Housing Affordability

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Somehow, the promise has been betrayed. Just what was society - the economy - and indeed, the housing market - meant to deliver. What was the promise? Has it been betrayed?


This article is based on a lot of reflection over the years on housing affordability, and talks I have previously given. Some statistics go back about five years, but I think the picture remains valid - I can't imagine the trends and influences would have changed that much since. I'll listen to any arguments any one wants to make. Having said this, the speculative vacancy report from Prosper Australia Melbourne, and the testimony from Saul Eslake, represent recent perspectives.

Contents :

The issue - housing affordability ... and progress ...

Whether or not there's a housing "crisis" ( that much abused term), there certainly seems to be a housing problem. Many measures show how much harder it is to purchase a property. But, getting to the nub, it feels like an important promise about what the world ought to mean has been broken. Amy Kilpatrick in 2007 mused that maybe the implicit social contract "if you worked hard enough and were a middle class person, you would be able to own your own home and have the security of your own home into your old age" has been betrayed. I need to broaden it out to look at how some things are getting better, while other things - like housing and the accessibility of a good life - are getting harder.

We've come a long way the last few hundred years. Children do not work in mines. We do not die of phosphorus related diseases in factories. We can work fewer hours - though it seems some people choose to work very long hours. And we live longer.

Just in the last few decades, its really ramped up. In living memory, we had men picking up nightsoil from the backyard toilet, and we had a trench out the backyard to distribute greywater - it was often a bit moist if not muddy, particularly around winter. Our houses now have carpeted floor, refrigerators, colour TVs, microwave ovens and air conditioners, and we don't have to operate wringers to dry our clothes.

It is cheaper to eat out entertain ourselves and travel. We can eat out-of-season food. We can cure many more diseases today than we used to - many types of cancer amongst them.

But coping with the increasing population density is hard. Decades ago, we got rid of "Photochemical Smog". However, the pollution we can't see remains an issue - asthma and other problems cluster around roads.

Our roads are congested, and increasing the number of cars makes the pollution even worse - with "stacks" being built which don't seem to fix the problem. And it's very expensive to expand the roads - even if we ignore pollution. We can't just chuck a road on the ground - all the ground is already taken up, and the growing economy has made it expensive. And tunnelling still more expensive.

It's hard to raise a family on a single income. We struggle to find accommodation close to work. The more affordable accommodation close to work is no longer the "quarter acre block" - it's a lot smaller - or it is a unit. We have lost our innocence - and there's no going back.

It used to be easier - but it has become hard now. The chooks have come in to roost.

To capture what's going on :

We have cheaper mobile phones, computers and whitegoods. We can cure more diseases, especially cancer. We eat foods out of season and dining, travel and entertainment are more affordable. But into the bargain, the beaches are more crowded, land is more expensive, the roads are more congested ( with associated pollution ) and there's more noise from planes flying overhead. We see fewer stars in the night sky and our children can no longer catch tadpoles at the local creek.

How did it happen?

In the ideal of the free market, prices should change so that investment in housing becomes more worthwhile; we then have more investment and the prices moderate. So, by this prescription, it is the "lack of market freedom" that has made things worse for us. However, advocates of this point of view usually focus on their own particular "free market" issue while ignoring everything else. Like negative gearing for example.

I've focused on the ambiguities of progress, which we'll look at again later. But there's another "economic" viewpoint. Back in 2007, Ross Gittins' "blamed" us for our situation, saying "We did it to ourselves". According to him, accommodation affordability declined because of our aspiration for high quality detached dwellings. There's only so much to go around (I've tried to answer why this is the case), so when we all compete for it, we bid up the price. When interest rates drop we make bigger loans - which only make us collectively bid up prices even more.

The scarcity bites - whether it be higher interest rates and lower house prices - or lower interest rates and higher house prices - you can't evade it. Yes, interest rates can be so high all the slack is taken up. And if you've taken out a variable rate loan and the rates rise - that can really hurt. I know of people who were hard-pressed to "stay on the road" when we had the "recession we had to have". However, in terms of what you actually pay overall for a new purchase - most of the time the interest rate doesn't matter that much. In similar fashion, all the first home buyers subsidy does is bid up prices by something approaching the value of the subsidy.

The promise of capitalism

Some say we're getting in the way of the market. The market will bless us all if we only let it follow its own course, and remove any obstacles in its way. Ideally, an efficient market should provide accommodation that's as cheap as possible. However, the "as possible" is the sting in the tail. But no matter what the market does, we can no longer have affordable free standing houses on decent size blocks ( much less the proverbial 1/4 acre block ) close to work in city centres.

Free market advocates emphasise the "better" element, but don't really tell us "how much better". Perhaps we'd still have a lot of people struggling. But a "free market" is in the eye of the beholder. Some may say Government intervention makes it less free. Still, negative gearing - intervention of sorts, "land banking" - and propaganda by the real estate lobby also limit market "freedom". What's most important for a "free" market seems to be influenced by what most benefits you the most.

Land was always scarce, and it's getting worse. The market can try to shuffle things around with prices and investment- but it can never undo this underlying problem. As Mark Twain said "they're not making land any more".

Keith Hart, an anthropologist talks about the our belief in the virtues of "the market" :

This modern religion is similar in many ways to older claims made on behalf of God: If society is omniscient and good, how can there be so much suffering in the world ?

Ideally, if land prices go up, this should prompt investors to provide more accommodation, and push prices back down. In reality investors rarely invest to improve affordability. What they mostly do is make expensive accommodation more expensive. Of course. You want to improve your returns, don't you? About 90% of the money claimed in negative gearing does not increase the number of dwellings.

Sometimes - when we're lucky, and the wind is blowing behind us - developers build a block of units on land and reduce the price per dwelling - if they're not trying to flog "luxury apartments". But - the sting in the tail is that these "cheaper dwellings" will never be free-standing houses. You need to increase the density, and the word "dwelling" must now mean something different.

Capitalism shares around the frustration. Sometimes more equitably, sometimes less. Land needs to be scarce in order for it to be developed. There is a necessary minimum level of scarcity - which translates out into frustration, housing pressure, lack of affordability - whatever you want to call it. This bears on a deeper issue - what we should ethically expect of our participation in the market - and more broadly, in society.


There's a lot of tensions in how we relate to the world. Different people are winners and losers, different views are contradictory, and nobody stops to think ...

On the one hand, it is noble to live a life, to partake of what the world has to offer, to work and to raise a family. We are a community, and we're all in it together. Another reality, though, is that we all compete, scrambling over each other to get to the top of the heap. We want to "get on" the property merry go round, and "get ahead". Still, maybe we just want financial independence without really wanting to tread on anyone along the way.

We want higher prices when we sell, and lower price when we buy - particularly so for houses and cars. We don't want additional development, but the original development meant we have the property we now live in - we're comfortable with that past development - but strangely, no more. While we can demonise developers - they did have their part to play in the past - and - if they don't wreck an area - they let more people share in the benefits of our area - a good thing, if we can get past our natural competitiveness. Still, the "developer" interest may not be "everyone's" interest - they're like an elemental demon, and must be kept in check.

If we're purchasing, we're happy with low interest rates, but unhappy when they rise. However, they're a natural part of the economy - at least if we grant the Reserve Bank is trying to balance out the overall benefits. This sometimes means interest rates going up. But, in contrast, for retirees living off their nest-egg - low interest rates are bad.

A fall in prices is good for those buying their first home, but bad for those already owning one - if affordability improves through declining prices, investors lose their money - improved "affordability" has its own other costs.

An increase in prices is what investors want. But this, together with areas becoming more attractive, can kill the charm of an area, with the local eccentrics no longer able to afford to live there.

Your property value can go up or down. Maybe it's just vagaries of "the market" - but if Government initiatives reduce property values, people complain - or even want compensation. If the Government builds a railway station, making your houses' price go up ... well, I've yet to see a queue of people at the Australian Tax Office, racked by guilt, wanting to pass some of that bonus onto the Government. Funny, that.

The supply of accommodation - and "land banking"

Supply influences the cost of accommodation. How much accommodation is available? Right wing apologists claim we're held back by a lack of release of new land for development by Government. But there's a lot of vacant land and empty accommodation we can't live in; as you walk around, you'll see the odd vacant block.

Sure, we might wring our hands about "speculators", and we'll get to that ... but even more insidious are people who deliberately sit on land, waiting for its value to increase, without bothering to do anything with it in the meantime. It's called "Land Banking". In Sydney, there's the "Terminus Hotel", see this article in SMH.

At some level, owning land comes with an obligation - to do something with it. Whether you live in it, or rent it, that doesn't matter - as long as you do something. We see this in the rarely used "squatters rights" ( adverse possession ) - if you live in someone else's property for seven years without them doing anything about it, you can claim ownership. If you own something you should do something with it - and if the squatter is at least doing something with it, something they deserve credit for.

In France, I understand that if you own more than one property, you're taxed as though the second property is rented out - whether you rent it out or not. In France, you should never being denied a dwelling - and you're certainly encouraged to provide one if you can. Maybe it was Napoleon, but way back in the dim and distant past, someone was thinking. In ancient India, Apastamba said "If any person holding land does not exert himself and hence bears no produce, he shall, if rich, be made to pay what ought to have been produced". The concern was about keeping agricultural land out of production - but there's a natural extension to denying availability for occupancy. In ancient China, around 300 BCE, Mencius, a philosopher of the time said a Government should chiefly tax the ground itself, rather than what is built or done on it - as noted in Durant's "Our Oriental Heritage".

Land Value Taxation means there's a real cost to hold land unused - there's a cost in twiddling your thumbs - which means you're more likely to make use of it.

It all adds up. In Melbourne, the people at Prosper Australia were originally using cyclists to get a handle on vacant blocks - but since then they've figured out how to use
water usage.

If you added these vacant properties, you'd double the availability of properties - which would surely improve affordability. I'd expect the Melbourne figures to be mirrored in Sydney. And yet the focus is on Government land releases, rather than unused land inside our cities. The real estate lobby talk about "shortages", but they ignore the large amount of property that isn't lived in or even offered for living in.

Further increasing density in existing areas - quite apart from land out of use - would also increase the dwelling stock, but the free market lobby never get passionate about this.

So why focus on land releases? Well, developers do develop. Derrrrrr. And to be fair, they probably do want to sell stuff for people to live in. However, their interests are different to people who are happy to watch the value of their unused properties grow, and we don't stop to notice the difference. They fly under the radar, and the interests of the real-estate lobby, developers and the cheer squad for anything that is private instead of Government try to portray a lack of new releases as holding us back. It's a gross distortion at best.

I don't know how large the new releases should be. Clearly, there's a balance to be drawn between the economy and the environment. There's even stories that population growth is engineered to suit the needs of developers, rather than developers responding to "natural" population growth. Regardless, a justification because there's a "shortage" which "jacks up prices" through a lack of land release makes no sense.

Negative gearing and the "landlord strike"

Negative Gearing is getting talked about more and more - lots of people, nodding, saying we should be rid of it.

Negative Gearing is something which is ( I think ) unique to Australia - it is a way of claiming your expenses in obtaining property against tax. In the US, there are "non-recourse loans". France has its own ideas about taxation related to property. There's a lot of permutations around the globe.

Many suspect negative gearing just serves to increase prices rather than supply. But there are also concerns that removing negative gearing would dramatically reduce supply. Landlords would go on "a strike" and the supply of housing will "dry up".

The underlying assumption is that all housing investment increases supply - which ain't so. Investment is often about making something already expensive more expensive, not increasing supply. Further, rather than actually changing anything, the property market can just vacuum up economic growth.

There's the claim that in the past removing NG increased prices. Well, this only happened in Sydney and Melbourne - and then because of reasons unrelated to NG. Even if some of this picture is true, cutting off NG should reduce the price of accommodation as investors are less inclined to buy into it. OK in the long term ( and I don't agree with this picture, just working through consequences of the supposed story) with less new property being built, the price might then go up - but not in the short term.

This point was outlined by Saul Eslake in his speech to Prosper Australia, "50 Years of Housing Failure".

The quality of investment is more important than its quantity. And, the way of getting higher quality investment is through a finessed taxation system ( based on Georgist principles ) which provides the right incentives. In any case, if we do believe there's a gross mismatch between housing supply and demand - the best way of dealing with this is through public housing, not through tax incentives which are an ineffective blunt instrument.

Freedom of choice ?

We'll continue to illuminate the nature of land, prices and the Georgist picture, but it now makes sense to look at some other issues. Free market apologists beat the drum about a free market ( Negative Gearing, humm ?? ) and Government Land Releases. But they also bang on about freedom and choice. Lets consider this part of the picture. There seem to be two claims - that in some way, various controls intrude on our sovereignty, with vision of the "Government" intrusively "running our affairs" - and that it is only by having free unconstrained choice that the market will be able to operate effectively and bestow its blessings upon us.

Yes, we make choices. We work hard, commute a long distance, and come home exhausted to veg out in front of the TV and not appreciate the world around us ? Because of choices we've made which, er make sense in terms of how we should get ahead? Is there nothing wrong with this picture?

And yet, these are our choices, which in their own way must make sense. The claim is that people are "just making their own choices" and "doing what seems right to them" and "who are we to say that people are making wrong choices". And well, they do have a bit of a point. We do need to understand this reality. Still, if none of your choices is really good, I think there's a problem.

Are we really making sovereign, rational informed choices? Just like people are rational participants in the market at the same time as they become addicted to drugs, gambling or other vices, and might struggle to lose weight? Yes, you don't want to patronizingly intervene in people's lives. But the idea that our joint selfish decisions must be good ones - that we can be blind to the fact that everyone is making the same sacrifices, that we're all "running to stand still".

One of the few things society is good at is generating large numbers of frustrated, pissed-off people. I guess it doesn't do many things well, so that's something. Stress, sometimes resulting in depression, is said to be an epidemic, with effects second only to heart disease - though maybe it makes heart disease worse into the bargain.

So, at the end of it - yes, freedom is important. We shouldn't be denied our individual choice. However, we're interacting in complex ways via the land market, and our own "free choices" can mean we shoot ourselves in the foot. We need to look further. There may be better ways of interacting for everyone's benefit than through selfishness mediated by the market.

Some numbers - things are getting worse

Intuitively we all know things are pretty rotten - we know something's wrong. But there are some numbers we can add to the picture. The years to purchase a median price house at median income in Sydney is 8.5 - but you're not going to spend all your income on the loan, and there's also interest; probably more like 20 years. Over 20 years, the ratio of average house price to average wages rose from 4 to 7 - we must now make ourselves indentured slaves for twice the time to get our financial citizenship, with that period of slavery being a function of the cost of a house and the interest on a loan. Ten years? Twenty? Thirty? In Rome you had to serve for 20 years in the army to get full citizenship (Yes, even given that Roman Citizenship was a sliding scale - thanks to Brad and George for discussions in this area - it's still an interesting comparison).

This median house price to median income is ration has risen 75% faster than wages over two decades, illustrating how the property market absorbs economic growth.

Between 1960 and 2006 real house prices increased at an average of 2.7 per annum, ahead of a 1.9 per cent per annum growth in per household real incomes.

But, yeah ... you only need look around.

Land Value Taxation : A step in the right direction

While the ancient Chinese and the French encourage(d) people to use their private land so others benefitted, and there's capital gains tax too, just plain "Land Value Tax" has a lot going for it. There are some passionate advocates - they draw on the ideas of Henry George. I'm a fellow traveller - though I prefer a broader focus.

By charging a fee to hold property, related to its unimproved value, LVT provides an incentive for the owner to do something with the property, benefiting us all, and devalues land banking. Now some people have let their properties go to rack & ruin - there are notable UK examples ( see here ). Certainly, their bank account is no issue - well you won't change their willingness to let their properties slide into oblivion. But for
others - you'll sure have an impact. ( Also - if you get an opportunity - take a boat tour of the ridiculously expensive waterfront properties around the Gold Coast. Amazing stuff ).

Until the return reaches a threshold, people will hold land out of use - new releases of land will just be window dressing. Just as important as incentives around the development of new releases are incentives around the use of existing property

Details of the Georgist picture - what determines the value of land?

There's a bit more to the Georgist picture; I presented a more detailed paper to the Society for Heterodox Economics back in 2009 - see here if you're interested ( Note that my email is currently john.august@fnord.optusnet.com.au - remove the 'fnord'). Their picture is sheds more light on things, but also has some problems.

Land is an important part of the overall cost of accommodation. Over time this value increases. It's a function of two things - the land might become "better" - more things might be built around it, or accessibility to infrastructure and proximity to work might improve. But the price might also go up through "mere competition" - more people want the same amount of land. This second effect - an increase through "mere competition" - is determined by prevailing levels of wealth, population growth and population transfer. You can even get demographic change - large houses vacate over time with only have Mum and Dad living there after the children have moved out - making accommodation scarcer. I can't see this as a "community benefit" increasing prices.

Georgists see any increase in land values as the result of "the community". Sure, some of it is - like the appearance of new railway stations, shopping centres, schools, hospitals and employment prospects - but not all. Still, overall the Georgist picture is fairer and certainly an improvement.

Further, as our economy grows, a disproportionate element of that wealth is vacuumed up in the property market as we squabble with each other to get that favoured property. That's part of the Georgist picture. Into the bargain, we've had nonsensical propaganda from the Real Estate Institute of NSW. They've talked about rents increasing by 20%. But think about this - how much must the rest of the economy grow in order to be able to afford those increased rents. Can we really expect the economy to grow that much? Where's the money coming from?

The Georgist inequity

It spotlights an inequity - if the value of land goes up through either surrounding improvements or an increase in demand, the investor's return will increase. But it's not something the investor worked for, like starting up a business or factory which will hopefully benefit the community.

Some of this increase is the result of the effort of the community, not the effort of the landholder ( for example, if they build something on the property). So, calling is a "tax" or "fee" is a bit misleading, and some people get hung up on it. In fact, it is "recouping" what the community has put in - and is perhaps better called "rent" than a "tax". Really, though, the word "tax" does not have that emotional resonance of "resentment" as it used, so it's perhaps less of an issue.

Still, you can just put your money away elsewhere and leave it to grow - for example a bank account, as compared to using is for some personal business or other activity. And the property market is linked to the financial market, with property investments in equilibrium with all the other possible investments - maybe even beneficial ones.

Property investors will say that in choosing locations where they get a return, their act of choice is a benefit. Well, maybe. But we're paying through the nose for the benefits of that choice, and it's community effort that has provided that return. You do wonder how much more stupid investors would be if the return was less. My feeling - not much! Still, its something you hear, and an important thing to think about.

Investors, speculators, developers and the financial market

To buy a property, we purchase it from the current owner, or from a developer who has built it on a newly released block. In between, we have "speculators" to varying degrees, who might knock down an existing property and build there, or improve a property in less substantial ways for resale - and at the extreme end - land bankers. And, into the mix, you'll probably have to take out a loan.

James Murray, a Sydney activist issues, asks : "What would houses sell for if no one could get loans for them" ? We might also ask : what would it be like if there were no speculators - or at least if there were only "non speculative developers" who only ever realised a fixed return for the accommodation they built?

Without banks, prices would be lower - but equally, we could not make arrangements to purchase something we do not have the money for - and it's not clear whether we would be better or worse off. You'd only have your savings to pay for houses. So, the price would have to be comparable to the average level of accumulated wealth or nobody would be able to buy them.

I won't even try to think about a market without speculation. Still, the "whole" market is supposed to operate so that money is invested where it does society the most good. It's an interesting promise. Free market apologists claim that at the result of mysterious phenomena we don't understand and ideological fiat, a free market will result in the best outcome. Sorry, I'm skeptical. The problems I see at present would get worse with a freer market. Still, while we're not talking about "removing" speculation, LVT will at least reduce its ugly side effects.

Market subtleties - transparency

Apart from the big uns we've looked at so far, the property market has its own other issues. Lower interest rates mean more available money, which pushes up prices. The cost of new accommodation is ultimately the result itself of three costs : the cost of money, the cost of land, and the cost of construction. But into the mix we have supply, demand and profit. Rent may be influenced by housing industry propaganda, together with distorted media reports and self serving quotes by bank economists, so rent is more what it can "get away with". Further, when returns drop, landlords may prefer to keep their properties unoccupied rather than rent them - prices are said to be "sticky". I've heard stories - particularly in country towns - of shopfronts remaining vacant for years. Then, lastly we can describe accommodation purchase prices as a "bubble" where they are overvalued, and are at that value because of the prices people are willing to pay to _purchase_ them, rather than being proportional to their rental return.

Uniqueness of Australia / Sydney

Why do we have it so rough in Australia? Or even, Sydney? We seem to be doing it a lot rougher than the rest of the world. I'm guessing all over the place, but here it is even worse. Partly - we're more fond of the backyard plot. We're a part of the global economy, and foreigners invest here. And we've a growing economy and we're running out of space - particularly in Sydney.

Economic laziness can confuse us

Economics is a double edged sword. Some economics does feel like "applied selfishness", with its own problems. But, at the same time, some economic concepts are worthwhile, and can be used to make better sense of the world. Much as I am concerned about the "justice" of the whole thing, people do misuse economic concepts and add to the confusion.

There's talk of "suppressed demand", "underlying demand", "shortage", "oversupply", etc. etc. But in economics there is the existing demand and supply curves which meet at the equilibrium price. The idea of a "shortage" has limited validity, though we can perhaps talk about "price shocks".

Maybe these terms do have some meaning, but they are used loosely in a way which obscures the underlying realities. "Suppressed Demand" may be a term which describes how things would be if your preferred ingredient were added. But just what the missing ingredient is rather arbitrary, very much in the eye of the beholder.

The economic approach - Ewwww - But ....

Some elements of the Georgist approach make me feel uncomfortable. It relies on the notion "if only you give people the right incentives, the market will work it all out and everything will be better". All we have to do is worship at the altar of capitalism, and she will bestow her blessings upon us. In this sense, it is strangely close to your classical capitalistic approach, "Economic Rationalism" ( "Economic Fundamentalism" to some), or even the line the right-wing apologists would run with.

And what about economic growth - is it really that worthwhile? And yet, Georgism does at least partly endorse economic growth. Yes, I have some concerns about the blind pursuit of growth. Regardless, I'm after better moral outcomes.

Free market apologist claim that "if everyone is better off, it doesn't matter if some people ended up getting a bigger piece - because everyone's situation has improved". Well, not quite - particularly in the property market. Property is scarce - as Mark Twain said "It's not being made any more" - and we're all competing for it, regardless of wealth. Inequality can directly influence affordability. Because those who have money push up the prices, making it more difficult for those with less money. So, those at the bottom get a double whammy. Even if there's "overall growth", if inequity increases more than the growth - and we're all completely over something which is inherently scarce - ouch!

A lot of what we do in the world is determined by money, much as many important things have very little to do with money. Accommodation is determined by the exchange of money. We put a value on things, we buy and sell - and this collides with our ideas about the sovereignty in what we own, what our rights are, and what our mutual obligations are in the society we live in.

Some people may have started off with low income in a low rent area, and did not feel inclined to move as their income (or, indeed their property value) increase. We have a conflict between personal expectations that "I have a place to live, not a shell I'll abandon as soon as it is practical" and the idea that people should be moving around like the market agents they're supposed to be. But people do also keep an eye on their property values. It's a complicated story, and the hold of money, the fact that some people own things which others do not - you have to engage with that. If we must worship at the altar of capitalism, the Georgist ceremonies are probably the least destructive method. But ideas of economics do need to mix with ethical philosophy and a pragmatic eye on what the market actually does, and how we do interact, separately to economic ideals.

That's the reconciliation I've come up with. I think it is an improvement.

In closing ...

In writing this article, I've attributed a lot of things to "free-market apologists". While I suppose that's a little bit slanted, I have tried to represent that view as I really do see it without deliberate distortion or trying to set up a straw man. Certainly, when I compare how I attribute things to the opposition compared to the excesses you see in Quadrant about the bogeyman left that they imagine - I'm really only pissing in the wind compared to those guys - they're the pros about set up armies of straw men, marching in unison.

Nevertheless, if you're such an individual, and feel I've mis-represented that view, let me know - if I don't directly engage with you, at least I'll try to give you a right of reply, noting the usual provisos about polite exchange on the internet.