Housing affordability crisis: The elephant in the room stomping young Australians

Affordably housing its peoples is a hallmark of a developed society. Yet, Australia’s housing system has been failing young people, argues Intifar Chowdhury.

Squeezed by rising rents and aggressive increase in property prices, young Australians are increasingly being locked out of the housing market, and thus are being denied the stability and financial security that was taken for granted by previous generations.

The housing affordability crisis deepens as inflation, cost of living and housing prices rise at a faster rate than wages. Similarly, Australia’s rental crisis worsens with natural disasters such as flooding and increased competition as the country reopens to international students.

The backdrop to the COVID-19 pandemic will also exacerbate this growing economic inequality across generations. In fact, those in their late 20s and early 30s have now known two crises: the Global Financial Crisis (GFC) of 2008-2009 and the COVID-19 crisis of 2020-2021. This puts them at unique risk and financial disadvantage compared to other members of society.

The reality on the ground is that, compared to their parents and grandparents, today’s young people are not only poor homeowners but also poor renters. The reality is an intergenerational theft.

While some have argued that housing should be at the front and centre of the upcoming federal election, housing affordability has not taken on a sufficient degree of importance in the policy narratives of the two major parties.

In fact, I’d agree that young Australians have been betrayed by both parties. Although the youth need a proper national plan for housing affordability and supply, their situation is sometimes met with rather condescending comments from the political leadership.

Prime Minister Scott Morrison’s comment – that “if you can’t afford rent, buy a house” is both comical and disturbing at first reading. As the PM flaunted in the first 2022 leader’s debate, first home buyer loan schemes allowed 160, 000 Australians to gain access to the property ladder last year. And his recent proposal to allow young people to tap into their superannuation has a similar ambition.

But what he neglects is how housing affordability concerns 67 per cent of Australians, many of whom are young people with low wealth and heavily taxed incomes. And government subsidies for a relative minority put upward pressure on prices for the many, presenting a trade-off of where it is more difficult to save a deposit for a home. Therefore, such comments are disturbing reflections of how far removed Australian political leaders are from the reality on the ground.

Housing affordability: a sticky problem?

Housing unaffordability has been identified as a pressing problem for more than decade now, so why then does it remain unresolved? The simple answer to this is that the politics around the problem prevents a permanent solution.

The housing affordability crisis persists because of two political reasons. First, more voters have an incentive to maintain the status quo compared to those who could benefit from a more equitable housing system. Although the growth in property prices entrenches economic inequality, it is a positive for incumbent homeowners who want to capitalise on their investment.

Further, impenetrable, cumbersome and ambiguous policies spook those with property. They fall into the status quo bias. For example, Labor’s 2019 election slogan to tone down investment incentives and introduce the housing tax upset property and construction industries and offended a large constituency of property owners. These radical proposals cost Labor the election.

Existing housing policies also fail to address the root cause of the problem. Most efforts to deal with unaffordability aim to cool housing demand rather than increasing supply. Pete Wargent, co-founder of BuyersBuyers, believes this approach would “make a marginal difference to affordability over time”.

Although investment incentives like CGT discounts and negative gearing are touted as the key drivers, recent review of six economic papers revealed that the combination of both contributed only a small 1 per cent to 4 per cent increase in dwelling prices. Whereas zoning restrictions, which limit the supply of land on which to build homes, contribute to almost half the rise of average detached house prices in major metropolitans, like Sydney and Melbourne. Centre for Independent Studies’ chief economist and a former RBA official, Peter Tulip, suggests increasing supply and lifting zoning restrictions can have huge benefits.

Yet, these are difficult to attain. The politics of improving housing affordability is determined by whether there are more voters who are property owners than not.

That is, whether there are more beneficiaries of unaffordability who will vote in their self-interest and support policies and parties that will keep prices high and rising, even if that compromises the future security of young people.

According to the Australian Electoral Commission, in 2022, there are 4.2 million voters aged over 65 compared to 3.1 million voters under 29. That is a difference of 1.1 million between lightly taxed, asset-rich older Australians, and younger wage earners. This intergenerational inequality is therefore a function of the classic headlock between the older haves and the younger have-nots.

Simple fix: increase supply?

Housing unaffordability is a complex structural issue that can’t be viewed through a simplistic lens.

Despite a plethora of issues influencing the housing market, the imbalance in supply and demand is at the crux of the matter. Rather unsurprisingly, the Property Council of Australia, recommends major parties to address supply shortages to improve affordability.

But adequate supply of housing doesn’t just mean constructing a certain number of dwellings on greenfield sites. It needs to be well-located and well-serviced with job, social and community infrastructures.

At both federal and state level, more commitment is requited to increase urgent need for more social housing. With a historically low level of social housing, (i.e. a non market rental housing sector), this would be more affordable and secure for low-income earners. Both major parties, however, fall short on public housing investment this election.

Supply of affordable housing can be increased by institutional investments, but investors show relatively little interest in affordable housing largely due to perceptions of risk and comparatively low returns. This is where government incentives and the introduction of some form of financial instrument (similar to the discontinued National Rental Affordability Scheme) could work.

However, evidence from Europe and Britain, suggest that government intervention may decline as affordability worsens. There is a major challenge to rolling out reforms: homeowners want to protect their properties from being undermined by growing housing supply, resulting in less support for government intervention. This feeds into inequality.

Another option is rent control. But opponents suggest that more limitations in the rental property make owning far less appealing. This again points to the headlocks between homeowners and renters; as the classic adage from former PM John Howard goes: no one is complaining in the streets about their house value going up.

Under the current structure, young people are common losers of the housing system. A change in government won’t be a silver bullet for housing affordability in Australia. What is needed is a structural change which is hard to attain given competing interests, imbalanced power and wealth dynamics among stakeholders.

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