Rising home costs means changes to Australian dream in an election year

home prices and location and convenience are forcing Australians to redefine the dream.
One of the hardiest perennials in the political garden is the "home affordability crisis". As is often the case in an election year, a lot of fertiliser is being spread about at the moment on the issue. While some of the policy ideas have merit, our politicians are too often focusing on the wrong parts of the problem and thus coming up with wrong, or at least inadequate, "solutions".
A big crop of new housing proposals has sprung up recently.
Australia's housing ministers are talking about a national shared-equity scheme where government becomes an equity partner in purchasing a home aimed at low and moderate-income households, as well as a revamped first home owners grant.
Federal Labor leader Kevin Rudd is proposing low-tax home deposit savings accounts, an overhaul of local government funding to rein in rising infrastructure charges on developers and home buyers, a shared-equity scheme and tax credits that can be offset against tax liability for investors who agree to charge below-market rents as a way of encouraging the supply of low-income rental housing. All will be considered at a national housing summit in Canberra later this month.
Federal Treasurer Peter Costello wants an audit of government land that could be released for development, while resisting Coalition backbench calls for that most hardy of all perennials in this debate - a doubling of the first home owners grant from $7000 to $14,000.
And Prime Minister John Howard has taken the opportunity to get stuck into the states for what he says is the key source of the problem - their failure to release enough land for residential development on the periphery of our cities.
Some of these approaches attack the problem of falling home affordability from the demand side and some from the supply side.
Demand-side solutions tend to be self-defeating. For example, government first-home buyer grants intended to make buying a house more affordable can, perversely, push up prices as sellers simply absorb the handout into their asking price especially in an overheated market. With no increase in supply, bumping the grant from $7000 to $14,000 would simply mean the going price would rise, more or less, by $7000. Likewise for the suggestion to scrap stamp duty.
And while Rudd's idea for tax-preferred savings vehicles would make it easier for people to gather a deposit (albeit with a cost to the budget), it would do nothing to restrain house prices and may actually add to them for similar reasons.
More broadly, what is happening here is simply a case of constrained supply meeting increasing demand, as incomes rise and housing finance has become relatively cheaper and more accessible .
If there is more money available (higher incomes providing the capacity to service bigger loans on offer) at a relatively low price (low interest rates) chasing a limited amount of housing (because there are only so many places people can, or want, to live), prices can only go one way - up.
Prices have also been pushed higher by cashed-up property investors chasing a limited stock of existing housing, assisted by easier finance and the tax system through negative gearing, depreciation allowances and the halving of the capital gains tax in 1999.
A supply-side policy approach is more likely to succeed, although many of the solutions offered have tended to be simplistic and inadequate.
As both the Productivity Commission and Macquarie Bank analyst Rory Robertson have pointed out (and the federal Treasury seems to agree), it is simply not enough to say that homes are now unaffordable for many first-time buyers because state governments have not released enough new land on the edges of the big cities.
The heart of the problem is that prices are being pushed up by competition for housing in the places in which people actually want to live - big homes close to the centre of cities and to the coast, with short commuting times to work and access to the entertainment, educational and cultural amenities that these places offer.
"The issue of location, location, location dominates the housing-affordability problem," Robertson notes. "Would-be home buyers on average incomes (or less) have been pushed towards the periphery of our cities and beyond, 'priced out' of the market for well-located family homes. Indeed, the extremely high price of land 'close to the action' leaves most of us struggling with that never-satisfying compromise between proximity maximising work, educational and leisure opportunities, while minimising travel time and the size of our houses and yards.
"In Australia . . . average home prices generally are much lower inland, or near the coast but well away from 'the action'.
"Unfortunately, all six of Australia's state capitals where most of us tend to live are high-demand coastal centres, and so are prone to be relatively expensive."
This demands a different sort of supply-side policy solution effectively shrinking distances in our cities through better transport and decentralisation and increasing housing supply closer to the city centres through more medium and high-density development.
The most promising approaches involve improving transport infrastructure, to reduce commuting times and effectively increase the quantity of "well located homes". It also involves creating jobs closer to plentiful lower-cost housing land by promoting suburban and regional economic development and encouraging decentralisation of major employers in both the public and private sectors.
And there needs to be new approaches to planning regulation and a change in expectations among some home buyers themselves especially accepting the new reality of apartment living instead of a house on a quarter-acre block.
As Robertson concludes: "The harsh reality for most of our younger generation (and others left behind) is that the housing-affordability horse has bolted and it ain't coming back.
"For those would-be home buyers priced out of the market for well-located family homes, the best practical advice remains to look further afield or to start thinking about apartments. These days, that never-satisfying trade-off between proximity and house and yard sizes simply is a fact of life.
"The Great Australian Dream has been downsized."
Source: The Age