Australian Greens Senators' Dissenting Report

1.1On behalf of the Australian Greens, I want to thank the committee for their work. I would also like to add a personal thanks to all those who supplied evidence to the Inquiry.

1.2It is undeniable that housing has become unaffordable in Australia. However, none of the recommendations proposed in the committee’s majority report would put a dent in housing affordability in Australia, in fact they would likely make the situation worse.

1.3Each year, housing becomes more expensive and further out of reach of first-home buyers. For the last 25 years, average house prices have increased at twice the rate of income.[1]Now only 14 per cent of homes are affordable for median-income households in Australia.[2]

1.4None of the top 10 most common professions in Australia can afford to buy a house and avoid housing stress. For example, a full-time childcare worker would currently take 31 years to save a home deposit.[3]

1.5The issue of housing affordability and declining homeownership rates was acknowledged and accepted by all committee members and stakeholders involved in this inquiry. Everyone agrees there is a problem, and it is a big problem.

1.6While the issues with the housing market are clear, the solutions are highly contested.

1.7The Greens strongly object to the main recommendations in the Coalition’s majority report. Increasing the political influence over APRA’s financial regulation powers, in particular over the serviceability buffer, will have serious consequences for housing affordability in Australia.

1.8The Coalition’s proposal to have the Government apply pressure on APRA to lower the buffer risks driving up house prices and saddling first-home buyers with even more crippling debt, while avoiding tackling a broken housing system that puts big banks’ and wealthy property investors’ profits first.

1.9The housing crisis cannot be fixed by reforms which will push up house prices, while the key historic drivers of house price growth are overlooked.

1.10Australia’s tax system has pushed up the cost of housing.[4]Any serious reform looking at housing affordability needs to tackle the $176 billion in tax concessions for property investors, including negative gearing and capital gains tax concessions.

The mortgage serviceability buffer

1.11Prudential policy, including the mortgage serviceability buffer and the independence of APRA to set the buffer play an important role in the stability of housing finance and our broader financial system.

1.12APRA provided evidence to the committee about the rigor involved in setting the buffer and delivered a strong message that now is not the time to relax lending rules.

1.13APRA explained that the serviceability buffer “exists to ensure that banks lend to borrowers able to repay their loans in a range of scenarios. The buffer provides an important contingency for a range of economic shocks – not only for rises in interest rates – over the life of the loan. It also factors in unforeseen changes in borrower’s income or expenses, which we have seen play out recently as cost-of-living pressures mount”.[5]

1.14The regulator warned against relaxing borrowing rules in the current context pointing to “high household indebtedness and a pick-up in credit growth, persistent cost-of-living pressures, a weakening job market and heightening geopolitical risks”.[6]

1.15The Coalition is pushing for the buffer to be lowered but the evidence gathered during this inquiry to support this agenda doesn’t support this.

1.16The committee heard support even amongst the banks for the current serviceability buffer settings by APRA:

Westpac said “we're supportive of the current responsible lending and the principles that underpin responsible lending. We're also supportive of the parameters that APRA set through their prudential standards. We're comfortable with the three per cent buffer as it stands today.”[7]

The Commonwealth Bank said “in consideration of the appropriateness of the buffer … it's an issue for APRA to consider. But, from our own perspective, we look at the buffer as a prudent and appropriate measure that ensures that first home buyers, but also all borrowers, do not overextend themselves.” “We believe the prudential settings today are appropriate and balanced.”[8]

Furthermore, the Australian Banking Association said, “we think that the current buffer settings are appropriate on the whole.”[9]

1.17The consequences of lowering the buffer, particularly if the decision is made as a result of political pressure, would feed housing demand and in the context of limited supply actually worsen the housing affordability crisis and make it harder for first home buyers to enter the market.

1.18Mr Saul Eslake said that “in a supply constrained housing market, which we have now and have had for most of the past six decades, anything that allows Australians to spend more on housing than they would otherwise be able to do results in more expensive housing rather than in a higher proportion of the population owning that housing.”[10]

Consequences for vulnerable borrowers

1.19Our current financial regulatory framework is working as intended to mitigate consumer harm. Encouraging vulnerable borrowers to take on unmanageable debt, thus increasing the profits of big banks, is not the answer to the housing crisis.

1.20Frontline services groups expressed concerns to any proposed changes to the serviceability buffer “given the human cost of unmanageable debt”.[11]

1.21For example, Ms Harrison from Mortgage Stress Victoria said that home loans which expose borrowers to debt beyond their means are financially, emotionally, and socially crippling.[12]

1.22Additionally, the Australian Financial Complaints Authority said that the real-world impact of unmanageable debt on consumers is “devastating and overwhelming for people and [can] create lasting hardship, impacting families and communities”.[13]

1.23Increasing risk and debt for vulnerable borrowers and first-home buyers is not the solution. If the serviceability buffer is changed it will allow first-home buyers to increase their debt to try and break into the housing market, it will bring with it ‘risk and human catastrophe’.[14]

1.24That no changes are made to the mortgage serviceability buffer and the process by which APRA makes its decision to set the buffer.

1.25Evidence gathered by the committee suggests that rather than expanding demand, restricting demand for particular groups has historically improved home ownership rates for owner occupiers.

1.26For example, in 2014 and 2017, APRA introduced restrictions on bank loans to investors, including a cap on new interest-only lending.

1.27As a direct result, the investor share of new housing commitments dropped from 40 per cent to 30 per cent between March 2017 and December 2018.[15]The reduced investor demand for housing also contributed to slowed house price growth. From June 2017 to June 2019 house prices fell 4.3 per cent, one of the weakest periods for house price growth in the past 30 years.[16]

1.28These interventions have a clear track record of improving affordability and home ownership rates for owner occupiers and first home buyers.

1.29Consideration should be given to restricting investor lending, for example by limiting interest-only loans or the proportion of lending going to investors, to limit speculative investment which drives unsustainable house prices rises that lock out first-home buyers.

Bank profitability

1.30Calls from the Coalition to lower the buffer risks politicising macroprudential regulations and appear to be unnecessary in the current financial environment.

1.31National Australia Bank told the committee that “80 per cent of our first home buyers today don’t borrow to the max” under the current buffer settings.[17]He offered multiple reasons including, that people don’t want to feel too stretched.

1.32Further to the point, lowering the buffer and improving access to housing finance would only push up house prices more by fuelling demand for housing. Which would inevitably disadvantage first home buyers.

1.33The effects of lower buffers and expanded access to finance would however benefit the bottom lines of banks and mortgage brokers. The enthusiasm of some of these institutions for a lower buffer should be considered in this context.

1.34Professor Andy Schmulow said “our banking industry is the most profitable banking industry in the world by return on equity. The return on equity that they enjoy is approximately 16 per cent… Those extraordinary profits are being extracted more than anywhere else from mortgages, which has now become some 70 per cent of their asset base”.[18]

1.35In light of these profits, it was suggested that banks could consider waiving mortgage insurance for first home buyers and absorbing the risk themselves given that insurance is actually designed to keep the bank out of financial trouble not protect the mortgage holder.

1.36Westpac responded “that's a policy rule that we could absolutely consider and it's an option available to us. I don't think I can answer now. There's a governance process around building out policy, but it's absolutely one we can take on notice and discuss further”.

1.37Housing affordability and the challenges for first home buyers trying to enter the housing market is a problem for everyone in Australia, including financial institutions. The responsibility for helping lower the barriers to entry for first home buyers can also be shared.

1.38Given Australian banks make high profits from mortgages, the Government should explore options such as requiring banks to cover the costs of Lenders Mortgage Insurance for first homebuyers, which could make their mortgages more affordable.

Alternative solutions to improve housing affordability and home ownership

Tax concessions for property investors

1.39It is widely accepted that housing supply is part of the problem and thus solution to addressing housing affordability in Australia. However, it is not the whole story.

1.40The Australia Institute research shows that “over the past ten years the population has increased by 15%. Over that same period the number of dwellings has increased by 19%. Despite the supply of new dwellings growing faster than the population, house prices increased 75% over that period.”

1.41This evidence indicates that supply shortages are not the main or only driver of house prices over the last decade as it is often portrayed in the housing debate.

1.42A major driver of house prices is increasing demand fuelled by the tax treatment of residential property in Australia, in particularly negative gearing and the 50 per cent capital gains tax discount.

1.43The combination of negative gearing and the 50 per cent CGT discount has attracted a huge number of property investors to buy housing over the past couple of decades.

1.44Dr Greg Jericho from the Australia Institute said “we can see that from 1970 to 2000, apart from a little bump in the late eighties with that asset boom that led into the 1990s recession, apart from that, housing prices essentially grew in line with household disposable incomes … But you can see a dramatic split from the end of 1999 and the introduction of the capital gains discount to the point where since then, in a sense, house prices have increased almost twice as much as household disposable incomes”.[19]

1.45The increase in investor driven demand has pushed house prices up, encouraging even more investors to purchase housing, and driven a long-term decline in the home-ownership rate. The combination of inflated prices and the advantage that these tax concessions give to investors when competing for loans and buying property has put first home buyers at a significant disadvantage.

1.46The solutions to improving housing affordability for owner occupiers, particularly first home buyers cannot be found by tinkering around the edge with housing finance eligibility and APRA mandates – they must address the root causes of unsustainable house price growth and the investor share of housing ownership.

1.47Mr Matt Grudnoff, from the Australia Institute said “if you get rid of those tax concessions, you’ll raise billions and billions of dollars. Those billions of dollars could then be used to increase the supply of housing, through public housing, social and affordable housing”.[20]

1.48To improve housing affordability and help more people into home ownership the Government should phase out negative gearing and the capital gains tax discount. These tax concessions mainly go to property investors, drive prices up and allow investors to outbid first home buyers.

1.49That the Government phase out negative gearing and the 50 per cent capital gains tax discount, the tax concessions for property investors which drive up the price of housing and allow investors to outbid first home buyers.

Expanding public housing construction

1.50Along with tax concessions, the declining role of the state in building housing stock, both for sale to owner-occupiers and for affordable rent through the public housing system has significantly contributed to the decline in housing affordability, both for renters and first-home buyers in Australia’s housing market.

1.51Mr Matt Grudnoff from the Australia Institute gave evidence that “if you look around the world, countries with affordable housing all have one thing in common—that is, they have a large role for the public sector in housing”.[21]

1.52The idea of a public developer is not new, and it has been a successful policy intervention in the past to address housing affordability in Australia. Macquarie University Economics Society gave evidence that “Australia developed a relatively high home ownership rate during the postwar reconstruction era when the Chifley and then Menzies governments undertook large scale investment in residential housing development through public property developers that built houses and sold them to first-home buyers at non-market prices, which saw home ownership rise from 46% to 72% between 1947 and 1966.”[22]

1.53While Australia’s home ownership rate amongst 25 to 34 year olds has dropped from 60% to 45% over the past four decades, in the same period Singapore, which has a large-scale public developer which builds homes that are sold cheaply to owner-occupiers, has managed to increase their home ownership rate from 60% to almost 90%.[23]

1.54If the major parties are serious about addressing the housing crisis in Australia, including for renters, prospective first home buyers and owner-occupier mortgage holders, then they should commit to a significantly expanded role for the state in building housing.

1.55In a housing crisis, the supply of homes should not be left up to private developers, whose profits increase the more that house prices and rents go up.

1.56That is why the Greens have committed to establish and fund a public property developer, which would see the Government build 610,000 well-designed high-quality homes for people to rent cheaply and buy at just over the cost of construction over the next decade.

1.57The scale of the housing crisis requires solutions other than demand side solutions that will directly contribute to future price hikes in housing. It requires increased supply of genuinely affordable housing, such as by establishing a public developer that cuts out property developer and investor profits and can provide a steady pipeline of construction outside the boom-bust cycle of the construction industry.

Improving tenancy conditions for renters

1.58The proportion of the population who are renting has increased significantly over recent decades across all age brackets, with growing numbers of Australians now expecting to rent for their entire lives.[24] However, tenancy laws in Australia give renters little security or ability to plan for the long-term, feel a sense of control over their home or protection from unlimited rent increases.[25]

1.59Alongside shifting incentives that favour investors over first-home buyers and owner-occupiers, it is essential that Australia strengthens tenancy protections for renters to ensure that the growing proportion of people renting long-term are not treated as second-class citizens, but are also able to enjoy stable, affordable housing.

1.60To support long-term secure and affordable housing for people locked out of home ownership the government should establish a publicly owned property developer to build homes to be rented and sold cheaply, expand public housing and improve conditions for renters by offering longer-term leases and restricting unlimited rent increases.

Senator Barbara Pocock

Substitute Member

Greens Senator for South Australia

Footnotes

[1]The Australia Institute, Submission 8, p. 1.

[2]PropTrack, PropTrack Housing Affordability Report – 2024, September 2024, https://www.realestate.com.au/insights/proptrack-housing-affordability-report-2024/ (accessed 28November 2024)

[3]Max Chandler-Mather MP, ‘Childcare worker would take 31 years to save a home deposit, analysis shows’, Media Release, 20 August 2024.

[4]Everybody’s Home, Submission 47, p. 1.

[5]APRA, Opening Statement: Financial regulatory framework and home ownership, 24October2024, https://www.apra.gov.au/news-and-publications/opening-statement-financial-regulatory-framework-and-home-ownership (accessed 28 November 2024).

[6]APRA, Update on APRA’s Macroprudential settings – November 2024, November 2024, https://www.apra.gov.au/update-on-apras-macroprudential-settings-november-2024 (accessed 28November 2024)

[7]Mr Paul Deall, Head, Risk, Mortgages and Consumer Credit, Westpac, Proof Committee Hansard, 24October 2024, p. 8.

[8]Mr Angus Sullivan, Group Executive, Retail Banking Services, Commonwealth Bank of Australia, Proof Committee Hansard, 24 October 2024, p. 24.

[9]Mr Chris Taylor, Chief of Policy, Australian Banking Association, Proof Committee Hansard, 24October 2024, p. 4.

[10]Mr Saul Eslake, private capacity, Proof Committee Hansard, 24 October 2024, p. 48.

[11]Ms Nadia Harrison, Chief Executive Officer, Mortgage Stress Victoria, Proof Committee Hansard, 24October 2024, p. 18.

[12]Ms Harrison, Mortgage Stress Victoria, Proof Committee Hansard, 24October 2024, p. 18.

[13]Mr David Locke, Chief Ombudsman and Chief Executive Officer, Australian Financial Complaints Authority, Proof Committee Hansard, 24October 2024, p. 28.

[14]Ms Harrison, Mortgage Stress Victoria, Proof Committee Hansard, 24October 2024, p. 21.

[15]APRA, answers to questions on notice 006, 24 October 2024 (received 1 November 2024).

[16]The Australia Institute, Submission 8, p. 11.

[17]Mr Andy Kerr, Executive, Home Ownership, National Australia Bank, Proof Committee Hansard, 24October 2024, p. 15.

[18]Professor Andy Schmulow, private capacity, Proof Committee Hansard, 16 October 2024, p. 12.

[19]Dr Greg Jericho, Chief Economist, The Australia Institute, Proof Committee Hansard, 16 October 2024, p. 37.

[20]Mr Matt Grudnoff, Senior Economist, The Australia Institute, Proof Committee Hansard, 16October2024, p. 38.

[21]Mr Grudnoff, The Australia Institute, Proof Committee Hansard, 16October2024, p. 39.

[22]Macquarie University Economics Society, Submission 27, p. [2].

[23]Michael Janda, ‘Could Australia learn from Singapore to make housing more affordable?’ ABC News, 6 February 2024, https://www.abc.net.au/news/2022-02-06/could-australia-learn-from-singapore-to-make-housing-affordable/100801082 (accessed 28 November 2024).

[24]Australian Housing and Urban Research Institute (AHURI), Final Report No. 431: Planning for a two-tenure future, 12 November 2024, https://www.ahuri.edu.au/research/final-reports/431 (accessed 28 November 2024).

[25]Associate Professor Ben Spies-Butcher, Submission 25, pp. [4–5].