Australia’s household debt-to-income ratio is a regular source of scary headlines. Every pet shop galah knows we’re among the most indebted people on Earth – sometimes it seems we’re almost proud of it.
What’s much less understood is that we’re being driven to the top of the debt pile by government policy. And, in the process, it is effectively government policy to make our housing among the world’s most expensive.
Low interest rates since the GFC have encouraged much greater borrowing throughout the developed world.
Throw cheap money at Australians and they’re guaranteed to compete for housing, driving up prices.
The Reserve Bank publishes updates a graph each month effectively underlining the relationship between our debt and housing prices.
But what pushes Australian household debt higher than most is a distinguishing government policy: The vast majority of our rental housing is provided by households – “mum and dad” landlords. Government and build-to-rent housing is relatively rare here, unlike in much of the developed world.
Australia’s percentage of government and non-profit housing has been steadily run down from more than 7 per cent of total housing in 1991 to 4.2 per cent in 2016. At the same time, other attempts to make housing affordable for low-income earners and those on social welfare have concentrated on subsidies for private landlords.
Given that the mortgage is the biggest debt for the vast majority of households, adding borrowing for investment properties inevitably boosts total debt.
And, perversely, relying on households to provide the vast majority of rental accommodation also is expensive for the federal budget.
Peter Mares, author of No Place Like Home: Repairing Australia’s Housing Crisis, says the government is subsidising the private rental market ineffectively and inefficiently through negative gearing, the capital gains tax discount and Commonwealth Rent Assistance, collectively costing more than $16 billion a year in forgone tax revenue and budget outlays.
The reliance on private rental accommodation has caught the Reserve Bank’s eye as well. The problem was spelt out by assistant governor Michele Bullock in a recent speech when she explained why our household debt-to-income ratio has increased by more than most.
“The increase in household debt over the past few decades has been largely due to a rise in mortgage debt,” Dr Bullock said.
“And an important reason for the high level of mortgage debt in Australia is that the rental stock is mostly owned by households. Australians borrow not only to finance their own homes but also to invest in housing as an asset. This is different to many other countries where a significant proportion of the rental stock is owned by corporations or co-operatives.”
Dr Bullock provided a useful graph to illustrate the point. There are three countries with higher debt ratios than Australia – but their owner-occupier mortgages are tax deductible, making them cheaper to service. Every other country had a higher percentage of government and corporate housing ownership.
“There is a clear tendency for countries where more of the housing stock is owned by households to have a higher household debt-to-income ratio,” she said.
Australia’s real housing crisis isn’t for those who find buying a strain or who have to buy a less desirable property than they’d like, but those on low incomes who will never be able to buy and are forced to always rent in an expensive private market.
If governments – state and federal – took housing affordability seriously, that $16 billion a year in existing effective rental subsidies could build a lot more social housing or more efficiently subsidise build-to-rent institutional investors that operate on longer time frames and can provide more secure tenure for rental households.
Housing affordability and reliance on private rental are bigger issues than just the financial stability question raised by high household debt. The social costs of short leases and insecurity are large but unquantified.
Peter Mares has cited Canada as an example of a country prepared to get serious about housing affordability.
“Ottawa is spending C$4.8 billion to increase the quality and supply of public and social housing provided by provincial governments and community organisations, and putting another C$11.1 billion into a National Housing Co-Investment Fund offering low-interest loans to build affordable housing for the private rental market,” he has reported.
But Australia continues to muddle along with shrinking public housing and token efforts around the fringes for financing non-profit affordable housing.
They are policies that are going nowhere towards solving the problem.