Labor’s new housing bills get the green light – what this means for you

Posted by Gavin Chau

Back to domestic matters today. After a year of back and forth, Labor finally gained a concession from the Greens over a $5.5 billion housing plan. This is comprised of two programs, both of which are primarily targeted at helping young people afford housing:

The Help-to-Buy shared equity program. The federal government will provide 10,000 people with 40% of the purchase price of any newly constructed home or 30% for purchasing an existing home each year.

Build-to-Rent program. Provides tax incentives for developers to build and maintain apartments.

While these can help provide some housing relief in the short term, they do nothing to solve the underlying issue in the long run. Namely, house prices and rents have been outstripping the pace of income.

The Help-to-Buy program will help a little with the lack of construction. In a best-case scenario where 100% of the eligible applicants purchase a new property, it will add 4% to the required housing stock, but it will almost certainly be less than this. This program is reminiscent of the housing policy in Singapore, where 77% of the population lives in government-subsidized housing. Both the government and the eligible participants get a fractionalized share in the house or apartment. This will add to underlying demand, and like all demand-side policies, ultimately, it adds to prices, making the problem worse in the long run.

The Build-to-Rent program (BTR) also does little to help ownership in the long run. It simply shifts housing ownership from individuals to institutions. Since many foreign-owned firms are responsible for the BTR sector, rental income moves away from traditional mum-and-dad rental property providers and funnels money to overseas firms. Rents are typically charged at a premium, adding to rent inflation. In the long run, we are likely to see homeownership rates continue to fall as more wealth is concentrated into fewer hands.

If we were to look at a more advanced housing market like Hong Kong, it would provide a useful analog for the future of Australia in the sense that the Hong Kong property price-to-income ratio is the highest in the world. Homeownership rates are down to 50% from 54% in 2004, and the average dwelling size is only 45m². In Australia, we see a similar pattern where 66% of people are homeowners (steadily declining from 70% in 1995). While the average dwelling size is increasing slightly at 230m², the average lot sizes of new houses have halved over time. Over time we will see housing densities continue to increase as the cost of land is spread over more dwellings.

A comedy of policy errors in the post-COVID era has exacerbated our housing problem.

Record immigration intakes
The use of quantitative easing (money printing)
Unions blocking the immigration intake of construction workers

The stupendous amounts of stimulus pumped into the economy during the pandemic was one of the primary causes. We have talked about this extensively, but money was created faster than goods could be produced. This always results in debasement, where the money we have saved in the bank becomes less scarce and, by default, less valuable. We see the result as rising prices in goods and services, not because they are inherently more valuable but because each dollar we have becomes less valuable. We’re seeing that play out now, and I hope some of our readers listened and positioned themselves with a large enough asset base to protect themselves from this particular form of theft.

The data below shows the result of the lack of qualified tradespeople. Since the pandemic, incomes for tradespeople and technicians have risen at an annualized pace of 5.6% per annum, outstripping the CPI, which measured 5% over the same time period.

The fallout from the Opal Tower in the Olympic Park has also added layers of red tape to the construction process. New builds require around $300,000 of consultant fees before being sold. This is just another extractive layer of costs that fall on the purchaser.

The net result of both policies will be a bad outcome for broader society while being good for asset owners. Not really the answer to Australia’s housing problem, but at the bare minimum, we can insulate ourselves from the problem by holding onto good assets.

Posted by Gavin Chau, on 26th Nov 2024