The housing future shock is coming

The housing crisis is becoming so severe that major policy changes will be needed to turn the market around.

There are few things that are riskier in a column than making predictions. Nonetheless, today we shall venture down this path.

Home ownership moved out of reach for many young people a while ago. Besides Bill Shorten, who managed to lose the unlosable election ­because of his proposed housing reforms, no major politician was willing to tackle systemic housing affordability. Until now, that is.

Demographic power shifted to the huge millennial generation. They are all of voting age now, and housing moved to the top of their agenda as they entered the family formation stage of the life cycle (after procrastinating and only making babies in their mid-thirties).

For millennials, renting a small inner-city apartment was all fun and games when it was just two lovebirds sharing the nest. Now that millennials are adding 1.7 babies to their households, not only do they need three or four bedrooms, they also deeply desire to own their home.

They blame baby boomers (who happen to be their own parents), politicians, and macro-economic trends for the housing affordability crisis.

Systemic change is now not only plausible but necessary if the major parties want to win the millennial vote.

So, what policy changes regarding property should you expect over the coming years?

First, tokenistic, nonsensical policies like First Homebuyer Grants will hopefully be buried for good. I am still looking for the one economist willing to argue that handing government money to homebuyers would make housing more affordable. The market isn’t dumb. The market learned that people with modest incomes who qualified for these grants could now be charged more. Such grants only increased median house prices, as homebuyers who didn’t meet these criteria had to cope with higher prices too. Only sellers and developers benefited from the grants. They were never more than an excuse for politicians to claim they were tackling the issue of housing affordability.

I expect precious few of such policies to be pushed in the coming years as the focus shifts to ensuring more housing enters the market.

Optimising existing housing stock

You can expect countless policy interventions aimed at optimising the ­existing dwelling stock. There are under-utilised houses (holiday homes, short-term rentals, empty nester homes) that policies will aim to make available on the free market – some interventions being smarter than others.

In practice, this means (incrementally) taxing the hell out of anything that smells like a holiday home or an empty investment property. Having foreign buyers store their wealth in Australian property is a nice way of ­financing new housing stock but only if the property doesn’t stand empty.

Taxation is a way to push these properties onto the market.

Now that millennials are adding 1.7 babies to their households, not only do they need three or four bedrooms, they also deeply desire to own their home. Picture: Thinkstock

The war on short-term rentals has only begun. Policies will only know one direction. That’s further tightening. Renting out a room in your house will be OK but whole properties on the rental market will be tightly controlled. Regulation follows innovation. It took policy makers a while to catch up on the impact short-term rentals have on the housing market, but it’s happening now.

Currently, local governments are responsible for these policies. Maybe the states will take over and set statewide rules. This would be in the interest of groups like Stayz or Airbnb, which would have a more predictable environment to operate in.

I fear the idea of financially incentivising baby boomer empty nesters to downsize will be seriously considered.

The logic is simple: empty nesters live in homes with several spare bedrooms and given the right tax incentives they right-size into a smaller dwelling and free up large homes for millennial families.

Sounds good in theory but risks only throwing money at people that would downsize anyway. Money spent on such incentives is probably better used on policies directly adding to the housing stock.

Adding more housing stock

Adding more housing stock is indeed what the biggest policy reforms will be aimed at. We’ve already seen generous tax cuts for the built-to-rent sector that will lead to big increases in stock. As commercial towers in the inner city will continue to struggle, proposals seeing office space repurposed to residential will be waved through quickly. It remains to be seen how many offices lend themselves to such a refurbishment, but the legal framework will be put in place.

Zoning reforms will make infill developments and high density ever easier. Building approvals are a painfully slow process, and the bigger the development, the more painful the process. I expect small improvements but would be surprised if bureaucracy can be sped up in a time of record low unemployment. So don’t expect too much change here – I’d be delighted to be proven wrong, though. One of the biggest policy shifts will stem from states grabbing ever more power from local governments. In Australia, local governments tend to have strong veto rights when it comes to building approvals. Also, councillors are systematically incentivised to vote against any new development. Not that all councillors act that way all the time – such a statement would be absurd.

There will always be some residents opposed to any development. In the current environment, a strong NIMBY culture in council is probably more helpful to get you re-elected than a strong YIMBY culture. A purely self-interested councillor should block every development that lands on their desk.

Councils make decisions for today’s local population, that’s who is electing them, but don’t get incentivised to make decisions in favour of tomorrow’s local population or in favour of the city, state, or nation. That type of long-term thinking is the role of the states. The states will snatch vetoing power away from local governments while simultaneously pushing housing targets onto each local government.

So far, using carrots (additional money for councils meeting their ­targets) is the policy tool of choice. In the future, a stick approach is also thinkable where funds are withheld or where councils that fail their ­housing approval targets are put under administration.

Broader changes

If the above changes don’t improve the housing affordability crisis, more disruptive policy changes will be ­discussed.

Negative gearing won’t be killed completely but it might only cover new housing stock.

The goal would be to encourage investors to add to the housing stock by building themselves or investing into off-the-plan properties.

The universal scraping of stamp duty will eventually be discussed. Substituting stamp duty with a land tax would set us up well for the 2030s. This is when the property market will record the highest turnover of homes ever. This is when baby boomers downsize and die at scale. This means their family homes, concentrated in the middle suburbs of our big cities, enter the market. Millennials in the 2030s will eye those homes and leave their homes on the urban fringe they occupied during the 2020s as they look to upgrade. A stamp duty hinders this property reshuffle.

All the while, renters’ rights will be strengthened. The Greens will become a more influential powerbroker and continue to push for renter rights. Look at Germany to get a sense of the direction in which policy regarding renters will move.

All housing reforms aiming to increase supply are null and void if we don’t have the workers to build all these new homes. High migration policies are all but certain. The skills shortage in the trades will not improve without migrants. Expect a tightening of the migration system aimed at getting the right skills into the country. Ideally, we would see Australian training centres overseas in the Philippines, India, or Indonesia.

Training talent overseas is cheaper than training them in Australia, doesn’t require housing while they are in training, and training standards can be very high as Australian residency and an Australian income are incentive enough. These qualifications might also be linked with regional visas.

These predictions are just that – predictions. They are, however, based on current data and endless discussions with industry leaders and politicians. I am more confident than ever that the property landscape in Australia will undergo significant change. Forget location, location, location – it’s all about supply, supply, supply from now on.

Simon Kuestenmacher is co-founder and director of research at The Demographics Group