A step towards affordable housing
One of the classic lines in a recent 4 Corners program was that for housing affordability to improve, house prices had to come down. The host went on to say that for many, a crash in housing markets is what they are waiting for in order to buy a home that is more affordable. Sure, a crash in housing prices is one way to improve affordability, but a crash in asset values involves more than just a substantial drop in the price of a home.
The economic consequences of a major fall in home values would be far reaching and long lasting; remember the Global Financial Crisis started with a crash in the US housing market.
With 52% of household wealth held in residential land and housing, a sharp fall in household wealth is likely to have a severe negative effect on consumer sentiment and household balance sheets, implying less household consumption at a time when Australia’s economy is precariously balanced and aiming for a pickup in consumer spending.
Lower consumer sentiment would likely see households become more conservative with a preference for saving rather than spending, which in turn, would place a drag on economic growth.
Given that Australian banks have a large exposure to residential property, an economic slowdown could see the banking sector impacted by rising arrears and default rates. Higher rates of negative equity would place the banking sector under pressure, push loan to valuation ratios into unhealthy territory and lead to tighter lending conditions for all borrowers.
Maybe a better way to improve affordability is to provide better value in the housing market, without trying to orchestrate a crash in existing home values.
Take Sydney as a key example; on our latest data there are 66 suburbs across Sydney that have a median house value under $500,000 (8.5% of all suburbs) and eight suburbs where the median house value is under $400,000. The problem is that these suburbs are mostly located in areas that are either hard to get to and from, they may lack essential amenities such as shopping facilities and health care, or they suffer from low socio-economic conditions (or mixture of all three).
Providing more efficient and affordable transport linkages that connect these areas to the major working and social centres would be a good first step towards making these regions more desirable and opening up demand for these affordable areas. Of course, large infrastructure projects are expensive, but after the stamp duty windfall the NSW state government has seen over the past four years, it makes sense this money would be reinvested back into the state. Major infrastructure projects are also stimulatory in the sense that they create jobs and provide a foundation for stronger economic growth.
Another step in the right direction would be improving local zoning regulations to allow for smaller lot sizes. Once again, focussing on Sydney, where the affordability challenges are the most pressing, the size of newly developed blocks of land remains substantially higher than most other capital cities. Based on land sales over the past year, the median block area was 515sqm which is larger than every other capital city except Hobart and Darwin.
Considering the land value is the largest factor in the price of a new house, reducing the block size could provide enormous affordability dividends. Based on the median rate per square metre of land, a 100sqm reduction the typical block size should reduce the typical land cost by nearly $80,000.
There are plenty of other strategies, including smarter home designs that allow for smaller floor plates but maximize the amount of usable space, reducing the tax burden on buyers and reducing development charges for developers.
I haven’t even touched on the affordability associated with higher density living, ramping up infill targets within established areas to ensure existing transport infrastructure is leveraged to the greatest extent. Nor have I discussed making regional markets, which are generally very affordable compared with the capital cities, more attractive for businesses to locate there which will attract jobs and inter-city/inter-state migrants.