Quarterly Essay 92
Author: Alan Kohler
Publisher: Schwartz Media
Reviewer: David Topp
Housing. A topic dear to the hearts and close to the minds of this profession. Either as owners of homes. Or as recipients of briefs pertaining to peoples’ homes. Or both. The varieties of housing related briefs are many. Land titling litigation, mortgagee in possession actions, equitable claims to real properties registered in other persons’ names, defective performance of domestic renovation contracts and executors taking action to evict hold-overs in a deceased’s house, post-death, are but five examples of housing themed litigation. I’m sure readers could conceive of plenty of others.
The cost of home ownership, along with cost of living concerns, generally, are the two primary focal points of politicians and commentators at present. Into the mix comes Alan Kohler’s contribution: THE GREAT DIVIDE: Australia’s housing mess and how to fix it (‘Great Divide’).
Kohler begins by citing the approximate 3.5 times household income cost his parents paid during 1951 for their first home. Which ratio also applied 30 years later when he and his wife purchased their own first home in 1981[1]. However, by August 2023, the median Australian house price had risen to $732,886, being 7.4 times annualized average weekly earnings[2]. This extent of disparity forms the ‘basis’ of Great Divide, namely, that ‘the high price of housing is undermining social cohesion and the proper functioning of the economy and the nation … [and] has distorted Australian society over the past twenty-five years’[3].
Has it though? Distortion of society and undermined social cohesion are strong charges to make. Compared to the United States over the last quarter century, one could argue that those statements much better describe that nation than ours. Australia has, after all, been spared the 2020 Black Lives Matter nationwide riots after George Floyd’s death, shooting massacres too many to mention and the January 6, 2021 invasion of Congress. Even the 2024 cause de jour – university campus arguments over the current Gaza Strip conflict – are being conducted on this side of the Pacific without the violence afflicting varsities state-side. ‘Sydney [as opposed to a US city] is the second-most expensive place to buy a house on Earth, after Hong Kong’[4]. Yet our social cohesion is demonstrably greater than America’s.
More on the politics later. Turning now to the facts and historical aspects of Great Divide – easily its strongest suits – Kohler cites the year 2000 as marking the crossing of the Rubicon, away from the relative closeness of the income/house price ratio he and his parents both observed as first homeowners to the contemporary great divide that made inevitable the way in which Kohler entitled his Essay. Four turn-of-the-millennium phenomena are cited for the ‘supercharging’ of housing demand between 2000 and 2023, namely, the Howard Government’s 50% capital gains tax discount, re-commencement on 1 July 2000 of the First Home Owner Grant, 200 basis points worth of interest rate cuts between February 2001 and February 2003 and a tripling of net migration between 2003 & 2009 which was not matched by new housing supply[5]. In turn, because most immigrants rent at first, combined with lower rates of homeownership among extant Australians, this ‘has exacerbated a rental property shortage that has been bubbling since immigration doubled in 2006’, creating a national capital city record low rental vacancy rate of 1% compared to a ten-year average of 2.8%[6].
18 pages of the 86 page Essay are devoted to Kohler’s in-depth demand side analysis, preceded by 24 pages of explanation of 3 broad supply side crunches which create price pressures at the other end of the traditional supply and demand equation. The three crunches are public housing, Australian preferences to coalesce in the major cities and the roles of state and local governments.
Turning first to public housing, Kohler cites two failed referenda: that of the Chifley Government in 1948 seeking to give the federal government permanent control of house prices and rents, which failed by 59.34% to 40.66%, and Gough Whitlam’s December 1973 reprise seeking to control all prices, not just housing; ‘although Whitlam managed to increase the Yes vote to 43.81 per cent [it was] still nowhere near enough’[7]. As an aside, Great Divide just so happens to be the immediate Quarterly Essay published after Professor Megan Davis’s Voice of Reason on Recognition and Renewal, also reviewed by this writer in these pages[8], into the then upcoming Uluru Voice From the Heart referendum, which, at 60.06% to 39.94%[9], was lost by a very similar margin to Chifley’s in 1948. Students of history will, of course, know that the third of the ‘big 3’ prime ministers during the period between the end of World War 2 and 1975 was Robert Menzies. By the time Menzies and his social services minister Sir William ‘Bill’ Spooner retired in the mid 1960’s, ‘the ideal of home ownership had been elevated to an almost religious status…and the destruction of public housing was well underway’[10], Kohler going further by strongly criticizing the way Menzies folded housing into social services: ‘It doesn’t belong there: housing is not welfare, it’s an economic right’[11].
That 67% of our population live in the capital cities[12], along with a generalized eschewing of moving out of cities into regional areas[13], will always make matters on the supply side of the equation ‘very hard indeed’[14]. And this is before Great Divide turned to the next hurdle: the role of state and local governments of which, by default {due to land use not being mentioned in the Constitution} take up the policy reins. Without zoning, ‘and the restriction on land supply that comes from it, housing would be an average of 36.8 per cent cheaper’ in Perth, Brisbane, Melbourne and Sydney according to a Reserve Bank commissioned report directed to the impact of zonings on house prices[15]. Kohler explains how the post World War 2 ubiquity of cars due to their new-found affordability meant that cities could afford to stage houses on large blocks, 20-30 kms away from CBDs, in all directions. The result is to have placed planning and zonings ‘in the hands of local councils elected by the local residents, who became NIMBYs as soon as they moved in. Serious medium density was out. On top of the control exercised by councils, private ownership… meant it was impossible for developers to get hold of enough land to build more than four units at a time, and still is’[16].
And not just in the inner cities is the search for suitable land beset with difficulties. ‘Minister under fire for slow pace of reform’ is an attention grabbing title of any news report. However, the anger cited was not directed towards state and federal housing ministers. Rather, it was from the Australian Conservation Foundation, Birdlife Australia and the Wilderness Society, amongst other groups, towards Federal Environment Minister Tanya Plibersek for alleged failure to deliver on promises to create an Environment Protection Agency to handle development decisions and enforce regulations, national standards to rule out damage to critical habitats and strengthening of the Environment Protection Biodiversity Conservation Act[17]. Be those arguments as they may, a natural concomitant effect of that list of demands being met in full is a lessening of lands capable of being released on which to construct new homes on and beyond the fringes of major cities.
Great Divide does not delve deeply into this particular policy conflict, apart from a tangential, though, of course, completely correct, observation that ‘…the geographic wealth gap is being widened by climate change, as floods and bushfires make living in large parts of the country uninsurable and financially crippling, but many families have no choice but to stay where they are because those areas are low-priced and they can’t afford to move’[18].
This particular notion was created in Great Divide wholly independently to that postulated in your present reviewer’s Brisbane Breached, The Story of a Drought Defaulted Floodplain (‘Brisbane Breached’): ‘Rocklea, an inner-southern suburb, is … serviced by a direct railway line into the inner city, making it… an … attractive residential proposition. In addition, Rocklea is in close proximity to public hospitals … For one of the … Rocklea residents … interviewed, the fear of moving further away from medical care seemed a greater risk than living in the same house so badly damaged in both 2011 and 2022, even when forced to convert their garage to a makeshift living room and kitchen… The inferential trade-off for that interviewee being that, to sell and purchase something genuinely floodproof, would involve moving much further away from hospital care than the actually quite conveniently located, in all senses bar flooding, Rocklea … The dilemma is palpable. Permanently removing 500 houses forever…to add to the 112 homes in Rocklea already discontinued … means 612 persons at least – plus their family members – added to the increasingly desperate pool of rental and mortgage applicants in a market as competitive as Queensland’[19].
Haplessly flood-prone suburbs like Rocklea, Goodna and the almost sadistically named Depot Hill – for a hill, it is anything but. Rather, it is a low-lying outer Rockhampton suburb on a natural Fitzroy River overflow floodplain – ought never have been built on in the first place. However, they were and, hence, remain established suburbs in which houses, businesses and schools operate, making complete levelling and removal of their many occupants impossible.
Proving that, for the supply side of the land and housing equation, it is not only local government zonings and not in my backyard animus towards higher density living that are hurdles to supply constraints. There are many many more.
Kohler’s thesis is that it will be ‘impossible’ to return to the status quo of his parents’ era ‘without purging the idea that housing is a means to create wealth as opposed to simply a place to live’[20]. He explicitly argues that ‘[T]o achieve anything in life you have to aim high … the aim must be to return the ratio to three to four times average weekly earnings, as it was twenty-five years ago’[21]. How then to achieve such a goal? Especially, one as lofty as that? And even more so when, based on the current average full-time adult wage of $99,174.40 per annum, returning to the turn of the millennium’s house price-to-income ratio would require the latest national median house price of $740,668 to have to halve to $370,000[22].
To merely state that proposition highlights its obvious impossibility. Something Kohler admits in the immediate next sentence: ‘…that’s not going to happen, of course, and it wouldn’t be a good idea even if it could’[23].
Rather, his suggested avenue to this goal is to increase the average full-time adult wage to $210,000, annually, so as to re-create the 3.5 times ratio[24]. At 4% growth in incomes per year, that would take about 18 years. Therefore 15-20 years of static house prices, co-existing with sustained wage growth of 4% per year would be required to restore that particular balance. ‘[T]hat sort of timeframe might also get Australians out of the habit of thinking that house prices always rise and that housing is the best way to build wealth’[25].
‘Might’ being the operative word. Especially, as how such a change away from this mindset would, of itself, create a concomitant failure of any form of rise in housing prices on the ground over the next 15-20 years. No causative factors were nominated. Besides, a desire to find a place to live and pay, accordingly, is, after all, an instinctive feature of the human condition. As is the subsequent desire to maximise the price received when the sale side of the property acquisition equation occurs. So long as other investment vehicles have drawbacks of their own – the unavoidable volatility of shares traded on stock exchanges and the erosion of the real value of funds earning bank interest only in these days of high inflation – the ‘habit of thinking that … housing is the best way to build wealth’ seems less than a habit than a concession to empirical reality.
Ironically, Kohler quotes Chinese President Xi opining in the same way: ‘He’s been banging on … for five years, saying that housing is not for speculation but for living in, but no one seems to be listening in China’[26].
If a leader who wields such immense power to the exclusivity of all others like Xi is not being listened to, what hope does a Prime Minister in democratic Australia – with a national history of dissent towards government and a free and open press only too willing to so engage – have to convince the populace that Australians must be disabused out of the habit of thinking that house prices always rise and that housing is the best way to build wealth?
In any event, Kohler answers his own question by pointing to the only phase of Australia’s history of unchanged house prices for a period as long as the 15-20 year time period he prescribed: 1930 – 1949, due to the Great Depression and then the period of price controls in World War 2[27].
A repeat of the 1930s depression and/or a third world war does seem a rather high burden to bear to achieve a holy grail of returning house prices to 3.5 times annual earnings.
Admittedly, no such case is made. Solutions actually postulated in Great Divide are to cut the CGT discount to 25%, limit negative gearing to new builds and to link immigration rates to the capacity of the Australian construction industry. On the supply side, pressure on councils is oft-mentioned, including a suggestion by demographer Simon Kuestenmacher to force all local councils to meet a quota of medium-density housing approvals, failing which money would be taken from those councils. ‘And if they don’t meet it for two years in a row, sack them’[28]. Still though, there’s much in the way of hope over reason in these entreaties. For a start, the constitutional efficacy of how such penal-style laws against councils failing ‘to take one for the team’ could be enacted then enforced was not explained. Not only that, it actually seems that the more challenges local councils come under, the more emboldened they are to resist; not three months after Great Divide’s publication, The Australian’s Margin Call reported that James Packer, one of this nation’s wealthiest – and most well-connected – people, ‘is still battling on with his $100m Edenville Corio project, a property play anticipated for suburban Geelong. That one’s questing through reams of red tape in the Victorian Civil and Administrative Tribunal owing to repeated rejections by local planning authorities’[29].
Proving that, if James Packer gets stymied in such ways, what hope do run of the mill property developers, already facing blowouts in the costs of labour and materials, have?
The Melbourne based Kohler goes on to cite his city’s many ‘Victorian or Edwardian terraces and villas [that]…can’t be pulled down for heritage reasons’[30]. The Brisbane equivalent is the way in which real estate agents love to promote the magic words ‘post-war’ to describe houses built post-1945, due to their substantially greater ability to be knocked down. As opposed to pre-1945 Queenslander style houses which are heritage protected. Meaning that owners of the latter cohort of properties must spend large amounts of money to maintain and improve their homes due to the lack of easy ability to knock down and re-start. The opportunity cost being the consequential directing of resources of the building industry, both human and capital, to renovations rather than new-builds. In this humble reviewer’s opinion, controversial as this may sound to some, if the greater good of housing an increasing number of homeless persons is to be better achieved, substitution of renovation by creation would be a good start. Heritage may be dear to some. However, it comes at a cost, and not just to the direct user but society as a whole. The very society whose cohesion Kohler expressly stated was being ‘undermined’ by the present state of housing prices.
Kohler concludes Great Divide this way: ‘It won’t be enough simply to restore the amount of housing construction to what it was before the pandemic, as the federal government is now aspiring to do’[31]. Rather, the restoration of the 3.5 incomes to prices ratio ‘will require active, and serious, government intervention’[32]. Which, in turn, will depend on which governments – at all 3 levels – members of the voting public, with their permanently differing and conflicting vested interests, elect, re-elect or depose every 3 and 4 years.
Meaning that the genie that escaped the bottle back in 2000 will remain elusive. Only time will tell if it can be recaptured, wholly or even in part, to attempt to alleviate and recalibrate during the second quarter of our current century.
[1] Great Divide, at p. 1
[2] Great Divide, at p. 2
[3] Great Divide, at p. 76
[4] Great Divide, back cover blurb
[5] Great Divide, at p. 52
[6] Great Divide, at p. 13
[7] Great Divide, at pp. 25 & 26
[8] https://www.hearsay.org.au/book-voice-of-reason-on-recognition-and-renewal/
[9] https://results.aec.gov.au/29581/Website/ReferendumNationalResults-29581.htm
[10] Great Divide, at p. 31
[11] Great Divide, at p.32
[12] Great Divide, at p.37
[13] Great Divide, at p.38
[14] Great Divide, at p.41
[15] Great Divide, at p. 43
[16] Great Divide, at p. 45
[17] Mike Foley ‘Minister under fire for slow pace of reform’ The Sun Herald 21 April 2024, at p. 17
[18] Great Divide, at p. 5
[19] Brisbane Breached, at pp. 155, 156, 166 & 167
[20] Great Divide, at p. 4
[21] Great Divide, at pp. 76 & 77
[22] Great Divide, at p. 77
[23] Ibid
[24] Ibid
[25] Ibid
[26] Great Divide, at p. 4
[27] Great Divide, at p. 77
[28] Great Divide, at p. 79
[29] Yoni Bashan Margin Call: ‘Packer in new play in property’ The Australian, 2 April 2024, at p. 13
[30] Great Divide, at p. 81
[31] Great Divide, at p. 86
[32] Ibid
