The Inconvenient Truth About Housing Affordability

You and I are being lead right up the garden path to a house full of smoke and mirrors. And it’s the best magic show in town, at least until the smoke fades and the truth begins to emerge.

According to every State and Federal politician, the reason Sydney housing is unaffordable right now is because we have a supply shortage. But if that’s the case, why has this shortage suddenly appeared in just the last 5 years?

And why has the population suddenly swelled? You can’t blame it on birthrates because babies don’t grow up that fast.

The Blame Game
Just about every politician and most within the commentariate will conveniently attribute this shortage to the ‘Big Three’. It stands front and centre of their smoke and mirror act.

Housing – NSW has always had a housing shortage, it goes hand in glove with population growth. It’s healthy. But now its chronic. Our housing shortage is no longer supply side driven, its demand side driven. i.e. unprecedented population growth is the problem, not housing supply.

Negative gearing – if negative gearing is the economic evil some would have you believe it is, why hasn’t it soaked up the glut of apartments in the Brisbane CBD and set that market alight?

And why hasn’t it reignited the Perth market which has gone backwards for seven consecutive quarters? No one even talks about WA now, it’s as if its dropped off the face of the earth.

Yes, negative gearing has definitely influenced the Sydney property market but it will end. Mark my word. Investors are chasing rental yields of 2.5% thinking that capital gains of 15-20%pa will continue forever. They won’t. Read, Perth market.

Interest rates – interest rates were the initial catalyst for the Sydney property boom, but this market darling is slowly becoming an ugly duckling with a growing number of mortgagees falling behind on repayments in a low interest rate environment. A frightening number of mortgagees are about two interest rate hikes away from going under.

The Inconvenient Truth
The inconvenient truth about our housing supply shortage is the government can fix it immediately, this weekend, but they won’t because they need it. Deep down, every government craves a housing crisis like Sydney’s.

Here’s why…

Five years ago, the NSW economy was on its knees and desperately needed something to reignite its economic engine and get growing again. The obvious answer was to emulate Perth and create a construction and infrastructure boom.

But to create a construction boom you need more buyers which means population growth. However, to grow a population organically (birthrates) takes too long so the obvious answer was to increase immigration. And how!

Our current net immigration rate into Australia is approximately 175,000pa, or 3,300pw. That’s half of Canberra’s population every year, or one new Canberra city every two years.

Approximately 80,000 of those people settle in Sydney each year. Our immigration rate has almost doubled in the last 10 years and now it’s really starting to bite, hard.

Australia, more specifically Sydney, now has now one of the highest immigration rates in the world which also correlates with being one of the most expensive cities to buy in as well.

In a recent report released by the ANZ bank, they estimated that 21% of buyers in the Sydney property market at the moment are foreign buyers. And most of them are cashed up, they don’t need finance.

So not only do we have more buyers in the market, their purchasing power is significantly greater as well.

The Hidden Effects
A population that grows too fast has another knock-on effect as well. It creates increased competition for jobs which ultimately slows wage growth. This affects us all, regardless of whether you’re in the property market or not.

What Will The Government Do?
In a word, nothing. For three reasons:

Firstly, the NSW government will not slow demand because they’re greedy for growth. Their growth is more important than our affordability. They believe the only solution to housing affordability is increased housing density. Just keep building more apartments and meet the demand. Make it Hong Kong-esque.

Secondly, both sides of Government will never, ever raise the ‘I’ word (immigration) because they are scared to death of being called racists by the Rant’n’Rave brigade, or having an 18C issued against them. For that reason alone, they will not touch immigration.

Thirdly, most voters are already home owners, so while non-home owners decry the current market, there is another side experiencing an incredible wealth effect and want to keep it that way. Baby boomers especially will be relying on this to help fund their retirement when they down-size. Politicians are very sensitive to this because they are the largest cohort in our economy.

The Solution
I want to stress that my opinions are in no way racially motivated.

What I’m suggesting in this post is why can’t we cap the immigration rate for 3-5 years. Property prices would still hold up for current owners but at least non-owners could catch up.

If that doesn’t work, why can’t we ‘smooth out’ the number of immigrants allowed into each state instead of trying to jam everyone into one city.

Have a magic weekend…without the smoke and mirrors.

Adam

Back paddock – Did you know more people have travelled out of space than have travelled to see the Titanic at the bottom of the Atlantic Ocean?

Now, suppose tickets to each destination were $100 each but you could only buy one, which one would you choose?