The New City - February 2007 editorial

Editorial: February 2007

Workers flee Sydney's unaffordable housing

‘Sydney must stop growing sooner or later’, demanded Clive Hamilton of the Australia Institute recently. ‘If the “endless growth” mentality is not reversed’, he continued, ‘in 20 years time we will be reading in the Herald of the next plan to lever an extra million or so residents into a bursting metropolis’.

Hamilton hopes to turn back the tide. His anti-growth outburst is pure wind, even though the accompanying prediction may prove accurate (the NSW Government plans for an additional 1.1 million people by 2030).

Perhaps Hamilton missed the significance of last year’s astounding United Nations forecast. More than half the world’s six billion people will be urbanised by the end of 2007. Several factors are driving this population drift to cities. Rates of progress vary between developed and developing nations of course, often starkly, but a world-wide pattern is clear. Changing forms of land tenure, new agricultural techniques and technologies, and shifting patterns of consumption, mean fewer people can, or in some cases need to, extract a living from the land. Still, population growth rolls on.

At the same time, globalisation and economic deregulation are transforming urban regions, creating zones of opportunity where diverse markets for all types of goods and services emerge in the wake of international trade flows. On a vast scale, manufacturing is gravitating to the fast growing megacities of the developing world, where millions are leaving subsistence farming behind. In the spreading cities of the developed world, traditional manufacturing struggles to keep pace with building construction, high-tech and services. A profusion of small operators are sprouting all over suburbia, offering services ranging from software design to discount retailing to weekend lawnmowing.

Developed and developing nations alike face the challenge of settling growing urban populations.

Australia is no exception.

Contrary to received wisdom, enquiry into this complex field suggests our cities must expand or slide into a phase of slow decline. In the wake of drought, the Stern Review and now the IPPC fourth assessment report, climate change hysteria sweeps all before it. The intractable crisis of home ownership and affordability, on the other hand, commands only fitful attention. For thousands of working Australians, the backbone of our suburbs, this is where our most serious social and economic challenges intersect. Acquiring decent accommodation for their families means taking on increasingly oppressive burdens, and this has wide-ranging consequences for the vitality of our urban regions. Surely, discussion about the future of our cities starts here.

Throughout its history, Sydney has been a magnet for aspiring newcomers from all over Australia and the world. So when newspaper headlines start to declare ‘Workers flee Sydney as rents rise’, something has changed. No doubt, the city continues to grow and to attract affluent settlers from local and foreign sources (mostly foreign: since 2001 Sydney has drawn 76 per cent of its population growth from overseas). And some city dwellers are moving to the country or the coast in pursuit of a lifestyle dream (the so-called ‘sea-changers’ and ‘tree-changers‘). But increasing numbers of low to middle income earners are being squeezed out against their wishes. NSW's population growth slowed from nearly 90,000 in 2001 to 53,000 in 2004. This fall was partly due to a net loss in population that year of 26,000 from interstate movements.

The housing affordability numbers are bad and getting worse. According to a recent Reserve Bank review, 35 per cent of households now have a mortgage compared to 27 per cent a decade ago and the number of NSW mortgage holders with repayments overdue more than 90 days rose by twice the national average. Macquarie Bank analyst Rory Robertson estimates that house prices have risen 75 per cent faster than wages over the past two decades. The proportion of owner-occupiers in the 25 to 35 age group dropped by 10 per centage points in the last 20 years and the rate for 35 to 44 year olds is edging down. For most of the 1990s, says Robertson, first-home buyers accounted for more than 20 per cent of home loans in Australia but by 2004 it had fallen to just 12.6 per cent, and even less in Sydney.

The most widely cited measures of home loan affordability in Australia are the Real Estate Institute of Australia home loan affordability indicator, the Commonwealth Bank of Australia-Housing Industry Association housing affordability index, and the BIS Shrapnel home loan affordability index. A Reserve Bank research note on these measures last November said ‘there has been an appreciable deterioration in affordability since 2001’. It was considered ‘significant that in 2006 the affordability indicator had fallen to a level comparable to that reached in 1989, despite the fact that interest rates in 2006 have been very much lower than they were in 1989’.

The news is no better for renters. Sydney’s rental vacancy rate is running at 1.5 per cent, the lowest in 20 years. And rents are predicted to rise by 20 per cent this year. Landlords never had it so good.

Few now deny that housing affordability is a serious social problem, particularly in our larger cities. However, there is heated disagreement about its causes, and how to respond. In general terms, the debate is between those who contend that house prices are essentially cyclical and others who argue that they reflect structural distortions. The NSW Government, for example, views Sydney’s current level of affordability as a function of last year’s interest rate hikes. These have bumped up borrower repayments and flattened the property market by scaring off investors. Predictably, the NSW Opposition says state-based property taxes (especially land tax) and levies are the killers. The underlying assumption, in both cases, is that property markets are inherently cyclical, so conditions for buyers and renters will improve once monetary policy is loosened or tax rates are adjusted.

The cyclical explanation is attractive to those with a vested interest in the prevailing system of land zoning, mortgage lending and property taxation. Left-leaning academics and environmentalists, who harp on about the boom-and-bust pattern of capital accumulation, tag along.

Monetary policy, taxes and levies do have a significant impact on affordability. The federal government can’t just blame the states in this respect. But the factors driving housing values are more diverse, complex and interrelated than the cyclical interpretation suggests. A complete explanation must also focus on the supply side of the equation, particularly the supply of land, which - for many - is the real lynchpin of the prevailing system. One leading member of Australia’s structural camp, Alan Moran of the Institute of Public Affairs, estimated that ‘the land component, which in 1976-77 comprised 32 per cent of a new home in Sydney, in 2005 comprised 62 per cent’.

Moran is in no doubt that this escalation relates ‘to the squeeze on land availability originated in misplaced desires to prevent “urban sprawl”’, while noting that ‘building costs have been stable’. If land prices remained stable or increased only at the rate of underlying inflation, says Moran, ‘average new house prices would have been 40 per cent lower than is presently observed’. This is a powerful point considering that the median house price in Sydney was $520,300 in September 2006.

Reports and studies highlighting the impact of land supply policies on affordability are starting to flow from housing and property industry associations and analysts. The most influential catalyst for discussion remains the Annual Demographia International Housing Affordability Survey, the third edition of which was released last month. The survey measures affordability across 159 markets in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States by means of the ‘median multiple’ (median house price divided by median annual household income).

The benchmark for affordability is a multiple of 3.0, where the median house price is three times the median household income. Consequently, the survey assigns Sydney (8.5), Melbourne (6.6) and Perth (8.0) to the category ‘severely unaffordable’ (5.1 and over). Sydney is the eighth most unaffordable market surveyed, less affordable than New York and London. Australia’s national median multiple is 6.6, more than double the affordable benchmark.

The survey’s strength lies in its comparative methodology. It’s hard to dispute a consistent pattern emerging from so many markets with varying population sizes, histories, locations, industrial and economic orientations, interest rate regimes and taxation arrangements. In contrast to the dire Australian findings, 42 markets are assigned to the ‘affordable’ category, including sizeable American and Canadian cities like Atlanta, Detroit, Dallas, Houston, Pittsburgh, Quebec and Ottawa. The survey’s message is clear, and consistent with Moran’s:

Research in the surveyed nations identifies the cause - the housing cost escalation is principally the result of supply factors. Where there are significant constraints on the supply of land for residential development, housing inflation has occurred. Where there are no such constraints, housing cost inflation has not occurred. Demand does not raise prices by itself. Demand can only raise prices where there is insufficient supply.

This conclusion undermines a popular Australian criticism of the structural or land supply explanation, namely that historically low interest rates in the early 2000s - which boosted the purchasing power of home buyers by 60 per cent, according to Rory Robertson - drove up demand and prices. The NSW Government and some media elements dismissed the survey on this ground. The Government also thought Sydney’s dismal ranking was misleading, since the ‘study included expensive harbourside areas’. This objection would have more substance if the survey used mean rather than median prices - median values, unlike means, are barely affected by a few extreme observations. As the survey points out, the median multiple has been recommended by the World Bank and the United Nations as a tool for evaluating urban markets.

On the strength of his paper, Thinking About the Big Drop in Australian Housing Affordability, Robertson was trotted out by the Fairfax newspapers to trample on the structural or land supply perspective.

One Sydney Morning Herald article featured his assertion that releasing more land on the outskirts will do nothing to improve affordability. Desirable inner Sydney suburbs like Bondi, Bellevue Hill, Bronte, Mosman and Paddington, he said, would remain beyond the reach of most first home buyers. This is a statement of the obvious, of course, and beside the point. Land releases improve affordability on fringe greenfields sites - where a large proportion, probably a majority, of low to middle income couples with children are willing to live. Shortly afterwards, the Australian Financial Review quoted him deriding the Demographia survey because the ‘the 26 most-expensive cities were high demand locations with a “large, sexy and high profile”’. In contrast, said Robertson, the affordable cities ‘were generally low-demand locations’, like Fort Wayne and other US cities which ‘were actually shrinking in size, such as Youngstown, Buffalo, Dayton, Rochester, Akron and Toledo’. He neglects to mention, though, that the affordable category also includes the booming cities of Atlanta, Dallas, Pittsburgh and Houston.

The NSW Government is not oblivious to the need for more residential lots on greenfields sites, and its comprehensive City of Cities plan earmarks two substantial north-western and south-western ‘growth centres’ for residential development. But the plan envisages that over the next 25 years only 30 to 40 per cent of Sydney's new housing (160,000 lots) will be built in these centres, while the balance will be assigned to higher density developments in the city's established inner suburbs. This is unlikely to have much impact on the affordability problem, however. In this respect at least, Robertson is correct. Yet the Government rejects expanded land supply as a solution to Sydney’s housing crisis, claiming that although 26,000 lots (including 17,000 rezoned by the Government last year) are currently available, there is simply no demand from developers and buyers in the weak property market. This reflects a narrow cyclical view of the market, however, and ignores the relationship between demand and prices. If lots were more freely available, their price would be lower and demand higher.

Housing affordability is on the agenda. But until planners and policymakers break free of their limited cyclical perspective, we aren’t likely to see more than stopgap proposals to increase the first home owners grant, cut taxes and stamp duty, increase the stock of public housing and rent relief - all of which are helpful but amount to little more than tinkering around the edges. Freeing up the land supply disturbs powerful interests, who will resort to flawed economic analysis, and fears of social dysfunction and environmental degradation, including the prospect that suburban expansion will increase carbon emissions. All of these grounds are proved baseless on closer scrutiny. They will be examined in future editions of The New City.

This editorial was republished by On Line Opinion, Australia's e-journal of social and political debate.

TNC 18 February 2007 Like to respond? Top/Homeo