Everyone needs a home, a roof over their heads. Homes can be refuges from the world, loving places to raise families and the first step on the road to self-reliance and security. Yet it is becoming increasingly difficult to meet this most basic of needs for many Australians.
Today, housing affordability is at an all-time low, with millions of Australians experiencing housing stress – and despite generations of well-meaning attempts to address the issue, it’s not getting any better.
The result is an ever-worsening divide of winners and losers in the Australian housing market. Homeowners and those with accounts at the ‘bank of mum and dad’ increasingly benefit from long-standing price growth, while first home buyers are increasingly locked out of owning their own home.
Those who can break into the market are often forced to buy in the suburban fringes far from the centre of cities. Here, they are denied opportunities that may increase their quality of life, including access to services, community support and higher paying jobs found in city centres and employment hubs. They aren’t reaping the economic benefits that living in a city should bring them, benefits that generations of Australian city and suburb-dwellers have enjoyed.
The Australian residential rental market, home to more than one in five Australian households, is not working for anyone either. Renters face acute affordability challenges and have one of the worst rental experiences in the developed world, while our research demonstrates that most private landlords would be better off putting their money into superannuation.
These connected crises fundamentally threaten the Australian way of life, and underpin some of our most pernicious challenges, from homelessness to health and wellbeing, and employment and economic growth. Put most simply, the current system is broken and is failing Australians.
Property is the lifeblood of PEXA as the operator of Australia’s digital property exchange platform. Buying a home is one of the most important purchases most people will make in their lifetime, and it is our role to make that experience as efficient, safe and reliable as possible. So, when we see these housing crises worsening, we want to do what we can to help.
That is why we partnered with LongView to forensically analyse Australia housing crises to determine the real causes – beyond the easy (often incorrect) answers – and to use that information to come up with real solutions.
The series of Whitepapers we released earlier this year brought together quantitative analysis of decades of data and drew on PEXA and LongView’s deep experience in the property sector.
What our research found was that there is a lot of misinformation about the key drivers of house prices – specifically, that the impact of interest rates and government homebuyer subsidies are often overstated.
It is often assumed that interest rates are the primary driver of house prices but this is not backed up by the evidence. While interest rates do play a role, they do not fully explain the consistent growth we’ve seen throughout economic cycles. After all, other countries have similarly low interest rates, along with supply shortages, yet have experienced nowhere near the growth in Australia.
Similarly, government ‘affordability’ policies have had surprisingly little impact on house prices over decades. It’s true that houses are among the most aggressively protected assets, with numerous government policies. Yet the cumulative impact of policies like the first home buyers grant, capital gains tax exemptions and negative gearing account for just a tiny fraction of the more than $7 trillion in value growth seen in real estate Australia-wide over the last 20 years.
Rather, we found house price growth has been primarily driven by something far more intrinsic to Australia’s profile, namely its demographics and low urban concentration. The result of this is that well-located residential land – land where people can live near to jobs and services – is in ever-increasingly short supply, more so, for example, than in the US or the UK.
The rental market is also broken, with the poor returns available to private landlords translating into a miserable, insecure experience for renters. What should be a stepping-stone to home ownership is increasingly becoming an unhappy, permanent arrangement for Australian families. Today, 43% of the nation’s 2.9 million renters have been renting for a decade or more.
These insights are important because understanding what is unique about the Australian property market is critical to developing solutions that will work. We think we’ve brought clarity to the conversation – particularly by confirming that governments alone cannot fix the problem.
The size of the A$10 trillion residential market and the growing scale of the crisis mean governments alone will never be able to make a meaningful difference to bridge the widening purchase and rental affordability gap for Australians, nor the rental experience.
To put numbers into context, the average total change in property prices each year amounts to a third of Australia’s GDP, more than the Australian Federal Government’s entire budget. Even if the government spent every dollar it has on grants to homebuyers, the purchase affordability problem would continue to worsen.
There is one clear solution: it is time to tap the nation’s growing pool of private capital. Private capital from sources such as superannuation funds, banks, family offices and high net worth individuals – many of whom are already invested in the residential property market as landlords – is plentiful and agile enough to deliver immediate solutions to an urgent national problem. The question is, where to put it to work.
We analysed four key private investment models – shared equity, institutional ownership of rental properties, build-to-rent (BTR) developments and rent-to-buy schemes – to determine which ones will make the biggest difference, which ones can work at scale and, crucially, which ones provide sufficient returns to attract private capital in the first place.
Our analysis concludes that shared equity schemes and institutional ownership of rental property offer the greatest potential to improve housing affordability and the rental experience.
Shared equity schemes – where an investor puts up some of the purchase price – improved purchase affordability by reducing the mortgage deposit barrier faced by homebuyers while offering good exposure to capital growth – the core component of returns in Australian housing markets.
Institutional ownership – effectively the creation of real estate investment trusts that hold a large number of rental properties – could offer a far better renting experience through more professional ownership and because institutions tend to hold property for longer periods. This would significantly reduce the possibility of renters getting evicted for a sale and potentially provide a consistent and more positive experience.
On top of the private capital solutions analysed in the Whitepaper, we know that another barrier to efficiently solving Australian housing crises is the shortage of accurate, timely, granular data.
Private-sector data and information can help speed up the response to increasing demand by local governments, planners, developers and builders. With the right data they can supply the right type of housing in the right locations, more quickly. For example, the team at .id (Informed Decisions), a PEXA company, are tackling this issue from two directions: demand and supply. To supply housing investors need information to select the right locations to invest in and to time their investments. We’ve built a national database of land settlement patterns across Australia which shows where residential land is, what it is zone for and what housing is on it so all stakeholders have a clear understanding of the total capacity for housing. To understand demand for housing, we’re also forecasting the future use of land, taking into account considerations such as climate-induced risk, demographic changes and migration assumptions. This information is available, but it previously wasn’t easy for governments, investors or developers to pull together.
In addition, a centralised, national social housing register to support the provision of social and affordable housing could help increase transparency and provide security to vulnerable Australians who remain on long waiting lists.
By bringing together a coalition of the willing, across all sectors, we can be part of a broader national response to find new, practical solutions to tackle this current crisis.
We’ve identified the best options, now it’s time to get on with it.
Glenn King is Group Managing Director and Chief Executive Officer
