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Just how stressed are we when it comes to housing affordability?

Property pundits are hoping the Reserve Bank of Australia’s latest cut to interest rates will help stoke the country’s flat property sector into life. But Australia’s housing remains highly over-valued…

Calculating a household’s residual income is a more accurate measure of housing stress. Image from www.shutterstock.com

Property pundits are hoping the Reserve Bank of Australia’s latest cut to interest rates will help stoke the country’s flat property sector into life.

But Australia’s housing remains highly over-valued, according to some sources, with worryingly high levels of private debt carried by households, particularly mortgage debt.

A high proportion of households consider themselves under housing stress; but this is something that is surprisingly hard to define.

The common benchmark for housing stress in Australia is a ratio of 30% of income spent on housing.

This is a misleading measure of housing affordability because it does not distinguish those on the brink of homelessness from those who can afford and choose to spend more than 30% of their incomes on high-quality housing.

An alternative is to calculate a household’s “residual income” – the difference between disposal income and actual housing costs.

The “residual income” measure can be used together with Indicative Budget Standards for Australia, which are designed for benchmarking the poverty line components of expenditure for different types of households at a given point in time.

If we omit poverty-line housing costs from these budget standards and compare them with the residual income of households, we can identify the type of households for whom residual incomes are below the budget standards without poverty line housing costs. These people are in housing stress because they cannot afford non-housing necessities after they have met their current housing costs.

The residual housing stress measure is easy to apply, because detailed data sets are available from Australian Bureau of Statistics Expenditure and Housing Surveys, as well as the more detailed HILDA household surveys conducted by the Melbourne Institute.

This is a more effective measure of housing affordability in several ways. The ratio approach applies the same percentage figure for every household type. The residual income measure uses benchmarks that vary for each household type, with an allowance made for changes in budget constraints and the fixed nature of housing costs in the short term. This makes it easier to develop policies that are targeted more effectively at issues of housing poverty.

For example, migrants and unemployed people are more likely to be in housing stress than those born in Australia and employed. Reducing barriers to social exclusion and helping migrants to find jobs would be effective policy against housing stress.

Policies such as the first home owner grants and first home saver accounts, assume homeowners will be in a better financial situation than renters, especially in the long run. Money spent on buying a residential property may be recouped when it is sold or used as a mortgage-free residence. Tenants do not get a return on their rent payments. However, such policies may be flawed if households are unable to sustain repayments over the period of their home loan.

In fact, households repaying mortgages are more likely to be in housing stress than those that are paying rent in the private market. (Although public housing tenants, who pay 25% of their income in rent, can often be classified as not being in housing stress.)

Both the first home owner grants and first home saver accounts, which are topped up by the government, add an inflationary component to property prices and may create an illusory hope among vulnerable households on the relative ease of the first step into buying property. Policies that provide industry incentives to increase the supply of properties for both owner-occupation and rental would be more effective.

The use of a residual approach may also be more relevant to public housing tenants. Unfortunately, the use of the ratio approach has discouraged research into the affordability of public housing.

While private sector rents are set by market forces, public housing tenants pay 25% of their income in rent, which is below the 30% threshold and results in them being classified as not in housing stress.

The residual approach measures a household’s ability to consume a basic level of non-housing goods. The measure captures the stress experienced by households as changing circumstances (such as an increase in family size) require increased spending on non-housing items.

While the overall impact on the housing affordability in these two housing sectors is uncertain, use of the residual income approach reveals that in the past 10 years, the incidence of housing stress has shifted from private to public sector tenants.

This suggests that federal and state governments would be advised to consider changes in the ways that welfare benefits and public sector rents are structured.

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27 Comments sorted by

  1. margaret m

    old lady

    We need to remove NEGATIVE GEARING which has inflated prices of housing by those who can afford to invest in property. I assume the idea was to provide a pool of rental properties to free the State Government of thier responsibilitie to deliver affordable rental properties for low income earners. Unfortunately it has made it so much harder for taxpayers to purchase thier first home and has not been a successful policy to deliver housing for low income earners or welfare recipients.

    State…

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    1. Chris O'Neill

      Victim of Tony Abbotts Great Big New Tax

      In reply to margaret m

      "I assume the idea was to provide a pool of rental properties"

      Of course, when those rental properties were existing properties (which is usually the case) then negative gearing provides absolutely nothing. Thus a huge amount of government revenue is simply poured down the toilet.

      There may be some justification for negative gearing to enable the construction of new dwellings.

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    2. margaret m

      old lady

      In reply to Chris O'Neill

      Negative gearing part of that small government big society idea enabling the governments to abdicate it's responsibility to provide housing for low income families along with essential services what do we pay out taxes for the IPA wants more toll roads built so big business has a cash cow in the road users that should be a government responsibility etc. The spin off of globalisation and turning our world into an investment opportunity for big business etc has gambled away our stablility. The ideology of technically advanced better educated population can afford to off load jobs and industries to the third world one problem we have a pool of non academic people who need jobs the collateral damage of this failed system. Citizens in too many countries have lost more than they have gained stability for one.

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  2. James Hill

    Industrial Designer

    "A dwelling house, as such, adds nothing to the income of its inhabitants".
    That statement 200+ years ago fromthe Father of economics was the source of the prudential leding policy that housing costs should be restricted to 25% of the householder's income.
    If the productive sectors of the economy were deprived of investment by spending on housing in excess of that percentage of 25% then progressively less and less wealth would be produced to service the non-wealth producing assett of a "dwelling…

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  3. James Hill

    Industrial Designer

    Unaffordable housing will, under Abbott, bring the Global Financial Crisis into Australia.
    It would be politic and appropriate for the Gillard government to bring in a Royal Commision into Affordable Housing to answer all the questions Abbott will be avoiding as a recessionary PM.
    All political corruption begins with residential rezoning rorts at the local government level, presided over by the usual, never to be rounded up?right wing suspects infesting all the major political parties, Labor, National and Liberal.
    Abbott's own local council dominated by his "Team" was sacked for corruption and put under an administrator, for those who care to remember.
    Time to clean these clowns up.

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    1. margaret m

      old lady

      In reply to James Hill

      It is pointless spending money on Royal Commissions until we come to the realisation that big business media may have a conflict of interest in delivering unbias information to enable voters to make informed choices re anything as important as our future. Marketting has taken over and a little scrutiny of that you can see endless manipulation of words to decieve, trickery to lies.
      This fact / factor is the danger to our futures.

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    2. James Hill

      Industrial Designer

      In reply to margaret m

      You are correct Margaret, but Royal Commissions are not really so expensive that we cannot afford one into housing.
      On the marketing front, William Sargant's "Battle for the Mind", explains the brainwashing techniques used.
      It seems to be on some sort of banned books list because of this.
      It was published in 1956, following the return of "brainwashed" POW's from the Korean War.
      A suppressed publication on the understanding that knowledge is dangerous?
      Royal Commissions lift the lid on a lot of hidden subjects.

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  4. Lincoln Fung

    Economist

    Genadi, Lionel and Luc, the methodology you mentioned in this article is obviously a step n the right direction and you should all be congratulated for making and using it.
    Another method could be simply use a ratio of average housing costs to household disposable income. Average housing costs can be defined by renting costs and/or by average mortgage payments, or a combination of them in some weights.

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    1. Gennadi Kazakevitch

      Deputy Head, Department of Economics at Monash University

      In reply to Lincoln Fung

      Lincoln,

      Many thanks for your comment. Unfortunately, using average housing costs in the ratio does not help avoiding the fundamental problem with the ratio approach - it does not allow for singling out the groups/types of households that are really in stress.

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    2. Lincoln Fung

      Economist

      In reply to Gennadi Kazakevitch

      Thanks Gennadi.
      Is it possible to calculate the ratios by groups/types then compare and rank them to form an order of stress?
      I've though such ratios would produce better measurements, i.e. irrespective rent of buying, different preferences in terms of voluntarily paying more or less and the differences in size of houses/properties, etc, as well as the stages of mortgage payments.
      Anyway, it may be my thought bubbles.

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  5. John Doyle
    John Doyle is a Friend of The Conversation.

    architect

    How are we ever to get affordable housing? Already land values are a huge hurdle. Where would you put affordable housing? It would work out in the country towns where houses are less than 1/4 of big city prices. But then there are a host of other issues. Hospitals and medical services are being closed down in many towns, in this state anyway. Jobs are scarce and the rest of the infrastructure to support a community is in trouble. You would just change mortgage stress for another social and employment stress.
    Without a total/holistic plan ain't nuthin gonna get done!

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    1. Gennadi Kazakevitch

      Deputy Head, Department of Economics at Monash University

      In reply to John Doyle

      Yes, John. Land use, town planning, public transport, roads, jobs, social infrastructure, but on top of everything - understanding and broad agreement on what is "plannable" at all and what belongs to market forces. Personally, I would like to see at least minimum culturally acceptable housing affordable by everyone in the community, but dot want to see or be a part of another major social engineering experiment.

      Many thanks for your comment.

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    2. margaret m

      old lady

      In reply to John Doyle

      I agree with the holistic plan idea but try and get those who are profiting from this mess to come to the party they hold the key avenues of information dissemination even the Government cannot get a honest hearing.

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    3. margaret m

      old lady

      In reply to Gennadi Kazakevitch

      I think you have not notice a dismantling of our services and structures a dividing the country I think you are well and truely in the middle of a social engineering.campaign

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  6. Geoff Taylor

    Consultant

    A few points:
    There has been insufficient government attention to a primary society obligation - shelter.
    The quarantining of a principal residence from capital gains tax may lead to overinvestment in a home, so
    phasing in a half capital gains tax over ten years needs to be considered.
    Also money going into a mortgage is not going into other businesses which might otherwise supply the household.
    Another factor is developer covenants which force you to build bigger than desired if you want to…

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    1. Chris O'Neill

      Victim of Tony Abbotts Great Big New Tax

      In reply to Geoff Taylor

      "Land remains the primary source of cost increases, rather than house building."

      Indeed and nearly all the value of that land has been captured by former owners, usually with little tax liability, even though those former owners contributed very little, if anything, to its historic increase in value.

      The end result is that young homebuyers have to struggle to finance the purchase of their homes using income which is fully taxed to buy property on which previous owners received nearly effort-free capital gains that had ample opportunities for tax minimisation.

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    2. Geoff Taylor

      Consultant

      In reply to Chris O'Neill

      And Chris, as noted earlier, the previous owner may well have had tax deductions for interest on his borrowing if he rented out the home (now bought by the young homebuyer) for a period while accumulating the capital gain.

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  7. margaret m

    old lady

    Greg North: Just reading some of the commentt having essential services does not mean it will be run well I agree to the point Government or Private there could be poor managment or managment that has made a poor judgement that is falible human beings that does not change the facts. Once those esential services provided a good service, profits that intern helped to keep our taxes down.

    GFC a perfect example that the free market needs strong government regulation and the people need the security of a strong government.

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  8. Garry Baker

    researcher

    A relevant story - however, for one it neglects to include demands from our massive influx of migrants - Given that per capita, Australia is a world leader

    A supply/demand equation tells it all - pricing wise

    Added to this (whether people are aware of it or not) - Canberra has exposed Australians to the full brunt of competition from China. Yes, our own domestic housing has long been up for grabs in China, thanks to Wayne Swan and his lust for foreign cash. A quick visit to 'Gifang' - 'Ironfish…

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    1. margaret m

      old lady

      In reply to Garry Baker

      I think the negative gearing asset class may not have been good for you for years but is still being used my many happy to wait the longer term for their reward. Another point do you see the Liberal Country party doing anything different re exposing us to the China competition. I think we need to very quickly look at what is happening to governments around the world and at Globalisation specifically add to that a big business media who may have a conflict of interest when delivering information to populations. Britain was a real lesson on how this business can negate the power of the general voter by manipulation of information.

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    2. Chris O'Neill

      Victim of Tony Abbotts Great Big New Tax

      In reply to Garry Baker

      "This form of asset class hasn't been good value for years"

      "Not good value" meaning it's valued nearly as if it is risk-free.

      "Though if punters never speculated on rental properties"

      Hypothetically speaking. A lot of the punters would still buy rental properties if negative gearing was quarantined the way it was before Keating was leaned on.

      "where would this sort of accommodation come from."

      Pretty much the same sort of places it comes from now, i.e. old, run-down buildings located on high-value land with the likelihood of long term capital gain.

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    3. Chris O'Neill

      Victim of Tony Abbotts Great Big New Tax

      In reply to Chris O'Neill

      "Pretty much the same sort of places it comes from now, i.e. old, run-down buildings located on high-value land with the likelihood of long term capital gain."

      i.e. Negative gearers mainly don't build new buildings and have very little positive impact on the total supply of dwellings. Their main impact is to shift buildings from being owner-occupied to rented. Sure there will always be people who have to rent. But there will always be people who can rent to them, absence of negative gearing notwithstanding.

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    4. James Hill

      Industrial Designer

      In reply to Garry Baker

      I remember, (inaccurately?) the census figures revealing about three quarters of a million empty residences across the nation.
      The absent owners may be paying the rates, but occupied dwellings provide far more to a local government area than just rates.
      For that reason, some government intervention should be made to open up such properties for rental.
      Governments have the power to resume properties; a short-term resumption, for the purpose of relieving the rental market shortage, and other reasons…

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  9. Robert Tony Brklje
    Robert Tony Brklje is a Friend of The Conversation.

    retired

    Consideration should be given to drive regional development and take away the focus from capital cities. Special thought given to those regional centres on major capital city to capital city routes.
    Governments can help to push this by shifting non-contact government services to those centres and by ensuring contact services are locally administered to boost employment levels.
    Care should be taken to ensure land is available for low cost purchase and any regional expansion is not curtailed by profiteering. Focusing in on leisure activities will ensure popularity of regional development and help to drive take up. There is also the downsize, capital recovery retirement market, as long as health services are available.
    So new lower cost regional properties to supply the market and a reduction in price pressure on capital cities.

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    1. margaret m

      old lady

      In reply to Robert Tony Brklje

      I think this is in part what the NBN is about. Investment in regional areas I think you will find that this Federal government has and is doing that along with raising the tax free threshold ensuring a little more spend money for the masses to assist local economy that is my ordinary voter look at things. Our local Liberal senator's business has fared well via cash investment in local country areas from this Hung parliament.

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