In this final instalment of the Housing Hunger Games series, Harry Chemay identifies all policy culprits and all the fixes government can make to deliver more affordable housing for renters and first-home-buyers.
We’ve arrived at the concluding piece in this trilogy on Australia’s housing ‘Hunger Games’.
A mismatched duel between renters and hopeful first home buyers on the one side and residential property owners on the other, happiest when interest rates are low and/or prices are rising.
How happy? Just released Australian Bureau of Statistics data now sees household balance sheets collectively in excess of $15 trillion, of which almost $11 trillion is in ‘land and dwellings’. If the typical Australian adult now has the second-highest median wealth in the world (after Belgium), it’s mostly due to soil, bricks and mortar.
With Australians stuck in the private rental market for longer, the percentage of renters who become homeowners each year has fallen from 14% in the early 2000s to 10% more recently.
The impact of this delay in home ownership is crystalised by the Australian Institute of Health and Welfare (AIHW), an independent statutory Australian Government agency with a remit to maintain health and welfare data.
The AIHW’s housing data dashboard shows the changing rates of homeownership across time.
It reveals that for elder Millennials (born between 1982 and 1986), only 59% were homeowners when they were aged between 35 and 39.
By contrast, when they were aged between 35 and 39, some 69% of people born between 1952 and 1956 (the parents of Millennials) were already on the housing ladder.
Unsurprisingly, this trend results in a larger percentage of the population renting over time, with private market renting rising from under 20% in the early 1990s to over 30% today, while social housing rentals effectively halved over the period.
Source: Australian Institute of Health and Welfare.
This delay in home ownership may not just be attributable to higher housing costs. Younger people pursuing more education for longer, then partnering and having children later in life, all play a part.
What is trickier to decipher is just how much of that delay is due to needing higher incomes for ‘adulting’ in the first place, specifically for secure and stable housing.
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Australia’s housing obsession
That so many high-income households continue to rent into 2024 rather than moving into home ownership suggests many are being squeezed out of the property market by other, better funded buyers.
Economists call this a ‘crowding out’ effect, where a market becomes disrupted by excess demand from a few well-resourced participants, pushing up prices and precluding others of more modest means from competing for the supply on offer.
Speculating in existing residential property may keep a whole range of facilitators gainfully employed (real estate agents, conveyancers and property managers among them),
but it doesn’t meaningfully add to the nation’s ability to create, build and trade.
Put another way, the value of Australian residential property was around $10.7 trillion at the end of 2023. That is some four times the value of all the companies listed on the Australian Securities Exchange (ASX) at the time.
By contrast, the US residential housing market, at some AUD $73 trillion, is broadly equivalent in value to the combined NYSE and Nasdaq, the two biggest exchanges in the US.
If every Australian residential property were to be listed on an exchange, it would be bigger than every other stock exchange in the world, except the NYSE and Nasdaq.
This obsession with property does not, however, promote economic growth and longer-term national wealth relative to investments in productive capacity, innovative technologies (think Wi-Fi or renewable energy), labour-boosting capital expenditure, or the arts and entertainment sectors.
Can we build our way out?
There are two ways to take pressure off the housing market: build more dwellings or remove some of the excess demand.
The Albanese government’s approach so far has been to focus primarily on supply; particularly that of social and affordable housing.
That’s the impetus for the $10 billion Housing Australia Future Fund facility, the $2 billion Social Housing Accelerator, and an additional $2 billion in financing for more social and affordable rental housing through Housing Australia.
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Then there’s the National Housing Accord, with its ‘aspirational target’ to build 1.2 million well-located homes over 5 years from mid-2024, struck between the Commonwealth government, states, territories, local governments, institutional investors and the construction sector.
There’s just one problem with this aspiration; it’ll require the construction sector to complete 60,000 dwellings each quarter on average, a rate AIHW data suggests Australia has never achieved and is nowhere near at present.
Source: Australian Institute of Health and Welfare (AIHW)
The target will require a construction sector that has the necessary labour force, is financially stable and firing on all cylinders. The signs thus far have not been promising.
Reducing the ‘Crowding Out’ Effect
While waiting for all this new housing to materialise, the focus should be on the demand side.
Such measures need not create downward pressure on house prices, they only need remove the excessive and unfair purchasing power of a small number of investors.
In the main, these would involve policy measures already recommended but rejected or applied without any urgency by successive governments.
Ban SMSFs acquiring residential property
Under superannuation law, large super funds are not allowed to borrow to invest. An exemption was, however, created for Self-Managed Superannuation Funds (SMSFs) in 2007. These are known as a Limited Recourse Borrowing Arrangement (LRBA).
According to ATO data, at the end of 2023 there was some $61 billion powered by LRBA loans. It was the fifth-largest SMSF asset during the 2021-22 financial year.
Source: ATO – SMSF annual statistics overview 2021-2022
In 2014 the Financial System Inquiry (FSI) recommended that the LRBA exemption be removed, noting that it would help “fulfil the objective for superannuation to be a savings vehicle for retirement income, rather than a broader wealth management vehicle”.
The then-Abbott government did not accept the FSI recommendation, instead referring the issue to the Council of Financial Regulators, which has been kicking this can down the road since 2019.
As a result, prospective first homebuyers today may at any auction be bidding against SMSF trustees with borrowing capacity based on average fund balances of almost $1.5 million.
Removing the LRBA exemption for further residential property investing by SMSFs would be a small, yet meaningful, win for those wanting a first rung on the property ladder.
Global anti-money laundering initiatives
First homebuyer shouldn’t have to compete against criminals.
According to the regulator, AUSTRAC,
the laundering of illicit funds through real estate is an established money laundering method in Australia
And it applies to both local and overseas-based criminals.
Unfortunately, having established the key anti-money laundering legislation in 2006, which requires a vast range of finance-related sectors to identify clients/customers and report suspicious financial transactions to AUSTRAC, Australia has since been a laggard relative to the rest of the world.
There are now plans to bring a range of currently exempt high-risk professions, including lawyers, accountants and real estate agents, so-called ‘tranche-two entities’, into the fold.
That Australia stands alongside China, Haiti, Madagascar and the US as the only nations not currently regulating tranche-two entities is not a badge of honour, and does genuine property buyers here no favours.
Reducing foreign holdings of residential property
There are long-standing limits for foreign nationals who wish to buy property in Australia, with the Foreign Investment Review Board responsible for vetting and approving such property transactions.
Historically, only newly constructed – ‘off-the-plan’ – residential dwellings were allowed, while established dwellings were off-limits to all foreigners except in limited circumstances (temporary residents and certain visa class holders).
The Turnbull government tightened the requirements in 2017, limiting the extent of foreign ownership in new housing developments to 50%, and applying a vacancy fee on foreign-owned residential dwellings left unoccupied, or unavailable for genuine rental, for at least six months a year.
The Albanese government’s bill to increase the vacancy fee passed both houses of Parliament just before Easter.
These measures (alongside attempts to curb short-stay rentals) could help reduce the number of dwellings left unoccupied, calculated at around 1 million properties (nearly 10% of the total housing stock) on Census night 2021, that might supply the private rental market.
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Why the Hunger Games?
SMSF borrowing, anti-money laundering and unoccupied dwellings are the ‘low-hanging fruit’ changes that can and should be implemented, while the big-impact measures for general property investors, such as limiting negative gearing and/or capital gains tax concessions, remain in the ‘too hard basket’ for both sides of politics.
Left unchecked by neglect, wilful or otherwise,
Australia is at risk of turning into a nihilistic nation where the aim of the game is to ‘beggar thy neighbour’s children’.
Therein, one’s main financial objective is to opportunistically build wealth through property, accepting that, in doing so, home ownership will be less attainable for future generations.
The mitigant, therefore, is to have a first home deposit ready for each child, acting as the Bank of Mum and Dad.
If everyone adopts that attitude we end up, unironically, in a housing Hunger Games; The Ballad of Songbirds and Snakes.
Harry Chemay has more than two decades of experience across both wealth management and institutional asset consulting. An active participant within the wealth and superannuation space, Harry is a regular contributor to investment websites in Australia and overseas, writing on investing and financial planning.