Can we escape a housing Ponzi nightmare without pain ?

Referring to the HILDA Report, the author suggests that, if immigration were reduced, a precipitate decline in house-prices could probably be adequately buffered by local buyers who currently cannot afford to enter the grossly inflated housing market.

Yet another report about homelessness in Australia

Melbourne University Faculty of Business and Economics this week released a report entitled,"The Household, Income and Labour dynamics in Australia survey," (HILDA for short).

The main disturbing and most publicized finding on the day it was released was that home ownership in Australia is in steady decline and the steepest decline is in the state of Victoria. In Victoria I see the extreme manifestation of this trend, homelessness in the streets of Melbourne, every time I venture to the city or inner Melbourne areas such as Carlton. I actually know personally two people, one older and one young, who have experienced homelessness in Melbourne.

It seems obvious that for home ownership levels to recover, growth in house prices urgently needs to slow and stop. For the good of our society, prices even need to fall. Author of the HILDA Report, Professor Roger Wilkins, offered as a solution to the catastrophic decline in home ownership, the very meagre suggestion of an abolition of the capital gain tax discount, presumably as a disincentive to investment in housing. I would however maintain that people will still want to invest if a certain capital gain is to be had, even if they do pay tax! They would still be ahead!

Would a decline in Australian house prices be a concern?

For home owners with only one property and who are mortgage-free, a drop in the $ value of their houses really wouldn’t matter as long as it were part of a general, overall decline in property values. For those who are servicing a mortgage, a significant drop in property prices could be a problem, as their equity becomes less as a proportion of the amount owing.

So, can we escape a populating growth fueled housing Ponzi nightmare without collateral damage?

Initially, stabilising the $value of houses would not be as painful as a sudden decline.

I will take it as read that house price increases are due to a greater demand than there is supply. Demand has increased as net overseas migration has increased. A dramatic increase in Net Overseas Migration (NOM) dates back to John Howard’s time in power and has hardly let up. This number needs to come down.

One can also base the potential housing demand on the number of young adults in the population. In the 'best of all possible worlds, local young adults will want to establish their own households, whether singly or as couples, or with friends or siblings, as a first step. Immigrants, young or old, all need accommodation immediately on arrival.

If, for young Australians, buying a house is manageable and they enter the housing market (for many it is not affordable now) then that will actually increase demand from that age group. So reducing immigration dramatically would not be the only factor affecting prices. Lower immigration would have a downward effect and local young adults entering the market would tend to keep prices buoyant. The two effects would not necessarily at all be equal to one another and this balance would depend largely on the amount by which net overseas migration decreased.

In 2015 there were 1,054,565 people in Australia in the age group 24-26 (inclusive). At this age let’s assume young people have finished their post school education and are ready for the work force. They really need to leave home and either buy a house or rent. In 2011 (https://www.aihw.gov.au/WorkArea/DownloadAsset.aspx?id=60129552283) 29% of young people 18-34 were still living at home. All the young adults still living at home with their parents are potential home-grown consumers of housing.

Are vacancies as a result of deaths an adequate source of housing supply?

In Australia there are about 150,000 deaths per year. Not all these deaths release accommodation, as not all deaths are of people living alone. Some may leave a family behind! But even if 50% of them did result in a house coming for sale or rental, i.e. 70,000 houses or apartments, then there is still that potential demand from 1,054,565 people in the 24-26 age group alone (2015 ABS) and, if the cost of housing stabilized, maybe all young people would be seeking accommodation away from the family home. Even without immigration, there is still, from these figures, a much higher potential demand for housing than there is existing housing which may become vacant. This is because the present age group needing to establish themselves in their adult lives is much larger than the older group. For example, in the Baby Boomer age group in 2015, arbitrarily aged 60-63, there were 775,971 people (2015 ABS) . This is a much smaller number than the potential house hunters in the 24-26 age bracket. Even then, people in their early 60s can expect another 20 years of life and will need their homes in the interim. Even if they left their houses there would still not be enough houses for the more numerous early 20s group. If one were to expect an imminent bonanza from the group 20 years older than the Baby Boomers, one would be disappointed because there are only 223,430 in a three year age bracket in their early 80s!

Where does demand for housing come from?

1. Emerging young adults needing housing away from the family home either as newly formed couples or other arrangements. The actual number depends on which age group is selected but it is a larger number than in the age brackets where downsizing or death are likely

2. Net overseas immigration – about 200,000 every year 3. Investment – local or overseas. 4. Holiday houses or units.

Of the investment properties, many of them will be available for rental. Although this does not help home ownership, at least it means, if rents are affordable, that people may be housed.

If foreign investment in Australian real estate were prohibited and net overseas migration reduced to levels say of the 1990s - 70,000 to 90,000 or lower, it would take extreme pressure off house prices. Then local young people might have a fighting chance of getting into the housing market. Young Australians who are now living at home with a parent or parents would get an opportunity to enter the market which would keep prices buoyant but not in the extreme.

Further demand for housing in Australia is surely waiting in the wings from people now sharing dwellings who would prefer less crowded arrangements. They would, in fact, become a new market for house sellers. The housing market would become more stable and gradually Australians could get used to a climate where a house was somewhere to live and not a speculative investment. The housing sector does not need to worry. If houses are on the cusp of affordable, I maintain there are local customers who will want to buy them or rent them. People would start to be able to exercise choices with respect to housing.

We are now in a dangerous cycle of price rises and of buyers, possibly in a defensive move, taking on enormous debt (relative to income) because they expect prices to go ever higher. A crash in prices would be wonderful for some and catastrophic for others, but I believe this situation can be avoided in Australia even with a significant cut to demand from overseas because of the age distribution of the population and the 'pent up' demand from young adults in the population.