Do investors have a responsibility for housing affordability?

Do investors have a responsibility for housing affordability?

Housing affordability

They may be regarded as contributing to housing unaffordability but investors could also be the ones to help first home buyers enter the market, argues an economist.

According to independent economist Saul Eslake, there is a direct correlation between the decline in home ownership rates, escalating prices and an increase in the presence of property investors.

He was referring to Australian Bureau of Statistics (ABS) figures that show that 25 years ago, first home buyers and property investors each accounted for about 18 per cent of the property market.

 

These days, the share of financing going to first home buyers is closer to 10 per cent with investors’ share growing to more than 45 per cent.

Speaking to Nest Egg, Mr Eslake refuted federal treasurer Scott Morrison’s claim that investors aren’t “squeezing” first home buyers out of the market, but acknowledged that changing the attitudes of individual investors towards property was a challenge in itself.

“I don't think you can change the attitude of individuals, the — as Mr Morrison likes to say — mums and dads trying to get ahead,” Mr Eslake said.

“My response to that [characterisation] is always: those mums and dads ought to stop and ask themselves, ‘Of whom are we seeking to get ahead through property investment?’ And the answer increasingly is, as some mums and dads are starting to recognise, is their own children.

“One of the things that's prompting them to recognise that is how difficult it is for them to get their 20 and 30-year-old kids out of their house.”

Mr Eslake said negative gearing means property investors tend to favour capital gains over rental income.

However, institutional investors could offer a ray of hope for those struggling to get a toehold in the market.

“In other countries that's not uncommon,” he explained. “One of the things that's unusual about Australia is that rental housing stock is owned by so-called mum and dad investors.

“In most other western countries the rental housing stock is owned by some combination of governments, not-for-profits, companies specifically set up to invest in rental housing and make a profit out of it and investment institutions.”

However, while rental yield remains comparatively low in Australia and land tax exists, the appeal for institutional investors also fades.

In order to attract investors, Mr Eslake said that “almost inevitably there would have to be either some tax concession on rental income for investors in affordable rental housing or alternatively some kind of ongoing commitment to a government subsidy to top up the returns”.

“It's also, to some extent, what Scott Morrison is trying to do with measures in his most recent federal budget, although they're not directed at attracting institutional investors so much as philanthropic investors”.

Nevertheless, without greater government or institutional investment into social and affordable housing, Mr Eslake predicts that the problem will only increase.

A global phenomenon

According to Credit Suisse senior equity analyst Dan Scott, Australia, along with Hong Kong and New Zealand, is one of the top three least affordable countries but rising populations are affecting housing affordability globally.

Mr Scott said: “According to the McKinsey Global Institute, if current trends continue, the number of households that occupy inadequate housing or are financially stretched could reach 440 million (that gives around 1.6 billion people) by 2025. To fill this gap, the investment in construction alone would amount to US$9-11 trillion dollars. With the cost of land, the total market value estimated could be as high as US$16 trillion dollars.”

While governments worldwide have started taking action to develop housing infrastructure, Mr Scott said the affordability gap is still “too large to be met with government subsidies and income support alone”. As such, there’s a need for market-based approaches.

“The most powerful lever to create affordable housing is to reduce land and construction costs. By developing satellite cities outside the big centres but along public transportation networks, land costs can be reduced by more than 50 per cent,” he suggested.

“Private companies developing land in partnership with government entities as well as manufacturers of rail-based local transport systems should benefit in this context.”

Additionally, architecture, engineering and construction firms could also benefit from the “huge demand for affordable housing” while low-cost building materials can also lead to “meaningful savings”.

“Operating and maintaining property at reduced costs contributes meaningfully to affordable housing as well. Companies providing insulation, windows, efficient heating and air-conditioning systems benefit from this multi-year trend,” he continued.

“Finally, providing access to affordable housing loans is the third lever of making housing affordable.”

Pointing to the practice of financial intermediaries buying loans from lenders before issuing securities to investors, he argued that by securitising mortgage debt, investors can also grab a slice of the underlying assets with reduced risk.

“For borrowers, costs are lowered, as they can access broader and better funding,” he concluded.

Do investors have a responsibility for housing affordability?
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