Prosper’s submission focuses on the scope of the strategy. We do not believe that a long
term strategy for affordable housing can ignore the political economy of private freehold land
ownership. Understanding the distinction between owning a home and owning a financial
investment is critical to resolving the wicked problem of housing affordability.
Reducing or eliminating the public subsidy of financial investment in homeownership, and
replacing that subsidy with shared equity and social housing takes us in the right direction.
It is necessary to unwind popular support for inflating the private housing market to ever
increasing prices for private gain, as this undermines the political sustainability of an
effective affordable housing strategy.
Download full submission to Victoria’s Ten Year Affordable Housing Strategy.
Victoria’s affordable housing strategy must extend to the political economy of private freehold land ownership.
This submissions builds on previous submissions to the Victorian Treasury and our Speculative Vacancies reports. In these previous submissions we provide more substantial evidence and analysis of First Homebuyer Grants, Shared Equity, and land supply policy.
Housing affordability has been an ongoing issue for Australia (especially eastern state capital cities) for close to two decades now. The problem has been overwhelmingly political, and hence governments of both sides of politics and at state and federal levels have been unable to address it.
At the heart of the problem is the politics of private freehold land ownership. Land is the largest and fastest rising cost in housing. Approximately two thirds of households own freehold land (about half of those with a mortgage); although as affordability has deteriorated, this number has continued to decline. In short, it is not in the direct financial interest of the majority of households to vote in favour of policies that reduce the (post-tax) returns, value and growth of what is for many their biggest asset. In the case of British Columbia, Canada, once renters became a majority, the politics shifted and governments were able to become more assertive in addressing the issue.
What has been the cause of land becoming increasingly unaffordable? Land in the private market is not merely a consumed service, but it is also a financial investment. The decline of interest rates vastly reduced mortgage borrowing/holding costs, which increased the size of mortgages home buyers could take and use to bid up prices. This combined with generous/minimal taxation of land (especially for owner-occupiers), ensures very high demand and value for land as a financial investment.
The subsequent rise in prices with the fall in interest rates has presented a new problem in housing affordability. While land has always been an entry monopoly, in the era of high interest rates people’s barrier to ownership was predominantly their income. Now the barrier is acquiring a deposit. Low interest rates mean it takes far longer to save for a deposit, and increases the appeal of riskier investments. This is coupled with higher prices, requiring larger deposits.
The popular policy response to this issue so far has been to reduce the upfront barrier to obtaining a deposit. Policies include: First Homebuyer Grants, Stamp duty discounts/concessions, superannuation saver schemes, and government underwriting of 5% mortgage deposits for first home buyers. All of these subsidies have put more buying power (demand) in the hands of homebuyers, which in turn has driven prices higher. Subsequently, housing is more unaffordable for the next group of buyers. This requires an endless expansion of government subsidies to chase after ever inflating land prices; to support a new influx of landowners who demand governments keep increasing prices.
The increased requirement for government assistance into homeownership has undermined a key purpose for state promotion of homeownership: reduction in government costs through private self-insurance and the provision of “asset based welfare”. The concurrent decline in the ability for households to obtain homeownership also continues to put pressure on the need for more rental assistance and social housing provision, or relegating those households to increased poverty and homelessnes (with all the associated public/social costs).
Housing affordability, if defined as “cheaper private freehold housing”, becomes a wicked problem. Making private freehold housing cheaper is only possible if we reduce the market price of land, which has been demonstrated as politically infeasible. The primary mechanisms to reduce prices or price growth are heavier taxation of land (especially on investors), as well as credit constraints (including higher interest rates). Regulatory constraints on investor loans (in conjunction with the banking royal commission) were somewhat effective in reducing prices, but there is pressure to wind these back.
The problem is not limited to the private housing market. As homeownership levels and prices (home equity) have risen, rising personal asset wealth in landed property has shielded private homeowners from financial risk, and reduced support for the welfare safety net among this homeowning bloc. Instead, they support its retrenchment in favour of more private homebuyer subsidies, lower interest rates etc. Increasing private home equity has become a form of (government subsidised) self-insurance. This dynamic has badly undermined political support for public and social housing investment, in turn accelerating a vicious cycle in which we now find homeownership the key driver of intra- and intergenerational inequality.
Victoria’s Ten Year Affordable Housing Strategy can begin to resolve the problem of high and growing land prices. First, the strategy must extend to the political economy of private freehold land ownership. It is necessary to unwind popular support for inflating the private housing market to ever increasing prices for private gain, as this undermines the political sustainability of an effective affordable housing strategy.
We have a responsibility to ensure that everyone can afford a home – we are under no obligation to ensure citizens can afford a financial asset.
Too often governments have misunderstood or poorly framed their obligations to help people achieve secure and affordable housing.
Understanding the distinction between owning a home and owning a financial investment is the key to resolving the wicked problem of housing affordability. Land is the biggest cost in homeownership, and because of its commodification it is also a financial investment (as opposed to the building itself). But homeownership does not necessitate ownership over the land or its financial returns. Governments do not need to provide subsidies for people to own land as an investment. What governments need to do is provide affordable access to the use of land for homeownership.
A certain portion of households will always need subsidised housing; the market cannot provide for their needs. This is where social housing fills the gap. There is certainly a social housing deficit in Victoria, and policy needs to ensure that state institutions can build in passive mechanisms that at least maintain social housing at a certain proportion of dwelling stock.
For the largest number of potential homebuyers however, what is needed is affordable housing in-between this housing continuum: homeownership without owning a financial asset. This is scarcely available in Australia. The Victorian Ten-Year Affordable Housing strategy can position the Government as a general provider of land.
Download full submission to Victoria’s Ten Year Affordable Housing Strategy.