5 recommendations to make housing affordable
This is Narrow Road Capital's submission to the Federal Government’s inquiry into housing affordability.
Dear Committee Members,
I have noted the enthusiasm that committee members have shown thus far in addressing the problem of the lack of affordable housing in Australia. This is positive, however the true test of political action is the outcomes achieved not the intentions. Many committees and enquiries have preceded this committee, looking into this issue. My experience in making submissions and corresponding with these committees is that they too were well intentioned but lacked the courage to implement the obvious and necessary reforms.
Vested interests including the property and construction industry, existing homeowners and politicians who own far more property than the average Australian consistently get in the way of meaningful reform. Enquiries and committees inevitably make weak recommendations, often pointing to reforms that another level of government must implement rather than acting within their remit. Australia’s federal government can meaningfully reduce the cost of housing by making changes directly under its control, as well as by using its funding of the states to apply pressure to state and local governments to do their part.
Accompanying this submission are several papers I have written on the wider topic of housing affordability in recent years. The key issues have not changed and the recommendations in these historical articles remain valid. In order to assist the committee I will begin with some background notes and brief comments on the top five reforms that the committee should consider.
The housing market is actually two markets
One common misconception is that housing affordability is just one issue. However, the ability to afford the rent on a property and the ability to afford to purchase a dwelling are two different problems. The solutions to each are somewhat different, though often interrelated. The committee should start with the lack of affordable rental property as the key issue, as housing is first and foremost a place to live and second, an investment opportunity. Low income Australians do not have an alternative to housing as a place to live, wealthier Australians do have alternative investment opportunities.
Rental housing is primarily a supply and demand equation. If the supply of housing grows faster than the population, there will be more properties available for rent and rental affordability will improve. Australia has for many years under built new housing relative to population growth. This has seen the poorest Australians need to devote more of their income to housing over time.
If governments actually want to help poorer Australians, the two biggest things they can impact are the availability of work and the availability of affordable housing. The Covid migration changes have clearly shown that if Australia stops importing low skill/low wage people the cost of rental housing will fall and the unemployment rate will fall. The combination of higher employment/wage levels and a lower cost of housing can substantially lift the living standards of hundreds of thousands of the poorest Australians if federal politicians don’t stuff it up by importing hundreds of thousands of people.
Recommendation 1 – Limit migration to those earning more than $150,000 per year
The fact that international borders have been largely closed provides an opportunity to permanently reset migration levels at a small fraction of what they were. Those granted the right to migrate to Australia should be people expected to contribute disproportionately to the tax base. The minimum income test should be set at a high level such as $150,000 per year to ensure that employers are not shirking their responsibility to train Australians for ordinary jobs.
At the low skill end, the number of working holiday visas should be slashed. Unemployed Australians in regional and rural areas can be put to work on farms and those in the city can get to work in cafes and restaurants. University students (both domestic and international) will continue to provide a sizeable pool of low skill labour. International students should be given fair warning that few courses are likely to lead to permanent visas.
The shift away from population growth should cause a shift towards productivity focussed economic growth. I’ve written about this many times, with much low hanging fruit to be picked amongst excessive regulation and government spending, high and inefficient levels of taxation and anti-competitive government/business practices. Something as obvious as having a simple and universal minimum wage for small and medium sized business could see businesses expand and unemployed Australians shifted into work, leaving almost everyone except the lawyers better off.
Recommendation 2 – Set a target to build at least 20,000 dwellings per month for 3 years
This recommendation is trickier as it relies more heavily on state and local governments for its implementation. State and local government restrictions that block property owners from maximising their land’s value have been the biggest impediment to housing supply keeping up with excessive population growth. However, with appropriate fiscal carrots and sticks, the federal government can incentivise the current housing boom to continue in the medium term.
In a true free market, such incentives would not be needed as those who own land would be free to develop it to maximise its value. This would naturally mean more greenfield house blocks in fringe suburbs and higher density in brownfield areas. Incentives could include direct payments to state/local governments based on the number of housing starts or the withholding of funds if they fail to meet targets.
There should be a wide scope for different housing types within this including detached houses, low and high rise dwellings and manufactured housing. For some low income groups, such as retirees without savings, manufactured housing villages built on cheap land in fringe suburbs or in coastal communities should be encouraged. Younger age groups typically need good proximity to work and schools, which can require multi-room units in brownfield areas.
The committee should largely ignore suggestions to set targets for building designated affordable housing. Australia needs hundreds of thousands of new dwellings to bring affordable housing to the whole population. Government programs that build or incentivise the building of mere thousands of dwellings available to selected groups (e.g. “key workers”) make no meaningful difference to the overall affordability of rental properties.
The ability to afford to purchase a property is more complex than a simple supply and demand equation. The RBA Cash Rate, tax settings and the availability of credit can all substantially impact the price of a property just as they impact many other investment sectors. Three additional recommendations accompany these areas.
Recommendation 3 – End financial repression
Financial repression describes measures used by governments to hold down interest rates. This is effectively a tax on savers with the benefit transferred to borrowers. As the federal government is increasingly indebted after years of budget deficits it benefits from low interest rates. By setting the inflation target for the RBA too high, the federal government is unofficially taxing savers for its own benefit.
The global evidence on the effectiveness of ultra-low interest rates has become clearer now that more than a decade has passed since implementation. Ultra-low interest rates have not materially increased wages, consumer price inflation or business investment. Ultra-low interest rates have inflated asset prices, including Australian housing. Lower interest rates reduce the monthly repayment required to repay a loan. Many buyers have used lower interest rates to increase the amount they borrow rather than borrowing the same amount and repaying it faster.
The federal government should amend the RBA’s current inflation target of 2-3%. It could be changed to keeping inflation below 3% or to target an inflation band of between -3% and 3%. To prevent financial repression the RBA should also be required to ensure that the cash rate allows all citizens to receive a positive after-tax real rate of return. This can be expressed as:
An independent RBA should embrace this rule as it will stop the federal government from using financial repression to deal with budget deficits.
Recommendation 4 – Tax reform
For the sake of brevity and given substantial government reviews of this area in the last decade;
· Switch stamp duty for land tax
· Lower and equalise the income tax rates across personal, company and trust income
· Treat all income equally (the same tax rate for work income, interest/rent income and capital gains)
· Broaden and increase the GST to cover the reduced revenue after income tax cuts
· Cut federal government payments to state governments to reflect lower income tax and higher GST collections
Recommendation 5 – Macroprudential reform
The ability to leverage up a minimal deposit and/or the ability to more relative to your income creates an arms race amongst buyers. The one who borrows the most can bid the most. However, the “winning” bidder may ultimately end up losing the most in an economic downturn that is accompanied by a house price correction. The RBA has worsened this with its monetary policy decisions (see recommendation 3) and APRA has failed to respond whilst house prices have run higher. Two simple measures can address the building systemic risk in residential property lending;
· Ban lending where the debt to income ratio exceeds six times
· Ban lending where the LVR exceeds 90%
The lack of affordable housing is almost exclusively due to poor government policies across federal, state and local governments. There is no one reform that can fix all of the poor policies that together have led to Australia being a world leader in unaffordable housing. The above recommendations are aimed at correcting existing government policies and thus allowing all Australians to have access to low cost rental accommodation. The recommendations will also assist those wishing to purchase a property, subject to them also having adequate income and savings to be in a financial position to afford to purchase a property.
The committee should avoid any schemes that involve governments underwriting or subsidising high risk loans to those who have insufficient savings or income to afford their preferred form of dwelling. These schemes encourage potential homeowners to save less, borrow more and buy more expensive properties. They can trap borrowers in homes and loans that are not suitable if their work, family or financial situations change.
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Narrow Road Capital is a credit manager with a track record of higher returns and lower fees on Australian credit investments. Clients include institutions, not for profits and family offices.