As the HIA advocates more Government handouts to stimulate the home building industry I wonder "has Australia's peak housing body has lost its way?"
The IMF are now saying that Government incentives, Stimulus packages and low interest rates hurt home builders and home owners because they disrupt housing sustainability. That is, they are the cause of our housing problems, not the solution: The International Monetary Fund [IMF] gets it, so why doesn't the HIA get it?
Short term housing solutions [incentives] create long term housing problems
The HIA still does not get what now even the IMF understands. That Government home building incentives cause house inflation that has unintended consequences. Those consequences include collapsing home sales and home values, foreclosures and falling home ownership in Australia. We have avoided what has happened in the US so far, but not because of the efforts of the HIA, but in spite of them. Now we need to make the hard tough decisions, that we might have been wanting to avoid facing.
Are home builders to blame to blame for the housing sales slump?
A recent HIA article has put the fall in home buyers at the feet of House builders themselves, saying that they are not innovating home designs.
I don't buy this argument. Yes, innovation is a necessary part of the home building process, but a home builder's job is to build, not innovate designs. That's an architects job.
The fact is that home builders have had to deal with GST, and added government requirements and standards to build homes over the last ten years, and that the fact is that homes would still be affordable, were it not for the price of the land component. And home builders are not responsible for that. So I feel that the HIA needs to look at why homes are no longer affordable, not blame its own members for falling home sales, because they are clearly not to blame.
What's Wrong with the HIA
An undeniable truth. Any industry that requires constant Government assistance over 10 years, and still fails to deliver on its true core purpose of housing Australians, needs to have a good hard look at itself.
The HIA did not create the problem. But in my view it has failed to see the problem. They are at the wheel of the train when it crashed. Not seeing the problem has meant it has not used it resources it has to avert the disaster.
Are interest rates the problem?
If the interest rates are the problem, what is the question? If the question is why are homes unaffordable, too high interest rates are still not the answer. The answer the house prices are too high. If house prices were half what they are, then interest rates at 12% would be affordable.
We have allowed ourselves to overlook the obvious. If land prices were half what they are, then established home prices would be lower, because of competition with new homes, and home builders would be busy.
In my view, house prices have got ahead of themselves because interest rates have been too low for too long. This has allowed land prices to get too high.
By the RBA setting interest rates too low for too long, home buyers have lost their sense of value and affordability.
If the monthly repayments were affordable when the mortgage interest rates were 5.5%, how could they be affordable at 10%? The HIA should have seen this ahead, but has said nothing on the subject. The Government should have seen this ahead. But it failed to.
The HIA just moan every time the rates have been increased from the lowest rates in history. This is hardly a realistic approach to the problem.
Even Governments and Opposition members have a go about interest rates, and blamed the banks. Whilst the banks did claw back some of their rate margins, why has this been seen as such a crime?
The greater crime is to allow lax lending and over lending that drove the prices up in the first place.
They may also have a hand in house inflation in lax lending practices, and over lending, but they are not doing that now, and the result is sliding house prices. Tighter credit rules would have stopped at lot of the inflation by not allowing money to be thrown at home sellers.
So interest rates are still too low in my view. Ironically, if interest rates were higher over the last ten years, then home would be more affordable now.
The fruits of low interest rates
The consequences of high interest rates are:
- Higher House inflation. That means we are all paying too much for our homes than we should be.
- Higher Land costs. Land costs seem to be set at the cost of an established home, less the cost of building a home on that land. The problem is that this has gotten ahead of itself, and now land is over $100,000 more than it should be based on that assumption.
- This means that people that own raw land want a piece of this profit, and that;s created a new problem.
- The Government has joined in the fun. They have stamp duties and taxes that have helped make new homes unaffordable.
- Bigger mortgages. Bigger home prices mean mortgages, and that means more profits for the banks.
So how is this the home builders fault? It clearly isn't. So why have the HIA chosen the blame its members? I suspect that they have been talking to land developers, the ones that have allowed the problem to be created in land being too expensive.
What the HIA needs to do.
The HIA did not create the problem either. John Howard gave us the GST, and the housing inflation that that created. The First Home Owners Grant was the spur that doubled that housing inflation pressure. Successive stimulus packages have allowed us to mask the real problem, until now, when we are all groaning under the weight of mortgages too big for us to maintain at have normal interest rates. What the HIA needs to do is:
- Stop asking for lower interest rates, and Government handouts.
- Start lobbying for lower land prices and the Government to treat development land as infrastructure, and invest in it.
- Start leaning on land developers to reduce the cost of their land. The sooner the land developers get the message that builders want land prices to fall by 40%, the sooner they will stop buying land at silly prices, and allow governments to put taxes and duties on the land they shouldn't.
The way forward for Australian Housing
If we are to create a sustainable housing market we need to ensure the low cost of housing land, and tighter lending practices. The banks are doing this, the Government needs to act on land, and the HIA needs to get behind housing land price reform, and treating the delivery of cheap land for housing as a basic necessity of life, and an essential infrastructure.
