Keynote lunch address to the Committee for Economic Development of Australia (CEDA)
Housing affordability – a national round up
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Thank you to CEDA for inviting me to speak today.
I would like to start by acknowledging the traditional owners of the land on which we are meeting – the Boonerwrung and Wurundjeri people.
Last month, a young professional called David wrote to me.
‘My wife and I live in a tiny one bedroom apartment. My wife is well paid earning way above the average wage. I am completing a degree but also work 20 hours a week.We have worked hard to get where we are but both realise there is a long way to go if we are to ever afford a nice home and have a family.
Despite our efforts we struggle to pay the enormous monthly rent bill for our apartment. We find it very hard to imagine how we will ever own our own home.
But enough about us…I don’t understand how Clare – a full time beverage attendant at the café near my work – will manage to buy a house. Hospitality workers provide an essential service without which our economy would be crippled.’
David is right.
Good housing policy – which requires the building of more affordable housing – is one of the foundations of the economic and social life of the nation, and a central concern for Government.
Labor made housing a key issue in the 2007 election and since then we have delivered $2.2 billion worth of new investment in our first budget.
One reason to make housing such as issue was the obvious social concern that was expressed so well in David’s letter to me.
The other reason was its importance to our economy.
Current economic climate
Australia has a strong economy – operating in a complex international environment.
There are some major countervailing forces at work in the economy.
We have record high terms of trade and low unemployment.
But growth is slowing and we are facing the highest inflation rate in 17 years.
Despite strong fundamentals, Australia is not immune from developments in global financial markets.
The credit squeeze is increasing the cost of borrowing – even though Australia has low exposure to bad debts.
The strength our economy and institutions means that we are well placed to meet these challenges.
The Government has started work on addressing capacity constraints in our economy.
The $20 billion Building Australia Fund will invest in new infrastructure – both to move goods across the country and to move people across our cities.
Our education revolution is directly targeted at raising productivity and addressing the skills shortages that too many of our industries are facing.
The Government is committed to improving workforce participation – both by addressing workforce disincentives in the taxation and welfare systems and by refocusing employment services on people who are not yet job ready.
Housing is also an integral part of this picture
Current housing market
The link between housing and economic strength is one that CEDA already knows well.
In 2004, at the release of one of CEDA’s report on housing affordability, Ivan Deveson (Chair of CEDA) said:
‘…the lack of affordable housing is affecting not only low-income households, but also households on moderate incomes. This represents a major barrier to the economic and social participation of many Australians and it may ultimately put pressure on wages. The bigger picture is that affordable housing is crucial to economic growth and social stability in Australia
Well-located, decent and secure housing is necessary to increase people’s capacity to work and undertake education and training, for all children to benefit from early childhood programs and for optimum health and welfare. It is also necessary for efficient labour markets and economic growth.
That was over four years ago.
Since that time the housing affordability situation has worsened.
Last month the Senate Select Committee on Housing Affordability released their examination of the problem.
There was unanimous agreement among Government, opposition and minor party Senators that the housing shortage is the core issue.
Australia is simply not building enough houses.
The housing under supply is driving up both house prices and rents.
It is people on low and moderate incomes who feel the greatest pain in these circumstances.
In 1996, an average priced home cost 4 times the average wage.
Today an average priced home costs 7.5 times the average wage.
I think we have reason to be concerned that the current housing market is having a serious impact on the ability of young Australians to buy a home.
Home ownership – that great Australian dream – has always been one the bedrocks of our economy and our nation.
Historically over 70 per cent of Australians have owned their own home.
Today that rate is falling.
What does troubles me most is the falling number of low and moderate income households – child care workers, shop assistants, mechanics, bus drivers and enrolled nurses – who are buying their own home.
This is a group of workers with stable incomes and good ongoing employment prospects.
Forty years ago my parents – and probably many of your parents – were a moderate income household.
My dad was a plumber and my mother was a housewife.
They managed to save enough to buy a block of land and then build a house.
On an equivalent income today, this situation would be almost impossible.
But that house is also my parent’s greatest asset.
Buying a home gave my parents a path to financial security they would not otherwise have had.
For most Australians, the family home is our greatest asset.
Alongside superannuation, home ownership is how we plan for our retirement.
We run the risk that a generation of moderate income earners are losing the opportunity for wealth creation that home ownership provides.
Soon after coming to Government I asked NATSEM to update their estimates of the number of households in housing stress.
NATSEM told us that there are 1.1 million households in housing stress.
That means there are 1.1million households in the bottom 40 per cent of income earners who spend more than 30 per cent of their disposable income on housing.
There only 10.6 million households in the country.
That means almost 1 in 10 households meet the technical definition of housing stress.
Almost 700,000 of these households in housing stress are renters.
Many of these renters are the same moderate income earners that are locked out buying their own home.
When you pay over 30 per cent of your disposable income on rent there is not much left to put towards a deposit.
Many are faced with the choice of paying higher rents to live near their jobs or paying slightly lower rents and incurring the costs of transport and the time commuting to work.
Not to mention the lost hours each day with their families.
Obviously this is a social issue.
But it is also an economic issue with a direct impact on labour supply and mobility.
People are making choices now – refusing to move to where the work is because that’s not where the affordable housing is.
Inner city pubs and shops will have difficulty finding staff.
Mining towns will be unable to attract teachers and police officers.
Access to affordable housing is impacting on labour mobility.
Take Mackay in Queensland – a town that has seen new mines opening to fuel the international economy.
Mackay has a rental vacancy rate of 0.02 per cent – there are no houses to rent.
Rents have skyrocketed with the greatest impact on key workers, young people and pensioners.
Already Mackay is having trouble attracting key workers like teachers and nurses.
It cannot be easy to convince workers with families to move to mining areas, when local schools and hospitals cannot find staff.
While I was in Mackay I heard stories of young people needing to leave town, just to find a home of their own.
How is the tourism industry going to grow if the very workers they might normally target cannot afford to live in town?
There are important social consequences as well.
I heard stories of older women who have lived in the Mackay all their lives forced to leave town because they could no longer afford to rent.
Forced to leave the town in which they have lived all their lives.
Mackay is not alone.
I heard the same story in Emerald and Gladstone.
The Senate Committee cited Karratha and heard it there as well -– it is a factor in towns around the country.
Unaffordable housing is impacting on the efficient supply of labour everywhere.
In a number of areas the Government has responses planned that are developing well, but other challenges are still before us.
Nothing, I am afraid to say, will turn the situation around quickly or easily.
We need to increase housing supply.
I understand David Gruen from the Commonwealth Treasury, presented data earlier today plotting the number of new households forming and the number of new homes being built.
It tells all we need to know – we need to build more houses to bring the market back into balance.
Then we need to keep it there.
Efficient markets need good information.
The housing market needs to know how many houses we need, where they are needed and what kind of housing will do the job.
That is why one of our early announcements was the establishment of the National Housing Supply Council.
The Council – chaired by Dr Owen Donald – has been given the task of pulling together the data we have available on housing demand and supply.
This will give us the ability to look into the future in a way we have not done for a long time.
Every year – starting next January – it will produce a State of Supply report to improve the information available to the market.
Efficiency of the housing market
Secondly we need to examine the efficiency of the housing market itself.
Many people have spoken to me about the need for planning reform.
I know that the States and Territories and local government have been making big efforts in this area.
My greatest concern in this area are the high holding costs our planning system imposes on developers, that are in turn built into the cost of new homes.
We owe it to new home buyers to make it as efficient as possible for new homes to come to market.
The Rudd Government is trying to make a start in this area through our half billion dollar Housing Affordability Fund.
The $512 million fund is aimed at funding projects that will lower the cost of building new homes by cutting red tape and reforming infrastructure and planning systems.
We have allocated $30 million to fast track the national roll-out of an electronic development assessment (eDA) system to make use of the technology available to us.
It still seems incredible to me that you can buy plane tickets, book a hotel and even book theatre tickets online, but in most places you cannot lodge or track a development application – and if a council wants to send to another agency, they have to give the paper copy to a courier to deliver.
The greatest barrier for first home buyers is saving a big enough deposit.
Changes in the credit market are likely to see a more conservative approach to home lending.
I understand that some overseas banks have already started to require larger deposits – even 30 per cent – to guarantee that they are making high quality loans.
In the last budget the Government committed $1.2 billion to establish First Home Savers Accounts to assist young Australians to save.
The new accounts, which will be available from 1 October 2008, will provide a simple, tax effective way for Australians to save a deposit for their first home through a combination of a Government contribution and low taxes.
The Government will provide a 17 per cent contribution on the first $5,000 of individual contributions made each year.
This means that anyone who contributes $5,000 to their account will receive an $850 deposit from the Government.
Earnings on the accounts will attract the low superannuation level tax of 15 per cent and withdrawals will be tax free when used to buy or build a first home.
The Government’s hope is that the accounts will make it a bit easier for young people to achieve what their parents did – buying a modest home that puts them on a path to stable housing and financial security.
Hopefully many will be able to maintain the discipline they had saving for a deposit as they making their repayments.
Most home buyers do their best to get ahead on the mortgage – so that keep afloat if a new baby comes along, interest rates rise or one partner loses their job.
It is one of the reasons mortgage defaults in Australia are low by international comparisons.
In the longer term, I think we need take a particular interest in the home ownership outcomes of moderate income earners.
Australia has largely avoided the sub prime lending that is having such a huge impact on countries like the United States.
Clearly lending to people who do not have the capacity to meet the repayments is not the solution.
Several States and Territory Governments are providing added assistance to moderate income earners.
Some are looking again at strategies to support public housing tenants to buy their homes.
Others are using planning laws to ensure that a minimum number of homes are available for sale to people on lower incomes.
Shared equity schemes – where the Government or a community housing organisation hold part of the value of a house as equity – are now operating in a number of places across the country.
Under the Commonwealth State Housing Agreement, States and Territories also provide modest mortgage assistance to help people to keep their homes when times get tough.
We need to see what the long term outcomes are from these schemes – particularly if they result in improved home ownership about moderate income earners that would otherwise have had a life time of renting.
Everyone now agrees that we need to increase the supply of affordable rental properties across Australia – and then ensure that they are occupied by the people who need them.
Our approach is to pick up on the recommendations made by CEDA all those years ago and provide an incentive to the market to build new houses and lease them at affordable rates.
The National Rental Affordability Scheme is a $623 million investment by the Government to help build 50,000 affordable rental properties for low and moderate income earners in its first four years.
The Scheme aims to leverage up to $13 billion of new investment to boost the supply of affordable rental housing.
Under the Scheme, the Australian Government will provide institutional investors with an annual incentive of $6,000 each year for ten years as a refundable tax offset or as a grant to build new homes and rent them to low and moderate income earners at 20 per cent below market rates.
State and Territory Governments have agreed to contribute $2,000 per home, each year in cash or in kind.
At the end of 10 years the property can be sold or continue to be rented.
The first call for projects was in last Saturday’s papers and we are looking forward to seeing the kind of projects that come forward.
The National Rental Affordability Scheme is a bold new idea for a country like Australia that does not have a history of institutional investment in residential property.
We want superannuation funds, for example, to invest in residential property in Australia on a large scale.
This Scheme gives them one opportunity to do it.
We will be evaluating the implementation closely and watching for obstacles along the way.
The Scheme gives us a chance to build some much needed affordable rental properties that will be available to moderate income working Australians – including key workers.
One of the challenges still ahead of us is refashioning the place of social housing in the modern Australian economy.
Large scale public housing began in Australia to provide stable housing to the workers at the frontline of post war reconstruction.
That was the idea when Ben Chifley’s Minister for Post-War Reconstruction, John Dedman, created the first Commonwealth State Housing Agreement – the large scale injection of Commonwealth funds into housing so that Australians had stable communities where opportunity could flourish and the economy could grow.
We continue to need social housing as part of the housing solution.
Down the road from me in Woolloomooloo lives a woman called Maria.
Maria is a single mum bringing up two young sons on her own.
Maria did a Law Degree.
She went on to win the University Medal.
Today she is a judge’s associate.
I do not think that Maria could have achieved what she did if she had not had access to public housing.
This housing helped her to achieve her full potential.
Stable housing – at price people can afford – allows people to participate in work, education and training.
It also gives the next generation of children a better start in life.
I think we need to be honest and accept that our social housing system no longer does the job that it was set up to do.
Too much of our social housing stock is highly concentrated.
Suburbs that were built to be communities of lower income working people, now concentrate ill health, unemployment and poverty into the same physical location.
Despite 17 years of economic growth, there are more than 200,000 families in Australia in which no one works.
We know that kids who grow up in jobless families are more likely to face disadvantage in adult life.
What then for children who grow up in suburbs of jobless families?
Social housing reform must to give tenants a better platform to participate in economic and social life.
We need to recreate a vision of social housing that is beyond the residualised model of shelter for the disadvantaged that it has been allowed to become.
Part of that reform could be a more flexible system of social housing.
Greater flexibility could provide a better social housing response in rapidly growing markets.
Head leasing arrangements deserve more consideration to give people who require fixed term assistance to the chance to get back on their feet and into society.
There is a case for new models that allow better integration of housing with other supports.
As part of our homelessness consultations, many people have advocated the creation of what is called Foyer models for homeless young people.
Foyer models operate by providing young people with accommodation on the condition that participate in education and training or take up work skills.
The services deliver the whole package, providing young people with both housing and the chance to be part of the workforce.
It is an important social outcome but at a time when we need every worker we can get to participate, it is an important economic outcome too.
A reformed social housing system is likely to involve modern business models for public housing institutions.
At the moment State owned public housing is a $60 billion asset against which no one borrows
There is certainly a case for neighbourhood renewal of many of the concentrated public housing estates – to improve the quality of the homes, achieve a greater social mix, to provide the transport and infrastructure that will link communities to the rest of society and to provide job opportunities.
Public housing has been used in the past as a tool for our economic and social development.
I think that a major reform program in the area of social housing could achieve that again.
CEDA has long recognised that housing is a critical part the economic development of this nation.
In 1961, in the very first volume of CEDA’s journal Growth, AV Jennings wrote:
‘Housing can no longer be regarded as anything less than a national obligation, and our approach to the problem must be as big as the task confronting us.’
I could not agree more.