Friday, March 02, 2007

Saturday Forum: Why Canberra has a housing crisis.

Looking for somewhere to live? If we are to believe the Chief Minister help is on the way. This month Jon Stanhope will release his long-awaited affordable housing strategy - six months in development.

For an unknown number of Canberra workers camping on couches, driving in from Goulbourn or not knowing whether they will be able to cope with a jump in rent it can't come soon enough.

In order to fix the problem his steering group will first have to work out exactly what's behind it.

Perhaps the first point to acknowledge is that despite the impression we have in the ACT our rental crisis is not unique. Type the words "rental crisis" into a newspaper search engine and you will also come up with dire stories this year from Sydney, Melbourne, Brisbane, Perth and Adelaide...

Reserve Bank figures show that throughout Australia rental vacancy rates are
at their lowest since the early 1980's. Canberra's average vacancy rate of
1.8 per cent last year was not that much different to Sydney's 1.9 per cent
or Melbourne's 1.7 per cent.

As the Bank's Governor Glenn Stevens put it the parliamentary committee late
last month: "Rental vacancy rates are low right around the country. No
particular region stands out all that much."

Governor Stevens was not saying that things aren't dire for people
attempting to move to cities such as Canberra, merely that at the moment
they are dire for people attempting to move to every Australian mainland

He says the root cause is the truly phenomenal surge in house prices over
the last few years. People who would have once bought now can't, so there
are more people wanting to rent. At the same time landlords are discovering
that renting out properties is no longer a particularly good way to make
money. The Governor says that as a proportion of the cost of a house rents
have halved over the past few years. This wouldn't have mattered that much
when landlords could expect to sell their properties later for a big capital
gain, but it matters now that prices have stopped rising.

The new very advantageous tax treatment for superannuation due to start in
the middle of the year will drive even more investors away from real estate.

That's why the Governor's very public suggestion a couple of weeks ago that
landlords should consider putting up their rents should be seen as a public
service. Either house prices are going to have to fall or rents rise in
order to keep enough landlords in the business.

In parts of Australia prices are falling. In some parts of South Western
Sydney it is said that most of the auctions on Saturday mornings are at the
behest of mortgage providers selling their customers' homes because they
can't keep up the repayments. Those mortgage providers are none to fussy
about the prices the properties sell for and so prices are plummeting.

But not in Canberra. Perhaps more so than any Australian city property
prices in Canberra are, to use economic language: "sticky downwards".

Here's why.

Canberra residents are different to people in the rest of the country in two
important ways. One is in the type of jobs they enjoy. Census data shows
that Canberra workers are much more likely to be in professional jobs than
workers elsewhere. 40 per cent of Canberra workers are in professional
jobs. Only 33 per cent of Sydney workers are. The other is in who their
employer is. Canberra workers are far more likely to work for the

This makes Canberra workers typically more financially secure than workers
in other cities. Put simply - if interest rates go up they are far less
likely to be forced to sell. As well, they seem to be far less inclined to
sell when prices go down, perhaps preferring to hold on until prices

Data from shows that typically around 6,000 houses change
hands a year in Canberra. In 2001 the figure was 7,500. Last year it fell
to 4,153 - the lowest annual total since allhomes began collecting figures.
It looks as if Canberra homeowners have the ability and the will to hang on
rather than sell when prices are falling.

Other things are different about the Canberra real estate market as well. A
higher proportion of houses are rented (33 per cent compared to 29 per cent
in Sydney) and there are more group houses (4.7 per cent of households
rather than 3.8 per cent). This means that paradoxically while more of the
population is financially secure than elsewhere less of it has housing

And because the absolute number of new houses built each year is low,
Canberra housing is vulnerable to unexpected shocks.

Typically around 200 houses a month are built in Canberra. In January four
years ago bushfires destroyed or damaged more than 500.

And the Commonwealth government, the ACT's biggest employer, has provided
another shock. In its latest budget it ramped up plans for recruitment,
apparently setting aside funds for an extra 3,000 to 5,000 Canberra-based
public servants.

It is hardly surprising that a land-release program decided on months or
years in advance has difficulty coping.

The most important part of the solution to be recommended by the Affordable
Housing Steering Group later this month is likely to be releasing more
blocks of land. It is a straightforward fix guaranteed to work, but it will
take time to take effect.

The Chief Minister has talked about quarantining some of the new blocks of
land for low-income housing. When announcing the release of 500 new blocks
at west Macgregor last month the Planning Minister Simon Corbell specified
that 75 or them had to be used for "affordable housing". From an
economic point of view there is nothing much wrong with such an idea
although, predictably, developers are less than enthusiastic.

Chief Minister Stanhope has also talked about allowing buyers to share
equity with in their homes with silent owners, an idea whose strongest
political champion to date has been the Liberal frontbencher Malcolm
Turnbull. As Chairman of the Menzies Research Centre before entering
Parliament in 2004 Turnbull commissioned a major report on the idea that
found it had merit.

Real estate agents want the Steering Group to recommend a cut in land taxes.
The head of the Real Estate Institute in the ACT Peter Blackshaw has
actually called for their elimination. But the argument isn't
straightforward, even if the ACT could afford to do without the income form
land taxes. It is generally agreed that land taxes depress land prices, not
increase them. That's right: depress. If an investor knows that there will
be annual costs involved after buying a property that investor is likely to
be prepared to pay less for the property in the first place. Removing land
tax would start a prices frenzy in the ACT (unless buyers expected the tax
to be reintroduced) shifting prices up to a new plain. On the other hand it
would, as the Institute suggests, increase the number of landlords. It
would do it at the cost of even higher house prices.

From an economic point of view every solution other than increasing the
supply of land for housing is mere tinkering at the edges, however
worthwhile. Increasing the supply of land will both increase the number of
houses for sale and the number of properties for rent. It is likely to
prevent house prices from rising for a while longer and maybe persuade some
of those home owners withholding their properties from sale while they wait
for a rebound to give in.

As it happens there are good reasons to be wary about the Canberra housing
market as a long-term investment proposition.

As I mentioned, it is particularly vulnerable to shocks. And shocks can
come from either direction. The Labor party yesterday unveiled a $3 billion
plan to cut commonwealth spending. The ACT Liberal Senator Gary Humphries says if implemented it would most likely mean a cut of 20,000 government jobs - 7,000 of them in Canberra.

Or perhaps not. Labor might not that many jobs. Or the Coalition could get
back and cut jobs itself. Or continue to increase them.

That's Canberra's problem. Decisions made by the Commonwealth are sudden,
unpredictable, and have a disproportionate effect on the demand for houses
and Canberra house prices.

A big slump the ACT housing market is entirely possible. Right now that
seems unlikely, just as did last week's sudden downpour and hailstorm after
months without rain.

Most of Canberra would hardly be praying for a cutback government employment and a slump in the ACT economy - but it would fix the housing crisis.

The Chief Minister's affordable housing steering group is certain to recommend more practical measures when it reports later this month, the most important of which will be dull but effective: an increase in the number of
blocks for sale.