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analysis: The housing market seems out of control. But there are lots of things we could do

By business reporter Daniel Ziffer
Posted , updated 
An inner-city house, slowly growing in value.(ABC Radio Perth: Emma Wynne)

I am dumber than our house.

In the past 10 years I have risen before dawn to produce early-morning radio, sliding outside in the darkness while trying not to wake our sleeping children.

As they’ve grown, I’ve kept working, juggling the rhythms of family life with the demands of live television, often only returning in the dark in time to help with bath time and bed.

My house isn’t that stupid. It just sits there.

Houses in Canberra, where I do not live.(ACT government)

Recent sales of similar properties in our area have added weight to what the data was telling me already.

In the decade we've lived here, our house has likely increased as much or more in value than I have earned in income.

I’m not poorly paid, but I am out-earned, consistently, by a construction of brick and wood — and, more importantly, the land it sits on — that just keeps getting more valuable as it ages and Melbourne's population grows.

Some people will think this is wonderful, that my house has achieved such insane capital growth.

But is it? I’m not so sure.

Feel-good factor

A key element of what rising house prices do is what's called the "wealth effect".

If you own a house, higher property prices may make you feel richer even though it's difficult to "realise" that profit.(ABC: Simon Leo Brown)

It's where you feel you're richer so you're looser with spending. That boosts company earnings, profits, investment and should lead to inflation and higher wages.

It's one of the reasons economists worry about falling house prices. They create a "negative wealth effect" and people shut their wallets even though their financial position has essentially not changed.

An additional benefit of soaring house prices is that my wife and I could use the equity — the amount of value held in the increasingly valuable house — to borrow more money.

But the downsides are everywhere.

Our house might be worth more money but, if we sold it, we'd still require another one to live in. Even though there are thousands of housing markets across Australia — and prices can swing markedly even within small suburbs — most have risen at a consistent rate in recent decades.

The pandemic has supercharged prices. You'll have read articles worrying about a potential 5 to 15 per cent drop in house prices. But that drop wouldn't even take them back to where they were in 2019.

And the biggest downside of all: There's very little chance our children will be able to live near us when they grow up — if they're able to afford to move out at all.

What good is living in a house worth "X.X million" if you then need to drive across town, and possibly out of it altogether, to see the ones you love?

Legendary problem

To explain some of the housing problems of Australia, I'm enlisting the help of John Legend.

Chrissy Teigen and John Legend arrive at the 64th Annual Grammy Awards In Las Vegas in April.(AP: Jordan Strauss)

Around the time my wife and I bought our house in an inner suburb of Melbourne, the US-based singer and his wife Chrissy Teigen were selling theirs.

We are similar in age and we've attended the same gigs a few times, but apart from that we don't have a lot in common.

I work for the ABC in Melbourne. He's sold millions of records and has an Elvis-like residency at a Las Vegas casino. The best tickets, including a private performance and a photo, cost $US1,000 ($1,438).

His fully renovated 600-square-metre three-bedroom house in the Hollywood Hills area of Los Angeles had a recording studio, manicured garden and a hot tub. Plenty of space to store the nine Grammy awards he had back then. The home was featured in Architectural Digest and eventually sold for just under $US2 million.

But at the same time, houses in the suburb I'd just bought in — with an extra bedroom, perhaps a garden or garage, items our house lacks — were selling for the same amount of Australian dollars.

His house had a commanding view and an outdoor bathtub. Ours looks over a factory. And both my house and the then-flash $2-million ones in our suburb are just a few blocks from the headquarters of a motorcycle gang.

So what's going on?

He's won an EGOT (Emmy, Grammy, Oscar and Tony award) and is a judge on The Voice.

I'm a public servant in Melbourne.

Why were we playing in the same sandpit?

Housing obsession

The biggest problem with the housing market in Australia is that there's not one way to fix it.

You could make housing more affordable by changing some of the elements I'll list shortly, but just doing one or two wouldn't shift the dial.

Multiple government and market forces make it hard to increase the affordability of housing … or create the political will needed to make it happen.

You've got to take in:

  • Federal government decisions that shape the tax system, providing incentives to invest in housing (and not live in it). Negative gearing allows property investors who make a loss to reduce the tax they pay on other income. The capital gains discount sees half the profits from the sale of an investment property go untaxed. On top of that, there are tax discounts for people putting money into superannuation — far less than you'd pay in income tax. Many people with self-managed superannuation funds (SMSFs) are investing in property using these schemes, giving them a huge advantage over younger wage slaves
  • The Reserve Bank sets interest rates, but its key focus is maintaining inflation (a measure that largely ignores house prices) within a band of 2 to 3 per cent per annum. It's recently shot up (6.1 per cent a year and seemingly on the way higher) but for most of the past decade it's been lower. That has kept interest rates low, allowing people to borrow more and keep pumping the market
Reserve Bank governor Philip Lowe has only recently lifted interest rates from "emergency-low" levels not seen since the pyramids were built.
  • State government budgets have become addicted to stamp duty. The fee — paid on the transfer of a property — has risen with prices. In Victoria, the stamp duty on a $1 million home (around the median price in the capital Melbourne) is $55,000, or 5.5 per cent of the cost
  • Renters have also got a bad deal from state governments. Some are slowly changing the rules — to allow pets and for renters to put pictures on the wall without prior permission — but things are tilted against the rights of tenants. Our standard one-year leases would bamboozle people in Europe where longer agreements are common. This precarious tenure, along with the privations of inspections and rules, are part of what drives demand for ownership
Not all states automatically let renters have pets. Even ones who are very good boys.(ABC News: Kristian Silva)
  • Local governments have, at times, been loath to rezone land in appropriate and timely ways. In a bizarre patchwork, city planning has been largely abandoned and left to an unfair scrimmage between developers seeking inhuman heights and densities for buildings, while shocked community groups try to salvage something, hoping that sunlight can hit the ground at midday in January. Elsewhere, communities have stood in the way of modest developments in appropriate areas, hoping to keep their neighbourhoods frozen in time
  • All governments have not done enough to boost social and affordable housing. The new federal government is finally back in the game (Victoria's government too) but it is starting from a long way back. Around 4 per cent of Australia's housing stock is affordable or social housing, reserved for people on low incomes. In many similar nations it's closer to 20 or 30 per cent
  • Home owners are also standing in the way of this change. The percentages move slightly, but essentially one-third of Australians own their homes outright, another third are paying them off and the final third are renting. With two-thirds owning or on their way to doing so, that's a big constituency that is thought to want constantly rising — nay, soaring — house prices

But do they?

Change is slow

The Labor Party dropped the potential changes to negative gearing it took to the 2016 and 2019 elections.

But the tide of inequality — and people seeing through the chimera of the "wealth effect" — may start to shift the tide.

There are a lot of options: windfall taxes for rezoning, to stop land banking and promote sensible land use. Changes to stamp duty, perhaps swapping it for land tax (as is happening in the ACT and starting to happen in NSW). Alterations to loan-to-value ratios. Mandated affordable housing in developments. Substantial investments in expanding social housing projects.

Our obsession with property, and the way the tax system is tilted to promote it, means a median house in Melbourne is (depending on the exchange rate) more expensive than a median house in London.

The focus on land and buildings takes money out of productive enterprises, like people starting or expanding businesses, or investing in education and training.

I love our house: the community, my children living close to their school mates, being not too far from a park (or a bikie clubhouse, if I choose to take up a hobby).

But what I really love is the family in it.

And I know more families would rest easier at night and live less stressed and more fulfilled lives if our housing market wasn't such a complete mess.

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Posted , updated