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Barriers to homeownership in Australia

CHAIR —Welcome. Do you have any comments to make on the capacity in which you appear?

Prof. Stimson —I am Professor of Geographical Sciences and Planning at the University of Queensland. I am appearing in two capacities, I guess, today. One is as a private researcher, and it is in that capacity that I would like to speak today. The other relates to the Australia Futures Task Force report, which came out of the ARC Research Network in Spatially Integrated Social Science that I convene nationally. I think we have sent that report to the committee and it is available on the website. It has among its seven or eight chapters a section specifically on housing choice and housing affordability. I would commend that report as evidence, and we have privately prepared another report today.

CHAIR —The one you just handed us?

Prof. Stimson —Yes.

CHAIR —Thank you. We will receive that as a submission. Dr Robson?

Dr Robson —I am a research fellow at the University of Queensland Social Research Centre and I work for Bob.

CHAIR —I invite you to make an opening statement and at the conclusion of that we will go to questions.

Prof. Stimson —I will try to make my opening statement brief. I will refer to a number of what I would regard as fairly significant issues concerning the current debate on housing affordability. I have had the good fortune to have been working for over 40 years now in research into urban and regional development matters in Australia, including a lot of issues to do with housing provision and affordability, housing choice and so on.

It seems to me that the current debate is quite ill-informed in some ways. I submit that we are not facing a housing affordability crisis that is systemic. It is an issue which is very specific to particular groups of people and households in society and to particular places where people live. There is enormous geographic variability in the incidence of housing related income stress. Systemically, if you look at the current data and look at it historically, we have had periods in the past when there have been possibly greater crises than there are at the moment, if the current one is a crisis.

There has been an enormous degree of stability over time in Australia in the incidence of homeownership and access of people to homeownership. In the past 20 years there has been a miniscule drop in total terms in the incidence of homeownership. There has been a significant shift in the last 10 to 15 years in the proportion of people who own outright as against those who are purchasing. The incidence of purchasing has gone up quite a lot as against outright ownership. There are a lot of factors underlying that.

The incidence of private rental has gone up slightly—less than two percentage points in aggregate—across the whole system. There has over time been an actual drop in the proportion in public housing, largely as a result of the withdrawal through the Commonwealth-state housing agreements of Commonwealth and state funding of new capital investment. If you go back, it was in 1986-87 when you had the crossover in terms of more people receiving rental assistance subsidies than were in public housing. And there has been a substantial sell-off over time in the public housing stock by state housing authorities. Whether that is good or bad policy is a matter of opinion, but certainly there has been a diminution in the total stock of public housing, and that has impacts at the most disadvantaged end of the affordability market.

There as been quite a significant increase, too, in the last 10 years or so in the incidence of people who are not in any of the standard housing tenures. That has doubled in fact, to about 3.7 or 3.8 per cent of total households that are not in any of the standard forms of tenures. That is related to a whole lot of things, including the incidence of people staying with parents over a longer period of time.

When you look at affordability, there is absolutely no doubt that the current so-called affordability crisis is related to a series of both demand push and supply restriction issues. In terms of the demand side of things, there was a coalescence of factors in the late 1990s that led to a very substantial increase in housing prices and demand for housing. One of those was the subsidies given to people entering home purchase. There is overwhelming evidence when you look back historically across governments of both political persuasions in Australia that the outcome where you get direct cash assistance to homeownership is that it leads to increasing house costs and that those policies have possibly deleterious social equity outcomes. As a result of the last round of those subsidies in the late nineties and the early part of this decade which were associated with offsetting the impacts of the GST, there was a sudden entry over a relatively short period of time of between 350,000 and 380,000 new buyers into the market. The Productivity Commission’s report refers to the cost impacts of that.

If you take that sort of thing out of consideration, there is no underlying demographic reason in terms of new household formation and population increase due to births and immigration to suggest that the increase in house prices that has occurred was a demographically led one. It was related to some other quite important issues, including an increasing preponderance of people wishing to purchase second houses and those sorts of things—a big increase in investment housing and so on. A whole lot of things occurred, but you cannot explain what has occurred in terms of the demand push with demographic factors. It went beyond that. You have had up until fairly recently a situation in which there was an enormous expansion in the variety of sources for housing finance and a very big increase in actual house prices. We have seen a rapid escalation of house prices relative to general levels of inflation. There was also until very recently a very low interest environment, unlike in the previous so-called housing crisis following the property bust of the last 1990s and the recession of the early 1990s.

What has caused this then? Quite a lot of the commentary and quite a lot of the evidence would indicate that supply restriction and cost impost issues from state and local governments have been the culprits, particularly in terms of the impact that that has been having on the price of a land-house package on the fringe of the capital cities. There is overwhelming evidence that over the last 20 years state governments and local governments have withdrawn from the game of community based funding of infrastructure. There is absolute evidence to show that. In the north-western corridor of Sydney, for example—to take one extreme—something like 36 or 38 per cent of the purchase price of a new land-house package can be directly attributable to state and local government charges, imposts and requirements. That goes down in some of the other capital cities to around 20 or 22 per cent. That has one hell of a big impact. There is irrefutable data to show that.

One of the other things is that there have been very restricted zoning practices, and there has been a lot of quite critical analysis of the regional planning and development policies of state government agencies and some local governments in terms of restriction of the supply of land on the fringe areas of the major capital cities. That restriction has bitten particularly hard in Sydney; it has had less of an impact in Melbourne. There is likely to be a substantial impact in south-east Queensland as a result of the most recent regional plan, which is putting severe restrictions on where development is likely to be permitted into the future here. So when you look at those issues it raises the question, from a public policy point of view, of what might be a more appropriate way of looking at the supply restriction and the cost impacts from government action at the state and local government level in terms of the impact that might have on housing affordability.

I would emphasise in conclusion that there is no weighty evidence as yet to show that we have had a big blow-out in mortgage defaults in the purchase sector. Nationally it is under 0.4 per cent and, in fact, there is quite substantial evidence to show that something like 40 per cent of people repaying mortgages are ahead in their payments. So it is not a systemic issue, but it certainly is an issue in terms of particular types of households and particular locations. That comes out most plainly, as we have seen in the last year or so, in Western Sydney. It is exacerbated there by negative equity, in terms of what has been the first homebuyer market there, as a result of property prices coming off in that area. So I think that there are some pretty big issues to look at. Certainly there is a problem for some groups in society and at some locations, but if you look at the aggregate it is not a crisis.

CHAIR —Thank you, Professor Stimson. Dr Robson, do you wish to add anything?

Dr Robson —No, I do not. Thank you.

CHAIR —I think that if we had some of our other witnesses here with us we could certainly have a lively debate between you and them, Professor Stimson.

Prof. Stimson —We could indeed, Senator.

CHAIR —I have got one or two in mind.

Prof. Stimson —You look as though you would relish it!

CHAIR —I could probably be the referee!

Senator COLBECK —Professor, that was a very interesting submission to us. Certainly, as the chair said, we have had a lot of conflicting views about some of the problems. You wound up by saying that it is a problem for some groups and some locations. The Senate has set up an inquiry into housing affordability. We are generally seeking solutions and ideas that we might recommend to the Senate on how we might deal with this issue. As I say, we have got this submission to have a look at, but have you got anything that you might wish to say to us about how we should approach it? Should, say, the New South Wales government be more proactive with local government? Is there any particular thing you would say to us for us to consider?

Prof. Stimson —I think one of the big issues is that a lot of the problems are institutional and come from the change in the functions of government that has occurred over the past 20 years. You could, from a sort of equity, whole-society, welfare outcome perspective, suggest that—

Senator HUTCHINS —Could I just interrupt there. I know you were here when Senator Macdonald was asking questions about sewerage. Is that somewhere where you—

Prof. Stimson —Yes. You could get a community rating way of having charges that the total urban system in a particular location covers through an ongoing contribution, for example. One of the other things is that, if you look at things over time, state and local governments have simply withdrawn from investment in infrastructure. Their contributions to the proportion of GDP going into infrastructure have gone down by over 50 per cent over a period of 30 years.

That is a massive turnaround in the way in which we used to fund the development of cities and so on and where the cost impact occurs. Is it shared over time, through rates, other charges and taxes and so on, or, as Senator Ian Macdonald was saying earlier, do we now have a situation where it is the first homebuyer, largely, that is covering the direct cost in situations where state and local governments used to pay for a lot of infrastructure?

You can have a big debate over this, about whether it to ought to be user-pays, community rating or whatever. The cost impact of those changes on the purchase price for a land-housing package on the fringe of cities—which is still the dominant area for the first homebuyer to enter the market—has been profound, to an extent that would vary from something like 10 per cent to up to as high as 30 per cent, depending on what state you are in and what city you are in, in terms of the cost of those charges in a first home package.

Senator COLBECK —I am interested in your assertion in respect of the issue—rather than the crisis—of housing affordability. I recognise that there is variability across the country. There is no question that that is the case. There are different things that impact on that in different places. We discussed in New South Wales the fact that there is rate pegging and that councils have found a different way to get money out of developers by charging levies or fees or using some other process to get their money. The system will find a way. Those things vary in different states and have different impacts. But across the board wouldn’t you say that there is obviously a blow-out in affordability, when you compare wages growth with housing prices? It varies, as you said, across the country, but it has significant impacts. We are in a situation where—I do not think it matters where you go—to varying extents there is a significant issue with the cost of housing across the country.

Prof. Stimson —There is.

Senator COLBECK —Do you think that the cost of the development of new property, new land estates and all those sorts of things is one of the things that provide a base in the various markets? Is that one of the drivers of the base of those different areas of the market?

Prof. Stimson —There is certainly that. There is an issue in some cities of restricted supply. There is certainly no doubt that, as state and local government policies are moving more towards what you could describe as an urban consolidation—redevelopment of existing areas and so on—the unit cost of housing activity goes up with densification. If you look at Sydney now, something like 60 per cent of the new dwelling construction is in redevelopment, densification and so on within existing areas. That is yet another example of a planning approach which has had cost impact implications. Whether you want to balance that off against the supposed energy and other benefits is an issue, but we need to understand that these policies are in fact having an impact on the cost of housing.

As I alluded to earlier, you have had this extraordinary increase in the cost of housing in the latest boom, and you cannot explain it by demographic factors. Why is that the case? You had this big shift of money into investment property and those sorts of things as well. That has gone out now, because the rental returns on investment property are very low—they are about two to three per cent, four if you are lucky, and in other areas of property investment the returns are around seven or eight per cent. So it is not economic at all, without negative gearing, to have small investors provide the vast bulk of rental housing in our cities.

It is probably not going to be recovered in terms of housing prices going back down; indeed, that would have a deleterious impact because a hell of a lot of people, as they are now finding in Western Sydney, have negative equity in their investment for home purchase. That is a problem, but to some extent these things have been offset by what has been historically a low-interest-rate environment. That has changed, as we all know, in the last few months. We probably will not see terribly many more increases in interest rates in the next year or so, but you have had also a substantial extension in the length of mortgages, from around 22 years up to around the 30-year mark now. Whether that is a bad thing in these terms is debateable.

Another thing is there is a lot of evidence to show that many households wish to consume more housing, and we see this in the size of new houses, which has gone up substantially, both medium-density housing and freestanding houses. We have also seen a great preponderance for Australians to borrow against the equity in their housing for non-housing consumption and investment, and we have to realise that a lot of the mortgage figures include the use of mortgages for those purposes, not 100 per cent for the purchase of housing. There has been a predilection for Australians to upgrade through renovation, extension and so on, and you can say at one level that this represents a consumption that is discretionary. On that basis, is it an affordability issue in economic terms? The answer is probably no; however, at the bottom end of the market—and this is one of the other things that I forgot to mention—the international benchmark called the Ontario measure of defining a household is that housing cost induced income stress is where a household in the bottom 40th percentile range of income distribution is paying more than 30 per cent of gross household income in housing costs. Why is that the international measure that is used? It is widely used across Western countries for establishing a benchmark for eligibility for housing assistance.

A lot of the data that is used—and this is one of the problems with the Housing Industry Association index—takes it that, where any household is paying more than 30 per cent of gross income in housing related costs, that represents a financial stress. That is just sheer nonsense. A hell of a lot of high-income households are paying 60 or 70 per cent discretionally in terms of consuming a lot of housing and high mortgages being charged. My point is that it is not a systemic thing; it is something that is related to particular categories of first homebuyers, certain income groups who have difficulty getting into the first home purchase market and those who, due to the unaffordability of some components of the rental market, are on the fringe of having eligibility for rental support and so on but cannot get it because there is just not enough money around for those schemes. They are possibly facing quite a long-term future in the rental market as against moving into purchasing. As I say, you have to look at the aggregate figures. We have not had a dramatic slide in the incidence of home purchase in Australia.

Senator IAN MACDONALD —Professor Stimson and Dr Robson, thanks very much for your submission, which has a lot of great stuff in it. We very much appreciate what you have submitted to the committee and what you have told us. I acknowledge that you are not advocating this, but I hope one of your scenarios for a reduction of housing affordability that you mention in your conclusion—that is, a recession, higher interest rates and higher unemployment—does not come to pass. I acknowledge that you are not advocating it, but I hope that that does not come to pass.

Prof. Stimson —So do we.

Senator IAN MACDONALD —I am a bit more interested in the other area you comment upon, which is geography. I come from the north of Queensland and am a great advocate for a big future for Northern Australia as the south gets drier and some of you people get sick of not being able to water your lawns. You said people live in the south-east Queensland area or in Sydney, for example, because that is where they want to live for all the obvious reasons. Do you think there is a role for governments to try and encourage further decentralisation so that people will be encouraged to go where the land prices are perhaps not quite as high and building costs are perhaps not as great? In some instances you are getting closer to where the real jobs are, in the mining or good tourism areas up in the north.

Prof. Stimson —You are right to one extent that certain places outside the metropolitan cities have been growing and are doing very well. Cairns is a case in point, with the private sector economy. Townsville is also a very successful case, with large public sector involvement. That is terrific in both cases. But, where it happens, usually you will find that it is agglomerated in particular places and those places grow and bigger places get bigger. Around the whole world there is very little evidence to show that public policies that are explicitly oriented towards deliberately decentralising population and economic activity work. The overwhelming evidence is that they do not.

You can try to develop growth with strategic infrastructure investment. The role that the Commonwealth has played in Townsville, for example, with the military base and that sort of thing, is a case in point. Certainly governments can play a very large part. The work that we do in the area of regional economic development in Australia, which is one of our big research programs at the University of Queensland, quite clearly shows that most of the successful larger towns in Australia have a very substantial public sector base to their employment—in the order of 22 and 25 per cent in just about every case. That is related to things like big base hospitals and health infrastructure, regional offices of federal and state government, educational institutions, regional universities, TAFE colleges and the like.

I certainly would suggest to you that there is a very explicit and direct role that governments at both the Commonwealth and state level can play in enhancing the greater success of places outside metropolitan areas that are a success, but I cannot foresee a situation where you are going to really stop the continuing attraction of the large metropolitan region. Around the Western world, the big cities are growing bigger simply because of what are standard agglomeration economies and the much more diversified labour market of those big metropolitan conurbations.

Senator IAN MACDONALD —I often say that the Department of the Premier and Cabinet should make sure, with better communications these days, that all of their staff live in Longreach, for example. That would free up a lot of housing in Brisbane, but I am not sure that it would be affordable.

CHAIR —Ahem.

Senator IAN MACDONALD —Madam Chair, did that ‘ahem’ mean, ‘Get back to the subject’?

CHAIR —No, I have a cough. I have been coughing for two weeks over the inquiry, and it is still happening.

Senator IAN MACDONALD —I thought you were bringing me to order!

CHAIR —Sorry, Senator.

Prof. Stimson —One of the downsides of what you would like to see, Senator, is that where you do get rapid growth in non-metropolitan Australia, particularly coastal locations, as you have in the Cairns area, housing prices have escalated quite quickly—not to the same extent that they have in some of the metropolitan areas, but it has still been very substantial.

Senator IAN MACDONALD —It has. Both your written submission and what you have said suggest that you do not necessarily agree in a broad way with the thought that local government charges or infrastructure charges are a big cause of affordability or non-affordability. I wonder if you have any thoughts about whether, if local government were given a wider source of income—the obvious example is a share of the GST—they might be able to go back to the days when they contributed more to infrastructure. Do you have a view on that?

Prof. Stimson —I think it is a problem for state government more than local government. We must recognise that the local governments operate very much within the constraints imposed on them by state governments. In fact, they are total creations of state government; they do not have any standing in the Constitution of Australia.

Senator IAN MACDONALD —Not yet. It is about to happen, I believe.

Prof. Stimson —Last time it was voted on it was pretty resoundingly defeated, but that was for a whole lot of reasons.

Senator IAN MACDONALD —That was politics!

Prof. Stimson —You could mount an argument that we ought to be giving much greater responsibility to larger-scale local governments and bypassing state governments. If I were to point a finger at the level of government which has probably been most irresponsible in this way over the last 30 years, it would have to be at the states.

Senator IAN MACDONALD —Great. Professor, here is a paid advertisement: if you are not doing anything in the next few weeks there is another Senate select committee, on state government financial management, that I think I would like to hear your views on!

CHAIR —Indeed.

Senator IAN MACDONALD —Keep an eye on it; it is on the website.

CHAIR —Are you on that one too, Senator Macdonald?


CHAIR —Well, there you go. Professor, I have just had a quick flick through the document you have given us here today. Thank you very much for that. When we were in our first set of hearings in Canberra about two weeks ago, the Department of Families, Housing, Community Services and Indigenous Affairs, FaHCSIA, went through some of the more recent initiatives of the federal government, which indicate that they are probably seeing this as being at crisis level. Look at the implementation of the National Housing Supply Council, the National Rental Assistance Scheme, the Housing Affordability Fund and the first home saver account, the government’s continuing support of the First Home Owner Grant, the quite extensive work on the National Affordable Housing Agreement—although I am not sure quite how you form an agreement about the national affordability of housing—and those sorts of initiatives. I wonder what your view is on some or any of those, particularly the ones which are trying to stimulate entry into the market.

Prof. Stimson —Those that have tried to stimulate entry to the market through subsidies to first homebuyers are only likely to have an indirect impact in terms of driving prices up further. The overwhelming evidence of all of the schemes that have been tried over the last 30 years shows that that is pretty much the outcome. There are other ways of doing it in different societies. In America, for example, the interest rates on mortgages are a tax deductible item. We do not have that in Australia. Some of my academic colleagues would vociferously argue against that, and indeed some of them push the notion of imputed rents being imposed on a home purchase. That is a nice theoretical economic argument, which I will not go into. There are other policy approaches that are tried in other countries. That would probably be the most direct way of getting an advantageous outcome for the recipients over the duration of home purchase. They do it in the United States. I am not necessarily advocating it but merely pointing out that other societies do approach these things in different ways.

The Commonwealth-State Housing Agreement mechanism, which has been in operation since just after World War II, has taken a bit of a battering, in fairly crude terms, by governments of all political situations. In the last 20 years there has been a big withdrawal from investment in the public sector in terms of capital stock for low-income housing. It might be time to start to have a look at doing that not necessarily through public sector investment and management but through some innovative approaches that other societies operate quite well, such as giving incentives to the private sector to provide low-income rental housing. That is done quite well in other parts of the world. We have been notoriously lacking in innovation in how we approach the low-income subsidy sector—what is called social housing in this country. I think that there are very big institutional attitude impediments in state housing authorities to exercising their minds on innovation in that field in this country.

That is my conclusion, having done research in this area over the last 40 years. I think we are way off the ball in terms of innovation approaches compared to what has happened in the social housing sector in European countries—and also in the United States, if I could dare say that.

CHAIR —You certainly can. What about the concept of assisting those described as marginal mortgage holders—people who are at risk of losing the capacity to pay their mortgage, losing their house, obviously, and therefore becoming more marginalised and so it goes on? There has been some discussion—and we had some evidence in Sydney, if I recall correctly—about the possibility of policy approaches that would keep those individuals or families in their housing as a primary policy response.

Prof. Stimson —It depends on what you are going to identify as constituting, and what the mechanism is for targeting, real marginal situations. If that were related to a situation where people were overextended through a voluntary predisposition to overconsume, that would hardly be a situation for intervention in terms of a public subsidy. If, however, you were to limit that initially to the target group by using that Ontario international benchmark measure, you could mount a very good equity argument to say that that might be an approach—and it might only be a short-term requirement. Who knows? If we move into longer term higher interest rate environments it becomes a bigger issue, but I would re-emphasise: even though interest rates have gone up at the moment in this cycle, if you go back to the late eighties, early nineties, they are way lower. The interest rate was capped at, I think, 15 per cent at one stage—13½ and then 15 per cent—for financial institution loans for home purchase where you occupied the home, and at that time, for investment loans, at one stage it went up to nearly 21 per cent. We are in a different environment, but there are a different set of circumstances causing the costs.

CHAIR —I heard that argument about interest rates somewhere else recently. For the novice in the discipline, can you give us a brief explanation of spatially integrated social science.

Prof. Stimson —It is one of 24 research networks that were established by the Australian Research Council, and we have over 350 members, a lot of them younger researchers. We do work in looking at the use of spatial methodologies to address and measure social and economic phenomena in our society.

CHAIR —Very interesting.

Senator TROOD —I am acutely conscious that I have arrived rather late in these proceedings, and one of the consequences may be that this question has been asked earlier. I was just struck by your remark, Professor Stimson, about the differential between the Ontario measure in relation to housing affordability and the HIA-CBA figure. I was interested to know whether or not there is any quantification of those differences.

Prof. Stimson —Yes, there is. My colleague Ann Harding, who runs NATSEM, is in our research network and we do a lot of collaborative work together. Her group has done the best modelling work to identify where those target groups are using the Ontario measure to address housing affordability and housing stress. She has had two reports come out relatively recently. I do not know whether she is giving evidence to you. She is overseas at the moment.

CHAIR —She is not available but her colleague—

Prof. Stimson —Robert Tanton. I strongly suggest that you do receive evidence from them.

CHAIR —We did—in camera.

Prof. Stimson —They are the best qualified to give you the explicit statistics on that.

Senator TROOD —There is a significant difference between those two measures.

Prof. Stimson —Yes, indeed.

Senator HUTCHINS —In Sydney we had WSROC, the Western Sydney Regional Organisation of Councils. The chairman, Councillor Hay, talked about one of the problems being the rate of land release. I would be interested in your observation. Part of the federal government’s plan is to release significant parcels of Commonwealth land. Do you think this will have an impact on housing affordability or are we just missing the mark altogether?

Prof. Stimson —It would have a marginal effect in total terms. There is an enormous amount of land held by the public sector across all levels of government that is either redundant or maybe ought to go from one use to another—military reserves that could be brought into urban use et cetera. I think probably the New South Wales government has done more than any other in Australia to restrict the opportunities for urban growth on the fringe of Sydney. That has been related to explicit state government planning views and legislation, which, quite frankly, are ideologically based and do not have any sound economic or social basis.

CHAIR —Professor Stimson and Dr Robson, I thank you both on behalf of the committee for appearing this afternoon, for your assistance with our inquiry and for the material you have provided to the committee. It has been a very interesting session.

Proceedings suspended from 3.23 pm to 3.33 pm