It seems like everyone wants to improve housing affordability but none of the major players who might be able to do something about it want to take the first steps towards actually achieving it. There’s little question something has to be done, but what is it?

As National Australia Bank chief economist Alan Oster told the Herald’s Eryk Bagshaw, housing prices have literally gone through the roof: "The housing markets in Sydney and Melbourne continue to defy belief," said Mr Oster.

He’s right. Figures released in late March from CoreLogic show that since January 1, 2017 Sydney house prices have gone up another 5.3 per cent, with auction clearance rates continuing in the 80+ per cent bracket and median prices above $1.3 million.

A NAB analysis found that median dwelling prices have climbed up to nine times higher than gross household incomes in Sydney.  Investor demand is often cited as the main cause of the ever-increasing prices: “In the year to January lending to property investors climbed 27 per cent. Investors borrowed $13.8 billion that month, more than the $13.6 billion that was lent to owner-occupiers. Of the $13.8 billion, only $1.2 billion was for building new homes,” commented Peter Martin in the Sydney Morning Herald.

It's property price growth that outstrips wages growth that make homes overpriced, according to Paul Dales, Capital Economics' chief economist for Australia & New Zealand: "With household income per employee having stagnated in the fourth quarter of last year, the rise in prices has made housing look even more overvalued. When compared to the average ratio to disposable income per employee between 1990 and 2015, housing now appears to be 44 per cent overvalued."

Another clue to the source of the ongoing strength of Sydney’s property prices comes from arecent reportfrom Credit Suisse analysts Hasan Tevfik and Peter Liu which shows that 25 percent of all NSW property sales are now to an overseas buyer.

80 per cent of these foreign buyers are classified as Chinese and are from mainland China, Hong Kong, Macau and Taiwan. The paper says this ‘makes sense’ because, while Australian housing is probably at the peak of its cycle, it's still cheaper to buy an apartment in Sydney than buying an apartment in China's major cities.

The end is in sight

Some housing market analysts are already calling for the end of the current housing boom to commence later this year.  BIS Oxford Economics managing director Robert Mellor told the Building Industry Prospects conference in Sydney that house prices would drop by five per cent over the next two years.

“Given that price growth over the last 12 months has been much greater than we would have anticipated six or 12 months ago, we now expect price declines probably between 2017 and 2019 somewhere in the order of 5 per cent in the detached housing market in Sydney,” he said.

Other analysts see 2017 as yet another year of price rises, followed by a slowing market in 2018. SQM Research managing director Louis Christopher said it was likely prices would rise by 11 to 16 per cent by the end of 2017, adding: “Next year is questionable … we could see some storm clouds in 2018,” he told Domain’s Jennifer Duke.

Domain Group’s chief economist Andrew Wilson said it was difficult to predict even six months into the future, given the present uncertain economic outlook. However, he also said that it is likely prices “will stagnate” in the second half of 2017

AMP Capital chief economist Shane Oliver told The Australian’s Daniel Palmer that the housing market is now “expensive on all metrics”. He expects a price retreat of five to 10 per cent in the housing market once the RBA starts raising rates with falls of up to 20 per cent for unit prices in Sydney.

Mr Oliver also said, in another interview with Philip Baker from the Australian Financial Review, that he didn’t expect rate hikes to begin until 2018: "To see a general property crash – say a 20 per cent plus average price fall – we need to see one or more of the following: a recession – which looks unlikely; a surge in interest rates – but rate hikes are unlikely until 2018 and the RBA will take account of the greater sensitivity of households to higher rates; and property oversupply – this would require the current construction boom to continue for several years," says Oliver.

The Melbourne Institute of Applied Economic and Social Research began its consumer confidence survey in 1974. One of its key questions is: “What is the wisest place to put your savings?” and gives options including bank deposits and paying down debt.

Real estate is traditionally one of its most popular answers. In September 2015 28 per cent of respondents nominated real estate, which was the highest score for any asset class; in March this yearthe score had dropped to just 11.6 per cent – the lowest score ever recorded for this asset class.

Westpac chief economist Bill Evans said the result showed a clear increase in risk aversion: "Consumers are saying: yes, we expect [real estate] prices to rise, but we are a little cautious. There is no doubt there is nervousness about the sustainability of the prices."

Maintain the status quo

The federal government has until now steadfastly ruled out any changes to the current negative gearing and capital gains taxation arrangements. Despite the likelihood that these are the principal economic drivers of investors’ property-buying frenzy, they have been ‘off the table’ as the government looks elsewhere for solutions.

As Ross Gittins, the Herald’s economics editor describes the lack of willingness for an all-out effort on housing affordability: “Our problem in Australia isn't so much fake news as fake government – governments that, lacking the courage to implement controversial solutions to problems, just create the pretence of solving them.”

The Turnbull government still insists that increasing supply is the best mechanism to reduce the cost of housing. "The key to having more affordable housing is to build more housing and so the argument against demand side measures in isolation is that all you do is, is pump up the market," Malcolm Turnbull told ABC radio.

The Commonwealth has even handballed the problem to the states, saying it’s up to each state and territory to solve the problem by rejigging things like stamp duty and releases of land for development. It also wants to see the processes of development applications speeded up.

But pressure is growing on the Turnbull government to do something about sky-high housing prices, especially in Sydney and Melbourne. The promised ‘housing affordability package’ in the next federal budgetcould show a change of heart, maybe even with tweaks to negative gearing and a possible reduction in the capital gains tax discount rate. We’ll know more after May 9.

Victorian treasurer Tim Pallas recently tried to shift some of the responsibility back to the federal government, saying:  "We believe the Commonwealth government needs to play a more active role in increasing land supply across the country.

“We would like to work with the Commonwealth on an audit of federal land to identify opportunities to increase the supply of housing within the urban growth boundary," he said, hinting that some Defence properties in Victoria could be converted to housing estates.

RBA treads carefully

Truly in the classic position of being ‘between a rock and a hard place’, The Reserve Bank is concerned that if it lowers interest rates to stimulate economic activity, which would help intending owner-occupiers to afford a property of their own, it would also stimulate investors who would most likely use their leverage to further disadvantage the first-home buyers who are already a threatened species.

But the RBA also knows that an increase in its cash rate would quickly be passed on to most Australian households, thereby raising the chance of increasing housing stress and decreasing spending on consumer goods.

Herald columnist Michael Pascoe says the RBA and the Australian Prudential Regulatory Authority (APRA) aren’t specifically interested in housing prices and the concerns of first-home buyers: “Their concern is whether lending for housing has gone crazy to the extent of potentially damaging banks in the event of a downturn – thus the regulators might not limit their efforts to investors if they fail to get adequate traction.”

Author and financial adviser Noel Whittaker outlines the consequences of a rate hike: “Any increase in interest rates would mean mortgage repayments would rise, putting pressure on household budgets; also, people buying properties would find it harder to qualify for a loan.

“These factors combined would put downward pressure on property but, of course, the effect on an individual property would depend on its location and price range. The pressure would be less for investors as the interest on their loans is tax-deductible.”

The RBA has also expressed concerns that any actions taken that led to a fall in housing prices might also trigger an economic slump. The Bank’s assistant governor (financial system) Michelle Bullock said there was a danger in the general assumption that prices would always rise: "What happens if things turn down, will the slump be bigger than it would otherwise be?"

A too-rapid or too-strong decline in prices could cause overstretched investors to get out of the market at ‘fire sale’ prices, leaving other owners owing more than their properties are worth. First-home buyers would benefit, and tenants could possibly get rent reductions, but for investors and existing homeowners this could be an economic disaster, especially if it happens at a time such as now when full-time employment is falling and income growth is sluggish.

"There is some need to tighten lending conditions for some Australian housing markets in terms of geographical areas and dwelling types," Housing Industry Association chief economist Harley Dale told The Australian Financial Review’s Michael Bleby.

"However, a blanket tightening of lending conditions – as now seems to be emerging again – is the wrong policy and risks damaging Australia's financial stability. That is the very opposite to the ideal outcome authorities want to achieve."

But what can we do?

The decisions of several previous governments limit the field of options available to the present federal administration. At present, it’s investors who get the immediate benefits from housing through their ability to negatively gear properties and from a 50 per cent discount on capital gains when the properties are sold.

Owner-occupiers get their biggest and about only break through their family homes being exempt from capital gains as well as from the pension assets test. Politicians are unlikely to make any drastic changes to the status quo, fearing political repercussions from voters that might be affected if the rules of the game shift against them.

An editorial in the Sydney Morning Herald cautioned that “Harsh measures to improve affordability now might spark a crisis of confidence and exacerbate price falls,” but added “Still, some measures are worthwhile if introduced slowly”.

Here’s a summary of the measures to improve housing affordability now under active consideration:

Shared home equity

One suggestion that could be appealing to housing policymakers is neither new nor costly to the public purse. It’s called ‘Shared home equity’ and was the result of a report by the Menzies Research Centre commissioned by the Howard government in 2003.

In this scheme the government, which could be either state or federal, or a participating institution takes a 25 per cent equity share in private homes. The payoff comes when the property is eventually sold and could be something like 40 percent of any price increase. These contracts could be ‘bundled’ and sold to other long-term investors such as superannuation funds.

Shared home ownership schemes have been trialled for several years in South Australia. A report by the University of Adelaide analysed ten years of data and concluded that suburbs with shared equity schemes enjoyed an 8 per cent rise in levels of home ownership compared to similar areas in NSW and Victoria

Among the many positive outcomes of these schemes are lower costs to the incoming purchaserof a home and the creation of a new class of asset for investors. By making housing more affordable it could also contribute to rising prices, but in theory at least it will increase the number of potential purchasers and make life a bit easier for first-home buyers.

Capital gains amnesty

It’s possible some sort of hybrid scheme may be introduced at the federal level through a capital gains ‘amnesty’ for a set period of time. Investors could sell their investment properties and instead of a 50 per cent discount receive either a higher discount rate or even a full exemption from capital gains tax if the sale takes place by a specific date.

However, given the federal government’s reticence to do away with any tax income unless it’s replaced from some other source, it would be hard to find a way to finance such a scheme without making some other sector of the housing industry more expensive and that would only lead to increased housing costs.

Introduce a land tax

Doing away with stamp duties and replacing any lost revenues with a broad-based land tax is another option that’s gaining favour in some sectors. The Henry Tax Review in 2009 gave some of the reasons why: “People who move house frequently are whacked with much more stamp duty than people who tend to stay put. So they experiment with staying put, driving longer distances [and] clogging up roads.

“They renovate rather than move, or buy bigger houses than they need in case they run out of room. Older Australians put off downsizing in order to put off stamp duty.”

Stamp duty in NSW works out at something like $40,000 on the purchase of an average home, and land tax adherents say this could easily be replaced by an annual tax on all properties.

In theory, this would reduce the cost of purchasing a home and ‘encourage’ (i.e. force) older homeowners to downsize, thereby adding to the supply of family homes on the market. Those senior citizens who’ve sold their family homes would then move into apartments, conveniently helping to reduce the oversupply that’s anticipated in a couple of years.

If you’re wondering how much tax the average homeowner would have to cough up each year, Grattan Institute fellow Brendan Coates told ABC News that stamp duty accounted for $19 billion nationwide each year and new land taxes would have to match that revenue.

"To do that you're probably talking about a tax on unimproved land value of about $6 for each $1,000 of unimproved land value," he said. “In Sydney, you would be looking a little north of $3,000."

It’s no wonder John Daley, the chief executive of the Grattan Institute, said: "When you talk about tax reform, this is far and away the biggest prize on offer. It would generate billions of dollars in annual returns to the NSW budget while also relieving federal government spending over a 15-year-period.”

The downside for homeowners is that this would add an extra expense – and not a small one either, that would have to be paid annually by all those who already are paying off mortgages, as well as raising the cost of renting property for all tenants – two very important political negatives as Greg Jericho notes in The Guardian.

“It’s a big ask. Only the ACT has gone down the land tax route. Stamp duty is a big money spinner for state governments, but it is a tax that you choose to pay. A land tax hits everyone and even if done in a staggered manner as is the case in the ACT, it’s a tough political sell.”

Let’s let the Herald’s Noel Whittaker have the last word on this topic: “The ACT liked the concept so much that they've already implemented it – well, at least partly. You guessed it: they've introduced land tax on the family home, but retained stamp duty on purchases.

“There have been numerous reports in the press about protests by Canberra home owners who've seen their cost of home ownership rise by more than 40 per cent,” said Mr Whittaker.

Use super for deposit

A great deal of media coverage has been given to the idea of allowing first-home buyers to access their superannuation for a deposit on a property. This has even been extended to the possibility of allowing employers’ superannuation contributions to be directed to mortgage repayments while homebuyers are employed.

The first problem with this is that it would simply add to demand for housing and stimulate price increases without contributing to supply. It would also mean greatly reduced amounts of capital invested in superannuation funds, thereby reducing retirement incomes and increasing the number of age pension recipients.

The ABC’s Michael Janda says allowing superannuation funds to be used for housing deposits would facilitate intergenerational theft:“Allowing first home buyers to access their super for a deposit will create a fresh pool of buyers.

“We could be left with thousands of formerly investment apartments in the hands of first home buyers, just as Australia's big cities enter a widely-acknowledged apartment glut. The smart boomers will walk away with the biggest profits, having been in the market the longest, while recent younger buyers will be left with more housing debt than equity and no superannuation either.”

A DIY approach

There is of course always the option for the federal government to build its own social housing, but columnist Michael Pascoe doesn’t think the Commonwealth’s commitment will go to that extent: “Treasurer Scott Morrison has foreshadowed the May budget will include an improved financing mechanism for social housing, but odds are that it will fall a long way short of what's required to address the bigger affordability crisis.

“It's unlikely to even balance the diminished role states have chosen to play in public housing over recent decades.”

Queensland University economist Cameron Murray is even more critical: "If you want more housing, you build it. Instead, governments tweak the funding settings for social housing, tweak rules about town planning, buy equity in homes, and provide cash gifts to home buyers."

Bond aggregator favoured

And finally, another idea that would help community housing providers develop rental homes for people struggling to locate affordable accommodation is to create an Affordable Housing Finance Corporation (AHFC).

A proposal by the Australian Housing and Urban Research Institute for an AHFC was submitted to state and federal governments last December and the federal government has said it will create a taskforce to investigate the plan.

The institute's proposal is for the AHFC to source capital from the bond market so it can provide longer-term, low-interest loans to the community housing sector than are now available. The Corporation would distribute the money to community housing groups who would develop and manage the rental accommodation.

This type of financing is called a ‘bond aggregator’ and has already been established in the UK with some success. At a March 24 meeting in Canberra with federal treasurer Scott Morrison and all state and territory treasurers it was agreed to take the ‘bond aggregator’ concept “to the next level”.

However, Mr Morrison reiterated his party’s position that the key factor in the housing affordability problem is supply, and the states can improve this with better planning and zoning regulations. He also made it clear that the federal government will not provide funding to the states for any tax changes, including such imposts as stamp duty.

Mark Bouris, columnist and chairman of Yellow Brick Road, sums up the problems anyone faces when attempting to tackle the vexed problem of housing affordability: “In the end, property markets are driven by supply, demand and the cost of debt. Any measure that doesn't address these factors in a sustained fashion has little chance of succeeding.”

While we wait

One way or another, tens of thousands of new apartments will be added to Sydney’s housing stock over the next couple of years. There’s one consequence of all this rapid development of high-rise housing that is only now being admitted, with the solutions many years ahead.

Liberal NSW Planning Minister Brad Hazzard introduced what he called ‘Urban Activation Precincts’ in 2014, despite concerns from a number of councils and residents that were affected. Three years later these have become ‘priority precincts’ and their number is now increasing.

Priority precincts are Sydney suburbs, primarily those in close proximity to the existing and planned rail network, targeted for high-rise development. This development has gone ahead at an unprecedented rate, replacing older free-standing houses or small apartment buildings with new apartment blocks up to 23 storeys high, and massively increasing the population of communities like Macquarie Park and Epping.

The problem? Vital infrastructure – schools, roads, healthcare facilities, parks, water and sewerage provisions, communications (think of the NBN)  and energy supply are lagging far behind and struggling to catch up. It’s going to take many years before residents of these new ‘priority precincts’ enjoy such attributes as open parklands and primary and high schools for the children of thousands of families who will live in them.

Planning and Housing Minister Anthony Roberts announced in March that the state government is looking at increasing the number of ‘priority precincts’.He’s also admitted to the Northern District Times that he and Ryde MP Victor Dominello “have been busy doing what we can with respect to retrofitting the infrastructure — which is a lot more expensive than having a good plan from the beginning”.

And what about housing affordability? It now seems it was never part of anyone’s plan.

Sources:

‘Don't bet the house on solving the affordability crisis,’ Mark Bouris, Sydney Morning Herald, 26 March 2017

‘The Bank of Mum and Dad is just generational self-interest to keep house prices high,’ Ross Gittins, Sydney Morning Herald, 28 March 2017

‘House prices jump 3.7 per cent since start of year,’ AAP Release on Sydney Morning Herald online, 27 March 2017

‘Chinese buyers to prop up Australian housing market: Credit Suisse,’ Myriam Robin, Sydney Morning Herald, 24 March 2017

‘Politics ensures Reserve Bank's housing pushback already failing,’ Michael Pascoe, Sydney Morning Herald, 23 March 2017

‘Rate cuts dismissed as house prices ‘defy belief’,’ Daniel Palmer, The Australian, 16 March 2017

‘Parliamentary Budget Office costs plan to abolish stamp duty in favour of broad-based land tax,’ Henry Belot, ABC News Online, 18 March 2017

‘Priority: better planning,’ Ben Graham, Northern District Times, 22 March 2017

‘Can budget 2017 fix housing affordability? Here are seven options,’ Greg Jericho, The Guardian, 17 March 2017

‘Home ownership 8 per cent higher in suburbs with shared equity schemes, study shows,’     ErykBagshaw& James Massola, Sydney Morning Herald, 24 March 2017

‘Australian housing markets 'defy belief' but bank warns against knee-jerk policy reactions,’

ErykBagshaw, Sydney Morning Herald, 16 March 2017

‘A shared home equity scheme will put roofs over more people's heads,’ Peter Martin, Sydney Morning Herald, 8 March 2017

‘Can budget 2017 fix housing affordability? Here are seven options,’ Greg Jericho, The Guardian, 17 March 2017

‘Adopt US model of tax deductions for homeowners, not investors,’ Daryl Dixon, Sun-Herald, 19 March 2017

‘House price shock: governments get serious,’ Editorial, Sydney Morning Herald, 18 March 2017

‘How would rising interest rates affect property prices?,’ Noel Whittaker, Sydney Morning Herald, 16 March 2017

‘Confidence in housing collapses to lowest level in 40 years: survey,’ ErykBagshaw and Peter Martin, Sydney Morning Herald, 16 March 2013

‘December quarter house price growth accelerated: ABS,’ Michael Bleby, Australian Financial Review, 21 March 2017

‘Superannuation for housing deposits would facilitate intergenerational theft,’ Michael Janda, ABC News Online, 16 March 2017

‘Fall in home ownership threatens to sink Australia's retirement system,’ Gareth Hutchens, The Guardian, 23 March 2017

‘Land tax: Parliamentary Budget Office costs plan to kill off stamp duty,’ ErykBagshaw, Sydney Morning Herald, 18 March 2017

‘Push to increase foreign stamp duty in NSW as more foreigners than first-home owners buying homes,’ AAP on Domain, 14 March 2017

‘Overvalued but no property crash on the horizon,’ Philip Baker, Australian Financial Review, 16 March 2017

‘Treasurer Scott Morrison pushes crackdown on investor loans amid house price concerns,’    ErykBagshaw& James Massola, Sydney Morning Herald, 25 March 2017