It's the great Aussie BBQ stopper.
The national obsession.
And the great Australian dream-turned-nightmare for many, who simply can't afford it.
I'm talking, of course, about property.
Which, to be clear, isn't The Motley Fool's stock in trade. We spend most of our time talking about companies and their shares but – given the aforementioned ubiquity of housing as a topic of national conversation (and investment) – inevitably we're asked for our views on residential housing.
The problem? That simple question is very difficult to briefly address, given all of the moving parts.
Despite that, I'm going to try… because we face some very real and some very time-sensitive challenges that need to be addressed.
I'm also aware, by the way, that there is nothing our politicians are more scared of than the votes of homeowners and landlords.
But we need those politicians to show some courage. And I'm about to tell you why.
It would take a book to cover all of the property angles, and we don't have the time or the space to do them all justice. So I'm going to narrow my comments down to a handful of areas, with as much brevity (as little verbosity?) as I can manage, while still making my thoughts clear and answering any likely follow-up questions.
Here goes.
Australian property is unaffordable for too many.
We had some new news this week, that the median Sydney house was now worth $1.65m, according to CoreLogic. And for those not in Sydney, the 'combined capitals' number is now $1.2m.
And if, like me, you initially see that $1.2m and think 'well, that's not as bad as I expected', we need to consider how on earth a seven-figure median house price of $1.2m became almost a relief.
(The median is the middle value, by the way. Not the average. So if there were 5 homes sold, and ranked in value order, the 'median' would be the third most expensive one.)
Whether you compare it to household incomes, individual incomes, or something else, the idea of having to pony up $1.2m (or $1.65m) for a home is surely something that should make us stop and reflect.
Given housing is 'shelter' at its most basic, and given that the great Darryl Kerrigan (and others) have reminded us that our homes are our castles, surely paying 8, 9 or 10 times our annual incomes – with 30 year mortgages costing close to 40% of our those incomes to repay, for three decades – is more than a society should think is reasonable.
And given that recent home ownership rates have fallen to 63% – less than NZ at 65%, the US at 66% and the UK at 67% – and that home ownership is the basis for a liveable aged pension, alarm bells should be ringing across the country.
So… Why aren't they?
Self-interest, mostly. Of voters and politicians. Oh, we care… just not enough to risk our house prices falling. As John Howard famously said "Nobody's ever complained to me about their house price going up".
And yet, what is the future for our kids and their kids, if this is to continue?
Home ownership rates can do little but continue to fall, if prices rise.
More and more money will move from consumption to shelter – reducing our standard of living.
Banks will push for longer mortgage terms, adding to the total interest bill.
Politicians will throw more money at 'improving affordability', which really does nothing of the sort, pushing up demand, and therefore prices, instead. They'll encourage us to raid any nest egg (read: Superannuation), in the quest to be seen to be 'doing something' while that 'something' is just putting more fuel on the house price fire.
And renting? On the most recent data, I've seen, housing vacancy rates are 0.7%, the lowest on record.
It's no wonder rents are up and house and unit prices continue to climb: there are simply too few to go around.
Make no mistake: there is no policy, nationally, that is designed to have anything other than a very minor impact on true housing affordability. (By the way, the only true improvement to housing affordability would be defined as loan repayments falling as a proportion of our household incomes.)
Because… well, as I said above, our pollies don't really want to 'fix' the problem, for fear of angering part of the electorate.
Thankfully for me, I have no such conflicted incentives. So here's what I'd so, in rough order of the impact I think it'd have on affordability:
1. Meaningfully reduce population growth – using immigration intake as the lever – for the medium term, at least until vacancy rates rise meaningfully. (Don't get me wrong; migration is important, we have some wonderful migrant success stories, it's not the fault of those migrants, and I don't care about their skin colour, race or creed! It's just the maths.)
2. Stop (but grandfather for existing owners) negative gearing for all residential property (for individuals, companies and trusts).
3. Return Capital Gains Tax to the old 'indexation' method, abandoning the 50% discount that never had any policy justification, and just rewarded speculation.
4. Put a moratorium on Australian property purchases by non-residents.
5. Meaningfully increase the number of social housing dwellings
There's another issue that we need to address, urgently, too. Read on…
We're about to cross a dangerous line in the sand.
As interest rates increase, housing becomes less affordable. I think we can easily understand why.
And as (when) they fall?
Well, in theory, housing would become more affordable. A mortgage of $800,000 is cheaper to repay, as interest rates fall, right?
But what about new loans?
It's possible a new purchaser will go to the bank and ask how much lower the repayments will now be on an $800,000 loan they had in mind.
But what's far, far, far more likely?
A new borrower will instead do what almost every other borrower has ever done, and ask the bank manager a very different question:
"Now that interest rates have fallen, how much (more) can I afford to borrow?"
And instead of borrowing $800,000, they'll end up with an $830,000, $850,000 or $880,000 mortgage.
And with that mortgage pre-approved? They'll be able to buy a more expensive house and/or bid more at auction.
Which… simply pushes house prices up.
As I alluded to, above, we have a matter of months (or weeks, if the RBA does the unexpected) to stop that runaway train from leaving the real estate station.
Weeks or months before lower rates increase borrowing capacity and start pushing those already-high prices even higher.
Which, I hope you'll agree is bad on two fronts:
First, house (and unit) prices are already too high, measured by affordability; and
Second, those borrowers will load themselves up with 30 years of extra debt they otherwise wouldn't have taken on.
The answer? I'm glad you asked.
APRA – the Australian Prudential Regulatory Authority – is the banking regulator which, among other things, sets the 'lending buffer': the amount banks must add to the prevailing interest rate, when assessing a borrower's capacity to repay a loan.
The buffer is an arbitrary 3% – meaning that when rates were at 2%, the banks used 5% to test borrowers. At the time, 5% was obviously too low. Now, with rates at 6.5% – 7%, any remaining doubt has been extinguished.
But also, if you're paying 6.5%, is there any real likelihood that rates go to 9.5%? No, I don't think so either. Possible, sure. But likely? Nah.
Instead, there is a very simple solution. APRA should be instructed by the Treasurer to vary that buffer, making it higher when rates are lower (there's more chance of higher rates in future), and lower when rates are higher (testing a loan at 10% isn't particularly realistic).
The other impact, and the one more apropos in this situation? If rates fall, say, 0.25%, but the buffer was raised by 0.25% at the same time, a borrower's lending capacity would be unchanged. The same thing would happen if rates went up 0.25%, but the buffer was lowered by 0.25%.
In other words the RBA could impact economic activity without whipsawing house prices, and incentivising (mainly) young people to take on extra debt.
Which… seems like a pretty good idea, no?
The problem? Rate cuts aren't far away. The Treasurer needs to act, now.
Our approach to housing is endangering Superannuation.
Lastly (for this article, not the only other issue facing residential property), is the impact on the Superannuation system posed by sky-high and long-lasting mortgages.
Frankly, having three decades of mortgage debt isn't good. If I was the Treasurer, I'd set a maximum mortgage length of 25 years. But there's a bigger issue here, and it goes to our retirement savings system.
See, Super was supposed to augment, and eventually replace, the aged pension for most Australians. That is, amassing a lump sum during our working lives would provide for an income stream in our golden years.
However, too often, Super lump sums are being drawn down in retirement to pay off excessive mortgage balances.
Yes, it's both allowing for larger home loans and not relieving the pressure on the Federal Budget, all at the same time.
Talk about a double-whammy.
Clearly, that's a bastardisation of the intent of Superannuation but, again, our pollies are too scared, or ideologically blinkered, to call it out or, more importantly, fix it.
The solution is simple, of course: Super must not be allowed to be relied on when a bank gives a borrower a mortgage. They shouldn't be allowed to factor in a post-retirement lump sum payment to extinguish that debt.
All that's required is a little vision and a little more courage
There are other issues when it comes to housing, of course, but the ones above are, in my view, the main ones.
More importantly, they're eminently fixable and clearly in the national interest.
We just need our politicians to actually grasp the nettle, and turn their minds to the best way to implement those solutions, to improve housing affordability for our kids (and older people, too!) as well as improve the quality of life of the average Australian.
Oh, and we need to put a little self-interest aside.
It's easy to say 'well, that'll never happen', but I think that's too defeatist.
As John Howard and Bob Hawke once agreed on stage at the National Press Club, Australians will support reforms that are in the national interest, and fundamentally fair.
I think the above suggestions pass both tests with flying colours. Perhaps we just need representatives with the vision, and conviction, of Hawke and Howard to make it happen.
Alternatively, we can tell our current pollies that we want them to act.
Either way, we need action, and the window is fast closing.
It's up to us.
Fool on!
