Navigating Australia’s Housing Crisis

Owning a home was the Australian dream for as long as we’ve been a country. For the current generation of younger Australians, that dream is feeling more and more unattainable. Housing prices are now 12 times the median income in Melbourne and a whopping 17 times more than the median income in Sydney.

To put that into perspective in the mid 1970s houses were 6.1 times the median income in Sydney and only 5.5 times the median income in Melbourne. On top of the fact that the dream of home ownership for the younger generation has all but gone, there is a rental crisis. The rental crisis is two fold but is largely a symptom of the home ownership problem Australia currently has. 

Anyone who has recently been in the hunt for a rental will tell you prices in capital cities defy logic. The data backs that up too! If you are in Sydney, the median weekly rent will take up a crazy 45 percent of your income. It all seems like a house of cards that simply will not topple over.

So how did we get to this? What went so wrong? In Australia each and every generation has left the next generation better off up until now. For the first time ever, the baby boomers will hand the country over to the next generations in a worse state than when they inherited it. Truth be told although you might have known the numbers, you’re probably already acutely aware of the housing issue in our country. 

Many things have been put to blame for the extreme inequality forming in our housing market. Supply, population growth and millennials frivolously spending have been the scapegoats for many politicians. Recent interest rate rises have only exacerbated the issue. 

The truth is that numbers don’t lie and the numbers show that Australia’s housing issue started in about 2001. That is where income and property prices start to really diverge from one another in a meaningful way. 

So what happened that caused such a great shift in market dynamics? The Ralph reforms were a series of changes to tax in Australia. They caused a lot of changes to how businesses and individuals operated however one of the biggest changes was effectively halving the tax on capital gains. 

This one change completely changed housing in Australia for one reason. It made housing the major investment option in the country. To put it simply it was yet another tax break for property investment. The introduction of negative gearing in 1985 had already drastically derisked housing as an investment option by allowing losses on housing investments tax deductible. The Ralph reforms came along and added a lot of fuel to the flame.

Investors must choose how they will invest their money. Smart investors will pick scenarios that are favorable to them. The Ralph reforms tipped the scale drastically towards property. No where else in our economy will you be given tax breaks if you win. On top of that, you will receive any money you lost in the shortfall between the rent you charge and your investment property loan back when you do your tax return. 

What’s more is that negative gearing accidentally benefits the upper class more than the middle or lower class in Australia. Those in the middle don’t have the cash to bleed throughout the year until they are given it back at tax time. Only existing property owners and the upper class can afford to bleed heavily and wait till tax time to receive it all back. 

A common argument against changes to negative gearing is that investors would have to sell off their investment properties. Ultimately lowering prices for property across the board and decreasing available rentals. These criticisms fail to see that this is exactly the point of making the changes in the first place. As investors would sell their properties, more first home owners would be able to buy that new available supply of homes. It should be our ultimate goal to reduce the amount of people renting and increase home ownership rates.

So why hasn’t this been addressed in any meaningful way by policy makers? No doubt that has worsened in the past 5 years. Changes would undoubtedly be unpopular with current property investors. Although baby boomers only make up 25 per cent of our population, they hold over half of our country’s wealth. Most of this wealth is ini property. Given the voting power boomers have and millennials consistently failing to show up to the polls in any meaningful way, it’s no wonder politicians have largely ignored the issue. Whoever makes a change to the status quo would have to be willing to piss off the largest voting group in Australia. 

Despite how unpopular major changes to negative gearing and CGT would be, there are other solutions. Changes to the way zoning laws work would be a big step in the right direction. This is particularly true on the eastern seaboard of Australia. Legislation originally designed to protect farmland now stands in the way of much needed new suburbs. Melbourne’s outer suburbs are full of patchwork suburbs where development seems to stop for kilometers before starting again for some reason. That reason would be the current zoning laws. It simply takes too long to rezone areas for proper use. It simply takes to long for the current system to rezone much needed land for development. Although likely the most effective change, it would be a massive undertaking as it is the foundation our states are built on. 

Productive changes can be made without having to rip apart the entire framework of the property industry too! Housing affordability is better in regional areas however there is little to no work. The closer you get into a capital city the more unaffordable a house becomes for the average Australian. This follows a pretty simple logic. Unfortunately Australia’s structure of one major capital city per state needs a desperate rethink. Each capital city is bursting at capacity and current infrastructure can’t keep up.

Other countries with similar geography and space to us have three to four major cities per state. Australia is not stuck with small spaces like Europe is, yet our public investment acts like we are trapped by our geography. Government investment into regional cities, including tax breaks for businesses who choose to have offices in regional cities would relieve the demand for housing in capital cities. 

Young people (the ones most affected by high cost of housing) struggle to make the move regionally. There is no work. They will either have to take a drastic pay cut, leave careers they’ve worked their whole life for, or commute hours upon hours a day. 

The idea is simple, each major capital city is essentially a monopoly in their respective state. For Victoria, Melbourne is a monopoly. For New South Wales, Sydney is the monopoly. If young people want to work, earn a good living they have to demand housing in that city. Instead, imagine if young people could demand housing across multiple cities in the state without having to make major lifestyle concessions. The only way of this occurring is if public investment shifts to focus on more than one major city per state. 

The current policy of investing heavily into one major city is not working. Red tape and bureaucracy means we can’t build infrastructure at the pace we need. It is a proverbial hamster running on an endless wheel. Instead, some of that money should be developing regional cities.

Of course, the longer an issue like this continues the more pain people experience.With that pain comes more fringe ideas on how the problem should be solved. It’s easy to over intellectualize the issue but at the end of the day, these are real people who need real places to live. Some have called for a more Progressive tax that penalizes people who own multiple properties on a sliding scale. Meaning that you would incur more tax as you acquired more property. Essentially discouraging investors from commoditising housing. 

Along with this suggestion, some have called for the government to release more land for first home buyers. This is largely a more extreme solution to changes to zoning laws. Close to a quarter of Australia’s land is still “Crown Land”, essentially meaning government owned. Some of this land is used for important things, like military facilities and infrastructure. Some of it however, is not used for anything at all. Some people have called for this land to be released to the public for sale to help increase supply of available property.

In order for this to have any real effect on the current issue it must be for new homeowners rather than current investors. The risk is that well established portfolio owners will just gobble up more land at cheap prices. So it would need to be limited to one per person, only for those who have no property of their own. People who push for this solution cite previous government programs. The most recent being when return soldiers could get farmland in Australia for what essentially was nothing. No doubt an extreme measure to solve our housing crisis that probably fails to account for a few things. Even if the government did sell off crown land cheaply to new home buyers, much of crown land is remote so there would be no infrastructure. Hardly livable, definitely not developable into a home for most.

There are plenty of solutions to solving our housing crisis. Some would make more of a difference than others. Regardless of efficacy, there are plenty of options on the table for policy makers to make real change. So when is change likely? 

If I’m honest, probably not very soon. Almost all of the solutions, no matter how simple, are politically unpopular. Taking into account that almost all policy makers are a part of the generation that benefits from a housing shortage, rather than the ones that suffer from it only confirms that nothing is likely to change tomorrow.

Even when we remove generational differences, policy makers will be hesitant for change. This is because at best estimates, real estate makes up around half of the wealth in Australia. Any change in this status quo is unlikely because the decision to make changes weighs heavy on the country. Who wants to be responsible for changes for half the country’s wealth? Probably not many people putting up their hands for that one.

For now, most politicians agree that something must be done. They have decided that building social (commission) housing is the best bang for their buck. Is cramming millennials into low quality high rise flats in mass a good solution? Probably not but time will tell.