“Canberra families are being shamed for daring to want to live in a standalone dwelling rather than to conform with the ACT government’s ideological commitment to high-rise development and life in a flat.” JON STANHOPE and KHALID AHMED take a deep dive into affordable housing…

HOUSING affordability has been a central element of the discussion generated by rising inflation and increasing interest rates. 

However, declining affordability is not a recent phenomenon. It has been building up over a long period. 

In its recent Budget, the Commonwealth Government made a major commitment to improve housing affordability – the first significant policy statement on housing from a federal government in decades. 

In this and subsequent articles, we aim to identify the factors driving unaffordability and assess the feasibility of the policy targets in the Federal Budget. 

Successive increases in the official cash rate, promptly passed on by the banks, over the past several months have added an average of about $1350 to monthly mortgage costs. For many households, particularly those who entered the housing market recently, the monthly increase in mortgage costs is much higher. 

Market research indicates that more than half (53 per cent) of mortgage holders will be in financial stress once the cash rate reaches 3 per cent, ie, with just one further increase of 0.25 per cent.

The interest-rate hikes are, of course, designed to combat inflation. The rise in inflation has been largely driven by external factors, such as the war in Ukraine and the consequent increase in energy prices, and disruptions to supply chains. The relevant domestic factors include labour shortages, potential impacts of floods on agricultural production, and, most significantly, a failure to secure domestic gas production for domestic supply.

However, at least at a macro level, the policy does make sense, ie, increase the cost of money, thereby reducing consumption and, in turn, put downward pressure on prices. 

However, it’s important to acknowledge the distributional impacts of rising interest rates. There are two broad cohorts to consider: those with a mortgage, and those without a mortgage and consequently with savings and investments. 

Faced with increased mortgage costs, the former group is highly likely to endure financial stress and will be forced to cut not only discretionary but possibly essential spending, for example, on healthy food and health care. 

However, the latter group will benefit from rising interest rates with higher returns on their savings and investments thus mitigating the impacts of inflation. 

While not seeking to frame this as a “have and have-nots” issue, it’s important to acknowledge that households most prone to financial stress will perversely bear a relatively greater burden in fighting inflation. Interestingly, mortgage costs are not included in the inflation figures.

In addition to mortgage holders, renters are also experiencing financial stress from increasing interest rates as landlords pass on the increased costs of finance. 

While the genesis of the current spike in inflation can be attributed to external factors, the origin and basis of the financial stress being experienced by many ACT families relates more directly to the increasing dearth, over the last decade, of affordable housing in Canberra. 

Unfortunately, the blame game has been a defining feature of public discourse on the causes of the increasing unaffordability of houses; eg, the federal government is blamed for not investing in public housing; RBA for low interest rates; Australian Prudential Regulatory Authority (APRA) for its lax macro prudential supervision; banks for their lending practices; and even households for wanting to enter the housing market.

“The fact is there were not and are still not nearly enough suitable dwellings or available land to meet the needs and housing choice of Canberra households.

Here in the ACT, households (in the main families) are, in effect, being shamed for daring to want to live in a standalone dwelling rather than to conform with the ACT government’s ideological commitment to high-rise development and life in a flat. 

In what can be described as a remarkable distortion of basic concepts of demand and supply, the Housing Minister Yvette Berry and the Chief Minister and Treasurer Andrew Barr have claimed that the extraordinary increase in land and house prices in Canberra are not due to a lack of supply, and that the ACT government had been meeting demand. 

Such claims are clearly nonsense and obviously do nothing to solve the problem of housing supply and affordability and in truth are little more than political spin designed to deflect responsibility for the chronic undersupply of land and detached housing over the past decade.

Put simply, many households borrowed too much to buy a dwelling that cost too much in order to scamper into home ownership at a time the prospects of doing so seemed to be receding at an ever-increasing pace. 

The fact is there were not and are still not nearly enough suitable dwellings or available land to meet the needs and housing choice of Canberra households, most notably in specific sub-markets of the housing market, especially the market for detached housing.

In this context, the commitment by the federal government to build “one million new, well-located homes” over five years from 2024 is encouraging. What is even more pleasing is the statement by Treasurer Dr Jim Chalmers that “it’s more important than ever that we work together to ensure there is an adequate supply of affordable housing where it is needed – close to jobs, transport and other services”.

For its part, the Commonwealth Government has committed to the supply of 10,000 affordable dwellings through initial availability payments of $350 million over five years. Beyond that period, incentive payments of $70 million a year for the next 25 years will be funded by the National Housing Infrastructure Facility. Under the Accord, states and territories will free up land, and make in-kind or financial contributions to deliver a further 10,000 homes over five years.

It is important to note and applaud the fact that, finally, there is an acknowledgment, albeit by the Commonwealth Treasurer and, by extension, the Minister for Finance no less, that the problem at the heart of the housing affordability crisis in Canberra and across Australia is a lack of supply, which is “affordable and where it’s needed”. That must be a good start.

Jon Stanhope is a former chief minister of the ACT and Dr Khalid Ahmed a former senior ACT Treasury official.