For anyone who’s been attempting to keep up with the latest in real estate, it’s been a crazy few weeks.
No matter which way you look at it, Australian real estate is gosh darn expensive. So we decided to have a chat with Trent Wiltshire, a former economist for the RBA and current Associate from Grattan institute, who have been crafting some insightful research into the current real estate market, some potential solutions to get to the bottom of what’s happening as well as how young people could potentially get into their own homes.
I spoke with Trent to find out a few things, including just why houses cost so much and what really is making it hard for millennials to enter the housing market.
Samuel Danby (SD): What are the barriers stopping young people getting into the property market?
Trent Wiltshire (TW): Obviously prices have risen by a lot over the past few years, especially in Melbourne and Sydney. That’s been a long-run trend. Prices have really gone up a lot over the last 20-30 years.
The price to house ratio is about 7:1 Australia wide. That’s the price of a house divided by income. That’s gone up from 2-3 in the 80’s and then 5-6 in the early 2000’s. In some parts of Sydney and Melbourne it’s even higher. These higher prices mean getting a deposit and getting into the market is a lot more difficult.
SD: Some commentary is telling us that first home buyers are being too picky about where they want to buy their first homes. Does this increase in the house price ratio mean there’s more to it than that?
TW: Most new housing is being build on the edge of our cities, or in the very inner city, in terms of high rise apartments. That’s been a more recent trend over the past few years. They’re the places where building new houses are the easiest and cheapest. Developers can build new suburbs out in the fringe of our cities.
If you think about the situation in the 1970s when many of our parents are buying a house, then the edge of the city would have been around 20 Kms from the centre of the city. [For example] in Melbourne that would be places like Altona or Glen Waverley. These are now considered to be the middle ring, and quite desirable suburbs. Now the outer ring is closer to 50 Kms from the CBD. So [in this example] places like Cranbourne or Pakenham.
New jobs are being created in and around our city centres, and it makes sense that people want to live close to where they work. In terms of being picky, it is tricky to afford these houses on the fringes of our cities where the jobs are and where people want to live.
SD: So my next question is why are houses so expensive in Australia at the moment? You’ve touched on it here talking about the different regions of growth, but are there any other factors that have caused this dramatic increase in prices over the past 20 years?
TW: So this is something we’ve thought about quite a bit. There are quite a few factors that led us to where we are now. Often when people talk about this they pick one or two causes they can identify as being the primary causes, but in reality there are 10 or so, or even more factors that have led to where we are now. I’ll just run through a few.
Some of these can be considered as good reasons, or good drivers.
- Over the past 25 years we have experienced really strong economic growth, incomes have grown strongly. As we become richer we generally spend more on our housing.
- More women are working, which means more dual income houses. So households have more money to spend.
- People are working in better jobs in more knowledge intensive industries that can earn more money.
- In the 80s and 90s we saw the finance sector deregulated, so more people were able to access home loans. That meant that people could borrow more, which pushed up housing as well.
But there are some other factors that are less positive. They’re all sort of demand-side factors.
On the supply side, one of the reasons we identified is how difficult it is to build houses in established suburbs that are closer to jobs and closer to transport. Often where people have grown up. The restrictions on supply there have contributed to the shortages of houses in Australia, which is about 200,000 houses.
SD: What makes that land so much more difficult to build new houses on?
TW: Often it’s restrictions enforced by state and local government on things like subdividing land and building new town houses.
Previous Grattan research has shown that the preference of the people, when they trade off things like the size of their house, the area they live and commuting times, that people prefer to live in smaller houses in better locations than what our current suburbs provide. There’s just not enough of these medium density houses closer to the city that young people especially would like to live in.
SD: Are there any other countries or cities abroad that we can look at as example of someone doing housing really well? Any prime examples?
TW: Australians have had the preference for larger blocks and bigger houses, so Australian houses are quite big by world standards. When you think about what’s a good example of a medium density cities you think about European cities, and some American cities as well.
SD: You came in for our 2017 Federal Budget event at FYA recently and sat on our panel, where we discussed the way the budget might impact young people. With this in mind, are the recent budget changes going to be effective to help young people break into the market?
TW: The government announced a few new policies to try and address the housing affordability issue. A lot of the things they’ve done might sound good, but probably won’t make too much of a difference to housing affordability and the government has kind of shied away from some of the really big reforms that would have an effect on housing affordability such as reforms to negative gearing, capital gains tax, or encouraging governments to reform planning regulations to allow an increase equity in the middle ring suburbs. Also nothing on working with state governments to swap stamp duties for land taxes.
Some of the things they did announce do affect young people, probably the biggest one was the first home buyer super saver account. It enables first home buyers to save a deposit quicker to enter the housing market.
There’s a good website available at budget.gov.au/estimator that helps you calculate how much you could save with this new policy.
A similar thing was tried with the former Labor government, with the first home saver account, which was actually more generous. But there was very little take up of these things, people get worried about having their savings locked up in super.
On the budget’s own figures they expect a pretty small take up of this new policy.
SD: What else do you think could be done to help housing affordability?
TW: Other things include helping with transport infrastructure in our major cities. Most of the jobs growth that’s occurring is either in our CBDs or very close to our CBDs. People want to buy houses near where they can access jobs, but it’s hard to build houses in these suburbs, so what you can do is enable people to access their jobs more quickly from outer suburbs.
Effectively, investing in infrastructure so people can get to the cities is a way to increase the supply of appropriate housing.
SD: That’s a really good point. I think making houses that are more affordable and further away more easily accessible is a solution that doesn’t cross a lot of people’s minds.
TW: We’ve also got a lot of infrastructure that we have built that could be used more effectively than it is. Some governments are also looking at congestion charging, which is basically pricing our roads so when you drive on a road, especially at peak hour, you’re imposing costs on others through increasing congestion. We can definitely think of using our existing roads and rails more efficiently to spread the load away from peak hours.
It’s probably a little way off, but it’s being investigated by state and federal government.
SD: If I’m a young person not necessarily looking to buy a house right now, but would love to have the opportunity to in a few years time, what steps could I be taking to help improve my chances?
TW: I’m wary of giving financial advice, but the super savings account does have it’s advantages, the catch is if you decide not to buy a house or your circumstances change, then your money gets kept in your superannuation and you won’t be able to withdraw it. That’s the catch with that sort of savings account.
If young people want more houses in our established areas, that are maybe smaller and more dense than what we have, we have to convince governments that that’s what needs to be done, rather than accept the status quo of how our suburbs currently are. I think that’s starting to happen, but it will take a while for that to change completely.
We’ve talked a lot about housing affordability, but renting is the alternative to buying a house. We’ve seen the share of people renting increase as home ownership rates have fallen. More and more people are renting and renting for longer.
Renting can often not be a great alternative for people. People with kids or on low incomes that might struggle to move house if the rental agreement comes to an end.
Improving rental conditions are something governments could look at as well. Things like changing tenancy laws to limit no grounds evictions, enabling tenants to make the property they’re living in more of their home, rather than just a temporary place to live. I think that’s a conversation Australia will be having over the next few years.