45-year home loan terms, completely phasing out stamp duty by 2028, evergreen interest only periods, initiatives to overcome deposit hurdles, reduced debt servicing buffers, back-ended balloon payments and efficiency improvements to home loan applications…
If implemented, initiatives such as these will help more people become homeowners, produce more home upgrades, ease the pressure on rents, encourage more Australians to invest in their future and reduce the significant tension within society.
Housing supply, housing affordability and renting have been frequently debated in Australia for more than 100-years.
History provides footprints of proof that relying on politicians to administer efficient housing policies is as effective as putting gumboots on pelicans.
A little over 40-years ago, the then Prime Minister gave a public address to the nation wherein he outlined the same challenges that confront us today. Not much has changed.
Back when Malcolm Fraser made that address to the nation, Australia’s population was 15 million (43 percent smaller than it is now), inflation was 10 percent, the unemployment rate was 6.8 percent, home loan interest rates were 13.5 percent, 3 of every 10 households were rented and a standard house in a capital city was worth $57,000.
The dire situation with Australia’s housing right now is not a one-off. That’s because the plonkers who produce various housing, credit and taxation policies have never understood the practicalities faced by the different segments of buyers, sellers and renters of real estate.
Standing on a podium and declaring ‘…we simply need to build more…’ is nothing more than generic gibberish. It has failed for more than 100-years.
If housing supply-and-demand was half as ‘simple’ as people think it is, the current data from Australia’s official statistician suggests we should have a housing *surplus*.
Australia’s population increased by 3.3 million over the last 10-years, equating to demand for an extra 1.34 million dwellings.
Official statistics confirm that the nation’s total housing increased by 1.8 million over the decade – 460,000 more than underlying demand requires.
The numbers prove that people’s comprehension of ‘housing supply-and-demand’ is grossly flawed. One can’t possibly expect the right reins to be pulled without properly understanding the situation.
Yes, the focus must be supply, but the solution has (much) more to do with removing grit from the system than building new homes.
The various policies which govern Australian housing are archaic, they create barriers instead of support and they fail to compliment the fact that every person’s housing needs change multiple times throughout their life.
No one spends their entire life living in the same property, yet the Australian system does not provide for mobility. Accordingly, the volume of available housing which meets people’s specific requirements falls well short of demand each year.
Whether to buy or to rent, there are nine (9) typical situations when one’s demand for housing changes during their lifetime:
- moving out of the parent’s home,
- becoming a young couple,
- becoming a growing family,
- upgrading to a nicer home,
- relationship separations,
- moving town to pursue career and / or lifestyle choices,
- empty-nesters who downsize in preparation for retirement,
- migrants arriving from overseas, and
- buying an investment property in attempt to avoid becoming reliant on a taxpayer-funded pension.
50 percent of properties purchased each year are by existing owner-occupiers who ‘swap’ homes. The Great Australian Dream is a mini-series, not a single episode.
A significant 20 percent of real estate transactions each year are for first home buyers and 30 percent are everyday Aussies whose preparedness to invest their own money into real estate adds more supply to the rental pool.
Australia’s housing stock typically increases by 2 percent (or 200,000 new homes) each year.
While the new housing stock plays a role, an overwhelming majority of the people whose changing circumstances triggers a demand for different digs each year will have their needs satisfied from among the remaining 98 percent of properties (Australia’s 11.2 million established dwellings).
The problem has nothing to do with Australia’s ability to build homes.
The three (3) biggest barriers for acquiring the Australian housing dream are:
- Loan repayment affordability (as opposed to the price of the property),
- Government handling fee theft (aka ‘stamp duty’), and
- Raising a big enough deposit to meet regulatory requirements.
In the absence of a single government department showing an ounce of innovation in this space, I have come up with six (6) separate initiatives. My hope is to start a meaningful national discussion, leading to reforms which benefit millions of Australian households for generations to come.
Construction will take care of itself – buyers will ensure that. The primary focus must be on policy innovation which address the genuine barriers that all buyers face, not just first home buyers.
The current collection of policies in this country fail to adequately support the aspirations of the nine (9) aforementioned categories of housing demand.
Mobility barriers created by archaic policies produces insufficient supply of established homes, which represents 98 percent of what buyers want. And there will never be enough supply of rental accommodation if investors aren’t supported.
Whereas federal and state government departments continue to waste time trying to put shoes on caterpillars, here are my six (6) innovations:
- 45-year loan terms
- National phase out of stamp duty by 2028
- Balloon payments
- Separating ‘Real Risk’ from ‘Robotic Risk’
- Social Housing Accountability
- Superannuation, LMI & Family Equity
45-year home loan terms
The ceiling for loan terms is extended to 45-years for borrowers up to 30yo, and to 40-years for people up to 40yo.
Most of life’s biggest achievements don’t occur without debt. Those of us who have studied Australian real estate history know that there have been eras when the maximum home loan term was 3, 8, 10, 20, 25, 30 and 40-years. A loan term is nothing more than an arbitrary time frame.
Providing the option of a longer term creates mortgage payment flexibility and better resembles how people live. This option will reduce a barrier for lifestyle advancement, produce an increase in supply of (established) homes for sale, improve housing affordability and improve human mobility.
Miles more important than the size of the debt is the ability of the borrower to service the debt. And the earlier the system allows a borrower in, the smaller the mortgage will be.
Imagine the first home buyer who convinces a credit assessor that they can comfortably afford a mortgage payment of $3,600 per month. Under the current archaic system, they can borrow $600,000 (assuming a 6 percent interest rate). For the same monthly outlay, if there was the option of a longer loan term, they can afford the benefits of a significantly better asset with improved borrowing power over 40-years ($655,000) and 45-years ($675,000).
The option for a property buyer to take a longer term is about creating more pathways for people to take, as opposed to lengthening an existing pathway which many Australians are unable to enter.
Property owners will continue to strive to repay their debt as quick as possible, but this innovation will improve the buyer’s capacity. As a result, the ability to fund a renovation improves, more existing owners will upgrade, there will be an increase in the supply of established properties for sale and more first timers will enter the market sooner.
This initiative does not mean that everyone who buys a property at (say) age 30 or 40 is in debt through to age 75 or 80, respectively.
It does mean that they can progress their life earlier than what the current archaic system permits.
The reality is that the household income will increase significantly over the years, many will elect to accelerate loan repayments, the law of averages says that the property value will triple over 20-years, and they’ll sell the property well before the loan term expires.
Stamp duty phase-out
Every state government should commit to an immediate freeze on stamp duty and real estate transfer charges to an across-the-board flat fee of $30,000. From 2028, a new national policy (raising GST to (say) 11 percent) should replace stamp duty and land tax.
Whether trying to move home, buy one’s first home or investing in a property for an extra renter to have a home, the fact that these important aspirations are conditional upon people paying a compulsory state government ‘handling fee’ of (typically) $40,000 to $60,000 is this country’s greatest example of financial theft.
Australians paid a whopping $200 billion in stamp duty charges and $90 billion worth of land tax to state and territory governments over the last 10-years. It’s an enormous mobility barrier.
Any official who pretends to care about important housing matters such as supply, affordability, mobility and the rental market while still charging tens of thousands of dollars just to lick an ice cream is an enormous hypocrite.
Others have already made the suggestion to replace the large one-off stamp duty fee with a smaller annual ‘land tax.’ While the proposal might benefit some buyers, it will disadvantage other property owners. And no government could ever be trusted to avoid frequently ratcheting up the annual fee.
Accordingly, I am in favour of completely removing both property taxes, significantly improving human mobility and governments making up for their lost tax revenue through a national GST increase.
All repeat home buyers with 30 percent or more equity in their home should be given the option of structuring their loan with a 40 percent balloon payment at the end of their loan term.
The benefits are similar to a loan with a longer term, however this initiative is primarily intended to support an existing homeowner with ambition to upgrade. Deferring 40 percent of the loan balance to the end of the term increases the buyer’s capacity.
If it’s good enough for credit providers to already approve loans to purchase depreciating assets such as a motor vehicle without any upfront deposit and with a 30 percent balloon payment at the end of 5-years, what’s wrong with a balloon payment on a loan for an asset which historically appreciates 3-fold or more each 20-year period?
To advance their own dream, more existing homeowners will list their existing (established) property for sale, thereby increasing resale supply and supporting someone else’s dream. It provides much needed lubrication to the current locked-up system.
Imagine an existing homeowner who convinces a credit assessor that they can comfortably afford a mortgage payment of $4,500 per month. Under the current archaic system, they can borrow $750,000. For the same monthly outlay, if there was the option of a 40 percent balloon payment, the borrowing power increases to $830,000, meaning they can afford a better asset.
Real ‘Risk’ versus ‘Robotic Risk’
On the condition that the loan to purchase the primary place of residence (PPOR) is on a debt reduction structure (P&I), anyone with more than one real estate asset should be afforded the option of choosing an interest only structure on all other loans for an evergreen term. In addition, APRA should reduce the current debt servicing buffer from 3 percent to 2 percent. And borrowers with a PPOR plus 2 or more investment property assets should be assessed by applying a 1.5 percent buffer (on the condition that their combined LVR is 65 percent or better).
Australia is regularly in short supply of rental accommodation and governments have only managed to fund 9 percent of the rental pool. Lateral thinking is required so that more of the small few who want to fund rental accommodation are supported. Society needs to be better than adopt tall-poppy bad attitudes.
The current status quo is for a maximum interest only term of 5-years and an expectation that the loan must then convert to an amortised repayment plan down to a zero balance. But why?
The primary purpose of purchasing an investment property is financial gain, not homeownership. Over time, equity increases as the asset value grows. Rental income generally increases over time, too, while expenses are largely linked to the rises and falls of interest rates.
If a credit assessor already considers an application to be an ‘acceptable risk’ to buy an income-producing asset with an interest only loan, how is the risk any greater in 5-years’ time?
On the law of averages, in 5-years’ time the rental income will be higher, ditto the borrower’s personal salary, and the value of the property asset has increased.
The RBA already confirm that credit to investors is of a higher quality than owner-occupied credit. Most investors are on everyday Aussie incomes, but the choices that they make with their income and their goal-orientated mindset is reflected in the quality of their credit application.
Despite all governments refusing to invest enough to increase the size of the rental pool, many thousands of Australians who already possess a high-quality credit standing would gladly do so.
Unfortunately, instead of treating these people with the respect that financially responsible adults deserve, the system treats everyone as a robot. Countless applications for investment credit which should be approved get declined and the pressure on the rental market unnecessarily continues.
Social Housing Accountability
Every state government should have a lawful obligation to increase the size of the state-owned housing stock by no less than 5 percent each year. Moreover, details of all government-owned assets acquired for the purpose of housing the general public should be recorded in a register which is updated quarterly and available for all of the public to view. Backdated to 1990, the minimum detail recorded should include the total volume of government-owned dwellings in each township, the total volume of bedrooms in each township, total volume of bedrooms occupied, total dwellings sold last quarter, total dwellings added last quarter, total dwelling inventory at the end of each quarter.
Every state, territory and the federal government must be held accountable. The amount of taxpayer revenue spent each year on publicly-owned assets to house citizens with legitimate disadvantages must be public knowledge.
It’s one thing for politicians to be recidivists for administering unintelligent housing policies, it is totally unacceptable that the general public has no visibility over the ongoing use of taxpayer monies on housing.
Governments are very good at standing on a podium and throwing around big figures which make it seem like they’re doing a lot of heavy lifting. But they never stand on the podium to announce the selling of rental assets or provide proper context of the minuscule total contribution that they’ve made to a very large pie.
According to data I obtained from the government’s own statistician (the ABS), the size of the government-owned rental pool is currently a piddly 300,000 dwellings. With 8.5 million more people living in Australia, governments provide 100,000 fewer rental properties now than they did 30-years ago.
It means that 91 percent of homes that 9 million Australians currently rent are paid for by everyday Aussie workers who earn less than $100,000 per year (source: ATO).
Superannuation & LMI
On the condition that a first home buyer (FHB) can demonstrate that they have saved no less than half of the required deposit from their own income, they have the option of withdrawing up to $50,000 from their superannuation balance to complete the purchase of their first home. In addition, governments should implement an economical mortgage insurance offering which supports loans for FHB’s up to a 95 percent LVR.
Aside from the aforementioned stamp duty financial theft, the biggest hurdle for people getting the first foot on the property ladder is raising the deposit.
In a world where financial literacy is not taught anywhere, I do understand and respect the important role that superannuation plays in supporting retirement lifestyles. But superannuation is littered with flaws of its own, including but limited to the fact that the age that one is able to access superannuation is fast approaching 70. That helps no one who wants to exit the workforce 10-years before then.
Granting someone in their 30s access to a portion of their superannuation on the strict basis that it is used as a deposit on their first home (an appreciating asset) could mean they get their foot on the property ladder 10-years earlier.
In dollar terms, the difference between the size of their mortgage over that 10-years could be $600,000 in 2023 compared to $1,200,000 in 2033. Surely this is an obvious financial benefit which will carry through to a better retirement lifestyle.
So there are my suggestions.
I am certain that the Negative Nelly’s of the world won’t be able to resist pointing out their ‘concerns.’
Regardless, we have decades of proof that the current system does not work and merely focusing on construction will not fix anything.
No system is perfect. But progress occurs by focusing on net gains, as opposed to getting paralysed by concerns.
More families get fed if the focus is on making more omelettes, rather that the potential of a couple of eggs getting broken.
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