We can’t build our way out of a housing crisis

Sascha: [00:00:02] From Equity Mates Media. This is the dive. I'm your host Sascha Kelly, where the podcast that says whoever said business news needs to be all business. Build, build and build some more. That sums up our government's approach to the current housing crisis. Just this month, we've seen it from all levels of government at a federal level. We've seen the government pass the Housing Australia Future Fund and at a state level we've seen Australia's biggest state, New South Wales, pass a budget with housing at the centre and Australia's second largest state, Victoria released their housing policy statement that outlined a ten year plan for the industry. So what did the Federal Government, New South Wales and Victoria all have in common? Building is at the centre of their solution. But here's the thing: housing experts almost unanimously agree we can't build our way out of this housing crisis. It's Monday, the 25th of September. And today I want to know how many houses need to be built before I can afford one. Because, of course, the dive Alec is all about me. Thanks for joining me today to discuss this personal problem that we're both facing. 

Alec: [00:01:15] Sascha, good to be here. As two aspiring homeowners, let's unpack this story.

Sascha: [00:01:20] Yes, look, let's start with the policies and then get to the analysis of the effects. I don't want to sound defeatist. And, you know, we do try to be removed from situations, but this is one that we both feel personally as a single person in a major city in Australia. I've just given up on housing affordability. I feel pretty hopeless. 

Audio Clip: [00:01:40] Well it will probably come as a little surprise. Housing affordability has hit a three decade low, with just 13% of Australians earning an average income able to afford to buy a property. 

Alec: [00:01:51] Yeah, well, Sascha, you're not alone. Housing affordability is now at its worst level in at least three decades. That's according to Track, the analytics division of REA Group RealEstate.com. The website we go to and Dream Prop Truck have built a housing affordability index. It measures the share of properties a household can afford to buy. That housing affordability index has fallen to the lowest levels since records began in 1995. That's why we say at least three decades. Yeah. So what we've learnt from the prop truck. A household earning the median that the typical income in Australia can now afford just 13% of homes sold across the country. It's a dramatic turn even from just last year where the median household income could afford almost 40% of homes sold across Australia. Now that big change from 40% to 13% in one year isn't because house prices have doubled. It's because interest rates have increased so much they went from 0.1%. And then 13 months later, and with 12 interest rate rises later, they were 4.1% and that means the cost of servicing a mortgage has gone up and affordability has gone way down. Wow. So 13% of homes, that's the number. So that's not the only challenge, Stacia, because it's also taking people longer to save for a deposit. The same report from prop truck found that the average Australian household would need to save 20% of their income for more than five and a half years to buy a median priced house. And I don't know about you, Sascha, but I'm certainly not saving 20% of my income at the moment. 

Sascha: [00:03:40] No, I'm definitely not. Alec, what do the numbers look like across the country? Is that just us here in the big capital cities on the eastern seaboard?

Alec: [00:03:49] Yeah, no, this is a national story. So if we go quick round the grounds and hit some of the major states and just share some stats that really tell the same story. In New South Wales, the social housing waitlist has blown out to 56,000 people, which is the highest ever recorded in the state's history. In Victoria, rental vacancy rates are at a record low and the price of rent is rising at the fastest rate in 15 years in Tasmania. Housing affordability is some of the worst in the country. A typical income household can only afford 5% of the homes sold in Tasmania in the past year. And here's one looking at Queensland and WA. Now the ABC reported this as good news in this story about housing affordability. Okay, I'll tell you the stats. You tell me if it sounds like good news. Sascha In Western Australia, 22% of households earning a median income can afford to buy a house, followed by 16% of households in Queensland. 

Sascha: [00:04:52] Look, I felt like you led the witness there, Alec, but yeah, one in five. And then you know what, 1.5 in ten. Yeah, that's still. What good is it? 

Alec: [00:05:00] Mm hmm. So I think, you know, like, put all those numbers together, and it's a story that's been well told, and it's not surprising anyone. Housing affordability is at a real low point in Australia at the moment.

Sascha: [00:05:12] And not to kind of lay it on even thicker, but it's not getting better any time soon is.

Alec: [00:05:17] Yeah, that's right. Short term and long term, the fundamental challenge is that our population is growing faster than our housing stock. So in the short term, we've heard a little bit about this, we've spoken a little bit about this on the dive. We're going to say an influx of migrants, it's estimated to be 400,000 this year and 700,000 between 2022 and the 2024 financial years. But keep that 400,000 this year in mind, because the most recent figures available show that over the 12 months to March 2023, new housing completions totalled just over 175,000. And so housing affordability is bad. And then if demand for housing increases faster than supply of housing, I mean, simple economics tells you it's only going to get worse. 

Sascha: [00:06:07] Yeah, And as I said in the intro, all sides of politics seem to agree that the only way out of this crisis is just to build. 

Alec: [00:06:16] Yeah. If you know the supply and demand mismatch that I just mentioned there, there's an obvious solution which is to increase supply, build more. Yeah, it's the obvious solution, Sacha, But it's also the more politically palatable solution because the alternatives, maybe reconsidering housing as an investable asset class, maybe have a real conversation about the effects of short term rentals on the supply of long term rentals. Maybe talk about the favourable tax and financial consideration given to home owners and multiple home owners. They're all a lot harder conversations to have. It's a lot easier to say, Let's get out of this housing crisis by building more housing. So it also sounds logical so it makes sense. And as a result, we've seen all levels of government agree. In August, the federal and all the state governments agreed to a target of 1.3 million new homes by 2029. 

Sascha: [00:07:20] And to achieve that goal alike, it really starts with the federal government. So let's talk about their response. Tell me a little bit more about the Housing Australia Future Fund.

Alec: [00:07:29] Yeah, this is the government's signature piece of legislation on housing. Even before the federal and state governments agreed on this 1.2 million new homes target, Anthony Albanese was really trying to push this legislation through Parliament. So much so that in June, when the Senate refused to debate it, he sought legal advice about a double dissolution of Parliament and that would be everyone loses their seats. The full Senate and the House go back to an election. That's how important he saw this piece of legislation as being, and it makes sense why he sees it as important, because housing affordability is the number one issue for a lot of people in Australia. And, you know, top five probably for everyone else. 

Audio Clip: [00:08:14] The Greens are in a position where we will support the Government's housing legislation. We're prepared, subject to the Senate, to pass it through the Senate this week. 

Alec: [00:08:24] But earlier this month Labour successfully convinced the Greens to get on board and the Housing Australia Future Fund passed. So what is it? It's $10 billion, a pot of money that gets invested and those investment returns each year are used to build affordable homes. So, you know, invest in the stock market, invest in bonds, whatever it is, $10 billion, maybe you get 5% a year from that. So 5% would be 500 million. That then is the budget to build homes. Now, as part of the negotiations with the Greens, there was an agreement that there would be a floor set on the amount spent each year. The Greens were worried that, you know what happens if that 10 billion gets invested and it doesn't make a return? Yeah, like my portfolio. 

Sascha: [00:09:15] Yeah. You just need a couple of dodgy years, which is understandable in the stock market or investing and then nothing gets spent. 

Alec: [00:09:22] Exactly. So this fund will distribute a minimum of $500 million a year to build new homes. This is the flagship for the build, build, build campaign. But it's not all that the government is doing. Separately, the federal government has launched a $2 billion social housing accelerator, which is money for states to spend on building new social housing or refurbishing existing buildings. Now, as part of this overall housing policy, the federal government are also putting money up for the states, basically a little bit of a competition. They've said for every House that a. Eight builds above their population based share of 1 million new homes. So like 1 million homes split by the population of each state. That's your target. Every home you build above that target, the federal government is going to give you 15 grand. So for states that are always looking for ways to fill their budget cash on the table from the federal government, it's not a new idea. The federal government have previously done something similar with national competition policy. They paid states nearly $6 billion over ten years to reform the competition laws. But this is the first time this cash incentive for state governments to do something has been used to boost housing development. 

Sascha: [00:10:44] So that's a bit of the lay of the land of the federal government's policy. Let's also dig into the states then, because last week we saw Australia's two biggest states, Victoria and New South Wales, also announce housing policies.

Alec: [00:10:58] Yeah, if that wasn't enough money from the Federal Government, the states are putting more money on the table in New South Wales. We saw the new New South Wales Labour Government hand down their first budget. And housing, unsurprisingly, was at the centre. The centrepiece of the budget was a $2.2 billion housing and infrastructure plan, which included one and a half billion dollars to build infrastructure, roads, parks, hospitals, schools to support the construction of new homes. Because you don't want to build greenfields.

Sascha: [00:11:29] You can't build a house without a road. 

Alec: [00:11:30] Yeah, yeah, yeah. And the government needs to be the one investing in roads and schools and stuff like that. So the bulk of it is to build the supporting infrastructure to support new houses. There was also $400 million reserved for a new housing infrastructure fund and $300 million for Land Con, which is a New South Wales government owned Land and property Development agency. So they'll actually be developing a number of homes themselves. So a lot of a lot of building is happening in New South Wales. 

Sascha: [00:12:01] And New South Wales. So what's happening south of the border in Victoria? 

Alec: [00:12:05] Yeah, sustainable down there where you live. The Government released a housing statement which outlined its ten year plan for the industry and it's important to note that Victoria is growing really quickly. The housing crunch is going to be felt quite acutely there because if the housing crisis at its core is a problem of supply and demand, well, demand for housing is going to rise very quickly. In Victoria. It's expected to have more than 10 million people in 2051. And there's not. So some of the measures that the Victorian Government are looking to do over the next ten years, they plan to build 800,000 new homes, as we keep saying, such a build, build, build. They also want to reform the process for approvals to get people building quicker. There are also some other interesting policies that's worth being aware of. A seven and a half per cent tax applied to short term accommodation like Airbnb and Bays. They're going to rebuild all of the state's public housing blocks and for renters, this one I thought was quite nice. They're going to create what's called a portable bond, which means rather than having to get your bond back from your existing landlord and then pay a new bond to a new landlord, when you move homes, you can just move the bond from one rental to another. So I thought that was quite nice. 

Sascha: [00:13:29] That's pretty clever, actually, because bonds are not a small amount of money.

Alec: [00:13:33] Especially when you have to outlay a second bond before you get that first one back. There's often a timing risk there. 

Sascha: [00:13:39] Yeah. So the federal government are putting billions into new homes and so are the state governments. Good time to maybe pick up a trade, but all the money in the world won't be enough because after the break, let's unpack why the experts and the industry agree that we can't just throw money at this problem because we can't build our way out of a housing crisis. Welcome back. Today on the dive, we're unpacking. Why you can't just build your way out of a housing crisis. Which is maybe a counterintuitive thing to say if you're talking about the supply and demand problem. You'd think if there's just not enough houses or if the price of houses are too high, adding supply is the logical solution. So, Alec, explain to me why this isn't going to work

Alec: [00:14:39] Yeah. We can't build fast enough is the simple answer. In a theoretical world where you had infinite capacity to build infinite houses and the only thing stopping you was the amount of money you invested in it. Then you could build your way out of a housing crisis because you could make supply outstrip demand. Hmm. But in the real world, where we're faced with capacity constraints, Australia has proven time and time again that we can't build fast enough. So let's unpack it. Let's put some numbers to it. The target that all levels of government agreed to was 1.2 million houses over the next five years, which is a completion rate of 240,000 houses a year. Australia's record, the most houses we ever built in a 12 month period was 223,588 in the 12 months to March 2017. So we've never hit the target that we need to hit every year for the next five years. Looking at the 12 months to March 2023, our number was 175,216. So you need to get almost 50% more to get there. And it's not like putting more money into the construction industry is the way we get from 175000 to 240000. High house prices are already a clear economic incentive to build. The challenge is more practical. Planning approvals take years. Tradies are in high demand and have long waiting lists of work already. And critically, the materials that we need to build houses are getting more and more expensive and are getting harder and harder to secure. 

Sascha: [00:16:26] So Alec, what I'm hearing is that at some point we just hit the capacity of what our current labour force can build. 

Alec: [00:16:32] Yeah, exactly. The way to get out of a housing crisis is to secure more supplies and train more tradies. But that takes time. And look, you don't have to believe me. Someone who's never worked on a construction site in his life. The builders of Australia are saying the same thing. Nigel Sutley, a prominent Western Australian developer, has said that only half of the targeted 1.2 million homes would be finished. He reckons between 600 and 650,000 if we're lucky, and quote the reason because of a lack of workers to build them. Robert Lynch, the chairman of a residential building company, Tamar Wood, said, quote, It doesn't matter what number they make it, whether it's 1.2 million or 5 million, it's all the same. We won't be getting there. And keep in mind, these are the people that have the most to gain in getting the money from this government in the hope that they'll get there. The Master Builders Association forecasts building completions into the future. Their latest projection has total building completions over the five years to 2028 to 1.4 million. So about 200,000 less than what the government want to get to. The report has shown that the sector is moving in the right direction. The projections are increasing, but I don't think they will get to the 1.2 that National Cabinet agreed to. And so it's not just the builders themselves, noted economist and housing market commentator Shane Oliver, the head of investment strategy and the chief economist actually at AMP, described the plan as, quote, a drop in the ocean and just warned that there was a huge pipeline of work that already existed. He said, quote, The main problem is shortfalls of materials and particular shortages of workers. Right now, we're having trouble trying to build something like 165,000 dwellings a year. The reality is we need at least 220,000 to keep up with underlying demand. It's all pie in the sky if we don't have the means to build them. 

Sascha: [00:18:41] So Alec this is all very depressing and it hasn't done anything to make me feel better. What can be done? Is there actually a solution? 

Alec: [00:18:50] Yeah. Let's hold on. Shane Oliver. Earlier this year at the Financial Review's Property Summit, he spoke about this issue. 

Audio Clip: [00:18:57] I think in Australia, this housing debate, I've been following it or part of it for many, many years and it goes from one bogeyman to another, you know, whether it's negative gearing, tax system, foreigners, you know, we're always blaming something or other, but we don't really get to the nub of the issue. But the nub of the issue, you know, apart from lower interest rates, enabling people to borrow more and pay more, is that we've had, particularly since 2005, immigration levels way, way above the level of supply that we actually need. If you go back to the immediate post early nineties recession, immigration levels were about 120,000 per annum, then that jumped up to 50 to 60000 per annum. So you really need 450,000 population through that period. But if you look at. The completions are dwellings. It didn't really jump up until we had the apartment building boom briefly from 2015 to 2018, I think it was 2019. That's the real issue here. We pump people into the economy and then we all go to surprise, surprise, house prices are expensive. We've got a housing affordability problem. Of course we're going to have that problem. So I think we do need to calibrate those immigration levels to the ability of the property market to supply the property and to allow each year half of that cumulative undersupply to be whittled away. 

Alec: [00:20:11] So, Sascha, from what I know we've signed it. The first thing we can do is align population growth with growth in housing stock. Personally, I'm a big proponent of a big Australia, but we need to be realistic about aligning population growth. The rate that we get bigger with capacity growth, the rate that we can house people. The second thing we need to do I think is have a sober conversation about short term rentals and what that has done to long term rentals. Nicola Powell, Domain's chief economist, has said with the country facing a severe rental crisis, a further 30000 to 50000 rental properties were needed immediately to bring the market back into balance. Now if you have a look at Airbnb in Australia, they have about 130,000 places listed with about 85% of them being entire homes. Now a lot of them are in holiday locations that won't be optimal to alleviate the rental crisis, but plenty of them are a whole houses or whole apartments in capital cities that if they weren't being rented short term, that would be rented long term. Again, I'm a fan. I'm a big Airbnb fan, I'm a shareholder. It's where I start my search when I travel. But to not acknowledge that there's some level of rental displacement here, I think is maybe a little bit naive. Now let's be clear. Both of those changes aligning population growth and immigration strategy with housing capacity and having a look at short term rentals won't solve the housing affordability crisis or the rental crisis, but it will stop it getting worse. Well, it will slow its rate of getting worse. And as someone who's just had their rent increase and is hoping to buy a house in the coming years, I'll take not getting worse at this point.

Sascha: [00:22:02] Hear, hear. Alec, I can't add anything further to that lost sentiment. I'm in complete agreement and as always with property, I'm feeling a little bit more depressed than when we started this conversation, but at least more informed. Let's leave it there for today. If you enjoy the dive, then please shout it from the rooftops. If you don't own your rooftop, then maybe your social media rooftop that it's really useful to us. Word of mouth is the best way for our podcast to grow, so we rely on you to send these conversations on. If you have feedback, get in touch via contact at equitymates.com, but otherwise I'm going to be back in your feeds on Wednesday. Thanks so much for your time, Alec. 

Alec: [00:22:41] Thanks, Sascha.

Sascha: [00:22:41] Until next time