Treasurer Scott Morrison spoke to the Australian Housing and Urban Research in Melbourne today. This is an edited version of his address.
Last year I said the three important economic goals Australians aspire to are to have a job that allows them to support and care for their families, to be independent in their retirement and to own their home.
The Government continues to share and facilitate Australians realising each of these aspirations.
Home ownership is a positive for the Australian economy, our society and the nation’s finances.
If Australians are able to affordably own their own home and achieve housing stability, this can set them and their children up for success and reduce risks of welfare dependence.
This is especially true as Australians reach retirement.
Australian homeowners who are not encumbered by large housing debt as they enter retirement will have their pension or superannuation incomes go much further to meet their many other costs of living.
Similarly, those who own their own home are subject to a higher assets test – excluding the family home – for accessing the age pension.
The proportion of Australian households that own their own home has fallen marginally from 71% to 67% over the last two decades.
The largest falls have been in Queensland and Victoria, rather than NSW, where housing affordability has been an established challenge for much longer.
However, between 2002 and 2014, home ownership among 25 to 34 year olds declined more significantly by almost 10 percentage points to less than 30%. That is more than 160,000 young people that would otherwise be home owners. For 35 to 44 year olds it fell by more than 10 percentage points to 52.4%.
Between 1981 and 2011 the share of median household income spent on mortgage payments by 25 to 34 year olds also increased by more than half and more than doubled for 35 to 44 year olds, with each paying around 25% or more of median household income on mortgages.
It is concerning that the decline in home ownership and increase in mortgage costs has been most pronounced in family-forming households and that Australians are increasingly carrying into their retirement larger mortgage debts, or are renting.
The proportion of home owners aged over 45 with a mortgage has increased and, according to the Productivity Commission in 2015, the most frequent use of superannuation lump sums was to fund housing, including paying down mortgages.
Saul Eslake’s recent report to Superannuation trustees noted, ‘it is likely that an increasing proportion of new retirees will use some or all of their accumulated superannuation savings to discharge their outstanding mortgage debt’ and that ‘an increasing proportion of retirees will be living in privately rented housing, spending a higher proportion of their income on rent.’
These are the facts and they represent a problem that needs to be addressed in the broader national interest.
As a Government, we acknowledge that for certain Australian households, housing affordability is an issue regardless of where they live due to economic reasons such as not having a job or social reasons such as having a disability.
However, in Sydney and Melbourne where supply has failed to keep pace with rising demand, the problem is far more acute.
Sydney and Melbourne have seen median house prices increase by 19% and 16% respectively in the past year and both have increased by around 8% per year on average over the decade.
Since 2006, the average number of years required to save for a deposit in these markets has increased from 5 to 8 years in Sydney, and from 4 to 6 years in Melbourne.
Prices in Brisbane and Adelaide only rose on average by 3% per annum over the decade while Perth growth was only 0.3%.
Obviously there’s not a single national housing market and affordability is not impacting all Australians the same way.
However, it is worth remembering Sydney and Melbourne are home to 40% of Australians and the significant housing challenges faced in Sydney and Melbourne do have national implications.
Our household debt has risen to 123% of the economy, $2.1 trillion, 80% of which is housing debt, heavily influenced by householder borrowings following higher prices in the eastern states, including from investors.
More than 60% of banks’ domestic loans are underpinned by residential real estate, with a heavy exposure to the eastern states.
RBA Assistant Governor Luci Ellis also recently observed to the Australasian Housing Researchers Conference that housing outcomes were central to the welfare of households and the stability of the financial system and that the housing sector was a key part of the transmission mechanism for monetary policy.
How we choose to address housing affordability challenges also can have national ramifications beyond the markets directly impacted.
As I have argued, dealing with housing affordability must involve a scalpel, not a chainsaw as advocated by the Labor Party.
Facing similar affordability challenges in markets such as Vancouver, the Canadian Government recently warned of instituting policies that created unintended consequences.
The principal cause of declining housing affordability is the failure of housing supply to adjust to increased demand, driven by higher economic growth.
It can’t be answered with lower economic growth.
To the contrary, our policy response must be careful and calibrated, lest we spark a negative housing shock that would undermine our economic confidence, negatively impact household consumption and retard economic growth.
The more than two thirds of Australians who live in owner-occupied homes would agree that reducing the value of their home is not a good plan, and it is not the Government’s plan.
Our response must first strive to remove obstacles that restrict supply responding to genuine demand. These impediments are well known, planning delays and regulations, supporting infrastructure and services, the cost of new development, taxes and charges and access to sites, including Government land, just to name a few.
And our response must be comprehensive – there is no silver bullet. We don’t claim instantly affordable housing. Anyone making such claims would soon be found out and rightly punished for it.
Our actions also need to occur at all levels of Government, coordinating our responses wherever possible.
A good example of the scalpel approach in the national sphere was the recent action taken by the Australian Prudential Regulation Authority to limit the share of housing lending that is interest-only. This follows their earlier intervention in December 2014, placing a speed limit on investor credit growth that halved previous levels.
Tackling the rental challenge
I want to turn our attention to the rental housing sector, and the increasing pressures being placed on our social and affordable housing programs.
As you all know, the housing market is part of a continuum – ranging from homeowners, to renters, to social and affordable housing, and regrettably homelessness.
Just over two thirds of households are owner occupiers, and almost a third rent – a quarter rent in the private market, and just under 5% rent through community housing providers at sub-market rates or in public housing.
Despite high price growth in Sydney and Melbourne, rental growth has been far more modest at just 1.5% and 2.2% respectively.
However, just because rental growth has not mirrored house price increases, does not mean the rental sector has avoided affordability challenges.
Around 47% of low-income rental households in our capital cities spend more than 30% of their household income on housing costs.
Furthermore, since around 2007 private market rents have increased more than Commonwealth Rent Assistance. So despite 80% of recipients receiving the maximum payment, 40% still suffer rental stress.
To top it off, community or public housing wait lists are approaching 200,000 and as at 2013–14, a quarter of a million people were accessing specialist homelessness services.
To appreciate these challenges we must understand the interactions between different parts of the housing market.
Higher house prices are making it tougher for potential homebuyers to transition into ownership.
Research by CHOICE, the National Association of Tenants’ Organisations and National Shelter, reports just over half of renters say they rent because they can’t afford to buy their own property.
Because of this, they are staying in the rental market for longer — a dynamic that puts upward pressure on rental prices and availability and even more pressure on lower-income households, increasing the need for affordable housing.
These trends were identified in a 2014 AHURI study by Hulse, Reynolds and Yates into changes in affordable housing supply in the private rental sector for lower income households between 2006 and 2011.
It showed a marked lift in renters with higher incomes between 2006 and 2011, supporting the observation that first-home buyers were increasingly staying in the private rental market for longer.
It is a statement of the obvious that you can’t help first homebuyers save for a deposit by implementing policies that increase their rent.
Increasing numbers of higher income earners privately renting has the obvious effect of lowering availability of affordable rental stock to those on low incomes.
The AHURI research calculated that the shortage of affordable and available dwellings for households on the lowest 20% of incomes, which deducts affordable dwellings occupied by those on higher incomes – the crowd out factor – was 271,000 dwellings in 2011, up from 211,000 in 2006.
For the next highest household income quintile, there was a shortage of 122,000 affordable and available dwellings in 2011, up from 87,000 in 2006.
This dynamic works both ways – not enough social and affordable housing means more Australians on lower incomes are pushed up into the private rental market and into rental stress, or find it harder to escape homelessness and move into stable accommodation.
This is, regrettably, what we are seeing in Australia.
AHURI has also observed that the private rental market is increasingly housing older people and families with children.
Couple families with dependent children represent more than one in five rental households. Between 1981 and 2011, the proportion of lone person households who are renting fell from over 40% to 25%.
Over 85% of private renters move within five years and almost one third of moves are forced. This is three times the rate of other tenures.
This is particularly concerning for families with children.
These families need housing stability to have consistent, reliable and beneficial access to the services they rely on such as schools, medical assistance and other supports. This means access to longer term leases.
If families or vulnerable Australians find it harder to access stable housing, further upward pressure is placed on financial supports and services. It also results in greater costs for taxpayers.
In short we need more housing, not just for homeowners, but for renters, for key workers such as nurses, teachers and police officers who can’t afford to rent or buy in the communities they serve and for those on low incomes, the disabled and disadvantaged.
And then there is the challenge of Indigenous housing, a whole other story with its own unique challenges.
Business as usual across federal, state and local governments is not an option.
There’s no better example than the National Affordable Housing Agreement, or NAHA.
The 2016 COAG Report on Performance confirmed failure even against the scant performance criteria set out in 2009.
• 10% reduction in the proportion of low-income renter households experiencing rental stress: no evidence that progress has been made. Instead, this increased from 35.4% in 2007–08 to 42.5% in 2013–14 (up 7.1%)
• 7% breduction in number of homeless from 2006 to 2013: increase from just under 90,000 in 2006 to more than 105,000 in 2011 — a 17.3% increase (noting that data to assess whether this benchmark has been achieved will not be available until release of 2016 Census data)
• 10% increase in proportion of Indigenous Australians who own their own home from 2008 to 2017–18: no evidence of any increase since 2008
• 20% reduction in proportion of Indigenous households living in overcrowded conditions: 16% decrease in the proportion between 2008 and 2012–13 (on track).
This agreement is a one way ATM providing important resources without accountability for outcomes.
We don’t need to spend more, and it’s not necessarily about spending less, provided we spend it better.
NAHA does not link funds to delivery of supply, even for public housing. Amazingly since spending $9 billion under this agreement over eight years, we have 16,000 fewer public housing dwellings.
While supply of social housing dwellings, inclusive of community housing stock, has risen by 13,672 over this period, the public housing waiting list has risen from 177,700 to 187,000. You simply despair.
Ever since matched capital arrangements were removed from Commonwealth State Housing agreements the growth in social housing stock has flat-lined.
In addition to the $1.3 billion spent each year by the Commonwealth on the NAHA, $4.5 billion is spent each year on Commonwealth Rent Assistance, $478 million on remote Indigenous housing, $310 million in residual payments on the terminated National Rental Affordability Scheme and $115 million on the National Partnership Agreement on Homelessness – the only area of spending where I believe we are making progress.
That is $6.8 billion annually seeking to address this problem and the States spend a further $5 billion each year.
We are all frustrated by the lack of accountability and results for this significant taxpayer commitment.
Boosting investment in private rental stock
Progress must be made boosting and diversifying supply of rental stock. This is particularly necessary for lower income households, those at greatest risk of rental stress, key workers and the increasing number of families dependent on rental accommodation.
This is also all about supply and demand.
Rental vacancy rates remain at or below their five year average which is less than 2% in Sydney and currently 2.4%t in Melbourne.
So who is going to supply and own the additional rental stock needed in the private market?
Rental yields for investors are at 2.1% in Melbourne and 1.8% in Sydney. It’s less for affordable and social housing stock and hardly comparable to the yields available to institutions and corporates in other investments.
Notwithstanding these low yields, 27% of Australia’s housing stock is owned by investors, with just 5% owned by public housing and community housing agencies. The balance is owner occupied.
By contrast, in the UK just 18% of stock is owned by investors. And unlike in Australia there is greater institutional ownership of residential real estate in the UK and even more so in Europe and the US.
The UK also has a far greater social and affordable housing sector. Again 18 per cent of stock in the UK is owned by social housing providers, more than three times Australia’s proportion.
Here, our private rental stock is owned by mums and dads.
Figures to be released later this week show 2 million taxpayers in Australia have an interest in a residential investment property. 72% own just one property and 90 per cent own no more than two. 1.3 million of these taxpayers negatively gear their investments, including 58,000 teachers and one in five police officers. Two thirds of those taxpayers who negatively gear their investments have a taxable income of $80,000 or less.
They are mums and dads.
Interestingly, in the UK where they do not have negative gearing, rent as a percentage of income is on average 25% higher (26% of income) than it is in Australia (20%).
Australian residential property investment is more geared to capital gain than yield.
If mum and dad investors were not part of our private rental market, there would be fewer rental properties available, meaning higher rents, further crowding out of those on lower incomes and even greater pressure on already overstressed community and social housing resources.
Regardless of one’s opinions of the merits or otherwise of negative gearing, it is an established and structural component of Australia’s housing markets. Disrupting negative gearing would not come without a cost, especially to renters, let alone the wider economic impacts. Proponents of disruptive negative gearing changes have ignored this fact.
This would not be good news for the 30% of Australian households who rent.
You cannot make the reckless ‘trust us’ assumption, as the Labor Party have done, that making significant changes to negative gearing would not have a negative impact on rents and the availability of rental stock.
Mums and dad investors are putting a roof over the head of around a quarter of all renting households in this country. Keeping them in our private rental market is important for ongoing rental supply.
However, attention must also be paid to how rented residential real estate can be better structured to provide more opportunities for institutional involvement. This would diversify the base of ownership and inoculate risk, while potentially delivering greater stability and certainty as well as greater innovation in product offerings.
For example, as institutional investors tend to take a longer term position on their holdings, this would create greater scope for longer term leases and potentially reduce the reliance of developers on attracting individual foreign investors to get projects off the ground.
As with any new emerging asset class this will need to be fundamentally driven by the private sector. It will require new liquid investment vehicles, greater investment scale, new players and partnerships, appreciation of the longer term investment horizon, the creation of more conventional asset management structures for residential real estate that institutional investors are accustomed to in other property investments sectors and a more sophisticated information and research base to support investment allocation models.
Boosting investment in affordable rental housing
The same challenges exist to increase the pool of discounted rental housing stock for key workers, those on low incomes and deep subsidy social housing.
In Australia this has been traditionally seen as the reserve of the state sector, where assets are subsidized through direct grants and transfer payments.
The problem with this model is that it struggles to achieve scale and is forever dependent on the fiscal constraints of Government.
In Australia, well intentioned programs like the National Rental Affordability Scheme were always going to be hostage to fiscal constraints on the budget. Not only did the program struggle to meet targets with high compliance costs and vulnerability to misuse, it was never going to reach any sustainable scale as the program’s cost curve was linear.
Like so many social policy issues, the challenge we face in affordable housing is bigger than Government balance sheets. But so are the benefits of successfully addressing those challenges. We all stand to benefit. This creates the opportunity for broader participation and investment.
The UK moved away from grant models some time ago. However, in their wake they left behind a sizeable community housing sector.
AHURI research has demonstrated that UK stock transfers have contributed significantly to a new housing sector that has been innovatively and creatively meeting new housing policy goals in a post grant environment.
The capacities created by their new approach has enabled the housing system to respond flexibly and creatively to shocks and changes. Seeing stock transfers as a basis for long-run system change, with a diverse set of costs and benefits to be considered, seems to be a broader perspective than has generally prevailed in Australia.
I agree that the creation of a housing association sector in the UK has, within budgetary constraints, allowed a larger affordable rental sector to emerge which would not have developed with councils alone, and that the sector has been robust, resilient and innovative in housing delivery. The UK’s experience is valuable for Australia.
It is true there has been growth in our community housing sector over the decade supported by a program of stock transfers. However, the community housing sector, or housing mutuals as I would term them, are still minnows here, lacking the scale, balance sheets and depth of skills necessary to take on a much needed and more dominant role in discounted rental housing.
Housing associations have also tended to often go it alone, with very few partnering with the private sector and institutional investors to bring together complementary skills – the former in the management of community housing and the latter in the development and financing of housing stock.
Our public housing stock remains overwhelmingly tied up on State and Territory Government balance sheets, where it is neither leveraged nor recycled, except in a small number of cases, such as in NSW.
Instead we have ageing stock becoming more obsolete by the day, propping up State Government books rather than providing sustainable affordable housing. I know State and Territory governments would like to go further on this front, as would the housing mutuals, and we should.
In short, we need our housing mutuals to be more activated. To achieve this requires further change.
That’s why the Council on Federal Financial Relations that I chair, tasked the Affordable Housing Working Group to investigate innovative financing models.
The Working Group found a ‘financing gap’ is a major barrier to the supply of affordable housing.
It’s a gap between the low rates of return available on affordable housing investments compared to market returns available on alternative investments with similar risk profiles.
As I announced last month, the Government is establishing a taskforce to look at harnessing large-scale private investment through a bond aggregator concept.
The bond aggregator would issue bonds to the market, and on-lend these funds to community housing providers — allowing them to access cheaper and longer term finance.
The Housing Finance Corporation (THFC) in the United Kingdom, has operated a similar model successfully for over 30 years.
THFC has provided more than £5 billion worth of loans which is assisting the provision of affordable housing throughout the UK.
Of course, if found to be viable, a housing bond aggregator is only a part of the solution. A variety of complementary reforms are required to increase the supply.
These must also include providing a pathway to home ownership for Australians in affordable rental housing. The UK has also had success in this area with their shared ownership and rent to buy programs run in partnership with housing associations.
Other measures are rightly being pursued by State Governments such as asset recycling in NSW. Victoria is increasing its direct investment with a $1 billion social housing growth fund and is also pursuing shared ownership. Social impact bonds and social impact investment also provide options and in January I released the Government’s social impact investing discussion paper.
Inclusionary zoning is also increasingly being embraced. The Greater Sydney Commission has released affordable rental targets of 5 to 10% as part of its draft District Plan, while in SA and WA there are strategies requiring 15% of new developments to be set aside for these purposes. In the ACT, greenfield developments are now required to have 20% set aside.
However, requiring the set aside is not enough to make it happen. The development still has to stack up to move ahead. The regulation doesn’t make it so, as some planners seem to think.
For inclusionary zoning to work, developers must be able to move the mandated affordable housing stock. Insufficient compensating planning concessions or a lack of incentives for buyers would lead to one of two outcomes. First, it’s all too hard and no houses get built, or prices are hiked in the balance of the development to subsidize the affordable component. In other words, first home buyers pay for the subsidy.
Getting the trade-offs right requires governments, in particular local governments, developers and investors to take a broader, longer term community building perspective.
Real estate development, particularly when it comes to facilitating affordable housing development, can be victim to very short term thinking and also highly transactional.
To mitigate this cost, developers also need more take out purchasers for inclusionary zoned stock. This will require developers, governments and investors to work more closely together to de-risk investment in affordable housing. As is already occurring overseas, the goal is for affordable housing to be conceived not so much as a real estate investment, but a longer term fixed interest investment that can comfortably sit within institutional investment portfolios.
There is a clear appetite for this from pension funds, particularly in the US and Canada. I would hope a similar appetite could be cultivated amongst Australian super funds. In fact our funds are already investing in similar products in the UK. What could be more in the interest of nurses, teachers or police pension fund members than investing in affordable housing for nurses, teachers and police officers?
As with residential real estate, this will require the same prerequisites to establish a new institutional investment class. However, more specifically for affordable housing, it will require de-risking the income stream and mitigating tenant risk. There are a series of options available for government to provide greater certainty in this area. But the other key requirement is the development of a mature housing mutuals sector that has the scale, expertise and balance sheet to partner with developers, governments at all levels and investors. They are a critical yet undeveloped link in our affordable housing chain.
There are few more important public policy issues than housing.
In both this presentation and the address I delivered last October, I have attempted to honestly and candidly set out the challenges we need to wrestle with to make housing more affordable, more secure and more available to all Australians, wherever they find themselves on the housing spectrum.
Today was not intended to be the day to outline our response to these challenges. I will have more to say about this in the Budget, but our attention to these issues and response will not begin and end there.
One Budget will not turn these issues around in isolation, but we can make a start.
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