How Australia's housing market spun out of control — and what we can do to fix it

ABC News

09 Mar

Property investment is ingrained in the Australian psyche, but is it too easy to cast landlords as the villain in our housing crisis? Margaret Lomas's property odyssey began with a small step — a ...

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We paid $28,000 for that unit.\"That was back in 1980, when Lomas was 20.Now in her 60s, Lomas and her husband at one point owned more than 40 investment properties. She has sold what she describes as \"the lemons\", but still has at least 25 rentals that will provide an extremely comfortable retirement. There might even be a little bit left over for their five kids. But not too much if Lomas has her way. The property portfolio was not put together with a view to leaving anything to the children.\"My plan was to spend everything I've got. But I just don't think now, with the way the portfolio has gone, that I will be able to do that. So they will get something when I finally pass on,\" she pauses, before adding, \"Although that's going to be a long time away if I if I have my way!\"At other end of their property odyssey are Justin and Lana.I meet them at an open home in Mortdale, a leafy, established suburb in Sydney's south, about a 45-minute drive from the city. They're starting their journey a fair bit later in life than Lomas with their first baby already \"incubating\" inside Lana's belly, as Justin puts it. With one baby only a few months away and thoughts of adding another one day, they are hoping to take a bigger first step into a three-bedroom home, like the townhouse they just looked at. Justin and Lana keep missing out at auction.(ABC News: Michael Janda)\"All of the properties nowadays which are within the price range of first home buyers, they're always about 2-1-1,\" Justin laments, referring to the number of bedrooms, bathrooms and car spaces.Like Lomas, whose father helped her buy that first property in Cabramatta, Justin admits that the couple will receive some family help to break into the market.\"I think, in this economy, it's quite difficult, unless you're [earning a] $200, $300k salary, it's quite difficult for you to actually buy yourself,\" Justin says.Even with the financial help, after more than three months of searching, Justin and Lana are becoming accustomed to disappointment. The couple was blown away at an auction earlier that morning, when a villa with a million-dollar price guide sold for $1.28 million.When I ask them who they are most frequently competing against, Lana answers without hesitation: \"Investors,\" she chuckles.Like many would-be home owners struggling to break into the market, you get the feeling if Lana didn't laugh, she might cry.Are investors to blame for the housing crisis?Property investment is ingrained in the Australian psyche.The most recent tax stats from a couple of years ago show nearly 2.3 million Australians declared rental income — that's almost 15 per cent of taxpayers. That number has jumped by around one million since 2000.More than 600,000 property investors own multiple rentals, although very few would own as many as Lomas, who has also made a living out of providing advice to those wanting to buy an investment property.\"I've written nine books about property investing, and I also used to host a couple of TV shows on Sky News, and it was all about property investing as well,\" she says.This culture of property investing extends to our national leadership. More than 90 per cent of federal politicians are home owners, two-thirds own more than one, while one in seven has a property portfolio of four or more homes.It's an inescapable fact that for every investment property there has to be a renter, someone who doesn't own the home they live in even though they may desperately want to. By definition, the more investors we have, and the more properties they own, the lower our shrinking home ownership rate will fall.No wonder it's tempting, and easy, to cast property investors like Margaret Lomas as the villains behind Australia's housing affordability woes. But it's also probably wrong.It took decades of hard work and (mostly) astute decisions for Lomas to build the property portfolio she has.\"I don't want to discount the fact that in order to make all of this happen, we did sacrifice an awful lot,\" she says. \"We didn't go on holidays. We never ate out. We never had takeaway in the house.\"More importantly, Lomas played by the rules of the game. Rules that, in a stroke of good fortune for her, were moving in favour of property investors in the late 1990s, when she bought her first investment property in Cairns.So, if we're collectively outraged by someone owning dozens of investment properties, perhaps we need to shift our focus onto those rules, not the individuals who have profited from them.Who, or what, is to blame?This was one of two central questions when I joined forces with Kara Jensen Mackinnon on the News Daily podcast team to investigate Australia's housing crisis. The other was, once we identified what was wrong, to ask if it could be fixed, and how.That first question has been easier to answer, if somewhat controversial. If you wanted to create a recipe for unaffordable housing, you'd pretty much do almost everything Australia has done since the 1980s. No wonder we're world leaders in the field. There have only been rare, and generally short-lived, moments when Australian policymakers have acted in ways that would limit price growth rather than boost it.Then-treasurer Paul Keating introduced the capital gains tax in 1985 to ensure that people paid tax when they profited from selling investments, including property. Unbelievably, until then, profits made from asset appreciation had been left completely untaxed. Keating also briefly ended the practice of negative gearing, whereby losses from one type of investment (such as real estate) could be offset against taxable income from other activities (like working) meaning less income tax would be paid. That reform survived all of two years, before fears of a political backlash saw it jettisoned before the 1987 election.Reserve Bank governors Ian Macfarlane and Glenn Stevens both raised interest rates in part to lean against what they identified as the growing risk of a property bubble in the early 2000s. Stevens even made a rare foray onto breakfast television to warn everyday punters that house prices don't always go up.The bank regulator, Australian Prudential Regulation Authority or APRA, under the leadership of Wayne Byres, threw cold water on another investor-led housing boom in the mid-2010s by using \"macroprudential tools\", such as limits on investor lending growth and minimum interest rates for loan serviceability tests, to place regulatory limits on how much people could borrow, especially investors.The biggest capital city property correction in modern Australian history followed, sparking a price drop of 8.2 per cent between a peak in 2017 and the trough in mid-2019.Sydney — the most expensive market where people need the biggest loans to buy — led that decline with a 13 per cent fall. While no doubt causing pain for some, that price dip was the opportunity for my partner and I to buy our modest house in Sydney's inner-west.But these examples of policymakers \"leaning against the wind\" have been rare and isolated. Mostly they've opted to throw more fuel on the fire.'The more you can borrow, the more you can bid'That downturn ended when the freshly re-elected Morrison government heavied the banking regulator to soften its stance in mid-2019. Combined with interest rate cuts, house prices soon bounded higher again, especially when pandemic stimulus was directed at the HomeBuilder subsidy and cheap home loans.After a few years of our house earning about as much as I do from working in rising value, we'd no longer be able to live where we do if we were trying to purchase now. It's no coincidence that Australia's biggest recent city house price correction coincided with moves by APRA to limit mortgage lending.\"The more you can borrow, the more you can kind of bid up the price of houses,\" explains Productivity Commission chair Danielle Wood.The head of the federal government's economic think tank says the start of Australia's three-decade house price boom dovetailed with banking deregulation.\"In that period, we saw a liberalisation of credit, so it was easier for people to borrow,\" Wood says.This liberalisation began in the 1980s, as the Hawke-Keating governments dismantled old regulations, loosening restrictions on credit — allowing foreign banks to provide loans to households — and ultimately creating the conditions where non-bank mortgage lenders proliferated and undercut the traditional big four banks (before eventually being bought out by them).At the same time, the move to an inflation targeting central bank, started by Keating and cemented by Peter Costello in John Howard's government, saw interest rates fall and stay consistently lower than they had been for decades.Economist Gerard Minack used to be the developed markets strategist for US investment banking giant Morgan Stanley. He's been working in financial markets for about 35 years, so he's seen the effects of these changes firsthand.\"The way most home buyers think is, 'I can allocate that much to a mortgage payment',\" he explains. \"If you can spend $1,000 servicing your mortgage a month, well, you can afford a much higher mortgage when interest rates mortgage rates are at 5 per cent than when they're at 15 per cent or 17 per cent [as they were] back in the early 90s.\"The first big change to the demand side, the ability of people to pay up for housing, has been the decline in interest rates, Minack argues. This has been borne out in the house price data. Almost every time interest rates have fallen, property prices have taken off not long after. Rate rises have often triggered price falls.But this factor pushing up house prices has a limit — one we reached during the COVID pandemic when some home loan rates fell below 2 per cent.\"Our most expensive cities, Melbourne and Sydney, are probably as expensive as they'll get relative to income,\" Minack reckons. \"And that's because we reached that peak level of expensiveness when interest rates, in the aftermath of the pandemic, were realistically as low as we will ever see them.\"The tax change that changed the investment gameBut, while facilitating the boom, the ability to borrow more doesn't by itself explain why prices accelerated so dramatically. That came down to competitive forces, as people scrambled against each other to buy the nicest home in the best location they thought they could afford.And the competition becomes more intense when you turn up at an auction only to find you are competing with several property investors. After its reintroduction in 1987, negative gearing already gave these investors an advantage in how much they could pay, because they could deduct their mortgage costs from their taxable income, something owner-occupiers can't do. But a change in September 1999 gave many more people an incentive to invest in property.Then-treasurer Peter Costello and prime minister John Howard introduced a blanket 50 per cent capital gains tax discount on the profits from selling any asset that had been held longer than a year. This overnight tax cut turned negative gearing from a handy subsidy for loss-making rentals into a potential tax minimisation scheme for high income earners. Divert a bunch of your earnings into paying the mortgage interest on an investment property, avoid paying tax on that income and then, when property prices rise, sell your investment and pay capital gains tax on only half the profit.\"The real take-off in house prices happened to coincide with the change in the capital gains tax under the Howard government,\" Minack argues. \"That motivated people to earn money via asset price appreciation rather than income, so it saw a lot more investors go into housing.\"However, modelling by a range of economists, including those at the Grattan Institute, estimates that reducing the capital gains tax discount and/or removing negative gearing would only lower home prices by 1-4 per cent. In other words, negative gearing is not the main issue. But this modelling generally assumes that property investors are making rational, professional calculations about the present value of their investments and how much that would be reduced by these tax changes. Ms Lomas says she is empathetic for young people trying to get into the housing market.(By Brendan Esposito)Someone like Lomas would probably operate on this calculus, which is why she is so selective about the types of property she buys. Lomas prioritises property with low purchase costs and high rental potential, often in lower socio-economic areas. But even her investments typically lean on negative gearing in their early years.\"When we talk about positive cash flow, we don't just mean that the rents are enough to pay everything,\" she explains. \"We mean the rents plus the tax breaks that you get from investing in property.\"And the fact that most houses are overvalued on traditional price-to-earnings metrics, by about a third nationally and close to 50 per cent in Sydney according to AMP's Shane Oliver, indicates that most investors (and owner-occupiers) are not buying based on such calculations.Again, it comes back to psychology — give Australians a tax break or a subsidy and many will take it, even if they'd be better off without it. Just look at first home owners' grants or HomeBuilder and their outsized effects on the market.Population boom and supply squeezeThose are the financial factors that have pumped up demand and the prices people can afford to bid for homes. But houses and apartments are not just investments. With relatively rare exceptions, someone lives in them. Only around 10 per cent of the housing stock sits empty on a given night. And this is the physical factor that has pumped up prices. Australia has a lot more people and a limited capacity to build new homes for them. At the end of the 1990s there were fewer than 19 million people living in Australia. In the 25 years since, we've added another 8 million.For much of that period, during the 2000s and 2010s, we seem to have built roughly enough new homes to keep up. That was another factor contributing to the falls in prices when lending was restricted between 2017-19 and again when rates started rising in 2022. But since Australia's international borders fully reopened in early 2022, the population has surged by around 1.5 million. We've probably only built about 450,000 homes during the same period.(I say probably, because this an estimate based on Bureau of Statistics building completions data. The ABS was briefly funded to provide up-to-date official estimates of Australia's dwelling stock between 2016 and 2022 but, in a mystifying decision given the prominent government discussion of housing shortages, that funding wasn't extended).That means we've only built an extra home for every 3.4 extra people yet the average household size has, for some time, been around 2.5. We're clearly not keeping up. The typical response has been that we need to build more homes.\"Demand for everything is increasing, but for almost everything else, supplies are forthcoming, so we get an increase in quantity,\" explains Peter Tulip, a former Reserve Bank economist now at the Centre for Independent Studies, a free market think-tank. \"Housing, however, is what economists call an inelastic supply. The supply is unresponsive. And so, instead of getting more houses, we're getting higher prices.\"The YIMBY movement — Yes In My Backyard — has grown exponentially as disenfranchised young Australians blame NIMBY — Not In My Backyard — opponents to development as the key driver of their housing affordability problems. They see reduced planning red tape as the main solution.While at the Reserve Bank, Tulip co-authored a paper that suggested planning regulations were the biggest barrier to supply and could be adding around 40 per cent to the cost of a Sydney or Melbourne house, with smaller but still substantial effects on the smaller capitals.Is building more apartments the answer?But what do the people who build apartments think?Ryan Bennetts is at the coal face of development, heading up property acquisitions for boutique apartment developer Central Element, which operates in Sydney's exclusive eastern suburbs and lower north shore. Recent NSW government planning changes that make mid-rise apartment approvals easier to obtain are welcome, he says, yet he doesn't believe these changes will lead to a dramatic drop in prices.\"There's countless examples of potential development sites that I could take you to that would be viable for development and increased housing if there was greater density on them,\" he tells me over the phone. \"Would you sell your apartments for 40 per cent less if you could just build whatever you wanted wherever?\" I ask him.\"I don't think that would be the case,\" he replies. \"Developers are, at the end of the day in the business of development to make profit and return.\"Opening up more development land, allowing more developers to come in and develop sites, may not in reality lead to such substantially lower prices, Bennetts says.\"You can theoretically take that approach of lowering your unit prices by up to 40 per cent, if that's what economists are saying, but that might not actually play out in practice.\"Economist Gerard Minack is also sceptical of a supply-only response to the housing crisis.\"People say, well, let's build more homes,\" he says. \"You just struggle to keep up. And we've had 25 years of this where people have been telling them, let's build more homes. It hasn't worked.\"Minack believes part of the solution to making housing more affordable is to slow population growth. \"It really is difficult to build enough homes. And I would also argue what a huge waste of resources to do all this investing, not to make anybody better off, but to stop us going backwards.\"We already know how to make housing more affordableThe second key question addressed in our Housing Hostages podcast was how to make housing more affordable again, if that was indeed even possible. The problems outlined above make many of the possible solutions obvious.If the solutions are so clear, why aren't they happening? That is equally obvious: All of these changes generate losers. Reducing population growth cuts the ready supply of extra customers to grow business profits and workers to keep wage growth under control.How to make property affordable againTaking out some physical demand by slowing population growth, so that developers and builders have a chance of keeping up with enough supply.Reducing some of the more onerous or arbitrary planning restrictions and speeding up the approvals process so that more new homes can be built faster.Strengthening lending rules to ensure that periods of low interest rates don't spark fresh house price booms by limiting the amount banks can lend.Rolling back some of the tax breaks that give investors an edge over owner-occupiers, and replacing stamp duties with a land tax to reduce upfront costs for buyers without sparking a jump in prices.Fewer planning restrictions and more development in existing suburbs threatens the lifestyle of existing residents — the infamous NIMBYs who flood councils with opposition to development applications.Tighter lending rules will limit bank profit growth, as would replacing stamp duty — a large up-front cost that most buyers have to borrow more to cover. Getting rid of tax breaks for investors creates obvious losers among the 15 per cent of voters and more than two-thirds of politicians who benefit from them.The losers are clear, sometimes big, and frequently vocal. The potential winners are uncertain, young and generally less well represented in positions of influence.But the crisis — where middle-income couples cannot realistically afford to purchase a capital city home without family backing — is reaching breaking point.\"I've just started randomly crying a bunch,\" house hunter Michelle tells News Daily producer Kara.Even though Michelle and her partner have now managed to crack the Sydney market, with a two-bedroom apartment in the suburbs, she's constantly reminded of the stark divide with earlier generations.\"I can't help but walk past people's houses now in Sydney and think, 'What did you do to get that?',\" she says. \"Like, a generation ago, we would have been fine. We're two sort of mid-career workers. We're both in sort of professional fields. We both went to university. I have a master's degree.\"You walk past these houses where people clearly would have been in the same position as us a generation ago, and they're fine. And I just can't stop thinking about how wild that difference is between us and them.\"And, unless something changes soon, that divide between the housing \"haves\" and \"have nots\" will only widen.\"That inequality will just keep transmitting from one generation to the next,\" warns Curtin University economics professor Rachel Ong ViforJ. \"So we're not just talking about the young people of today. We're talking about their children, and their children's children.\"Even those who've benefited from Australia's incredible run-up in home prices acknowledge that today's youth face a bigger struggle.\"I have extreme empathy for young people trying to get in the market today. And I know most people in my age group will go, 'Well, it was just as hard for us', says Margaret Lomas, acknowledging her own belt-tightening to ride out high interest rates in the 80s and early 90s. \"But I don't actually think it was just as hard for us.\"But will existing property owners, perhaps at their own expense, support the changes to make it easier?CreditsWords: Michael JandaProduction: Catherine TaylorPhotographs: Brendan EspositoIllustrations: Lindsay DunbarPosted Yesterday at 6:00pmSat 8 Mar 2025 at 6:00pmShareCopy linkFacebookX (formerly Twitter)Related topicsACTHousing PolicyNSWNTPersonal InvestingProperty PricesQLDRental HousingSATASVICWA","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1}}}