Hedging risk should be part of housing landscape
The housing affordability problem has stimulated many policy responses over the years, as the cost of gaining a toehold on the property ladder has risen higher and higher.
The housing affordability problem has stimulated many policy responses over the years, as the cost of gaining a toehold on the property ladder has risen higher and higher. The housing affordability problem has stimulated many policy responses over the years, as the cost of gaining a toehold on the property ladder has risen higher and higher.From the 1960s until the 1980s, real (that is, inflation adjusted) house prices closely tracked growth in real average weekly earnings, according to a recent paper by the Sydney University economist Judith Yates.Then house prices started to outpace earnings growth. According to data from the Housing Industry Association, between 1995 and 2010 the ratio of house prices to household income rose from under 2.5:1 to more than 4:1.Yates's paper shows that by 2010 real house prices were more than four times those of 1960, compared with real average weekly earnings being less than 2? times 1960 levels.Offering grants to first-home buyers is one policy response. But if there is no increase in the supply of housing, such grants tend simply to drive up prices the benefit is captured by existing home owners and does not help affordability.Stamp duty relief for first-home buyers was tried recently in NSW. Again, the question is whether it increases supply - by encouraging developers to build when they otherwise would not - or just feeds into higher prices.In thinking about other approaches, a good starting point is to consider the benefits that buying a house or apartment delivers. One is security of tenure, unlike in rental accommodation where leases typically last only six months or a year.Another important benefit is financial. Paying off the mortgage is a form of saving and most of us find the enforced saving of a mortgage easier than voluntary saving.There is also the prospect of a capital gain. Since most people borrow heavily to buy a house, the gain can be large when expressed as a percentage of the amount of equity you put into the house. (Of course, when house prices fall people can see their equity wiped out.)This capital gain is also tax-free, making owner-occupied housing an attractive vehicle in which to accumulate savings.All this means that if housing affordability gets harder, it is also harder for people to accumulate significant savings over their lifetime.In other words, there are good public policy reasons to try to respond to the challenge of housing affordability.The economist Robert Shiller, of Yale University, has written about the risks facing people who are in the housing market - and people who are not in the housing market but would like to to be.He has long argued that it would make sense if people could buy financial instruments linked to the value of house prices. In fact, the Case-Shiller index of house prices in the US is now the basis for futures and options contracts traded on the Chicago Mercantile Exchange.If you are not in the housing market - but would like to buy a house in the future - you can buy such a financial instrument to partially hedge yourself against the risk of house prices rising sharply.Extending Shiller's thinking, perhaps another approach would be to encourage the establishment of managed investment funds that owned pools of residential houses and apartments, with consumers able to buy units in the fund.These units would offer consumers a hedge - because if the price of houses rose, the value of the units would also rise.A young person could buy units with a small value to start with (putting, say, a few hundred dollars a month into such a fund). Alternatively, they could buy units with a larger face value, partly funded by a bank loan.It might even be possible to make these units capital gains tax free if the proceeds of their sale were used to purchase a home to live in.These managed funds could inject new demand into the housing market. They could also offer innovative forms of leasehold tenure over houses and apartments, with longer terms than is common in the market today (three or five years, say, or even longer.) This could help make rental accommodation a more attractive and satisfactory alternative to owner-occupied housing.The merits of these specific ideas can be debated. The basic premise, though, is the one for which Robert Shiller has argued. How can we help people either in the housing market, or wishing to enter the housing market, to hedge some of the risk they face?It is fruitful territory for policy innovation.Paul Fletcher is a Liberal MP.