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When the market is the policy, housing fails

Books | Three housing researchers plot the way out of Australia’s affordability crisis

Peter Mares 25 May 2020 2888 words

“Financialisation” encourages homeowners to view their house as a bank from which they can withdraw funds, often in order to buy more property. Meriel Jane Waissman/iStockphoto

Housing Policy in Australia: A Case for System Reform
y Hal Pawson, Vivienne Milligan and Judith Yates | Palgrave Macmillan | $130 | 368 pages

The Covid-19 pandemic is shining a harsh light on the failings of Australia’s housing system. Rough sleeping and severely overcrowded dwellings are no longer just a matter of individual welfare but also a significant public health problem. The long-run escalation of house prices in the eastern seaboard cities looks less like an accumulation of wealth and more like a mountain of debt.

If property values fall and then stay low, Australia’s economic downturn could be deepened by the lack of consumer confidence that comes with subdued house prices. Some borrowers, particularly those who bought recently using low-deposit loans, could find themselves owing more to the banks than their house is worth — and with Australian banks more heavily exposed to residential property than most of their OECD counterparts, the financial impact could be wide.

Master Builders Australia predicts that residential construction will fall by 27 per cent next financial year, which means 43,000 fewer homes will be built in an already slowing industry. Construction — Australia’s third-largest employer — sheds labour quickly in a downturn but picks up much more slowly because of the time taken getting planning approval, running marketing campaigns, booking up pre-sales and securing finance. The impact of a construction downturn also ripples through sectors like building supplies and real estate services.

Perhaps it’s no surprise that Master Builders Australia has joined with its traditional rival, the construction union CFMMEU, in calling for the federal government to stump up $10 billion for 30,000 new social housing dwellings. Community agencies agree: the Community Housing Industry Association has combined with National Shelter and Homelessness Australia to propose a Social Housing Acceleration and Renovation Program, or SHARP, to spend $7.7 billion to build 30,000 new homes and repair thousands more, and ACOSS wants something similar.

This might sound like special pleading by vested interests and the usual bleeding hearts, but these proposals are a far more practical and immediate response to Australia’s recession than grandiose plans like a fast train between Melbourne and Sydney.

How do we know that? At a cost of less than $6 billion over three years, Kevin Rudd’s post–global financial crisis social housing initiative created 14,000 jobs. Every dollar spent generated $1.30 in economic activity. Almost 20,000 new dwellings were built and another 12,000 — some uninhabitable, others likely to become so — were repaired. Along the way the initiative helped to build the capacity and asset base of Australia’s nascent not-for-profit community housing sector.

But Rudd’s initiative was a one-off response to a crisis, and once it was over much of the momentum was lost.

State-based social housing packages — like the one announced this month in Victoria — will help to counter the immediate downturn. But they won’t tackle structural problems in the housing industry, including the way that Australia’s near-total reliance on the private sector generates boom–bust cycles. Despite Rudd’s initiative, real estate prices rocketed in most capital cities after the GFC, boosting household debt, inequality, rental stress, housing insecurity and homelessness.

Any stimulus program needs to fit into a national housing strategy linking all three levels of government. It should build at least 15,000 new units of social housing every year for decades into the future — about five times what gets built now, but no more than the construction levels regularly achieved in the decades after the second world war.

With the need for a national strategy more urgent than ever, the timing of Housing Policy in Australia: A Case for System Reform couldn’t be better. Experienced researchers Hal Pawson, Vivienne Milligan and Judith Yates pull together years of work — not only their own but also that of colleagues working through the Australian Housing and Urban Research Institute — and draw on overseas experience to make a persuasive case for change.

In a sense, the aim of housing policy is simple: everyone should have access to safe, decent, affordable shelter, whether rented or owned, house or apartment, city or country, shared, single or family. But if there is an underlying thesis to this book, it’s that the basic aim has been confused by the different and in many ways conflicting role housing has come to play. Increasingly, it is a vehicle for building and transferring wealth.

As housing researcher Bill Randolph writes in the foreword to this book, we’ve moved from housing policy as “a ‘fourth pillar’ of the postwar political settlement, alongside wages growth, social security and trade protection” to a position where, in effect, “the market became the policy.” But, as the authors make clear, the housing market is profoundly shaped by government action, primarily through iniquitous tax settings and subsidies that benefit some (existing homeowners and property investors) and harm others (low-income renters in the private market).

Successive government policies have led to the “financialisation of housing,” a term that I had found rather opaque until I read this book. As the authors explain, the term refers to how dwellings are “increasingly viewed as tradeable assets with capital value rather than homes with utility value.” It is a process supported by the deregulation of the financial system since the 1980s.

One local manifestation of financialisation is the way it encourages homeowners to view their house as a bank from which they can withdraw funds, often in order to buy more property. Financialisation also means that investors buy “stash pads” as a kind of “safe-deposit box” for excess capital, often in markets where the purchaser has little or no connection to the local community or its urban fabric. Foreign investors buying high-rise apartments in Sydney and Melbourne are a good example, but so are Australian investment funds buying cheap rental properties in the American Midwest.

In a more developed form, financialisation encourages the emergence of private equity firms, trusts and other corporate entities as mass landlords focused on driving up rents and driving down costs. The firm Kushner, in which Donald Trump’s son-in-law and preferred fix-it man Jared Kushner is a major shareholder, owns 23,000 apartments across five American states. It stands accused of systematically harassing low-income tenants to force them to move so that it can raise rents, and then of pursuing those same tenants through the courts for unpaid fees.

Australia’s 2.1 million landlords are mostly small-scale property investors. But if Covid-19 produces a major property slump and distressed owners are forced to sell in a falling market, then we face the possibility of the same kind of property empires that emerged in the United States and Ireland after the GFC. Even during the boom, the number of Australian investors with multiple properties was growing faster than the number who owned just one.

Pawson, Milligan and Yates build their case for system reform by revealing the many shortcomings of a narrowly conceived market approach. For a start, current arrangements increase risk — most obviously for households, with 1.3 million people pushed into poverty by excessive housing costs. But it’s also evident in the apartment boom, where a lightly regulated industry has produced defective buildings clad in highly flammable materials or vulnerable to flooding.

And then there is the risk that property-fuelled household debt poses for the financial system and the wider economy. Periodic “price corrections” in the housing sector depress demand and consumption throughout the economy, and threaten the stability of the banking system. As the authors write, “This latter issue is of particular salience for Australia since, as reportedly demonstrated by IMF loan book profile data, Australian banks’ exposure to residential property is the highest in the developed world.”

Second, our approach to housing increases inequality. In theory, an era of low interest rates and deregulated lending should make home ownership more affordable. But, by enabling higher-income earners to take out bigger loans “to purchase more expensive housing than they might otherwise be able to afford,” it fuels price rises and puts home ownership “further out of reach for low-income earners.”

Rising prices widen the “deposit gap” between the price of a dwelling and the maximum amount a bank will lend, so while a household’s income might be high enough to comfortably service a mortgage, it is almost impossible to save the required down payment. In March, just before the pandemic hit, Melbourne’s median house price reached a record high of $918,000. That makes the standard 20 per cent deposit $184,000, or more than a decade of saving on the gross median income of $88,000 — assuming, heroically, that the household is able to save a fifth of its earnings.

Over the past two decades, as a result, “wealth rather than income has presented the major stumbling block to home ownership entry for low-to-moderate-income households.” The best advice to aspiring first homebuyers is not “get a good job,” as former treasurer Joe Hockey once claimed, but choose wealthy parents.

As home ownership moves increasingly out of reach, the pressure on low-income tenants increases. They are crowded out of the declining number of affordable properties by renters who earn more and are trying to keep their housing costs low while they save for that elusive deposit.

Another way of thinking about housing and inequality is to think about housing as an essential cost that everyone has to pay. True income inequality is not revealed by comparing raw data on household incomes but by comparing those incomes after housing costs have been covered. Using this measure, the gradient of income inequality in Australia is much steeper.

During the housing boom, incomes for the top ten per cent of households rose 85 per cent before housing costs, and 81 per cent after. Incomes for the poorest ten per cent of households, by contrast, rose about 50 per cent overall but only 30 per cent after accounting for housing costs. As a proportion of income, housing costs had risen sharply for the poor — who are mostly renters — but barely changed at all for the wealthy — who generally own their own homes.

At the time of the Henderson poverty inquiry in 1975, as the authors note, “before-housing” poverty was higher than “after-housing” poverty. Now it’s the opposite. In other words, our housing system helped to pull people out of poverty in the postwar decades but now pushes them deeper in.

The role of housing in inequality also manifests spatially, write Pawson, Milligan and Yates, not only in the “coincidence of rising homelessness with growing numbers of grossly under-occupied homes” but also in the fact that residential property close to city centres (and to jobs and services) appreciates more rapidly than dwellings on the urban fringe.

Housing-related tax concessions — like exempting the family home from capital gains tax — drive this inequality. Households in the top income quintile receive “an average benefit more than sevenfold that received by households in the lowest income quintile.” It’s well established that wealthy households also capture the bulk of gains from investment breaks like negative gearing and the capital gains tax discount. Yet these tax concessions do nothing to increase the overall supply of rental housing (let alone affordable rental housing). As the authors document, in the ten years to 2018 only 7 per cent of investment property finance was used to build new dwellings.

These tax concessions don’t just increase inequality, they also reduce productivity by encouraging Australians to overinvest in housing using money that could be spent in sectors that might generate more wealth. By treating housing as a protected asset, tax arrangements encourage inefficient use — large houses with unoccupied bedrooms, for example, or second homes that are rarely used. And housing inequality is itself a drag on productivity: insecure private rental housing is likely to result in frequent moves, which damage children’s schooling, and congestion is worsened by the long commutes of workers forced to the “‘affordable edge” of Australia’s cities.

The market approach has also sent Australia’s public housing system into long-term decline. Under the first ten-year Commonwealth State Housing Agreement, struck in 1945, state housing authorities built about 96,000 homes for rent. Although Menzies shifted the bias towards home ownership under the second agreement in 1955, state construction continued to deliver a significant proportion of all residential building activity through the 1960s, accounting for about one in every six houses built between 1945 and 1970.

Since the mid 1990s, government’s average contribution to building has been about one in every thirty-three houses. Amounting to fewer than 4000 dwellings per year, this is barely enough to keep pace with sales and demolitions of existing social housing stock, let alone the growth in Australia’s population. With many dwellings occupied by long-term tenants, the availability of social housing to people in need has fallen precipitously, from 52,000 new social housing lettings in 1991 to just 35,000 in 2017.

Other processes have also had an impact on public housing. In the 1980s, the deinstitutionalisation movement shifted people with disabilities, especially mental illness, into community care. With no government investment in alternative housing to provide this care, “public housing became the default tenure for many of those affected by the closure of the institutions,” despite the fact that existing stock was not well suited to this purpose. Once a way of increasing the supply of housing, public housing became a safety net and then, increasingly, an “ambulance service.”

Symptomatic of this trend, state and territory governments have progressively transferred responsibility for their housing portfolios from public works agencies to human services departments. “Perhaps the single word that best captures post 1970s change as characterised here is residualisation,” write Pawson, Milligan and Yates:

This describes a process of socioeconomic change whereby the tenant population of social housing has become increasingly confined to those unable to compete effectively for market housing. This change is starkly highlighted by official statistics revealing that the proportion of NSW public housing tenants for whom wages are the main source of household income fell from 85 per cent in 1960 to just 5 per cent by 2013.

The history of public housing in Australia is one in which governments have been “reluctant landlords,” with the period from 1945 to 1956 “a partial exception to this general trend.”

Other nations have taken a different path. About a third of all Dutch households live in secure, rent-moderated social housing. In the face of UK-wide austerity measures, the Scottish government has continued to develop social housing at a high rate. Even in the United States, a longstanding low-income housing tax credit facilitated the private-sector development of almost three million affordable rental dwellings by 2017. US housing financed in this way must retain its affordable status for at least thirty years, whereas under Kevin Rudd’s short-lived National Rental Affordability Scheme, housing only had to be priced affordably for ten years. The US tax credit leveraged around US$100 billion in private investment; in the absence of a similar mechanism here, the holy grail of superannuation funds investing in social and affordable housing will never be realised.

Many other countries also make much greater use of planning measures like inclusionary zoning to generate social and affordable housing, recognising that the market alone won’t deliver an adequate range of dwellings.

While there are differences of detail between the major parties in Australia, write Pawson, Milligan and Yates, “it would be difficult to identify any distinct ideologically inspired policy difference between governments of Labor and Liberal/National hue at either federal or state/territory level.” Instead, governments engage in “busy work” — measures that give the impression of activity but fail to strike at core issues. Partly this failure reflects a shared view that home ownership “is inherently the most superior form of tenure” — a myth the authors debunk — and the linked ideal of “a property-owning democracy.” And partly it’s electoral maths: voters who own their own homes, and who have an interest in seeing the value of that property increase, vastly outnumber aspiring homeowners who have an interest in greater affordability and renters who would benefit from more social housing.

But governments can only ignore the failures of housing policy for so long. Australia’s low age pension rate is predicated on widespread home ownership keeping housing costs low in old age, but this is now the “crumbling pillar” of Australia’s retirement income system. With forecasts that home ownership rates among the over-sixty-fives could fall below 60 per cent around the middle of the century, spending on Commonwealth rent assistance will cost much more than the current annual $4.4 billion, which is more than three times the funding the federal government provides to the states under the National Housing and Homelessness Agreement.

As the authors make clear, pandemic or no pandemic, this is a long-term problem with long-term implications:

Firstly, Australia’s current housing policies and housing system are further compounding existing income and wealth inequalities. Secondly, current forms of housing assistance will become fiscally unsustainable if current trends persist. Thirdly, Australia’s housing system underperformance is increasingly compromising broader public policy objectives.

This is an academically oriented book using careful language and detailed referencing. Retailing at more than $100, it isn’t destined to be a bestseller. But it is a landmark achievement that puts a peg in the ground, a reference point for where housing policy should go next at this moment of crisis and opportunity. Politicians, public servants and industry players who are thinking about how Australia rebuilds after the Covid-19 pandemic would do well to read it. •

Peter Mares’s four-part radio series, “Housing the Australian Nation,” will be broadcast on ABC Radio National’s Earshot on from Saturday 30 May.

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