The housing affordability problem
The majority of Australians aspire to home ownership. It
should be an aspiration that through prudent management of household finances
they are able to realise. Currently, there is a significant problem with
housing affordability in Australia. In certain regions of the country the
problem is particularly acute (see chapter 8).
On some measures, housing affordability is at a record low
(see chapter 3).
- the average house price in the capital cities is now equivalent
to over seven years of average earnings; up from three in the 1950s to the
- only a third of transacted dwellings would have been accessible
to the median young household in 2006–07, compared to a long-run average
of almost a half
- around two-thirds of households in the lowest 40 per cent of the
income distribution with a mortgage or renting were spending over 30 per cent
of their income on housing, the established benchmark for 'housing stress'.
would suggest the problem may be less widespread:
- a low income household that in 1996 was devoting 30 per cent of
its disposable income to mortgage repayments would today be able to devote
47 per cent of its disposable income to servicing debt while maintaining
the same standard of living. Only around five per cent of households have low
incomes and spend more than half of it on housing.
As house prices have
increased, so too have rents and there are many more renting households in
stress than home buying households. Of greatest concern, as many as 100 000
Australians are currently homeless (chapter 2).
The problem of affordability in Australia has been a
function of both strong demand and limited supply. Several factors have contributed
to the strong demand for housing (chapter 4). They include:
- higher average real incomes and an increase in the number of
double income households;
- a decrease in the size of the average household due to later
marriage, fewer children and increased incidence of separation and divorce;
- relatively strong population growth underpinned by higher
the decline in standard home loan interest rates from the mid
1990s to early 2002 reflecting a low inflation environment;
- greater availability of credit, including from non-bank lenders;
- the taxation system's incentives which have encouraged investment
in second and third properties (through negative gearing provisions and the 50
per cent capital gains tax discount) and have benefitted owner-occupiers over
renters (through the capital gains and land tax exemptions on owner-occupied
It is estimated that there is currently an annual shortfall
in housing supply—relative to underlying (population-based) demand—of 30 000
dwellings. Several factors have been blamed for the shortfall in housing supply:
three are of particular concern (see chapter 5).
First, state and local governments' planning processes are
too complex and often involve long delays and high costs. These impediments to releasing
and zoning land add to developers' costs, some of which are then passed on to
the homebuyer. The state governments should reform and simplify their planning
processes so that local governments can process planning applications more
quickly. The committee urges state governments to act swiftly on the various
planning reviews and reform processes they currently have in train. It welcomes
the Commonwealth government's proposal for local governments to compete for
federal grants to cover part of their new infrastructure costs on the basis of
their proposals to cut red tape and reform their planning processes.
Secondly, some witnesses argued that developer infrastructure
charges are excessive and have restricted supply. Previously, infrastructure
was paid for by local and state governments out of rates and taxation revenue,
and was often only installed after residents had moved in. Now, the
infrastructure is installed as the land is developed and is increasingly being
funded by specific charges on developers. These charges are significantly
higher in New South Wales (perhaps because of rate-pegging by the state
government) and may be significantly reducing the supply of land for housing in
Thirdly, there is a shortage of skilled labour in the
construction industry. There is widespread concern that skills shortages will
prevent the industry from meeting future housing demands, particularly as the
planned investment in national infrastructure projects commences. The committee
welcomes collaboration between the federal government and the construction
industry to make section 457 skilled worker visas more flexible and
streamlined. It sees an important role for the National Housing Supply Council to
track the construction industry's current and future skilled labour needs based
on both the underlying and effective demand for housing.
The right kind of supply
The committee stresses that an adequate supply of housing is
not simply a matter of constructing a certain number of dwellings in greenfield
Housing supply must be well located and well serviced with
supporting jobs, public transport and social and community infrastructure (see
chapter 5). The way to improve housing affordability is not to build cheap
houses on the outskirts of cities away from employment, services and public
transport links. This simply shifts costs from housing to the cost—in dollars
and time—of transport. Rather, the aim must be to build affordable housing in
areas where infrastructure can provide for and attract new residents. In
considering longer-term changes in the housing stock, thought must also be
given to it being environmentally sustainable for it to be truly 'affordable'
in a broader sense (chapter 11).
These are major planning challenges. The Victorian and South
Australian governments have both devised 'urban growth boundaries' to contain
urban development. Future housing development is planned around targeted 'activity
centres' near existing transport and shopping precincts. The committee argues
that while these boundaries are sound in principle, they need to consider
carefully projected population estimates which are vulnerable to government
policy decisions on issues such as immigration. It is also essential that state
and local governments ensure the support of developers, home buyers and local
communities in moving toward a more compact city design.
The second challenge is that the housing supply must reflect
what home buyers need (see chapters 5, 6 and 8). The committee has taken
evidence from several witnesses that there is often inadequate housing for
those looking to downsize and for those with limited means seeking less
expensive private rental housing or social housing. Greater diversity in the
design, price, location and tenure of housing will help to address the problem
of housing affordability and help strengthen local communities.
The committee argues that state governments' planning
frameworks must establish a specific target for 'affordable' housing (see
chapter 6). In addition, all three tiers of government should invest
significantly under the new National Affordable Housing Agreement to meet
specific targets for social housing.
State and territory governments'
An important part of the committee's remit has been to
examine the taxes and levies imposed by state governments (chapter 7). Stamp
duty is the most visible and substantial state government impost on home
buyers. State governments have failed to adjust stamp duty thresholds to keep
pace with house prices. This led to a substantial increase in the average rate
of stamp duty on a median priced house. The committee's broader concern is that
stamp duties are inefficient. They discourage people from moving to more
appropriate housing types as their circumstances change. They may encourage
first home buyers to buy a larger home than they need at the time to avoid
paying further duty should they relocate.
As mentioned, state governments' infrastructure charges on
developers can potentially restrict the supply of housing: they may also
substantially increase the cost of a house. The committee heard a range of
views on these charges:
- that they enable more land to be developed quickly than if the
cost of infrastructure were to be borne by cash strapped local governments;
- that the current system allows local governments to set
excessive, 'gold-plated' standards for the outlay of infrastructure;
- that higher infrastructure charges will not substantially affect
housing affordability; and
- that a new infrastructure funding system is needed based on a
'betterment levy' imposed on the owners of rural land when the land is sold for
urban use, often at a greatly inflated value.
The committee cautions
that it may not always be the case that developer charges are passed on to the
home buyer. Instead, they may be partly incurred by the developer or be 'passed
back' in the form of a lower price paid by the developer for the land. The
extent to which the charges are passed on to the home buyer may vary with the
state of the housing market.
Assisting first home buyers
There are several current and prospective federal and state
government schemes to assist first home buyers (see chapter 9).
The current First Home Owners Grant (FHOG) was introduced in
2000 as a $14 000 payment to first home purchasers of new dwellings and
$7 000 for the purchase of existing dwellings. The scheme is now a
$7 000 payment for all first home purchasers. The committee has received
evidence that the FHOG has had an inflationary effect which has benefited
existing home owners rather than those seeking to enter the market. Several
witnesses called for the payment to be restricted to houses below a certain
value, or to buyers below a certain income.
The committee believes there are grounds to consider the
operation of the FHOG, and notes the added assistance of First Home Saver Accounts
(see below). Such consideration could include the reinstatement of the scheme's
original structure, which gave a larger payment to purchasers of new dwellings
than purchasers of existing dwellings.
The federal government announced further details of its First
Home Saver Accounts Scheme in the 2008 budget. Under the Scheme, both the
government and home saver will pay a contribution to a deposit account. The
government's contribution will be a flat 17 per cent (a maximum of $850). The
investment earnings of the accounts will be taxed at 15 per cent and
withdrawals, for the purpose of purchasing a home, will be tax free. The
committee acknowledges the introduction of these accounts and believes the
instilling of a saving habit is important.
The committee notes the limited but growing use of 'shared
equity' home ownership schemes, offered by some banks and some state and
territory governments. In principle, these schemes are an attractive avenue for
lower income people to purchase a part share of a house they could not otherwise
afford. However, there are legitimate concerns that shared equity schemes must
abide by this central purpose and should not become a vehicle for home buyers
to demand bigger and more extravagant homes.
This inquiry emphasises that the current supply of rental
housing is severely inadequate (chapter 10). Vacancy rates are at record lows. The
committee acknowledges the federal government's National Rental Affordability
Scheme and its notional target of an extra 100 000 affordable rental
dwellings with 50 000 by 2012. The Scheme will provide annual tax
incentives over 10 years for investors in affordable rental housing. In the
absence of specific details as to how these incentives will be structured and
targeted, the committee will watch growth of the scheme with interest.
The committee identifies other aspects of rental housing
that require attention:
- various organisations argued that the Commonwealth Rent
Assistance Scheme is inadequately funded and poorly targeted. There were suggestions
to target rental assistance in line with regional rental prices and to broaden
the payment to include home purchasers in temporary financial stress; and
- public housing has been financially strained for more than a
decade as its client base has shifted from couples with children (with many
paying market rents) to people with mental health or other social problems.
There is a need to increase the stock of public housing, facilitate the entry
of a more diversified mix of income earners and restore pre-1996 funding levels.
Most of the current problem in housing affordability is
structural rather than cyclical, so longer-term solutions must be considered.
In the longer term, decentralisation policies offer scope to allow more people access
to housing that is affordable both in regard to its purchase price and in
regard to the cost of commuting from home to work (chapter 11).
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