5 Ways Premier Berejiklian Can Address The NSW Housing Affordability Crisis

5 Ways Premier Berejiklian Can Address The NSW Housing Affordability Crisis

Daniel Kisbee

Symptomatic of the affordability crisis currently gripping the State, of the 186,000 NSW home loans approved in 2016, less than 9% were to first home owners. With a teetering AAA national credit rating, below trend GDP growth, rising unemployment and stagnant wage growth, housing affordability has moved from a watercooler gripe to the predominant conversation in Australia’s most populous state. NSW Office of State Revenue figures confirm that over the five years to 2016, First Home Owner Grants have fallen 75% in number, and the ABS statistics confirm that households now carry about half of Australia’s total debt. This, coupled with the median 2017 NSW dwelling price now up 18.4% to $795k (notably sitting above the $750k FHOG threshold) and the affordability conversation takes on a distinctly political dimension.
The most recent ABS statistics put average weekly earnings at $1,533, or just shy of $80,000 per annum. Adjusting for overtime and on a per household basis, this sees NSW housing at a price to income ratio of well over 8 times. A0nd in the 2017 Demographia International Housing Affordability Survey, Sydney ranked above Vancouver, but below Hong Kong in the Top 3 Most Unaffordable Cites in the World. The spotlight is now cast firmly on NSW and it’s new Premier Gladys Berejiklian — widely panned as NSW Treasurer for not doing enough to address housing affordability —  to provide a solution.
1) Divert the conversation away from Immigration
The Premier needs to firstly address the “noise” around the issue, and a good place to start would be rebutting the fallacious arguments around housing affordability peddled by the likes of One Nation, Independent MP Bob Katter and even some factions of the major parties.
NSW will add almost 2 million new residents to its population over the next 20 years, taking its population to over 9.6 million people. However, the direct link between housing affordability and immigration is not as commonly described. While newcomers to NSW have heightened housing demand, and economic first principles state that where there is a rise is demand the “invisible hand” forces supply higher, the answer to the affordability quandary does not lie in restricting immigration. Before we get to that, let us ask what the real impact of immigration is on housing affordability.
Firstly, the distinction needs to be made in our public debate between permanent settlers and temporary migrants. But regardless of on what basis people are coming, it is clear from the data is that Australia’s population has increased significantly over the last five years, with Net Overseas Migration having doubled since 2006 and NSW has taken on much of this resident inflow:

Visa Class Number (2015)
457 (Temporary) 37,276
Student 108,518
Skill Stream 36,509
Family Stream 20,200
TOTAL 165,227
Source: “Australian Demographic Statistics” ABS cat.no. 3101.0

Just as Net Overseas Migration is a reliable indicator of the inward and outward movement of persons from Australia, Net Interstate Migration (NIM) and its impact on housing in NSW must also be considered. During the same 2015 period, 339,000 people moved states. However contrary to common belief, New South Wales has registered NIM losses each year for the more than a decade, as tabulated below:

Year NIM
2006 -25,576
2010 -9,458
2012 -17,965
2015 -6,639
Annual average
2006 to 2015
Source: “Net Interstate Migration” ABS 3412.0 – Migration, Australia, 2014-15AB

Housing starts hit a record low under the former Carr administration, with the 2008 figure of 23,636 woefully inadequate, thus creating a supply shortage that would manifest itself in the affordability crisis the State now faces. However since that time figures have materially increased, with housing approvals of 52,000 for the same 2015 period analysed above, and housing starts mirroring that figure.
Applying the average Australian household size of 2.6 people, and noting that migrants will occupy a range of dwelling types from high density student accommodation to suburban family homes, the disconnect between total new persons requiring accommodation and housing starts is not as dire as described in some quarters. Overlay the fact that NSW multi-unit dwelling construction starts have surpassing detached housing starts each year since 2012, and with the NSW government approving around 5,000 new dwellings per month at an average on completion market value of $795,000 a piece, it is clear that rather than solving the current affordability crisis, restriction of migration would rob the state of the GDP growth generated off the back of the current unprecedented levels of construction. And this is to say nothing of the contribution these new migrants are making to the broader NSW economy.
2) Clearly define State versus Federal Issues
As Leader of the New South Wales Liberal Party, Berejiklian would do well to delineate the proposals and possibilities that lie within her State jurisdiction, and confirm to the people of NSW that even with the scrapping of social housing programs such as the National Rental Affordability Scheme (NRAS), the Federal Coalition government remains committed to improving housing affordability. By opening a dialogue with the people on which issues are in which jurisdiction, she can allow the electorate to hold her accountable for progress on the issues she can directly control, and she can demonstrate progress and outcomes here. By leveraging her ministerial relationships in Canberra and at other levels of the public service (evident in her appointment of former Reserve Bank governor Glenn Stevens to advise her on the topic), she can ensure that this issue gets the attention it requires from the Federal government.
Similarly, Federal Treasurer Scott Morrison’s needs to do more than discuss the topic, and with his second budget due in only a few short months, his action (or otherwise) on housing affordability will be felt throughout the nation, perhaps most acutely in NSW. To this end last year he enlisted junior Minister and former tax lawyer, Michael Sukkar to assist in building a Federal platform for housing affordability. Sukkar states that he sees housing affordability not as an ideological problem, rather as an economic problem; and as such can be addressed with taxation reform and realigning the incentives of market participants.  “The systemic problems of housing affordability can only be addressed by supply-side reforms.” Sukkar says, “I’m also very focused on what we can do to assist first home buyers entering the market.”
This kind of policy rhetoric at a Federal level is nothing new, and promisingly, a consultative approach is being taken by the Council of Australian Governments (COAG) with an agreement reached at their December 2016 meeting to place housing affordability, and sustainable funding for homelessness services high on the agenda for 2017. Also at this meeting, the Federal government confirmed it would extend the current social housing programs for a further 12 months while alternative strategies are explored.
But looking further afield than the rising NSW housing market, there are demographic and socioeconomic changes on the horizon that will render a wholesale review of government housing policies at both a State and Federal level necessary.  And the answers are not likely to be found within, but without…
3) Look at International Examples
Since 2012, the United Kingdom has run a government program “City Deals and Growth Deals” as part of their localism agenda to develop affordable housing and promote small and micro businesses. City Deals sees local government areas and divisions working together on pitches for Federal funding for social housing projects, backed by the Federal government.
While a collaborative approach with different levels of government is great in principle, the practical realities of management siloes and shrinking funding pools remain obstacles that must be addressed. A core tenet of City Deals program is the key metrics and hurdles around housing growth and productivity – the effective return on the Federal government’s investment in terms of improved housing affordability. With fragmented local Councils and depleted NSW State coffers, the spotlight on any investment would be huge; and to successfully transplant this program into NSW would require government cross-departmental cooperation of the kind not before seen in Australia.
There must be another way. In fact, the NSW government has even done a feasibility study on a slightly different overseas concept, also from the UK. The Housing Finance Corporation (THFC) is a finance aggregator and intermediary that co-funds affordable housing for rent and ownership with a focus on needs-based accommodation and sustainability. THFC matches the borrowing demands of registered landlords with available government assistance/subsidy and then sources the best finance on the capital markets – underwritten by a Government guarantee. Mortgage bonds are then issued, consolidating individual landlord lending requirements into a saleable package supported by Government, and this has proved effective in the financing almost 2.5m dwellings in the UK.
THFC directs the investment as required (in conjunction with a specialist intermediary) and with the bonds issued and combined with the Housing Benefit, government subsidies and public initiatives, these bring together a scheme of registered Landlords and trackable housing outcomes. KPIs are also in place to ensure that THFC funds meet certain outcomes around the provision of new accommodation.
The Australian Housing and Urban Research Institute (AHURI) has done extensive research on this concept, known as the “bond aggregator model” and plans to report to the State Treasury Heads by mid-2017 with an implementation plan that suits the Australian setting. The AHURI research into the bond aggregator model is detailed in AHURI Final Report no. 220.
4) Consider Supply, but pay better attention to Demand
As discussed in (1) above, owing in no small part to the attitudes of the previous State administration to property development, NSW has produced fewer homes per 1,000 people than the national average during the last decade.

New Homes / 1000 people NSW Australia
2005 – 2015 4.8 7.2
2010 – 2015 4.9 7.1
2015 6.2 8.2
Source: Associate Professor Steven Rowley, Curtin University; Australian Bureau of Statistics “Building Activity Australia”

So it makes intuitive sense to argue that the solution to the housing affordability issue lies with supply, and supply alone.  Increase the supply, solve the issue, right? Wrong.
Australia is already a world-beater when it comes to housing starts. When we compare Australia to the rest of the world:

Source: Associate Professor Steven Rowley, Curtin University
The ultimate determinant here must then be on the other side of the ledger.  Demand. While it is true that a large multi-level apartment complex will be at least two to three years out of the ground from go to whoa, the reason all this new housing supply in NSW hasn’t had the expected impact on affordability is that the market moves dynamically. As increasing levels of supply come on board, these have been met or exceeded by increases in demand, with the “on completion” market prices also moving upward in lock-step.
In simple terms it’s not supply, rather demand, that is determining the affordability (or lack thereof) of housing in NSW.  Developers — themselves hostage to the price of raw land and construction costs — are pricing higher and higher along with the rising demand; and new stock is being absorbed just as quickly as it hits the market. This pushes the cost of housing further and further out of reach for many in NSW. 
5) Listen to the (young) people
An early strength shown by Gladys’ predecessor Mike Baird, was his ability to harness people power and social media to connect with the people of NSW. This proved particularly powerful in connecting with arguably the most disenfranchised sector of the potential home-buyer set – Generation Y.  Solutions proffered by this demographic have taken the form of:

  • Relaxing some planning controls;
  • Reforming planning processes and institutions to be more proactive;
  • Modifying standard Tenancy Agreements to allow longer term (multi-year) tenancies;
  • Restructure the National Affordable Housing Agreement (NAHA) based around transparency and performance metrics agreed between the State and Federal governments;
  • Increasing subsidies for younger buyers, means-tested by assets and income;
  • Salary-sacrifice arrangements and novation/part-forgiveness of HECS debt;
  • Scale back Capital Gains Tax concessions for property investors; and
  • Reforming negative gearing on a stepped basis by number of investment properties owned.

It is also important to note that housing affordability is influenced not just by contract price, or market rental, but also by commuting costs, demographic trends and consumer preferences. Furthermore, the current conversation on housing affordability largely ignores the plight for renters on minimum wage, with a shrinking pool of affordable suburbs and commute times invariably measured in hours.
Downsizing to increased density accommodation is a reality for many currently running from housing stress. Successful developers looking to tap into this trend will build precincts, not just discrete apartment blocks filled with as many boxes as permissible. That may mean a longer wait for the developer until profit, but this can be managed through different financing models, and accessing different funders and capital sources.
While no panacea exists to the housing affordability problem in NSW, and many of the issues and solutions above transcend State politics, the electorate will no longer tolerate mere lip service to what has developed into the Achilles’ Heel of life in NSW, and in particular in Sydney. The Premier has until her next election in 2019 to show progress on housing affordability; but developers with strong, de-risked projects won’t be waiting until then. It may be up to the residential property developers of NSW to look at new strategies to bring affordable product to the market faster, and seek advice to ensure they have these projects funded in an equally innovative and cost-effective manner.
Daniel Kisbee is a Senior Analyst at Development Finance Partners, and holds a Bachelor of Economics from the University of Queensland, and has over a decade of experience in Banking and Finance.


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