The US subprime mortgage crisis has seen hundreds of thousands of Americans lose their homes. In Australia, between 1985 and 2004, incomes doubled-but house prices quadrupled.
The result is that Australia has one of the least affordable housing markets in the developed world.
A report released in March by researchers at the University of Canberra said that nearly 90 per cent of surveyed areas in Australia were considered severely unaffordable.
The researchers reported: “Over the past decade outright home ownership dropped by about 9 percentage points to 34.3 per cent.
“On average, to purchase a house in 2005-06 a household would need 7.5 times its annual disposable (after tax) income while a decade ago less than five times would have been enough.”
Housing stress is defined as households spending more than 30 per cent of after-tax income on housing. Almost 23 per cent of households were in stress in 2005-06 compared to 19 per cent in 1995-96.
Roots of the crisis
This crisis is a product of the Howard government’s commitment to private home ownership. Among its first decisions in 1996 was to cut funding to public housing, with spending falling 30 per cent by 2005.
The problem was compounded by Howard’s decision in 1999 to halve capital gains tax, followed, a year later, by his introduction of the first home buyer’s grant.
Investors already enjoyed a publicly funded subsidy in the guise of negative gearing-tax breaks on losses incurred in renting out housing.
The housing market began to take off. Speculation turned into a feeding frenzy as cheap credit, released to cushion the economy in the wake of dot com crisis in 2000, fed runaway prices.
The problem was masked by the ease with which people could take on huge loans at relatively low interest rates. The lure of ever increasing housing prices meant buyers felt they could borrow big and get richer quickly. But a combination of the sub-prime crisis in the US and inflationary pressures at home has led to sharply higher interest rates.
The result, as The Age reported on February 29, is that “the average Australian family can no longer afford the average home mortgage”.
“In the December quarter, servicing the median home loan required 37.4 per cent of gross median family income, up sharply from 36.6 per cent in September and 35.2 per cent a year ago.”
Some blame the housing crisis on immigration or the failure of state governments to release land.
But the problem is not that the population is growing, it is that governments have walked away from public housing at the same time as the private market is faltering.The Housing Industry Association reported that, in the 2006-07 financial year, new home sales fell 12.1 per cent. “The decline in new home sales is clearly a result of poor and deteriorating affordability,” it said.
There is no shortage of land. The major house builders in Melbourne, for example, are hoarding land on the city’s fringe to cash in on rising prices. In short, the housing crisis is a failure of the market.
What’s the solution?
Socialists argue that the necessities of life should not be subject to speculation and profitability.
The first step to solving the crisis should be a massive expansion of public housing.
In 1996-97, there were 393,000 public and community homes. By 2005, that was down to 343,000.
Paying for public housing would involve a fundamental shift in the tax regime. Instead of public funds being used to subsidise a minority to accumulate capital, the money should go into meeting need. That means abolishing negative gearing, raising capital gains tax and dumping the first home buyers grant-all of which drive up housing costs.
Public housing can be designed to meet needs the market doesn’t properly cater for-shared housing, housing for people living alone, housing for people with disabilities or those needing access to health services. It can also be designed to meet the challenge of global warming.
A new public housing development in the Melbourne suburb of Windsor shows what can be achieved.
The flats are insulated and windows double-glazed. Solar panels provide electricity. Rainwater is recycled. Electricity, gas and water use will be halved. And the building is planned to last two centuries.
To turn this isolated example into the norm will involve political mobilisation by tenants’ groups, unions and the Left.
By David Glanz