Barnaby Is Right

Prior to the November 2007 federal election, the ALP, and particularly the shadow treasurer Wayne Swan, had quite a lot to say about the dire state of housing affordability in Australia.

Naturally, it was all the government’s fault.

Eager to show that a new Labor government would fix this problem, in June 2007 the Rudd Labor opposition put out a discussion paper, “New Directions for Affordable Housing – Addressing the decline in housing affordability for Australian families“. It was a precursor for their National Housing Affordability Summit the following month.

Approaching six years later, with an election coming up in which Labor looks set to be swept from office, let us take a look at what they said, versus what they did:

Executive Summary

Most Australians either own their own home or aspire to one day owning a home.

However today, housing is less affordable than at any time in our history:

• Reserve Bank of Australia data shows that today, 9.5% of household income is consumed by mortgage interest repayments – the highest level it reached under the previous Federal Government was 6.1% in September 1989;

Actually, the RBA data shows that it was 9.2% through the first half of 2007. But who are we to quibble.

With interest rates now at GFC record lows, the latest RBA data shows that 8.2% of household income is consumed by mortgage interest repayments.  The highest level it reached under the Federal Labor government was 10.9% in September 2008. And – important to note – it matched the previous government’s record 9.4% (September 2007) from September 2010 through September 2011, despite an official interest rate fully 300 basis points (3%) lower than the peak under the previous government.

• The average housing mortgage repayment to income ratio for typical first home mortgages has increased from 17.9% in 1996 to 30.7% today;

Today it is … I don’t know. I can’t find where Labor came up with their (unreferenced) figures, and am now too bloody eye-shot from looking to persist any longer.

• Housing affordability as measured by the HIA-Commonwealth Bank Affordability Index is down 40% from 167.5 in 1996 to 97.8 today.

It is now down a further 33%, to 65.8 (September Q 2012), with a low of 54.1 (-44%) in the December 2010 quarter.  Six (6) official interest rate cuts since 2010, and weakening house prices, have helped the index bounce back a little. Even so, it is clear that housing affordability has declined significantly since 2007.

Declining affordability is having a particular impact on the housing aspirations of younger Australians:

• The proportion of 18-34 year olds buying houses has declined from 48% to 44% between 1994 and 2004;

Today it is … I don’t know. In making this claim, Labor’s discussion paper referenced the ABS Social Trends 2006 document. Helpfully, the latest ABS version does not include directly comparable data.

• The proportion of first home owners as a proportion of the market has declined from 21.8% in June 1996 to 17.5% in February 2007;

It is now down to 14.9% (December 2012).

The current Government’s response to this growing crisis has been to point to the interest rate peaks under the previous Federal Labor Government more than a decade ago.

The current Government’s response to this growing crisis has been to point to the interest rate peaks under the previous Federal Liberal Government more than half a decade ago.

They refuse to recognise the obvious. With the housing affordability index now 33% worse than 2007, when official interest rates were more than double their present GFC-equalling “emergency” lows, clearly something has gone seriously wrong with Labor’s housing affordability policies.

First home buyers, their parents and home owners more generally are not interested in a political ‘blame game’ that fails to provide them with solutions to the problem of housing affordability into the future.

Federal Labor is committed to providing much needed national leadership on housing affordability.

Fine words. But what has the Labor government actually done to improve housing affordability since 2007?

Well, there was the First Home Saver Accounts (FHSA). Remember those?

Launched in Brisbane by Kevin Rudd, the document announces bold plans for a National Housing Affordability Summit, and floats the idea of First Home Savings Accounts, which would allow youngsters to salt away cash tax-free until they stump up a deposit.

Ultimately, this “bold” idea went from being just a tax concession pre-election, to just another taxpayer-financed subsidy post-election:

Each year the government will make a 17% contribution on the first $6,000 you deposit each year. This means that if you deposit $6,000 in one financial year, you will receive $1,020 from the government.

According to the Australian Prudential Regulatory Authority (APRA), there are 38,500 First Home Saver Accounts opened since the scheme was launched in October 2008, with savings worth $377.8 million (Sept 2012). That’s an average of just $9,812 per account:

What APRA doesn’t tell you, is just how those savings accounts might actually reduce the cost of buying a first home.

Especially when, according to the ABS, the average loan size for first home buyers has increased from $232,700 to $293,900 (+$61,200, +26%)  since Labor came to power:

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So, how is it that first home buyers have become even more deeply indebted, and housing has become even less affordable under the Labor government than under the Liberal government?

Well, there is one other housing-related policy that Labor implemented.

A doubling of the previous government’s First Home Owner’s Grant for buyers of existing homes, and a trebling of the grant for buyers of newly-constructed homes:

Oct 2008 – CASH grants to first home buyers will be doubled to $14,000 – and trebled to $21,000 for those buying newly built properties – over the next eight months under the Federal Government’s economic package.

The Prime Minister, Kevin Rudd, said the move was designed to stimulate construction and help first home buyers, tackling the economy’s “twin challenges” of a subdued housing industry and poor affordability.

Did the Rudd stimulus package – combined with record low interest rates from the RBA – help increase construction of private dwellings? Yes it did. But as the following chart shows, all it did was briefly stem the bleeding, because in 2012 the number of private sector dwellings completed fell sharply:

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What is clear is that doubling/trebling the FHOG mostly served to bolster the profits of the banks – and existing home sellers – thanks to a big, temporary spike in the number of first home buyers taking out mortgages, using the “free” first home loan deposit handed to them by Rudd Labor:

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Interestingly, in July 2007 in response to a questioner on a Live Blog at the Daily Telegraph who suggested a doubling of the FHOG, then shadow treasurer Wayne Swan stated that “merely increasing the grant in the absence of other options is unlikely to provide a sustainable solution to the [affordability] crisis“:

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So what did Labor do in government, just 15 months later?

Merely increased the grant in the absence of other options, of course. In flagrant contradiction of the expert analysis contained in their own pre-election housing affordability discussion paper:

As Saul Eslake put it:

Anything which puts additional cash in the hands of buyers…results merely in more expensive houses. Instead, policy needs to focus on increasing the supply of housing – particularly low-cost housing – and reducing the time taken to bring land and housing to market.⁴⁰

This analysis suggests that simply increasing the First Home Owners Grant in isolation may not make housing more affordable in the long run if it leads to inflationary pressures on the cost of homes. It is important that policy proposals designed to assist first home buyers, are economically responsible so that there [sic] benefits are not eroded through additional pressure on house prices.

Er … no.

What Saul Eslake’s analysis clearly stated (not suggested), is that “anything which puts additional cash in the hands of buyers… results merely in more expensive houses. Instead, policy needs to focus on increasing the supply of housing…”

In broad summary then, after nearly 6 years of Labor governance, we have established a few basic facts.

Housing affordability is worse than ever. Despite record low, “emergency”-level interest rates. (Heaven help us when they rise)

The percentage of first home owners has slumped, and they are more heavily in debt than ever before.

New housing construction is declining.

The only real policy “initiatives” on housing affordability by Labor have been a taxpayer-financed subsidy for first home owner savings accounts, and, a doubling/trebling of the previous government’s First Home Owners Grant; something that they were explicitly advised not to do, which has only served to push housing affordability down, and house prices up.

And finally, we have established one other basic fact.

“Education Revolution” notwithstanding, Wayne and the ALP can be graded an EPIC FAIL on their basic English comprehension skills.

Tags: FHOB, first home owners grant, first home owners savings account, HIA-Commonwealth Bank Affordability Index, housing affordability, national housing affordability summit, wayne swan