Tightening of the mortgage belt.
The Australian dream of home ownership crushed

by Bob Briton

Social change is gathering pace in Australia. Nowhere is this 
more visible than in the housing sector. As housing affordability 
slips to its lowest levels on record, the great Australian dream 
of home ownership is under threat for broad strata of people who 
used to take this ambition for granted. Many working class 
Australians — particularly since WW2 — managed to save a 
deposit, get past the first few difficult years of their mortgage 
repayments and eventually wind up with a secure place to live. 
For those who did not wish or could not afford to go down the 
mortgage path there was the option of private sector rental or 
public housing.

The home could be sold to fund nursing home costs in old age or 
to provide a boost to the finances of subsequent generations. 
This pattern was at the heart of the widely held belief that 
Australia was the "lucky country", spared many of the worst 
excesses and insecurities of capitalism. The fact that working 
class families became small stakeholders in the system of private 
property served to damp down disquiet at many of the inequities 
and injustices in Australian society.

These "certainties" are evaporating and dreams are being crushed. 
The Reserve Bank, which usually restricts itself to commenting in 
its brief on the broad-brush aspects of monetary policy, has felt 
obliged to comment on the crisis and some of the remedies that 
have been suggested to overcome it.

The Federal Government has sought to release some of the pressure 
on it by establishing a Productivity Commission inquiry into 
housing affordability for first homebuyers. It is due to report 
this month.

The scale of the problem

Most of the widely expressed concern about the housing market is 
for the future of "Generation X" — young people aged 25 to 39 
years. In 1989, 64 per cent of this group owned their own homes. 
Today the figure is 54 per cent. Greater numbers than ever of 
this age bracket are renting in the private rental market where 
insecure three, six and 12-month leases are the rule. Growing 
numbers live with their parents to reduce living costs.

Low, stagnating or fluctuating incomes and factors such as 
casualisation have reduced their purchasing power. The major 
cause behind the statistical shift, however, has been the 
skyrocketing price of housing throughout Australia in recent 
years.

Paul Willey is manager of the South Australian Government's 
Housing Management Council Secretariat. At the start of SA's 
inaugural Housing Week, he was asked in the media whether housing 
was affordable in Adelaide, which still has the cheapest 
properties of all the mainland capitals:

"For low-income earners — the bottom 40 per cent of income 
earners who get paid less than $632 a week — clearly not. We 
have done some assessment that showed people in the lowest 40 per 
cent of the income range were only able to purchase less than 5 
per cent of the housing available for sale. Part of the challenge 
is that affordability is hitting the next income percentile — 
those who are typically middle-income earners. For essential 
workers like police officers and teachers, affordability is 
becoming a problem as well."

Twenty years ago in Adelaide a house in the median price bracket 
would sell for three times average annual income. Today it is six 
or seven times that figure. In other capitals the situation is 
worse, particularly in Sydney where house and land packages have 
risen by 31 per cent in the last year alone. In response, the NSW 
Government tries to set aside part of every new far-flung 
development they undertake for middle-income earners in the 
$44,000 to $64,000 bracket.

With that income, the would-be homeowner can only borrow between 
$210,000 and $270,000. The tracts of land being released are 
themselves worth over $300,000 and the house and land package is 
usually priced at over $400,000. With rents and other costs like 
utilities taking bigger and bigger chunks out of the typical pay 
packet, the deposit gap becomes virtually insurmountable for the 
targeted group. Of course, established homes closer the city 
centre are even further out of reach.

Unfortunately, the beleaguered Generation X-ers' problems do not 
end with the signing of the mortgage documents. There is then the 
problem of the repayments. It now takes nearly 40 percent of 
average household income to support repayments on the median 
priced Australian house — selling for $339,400 in June 2003.

One repayment away from homelessness

It has been said that many Australians are just one mortgage 
repayment away from homelessness. There is now an additional 
problem that could see all the trappings of the Australian dream 
repossessed. Housing-secured debt has risen dramatically. People 
are also adding cars and even holidays onto their mortgages.

When major segments of "middle-income" Australia become 
marginalised and dispossessed of their small stake in the system, 
a crisis of credibility becomes inevitable. Government 
politicians are doing the maths. If home loan interest rates get 
pushed up to 7.05 per cent following the 0.25 percent rise in 
official interest rates last week, 33 electorates throughout the 
country will move into the "housing stress" zone. This means that 
most households in the electorates will be spending more than a 
quarter of their income on housing. These people will be asking 
questions: What went wrong? Who is to blame? What can be done?

What went wrong?

What could possibly have gone wrong? Interest rates, even with 
the recent increases, are at a 40-year low and the economy 
continues to grow. Since July 2000, the Commonwealth has given 
first homebuyers grants of $14,000, recently reduced to $7,000, 
to help overcome the inflationary effects of the GST.

Unfortunately, spiralling costs have swallowed the benefit of the 
first homebuyers' grant and then some. The numbers applying for 
it have slowed. In Queensland, for example, only 6681 people 
received the grant in the June quarter this year compared to a 
similar quarterly period 12,577 just 18 months ago.

Some people, Federal Treasurer Peter Costello included, like to 
put the major blame on the shortage of land available for 
development. The resultant price increase, it is claimed, 
accounts for our housing woes. Opening up more land, even land 
previously "locked up" in national parks, will bring relief.

It is true that land values have surged. The problem is acute in 
Sydney but is a problem in other parts, as well. In Brisbane in 
the 1970s land accounted for 21 per cent of the cost of a land 
home package. It has since soared to represent 49 per cent of the 
cost. However, housing affordability is a problem throughout 
Australia, even in regional centres where land availability is 
not an issue.

Many others — like NSW Liberal Party Opposition leader John 
Brogden — have singled out stamp duty as the major fly in the 
ointment. It is true, particularly since the introduction of the 
GST, that the family home has gone from being the lowest taxed 
domestic item to the highest. Housing taxes are an $11 billion a 
year cash cow for federal, state and local governments. On its 
own, stamp duty adds $5494 to the cost of a $300,000 house in 
NSW.

Brogden is suggesting a 10 percent reduction in this rate over 
the next four years. Clearly this is not going to have the 
required impact on housing affordability.

Federal Labor wants low-income earners to become part of a 
"savings culture". Mark Latham has proposed granting families 
$500 at the birth of each child and other payments into a "nest-
egg" account that are conditional on the family making savings of 
its own. At age 18, it is hoped the young adult can then invest 
the $10,000 "nest-egg" on higher education or as part of a 
deposit on a house.

The cost of a modern-day university degree — let alone that of a 
family home in Sydney — makes a mockery of this Blair-esque 
proposal.

Others blame current levels of immigration. NSW Premier Bob Carr 
is the most prominent of this theory's backers. While the 
argument might have relevance to Sydney where most migrants still 
tend to settle, it goes nowhere towards explaining the Australia-
wide problem of affordability for new homebuyers.

Even in Sydney, it would be senseless to blame newly arrived 
migrants for pressures on the home-buying market. The 
overwhelming majority of recent arrivals are renters and in 
Sydney the vacancy rate has risen in recent months to 2.9 per 
cent for rental accommodation. "Stable population" advocates are 
playing a low card in the debate.

These are only some of the more notable of the suggestions being 
made in response to the crisis in housing affordability. There 
have been over 200 submissions made to the Productivity 
Commission's inquiry into the predicament of Australia's first 
homebuyers.

Enter finance capital, stage right

The Reserve Bank has come off the sidelines to give the clearest 
indication of what is part of the problem behind the present 
crisis. Governor Ian Macfarlane told a parliamentary committee in 
June that, compared to several other countries with similar 
economies, Australia has a tax regime very favourable to property 
speculation. He pointed to negative gearing — by which the 
interest on borrowings for investment can be claimed as a tax 
deduction — as an example of the breaks given to the forces 
behind the speculative boom.

Banks and big non-bank lenders have exploited fears among the 
post-WW2 "baby boomers" over the security of their retirement. 
They have arranged loans for these anxious mum and dad investors 
with no deposit or low deposit for second third or even fourth 
investment properties. Purchase the property and let the income 
from rent fund the interest and loan repayments.

Along with the big investors, these small players have left the 
non-performing share and cash markets and moved into "bricks and 
mortar" with a new dream of multiplying assets.

Borrowing for investment housing grew by 36 per cent in the year 
ended last June. It grew by 8.4 per cent in the month of June 
alone! In September only 13.3 per cent of loans went to new 
homebuyers. Loans to investors now account for 45 per cent of 
total funds made available for housing from lending institutions.

These "baby boomers" are themselves now very exposed to higher 
interest rates, any periods without a tenant or decline in 
rental, as well as to any downturn in house values that may occur 
due to interest rate hikes.

Any such developments would be added to the underlying risks 
associated with illness, a decrease in wages, unemployment or 
divorce. Some may end up with "negative equity" — more debts 
than the sale of their assets can cover.

Unfortunately for first homebuyers, any slight downturn in house 
prices that might accompany the expected interest rate hikes is 
unlikely to benefit them either. Expensive housing at low 
interest rates is the equivalent of cheaper housing at dear rates 
of interest. What is more, housing prices will most likely 
plateau at a level still out reach for the sorts of buyers that 
used to have realistic expectations of becoming homeowners.

Cheap public housing, once a realistic option, is now in a state 
of crisis. State governments have wound back public housing, 
leaving thousands of people without adequate shelter.

Winners and losers

Mortgage House Australia was a home loan broking firm that has 
morphed into a funds provider. Its managing director Ken Sayer 
was interviewed in May by Melbourne's Sunday Herald Sun and 
asked, among other things, how he would invest $20,000.

"I would take out a $20,000 margin loan and buy $40,000 of blue 
chip shares. You can claim the interest as a tax deduction", he 
replied. Mr Sayer's response encapsulates the spirit of the times 
and the sort of attitude fostered by governments in this neo-
liberal age.

For some time even Centrelink encourage "baby boomers" to attend 
seminars where the benefits of various speculative schemes were 
promoted

Shares and property are portrayed as the means by which people 
will become self-funded and cease to be a "burden on the 
taxpayer" in old age. School children manage dummy shares 
portfolios to get the feel of managing their personal financial 
affairs in this new age.

A combination of greed and fear caused many to sign up to schemes 
promoted by get rich quick gurus like Henry Kaye. The collapse of 
his National Investment Institute left many out of pocket for 
amounts of up to $55,000 to attend seminars concerning his 
dubious property investment schemes. Investors that took his 
advice have been badly burned. Other schemes still operate.

Investors and desperate first homebuyers have taken on 
unregulated and expensive "vendor finance". Some have fallen 
victim to loan "wrappers" who buy houses for the would-be 
homebuyer, then sell them on to the purchaser at a new, inflated 
price. The property deed remains in the name of the "wrapper" 
until fully paid off. Any failure to meet the payments sees the 
purchaser on the streets with no equity and no right of appeal 
whatsoever.

Common to all of these cases is that it is the lender — and in 
particular big finance capital — that wins at every turn at the 
expense of ordinary working people. Even the irrepressible Mr 
Kaye saw to it that he would be paid as a creditor to his failed 
company while its 80-odd sacked employees wait their turn.

The people want answers, Howard urges inaction

None of these developments appear to faze our Prime Minister. In 
fact he congratulates himself on overseeing conditions in which 
the assets of better-off Australian families have grown in value. 
The only pressure-relief valve that he has shown any interest in 
investigating is the possible reduction of fees and stamp duties.

The government appears set to ignore the Reserve Bank's warnings 
about negative gearing and has happy memories of the strike by 
finance capital that afflicted the construction sector the last 
time the then Federal Labor Government implemented the policy.

It is not likely that many of the submissions to the Productivity 
Commission inquiry will be thinking outside the capitalist 
square. Welfare agencies and the ACTU support a variant of 
Labor's deposit-building strategy. They want first homebuyers to 
have access to $10,000 of their anticipated superannuation nest 
egg ahead of retirement to help them get into the housing market.

Real alternatives with real chances of controlling the turbulent 
housing situation and making housing affordable are not on the 
agenda. The reinvigoration of public housing to act as a brake on 
rents and prices in the private market will not be pursued. The 
re-regulation of the finance sector and the bringing of its 
institutions under social control will also be out of bounds. Big 
money need not fear an end to the movable feast of speculation 
coming from the Federal Government's inquiry into housing.

Access to affordable housing may yet provide one of the strongest 
drives for the forming of a government of people's unity, a 
government of left and progressive forces committed to the use of 
the country's resources to meet the needs of the people. The time 
to start getting active in the building of such a coalition is 
now!