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Economists discuss housing affordability and mortgage stress.

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Tuesday 17 July 2007



FRAN KELLY: The high cost of housing has helped push Australian debt levels to record highs. And that phenomenon is really not disputed. But what is being challenged is Labor’s claim that more than half a million households in this country are now suffering from acute financial stress.


The Howard government maintains that while debt levels are high, Australian families have never been better off because unemployment is at all time lows, incomes are rising while inflation is staying low.


Labor counters that the government has lost touch with the ordinary working families, many of whom are now struggling to pay off their mortgages or who can’t even afford to get into the housing market in the first place.


It was a point Opposition Leader Kevin Rudd was keen to emphasise when he spoke to voters at a Gold Coast shopping centre yesterday.


VOX POP: We’d like to hear a little bit more about the poor kids that can’t get houses these days.


KEVIN RUDD: Well housing affordability is a big one. The big one’s that we pick up around here are housing affordability, rents, cost of groceries, petrol and WorkChoices.


FRAN KELLY: That’s some bread and butter issues folks and we’ll be hearing a lot more about those issues from Kevin Rudd in the next few months.


But right now, just how things are, how tough are things out there in mortgage land? And to discuss this I’m joined by three experts on this particular sector of the economy: Doctor Steve Keen is Associate Professor of Economics and Finance at the University of Western Sydney and he’s done a lot of research on Australian household debt levels.


Steve, welcome to you.


STEVE KEEN: Thankyou.


FRAN KELLY: Craig James is Chief Equities Economist at CommSec, a division of the Commonwealth Bank which is a major lender in the home loan market. He joins us on the line from Sydney.


Craig welcome.


CRAIG JAMES: Good morning.


FRAN KELLY: And social welfare expert Julian Disney, is these days, the Chair of the National Affordable Housing Summit, which is a coalition of community and industry groups formed to address the issue of the high cost of housing. And he joins me in the studio too.


Julian, welcome to you.




FRAN KELLY: Now, mortgage stress: fact or fiction? That’s basically the question we’re trying to pick-a-part here.


Steve if I can ask you first, Labor says more than half a million households in this country are suffering mortgage stress because they’re forced to pay 30 per cent or more of their gross incomes on mortgage repayments. Now the government, some economists, even the Reserve Bank says that’s an exaggeration. What do you think?


STEVE KEEN: I don’t have the same detailed figures that the Labor Party is working with there but I’m pretty certain they’re correct. The level of financial stress is enormous simply because the level of debt has gone up, interest rates have gone up not quite as much as debt has increased, but the two together have jumped from taking a mere five cents in the dollar out of the average households disposable income to 11 cents in the dollar in the last five years. Now nothing else in the country has gone up 120 per cent in five years. So that’s why they’re feeling stress.


FRAN KELLY: But for that statistic to be relevant don’t we also have to look at what that 11 cents worth of debt servicing is going and what if it’s servicing investments that are actually going up in ….


STEVE KEEN: I would be delighted if we’re servicing investments. What it’s actually servicing is massive speculation in the price of assets. If you take a look at the amount of money that was borrowed that actually was used to buy houses, it’s only five per cent of the money that’s been lent to households and investors in the last 10-15 years has actually gone to build houses. The other 95 per cent has gone to speculate on the prices of existing houses. Now making existing houses more expensive doesn’t increase the productive capacity of the economy. And we’ve fooled ourselves by supporting speculation and calling it investment.


FRAN KELLY: Craig James what do you think because debt levels have gone up, that’s true, but you think our wealth, the amount we’re worth has gone up too?


CRAIG JAMES: Yes, unfortunately people just look at one side of the equation. When we’re going into the local supermarket we look at what prices have gone up but we don’t look at the other side of the equation that our wages have also gone up. We don’t look at the fact that the share market has been rising and increasing people’s wealth levels as well. Over the last five years the average wage has increased by 25 per cent. Now that’s well ahead of growth of prices in the order of 14 per cent. And a lot of goods have actually become more affordable over the past five years. Whether you take milk or bread, rump steak, bananas, petrol, beer, you name it, it’s all become more affordable. That’s because wages have increased at a faster rate than those prices. And it’s also other goods like clothing, TVs, cars; cars are the most affordable in 20 years. All these goods are taking up a smaller proportion of people’s budgets, that’s allowing more to be able to be spent for housing.


FRAN KELLY: How does that figure fit in with that statistic Steve just gave us of in 1990 five cents in the dollar were spent on mortgage debt, now it’s eleven cents?


CRAIG JAMES: Certainly we are spending more on mortgages. In terms of the average wage something like 41 per cent of the average wage now goes on in terms of paying off the average home loan. If you go back five years ago that figure was only 30 per cent.


But a lot of it is choice. A lot of it is the fact that people have got a lot of extra in terms of their income that they can allocate to housing, servicing a mortgage, perhaps a margin lending to buy shares, perhaps an investment property. So a lot of it is actually choice rather than compulsion. And people have got extra dollars left over and people have decided to be able to put it into housing.


Really when you’ve got a situation where wages are increasing at a faster rate than prices, unemployment is super low, wealth levels are at record highs, it’s hard to fathom that with suggestions that everyone’s under stress.


FRAN KELLY: Julian Disney this seems a perfect point to bring you in. Are people choosing to take on more risk? Is that the difference we’re seeing now, people are taking on larger mortgages because they chose to buy bigger and better houses?


JULIAN DISNEY: Well quite a lot of the 500,000 that you referred to are doing that. There is quite a lot of discretionary taking on of additional debt, whether it’s additional housing debt or not.


And so I think if we’re looking at this from the point of view of those who are struggling with unaffordable housing problems, that 500,000 people is not the correct figure, it’s an overstatement.


There are however major economic problems flowing from those 500,000 people as Steve mentioned. Many of them have contributed to driving up house prices for other people, many of them have contributed to the fact that we have a frightening high level of household debt. So the 500,000 does show a general economic problem that will hurt us badly in the future.


FRAN KELLY: Because we’re taking on more debt and because we’re getting into the investment market and that’s warping the home market, is that it?


JULIAN DISNEY: Yes. Firstly, it’s sucking too much of our investment into housing rather than things for example which would improve trade, also it makes us more venerable to economic downturn in the future. But within the 500,000 there’s quite a significant number, the Reserve Bank figures would suggest it’s about a third at least of that 500,000 who are in genuine difficulty trying to service their housing costs. So there’s a group there that’s important.


But also there’s another 500,000 people shown by the census who are the main people suffering unaffordable housing and they’re renters. The census confirms, in fact it shows figures even worse than we feared, how many renters are paying above what’s a manageable level of income and of course that means that those renters not only are in hardship but in many cases it reduces their chances of being to buy a home anyway because they can’t save up for it.


So the big problems are in renters and in recent purchasers who’ve taken on, in many cases, unmanageable debt and won’t have that by and large balanced by capital gains.


FRAN KELLY: So mortgage stress is perhaps not the appropriate term; housing affordability it’s better to focus on and the rental market though, I mean, has it not always been the case that there’s been many, many people who find rents increasing in cycles and the rental market sort of booms and busts all the time, find it difficult to get rental accommodation and also find it difficult to get into the home market. I mean it’s always ever thus, isn’t it?


JULIAN DISNEY: Yes but this is worse than we’ve … the housing affordability figures for example which focus—the HIA figures on that—which focus particularly on people trying to get into the market. They’re at the worst level for 30-odd years. Rental vacancies, which is the best indicator of where rents are going to go are the lowest for at least 20 years.


S o there’s a huge shortage of rents. And rents have gone up in the last year or so by double the rate of inflation, and relative to income they’re at the highest level they’ve been for at least 30 years, so this is much worse.


FRAN KELLY: But a couple of years ago landlords were offering incentives to get people into their properties.


JULIAN DISNEY: It’s changed dramatically and it’s always been in the offing. What happened was that landlords were, because they were getting such huge capital gains over much of the last 10 years they weren’t putting up rents. We predicated three years ago when we held the main housing summit it was quite clear then that now that capital gains were slowing down that landlords would start pushing up rents and also they’ll get out of the rental investment area. This is one of the major problems we have that rental investment now is increasingly not a good thing for landlords, they cant make enough out of it and that’s going to create even bigger problems in the future.


FRAN KELLY: Well Steve, I suppose what we need to move onto now is what can be done this and what should be done about it. Is it the government’s business if you like if people are choosing to borrow more because they’re feeling more secure or more aspirational?


STEVE KEEN: Well the government in some ways has encouraged this by such things as our long fixation on negative gearing and allowing negative gearing on existing houses. If you had negative gearing that only allowed you to make a tax loss against building a new property I wouldn’t be complaining. But we’re allowing it against buying a property that already exists. So we’re encouraging people to speculate on the price of houses, we’re not encouraging them to actually build houses.


And that’s why we’ve gone from this ridiculous situation of a so-called investment-led building boom which only ended in Sydney two or three years ago and whamo less than a year later we’re in a rental crisis. Well if we were actually building investment properties why didn’t we have a glut of properties to depress the rents after the event? So we weren’t even building the properties we though we were building. So that negative gearing is something the government’s contributed for obviously the history of the Australia government pretty much, not just this particular party.


And we also had the doubling of the first home buyers loan, that really encouraged people into the market to stop the bubble bursting three or four years earlier than it would have done.


FRAN KELLY: Isn’t that a good thing though, didn’t that help people to be able to afford their houses?


STEVE KEEN: It helped them pay twice as much to buy a house because they went in with twice the deposit and the lenders gave them twice as much money. It just drove the prices up it really didn’t increase the supply. And that’s the great dilemma. We’ve been doing do many things to increase the amount of money people have to speculate with about the price of houses, we haven’t really been doing much to increase the supply of houses.


FRAN KELLY: Well that’s the point the government’s hammering now, that state government’s need to release more land.


STEVE KEEN: And if they did it where they’re talking about doing it they’d depress the prices of people who are currently suffering mortgage stress because they bought investment properties that are now negative and they’re going to go out backwards with bankruptcy if they do that. It isn’t a solution.


FRAN KELLY: So what are we saying, damned if they do and damned if they don’t aren’t we Craig James?


CRAIG JAMES: Well it does get down to a situation of supply and demand, it always does. And at the moment demand is super strong, Julian’s hit the nail on the head in terms of the vacancy rate, lowest levels in the order of 20 years.


Part of that is caused by the fact that we’ve had very strong immigration over the last couple of years to fill our job mark et. And all those people have got to have somewhere to live. The job market is super strong and that’s increased demand for housing but supply hasn’t kept up. And part of the problem is that investors have decided to use the share market rather than the property market to put their money.


Once we get to a situation where you’re getting level playing field in terms of your investment that it’s just as easy to invest in a residential property as it is in terms of the share market then you’re going to get more and more people back into the property market.


But a lot of people it’s too hard, it’s too hard in terms of the property market; it’s much easier in terms of the share market. Much easier entry and exit, we need to get the same sort of situation. So need to streamline some of the laws, conveyancy etcetera, the real estate fees. We need to make it just as easy to be able to get into the property market as to get into the share market. But certainly ….


FRAN KELLY: But Craig just on that, if we do more to … and often this is put as a solution to the public housing problems: let’s make it easier for people to invest in housing, but really what we’re doing is making it easy for one sector of the community to grow their asset base, aren’t we, and giving them a handout to help them do that so they get richer but meanwhile people still have to be able to afford to rent those properties and there’s no control as we see now—over the rental market.


CRAIG JAMES: Well yeah, it’s not a case of handout and certainly that’s something we wouldn’t be advocating. What I’d want to see is something which creates a more level playing field.


If you do have more investment in housing then you have more creation of rental housing, you’re increasing the amount of supply and that’s putting less upward pressure on rent so really that’s what we need to see. We need to see more investors coming to the property market.


But the incentives have got to be there. The incentives have got to be there in terms of return and to some extend we do have an element of market failure at the moment. The share market is producing super strong gains, it’s a no-brainer for people to put their money into the share market rather than the property market. All the money is going there, we’re not creating the rental properties we need, as a result we’ve got that disconnect between supply and demand and rents are rising.


FRAN KELLY: I can tell we’re going to run out of time for this any moment. But Craig can I just ask you very briefly to just answer this question, we hear a lot of different views on this: are the major home loan lenders seeing much evidence of rising mortgage defaults, because that is a real key clue here isn’t it?


CRAIG JAMES: Yeah, the short answer is no. Most people are in front in terms of their repayments. Around about a quarter of borrowers are around about a year ahead of their scheduled mortgage repayments.


FRAN KELLY: Okay. We are going to run out of time so I’m going to interrupt you there Craig because Steve is shaking his head but I’m going to go to Julian first on that. Julian does that surprise you to hear that and also just a quick view from you about the fact that when we talk about people not being able to get in the home loan market and mortgage stress, housing stress is also caused by people being forced further and further out to the fringes of our capital cities and it’s harder to manage everything from there really.


JULIAN DISNEY: Well that’s a crucial issue, there are at least it’s many hidden victims of affordable housing or excessive housing costs as there are those paying about 30 per cent. A lot of them have had to go a long way away from their work, pay a lot of money and spend a lot of time travelling and that’s puts stress on families and others. So that’s a major problem.


The other key thing to mention though is to come to your point of whether we’re … what sort of incentives we should put in. The key proposal that our group has been propounding—and I see that the Shadow Minister for Housing has put the same view in the paper this morning—is to follow a US example and have an incentive for investors in low-rent housing which is occupied by lower income households and we’ve put detailed proposals for that. They’ll only get the incentive if the housing is below market rent, say 20 per cent and mainly in the hands of lower-income households. And that’s a crucial way of trying to get the investment down to reduce rent inflation and get the low-rent housing into the hands of the people who need it most.


FRAN KELLY: Steve, very briefly from you, you clearly don’t agree.


STEVE KEEN: Vehemently disagree with Craig. There’s an enormous evidence of rental stress. Yes one quarter might be well ahead of their payments—they’re the wealthy ones, they’re not the ones in Campbelltown and Blacktown and the peripheral suburbs of Melbourne and Sydney and Brisbane who are finding it very hard to meet their mortgages. So it’s rather asinine I’m afraid to focus on those who are doing very well. Of course some are but there’s a vast majority who are not and they’re the ones who are making this into the mortgage stress election.


FRAN KELLY: Okay, Steve Keen, Craig James and Julian Disney, thanks very much for joining us on Breakfast .