get out of the way and allow the market supply and demand signals to lead to more direct and positive action.
