Housing

Affordability:
What can be done about the
Great Australian Dream?

KPMG Economics

October 2016
Executive Summary The issues
There is no doubt that Australia is experiencing a worsening Average access to intergenerational equity being the average
problem regarding housing affordability, a fact highlighted this week amount of time a generation has access to potential wealth via
(24 October 2016) by the Federal Treasurer in a speech to the inheritance from the immediately preceding generation is
Urban Development Institute of Australia. anticipated to be greatest for Baby Boomers, and least for
Generation X.
The driver of reduced affordability has clearly been the rapid
increase in the price of housing, relative to a more benign We are now seeing a change in behavior by current generations
adjustment in household incomes. regarding home purchasing which is new compared to previous
generations. That is, some young people are now collaborating to
Many of the drivers of house price increases and affordability
buy, some are assisted by parents, while others are simply
pressures on some households are occurring globally, are largely
choosing not to buy because they dont want to be committed to a
macroeconomic and are the product of a complex interaction of
location for 30 years of a mortgage.
demand and supply side factors, and no single policy intervention
will address the entire issue. Low income households are only able to afford housing stock that
is located on the fringe of cities, and even then this has become
About a decade ago KPMG Economics completed a detailed review
more difficult. However, this outwards push of the urban fringe
into housing affordability in Australia. At the time we found that the
also creates broader issues for society around provision of
change in median house prices were mostly influenced by the
infrastructure into these greenfield locations, and the false
underlying strength of the economy, the performance of the share
economies associated with cheaper housing but more expensive
market, and the proportion of housing being purchased by investors
private and public transport.
relative to owner occupiers.
We have just re-investigated the relationship of median housing
prices in Australia to the key drivers identified a decade ago and
found GDP and investor activity remain key influences, but the
share market no longer had such an influential role. However,
wages, interest rates and housing supply are factors whose
influence on house prices have strengthened over the past decade.

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Executive Summary Some solutions
KPMG recognises the challenges associated with resolving the
problem of housing affordability are complex and they involve a
range of both supply and demand side factors. We have offered a
number of solutions that provide a way forward for housing
affordability to be improved on a permanent basis. These include:
1. CGT reduction: reducing the capital gains tax discount from
50% to 25%, thereby making property investment marginally
less attractive
2. Aggregate property tax: abolish stamp duty on the transfer
of residential property and conflate rates, land tax, insurance
taxes and emergency service levies into a new Property
Services Tax
3. Systemic reforms aimed at maintaining the supply and
diversity of land and housing in established and growth areas,
through:
a) Set targets: a stronger role for target setting for net
additions to stock to drive Local and State Government
planning schemes;
b) Affordable product: target setting would also focus on
encouraging greater diversity of housing stock and
deliberately encouraging smaller, well designed affordable
products;
c) Streamline planning: making further improvements to
the planning system to capitalise on the Governments
planned use of structure plans as a means of reducing the
holding costs associated with planning delays - and
2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.
All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
providing developers in both the private and public sector
with greater capacity and incentives to bolster supply at
times when the market is under substantial demand
pressure;
d) Empower public supply: supporting a stronger role for
government land authorities to focus on housing
affordability for middle income households within the
context of a broader sustainability agenda.
4. Targeted Reforms aimed at improving access to those groups
who are the most excluded from affordable home ownership. This
package would focus on:
a) More low cost housing: the production of a greater volume
of more sustainable, well-designed, lower cost house and land
packages;
b) Improve assistance: better targeting of existing State first
home owner assistance to increase the overall value and
impact of that assistance;
c) Promote shared equity: the introduction of a shared equity
program with a percentage of that equity exempt from rental
interest charges for the life of the loan or a part of it to be
provided by Government and/or the private sector.
KPMG also believes that the solution for Australia must involve all
levels of Government working together, given the factors driving
the problems are not under the remit of any one level of
government. It should be a priority area of public policy.
3
Introduction
The problem of housing affordability is not new, a point recognised Chart 1
by the Treasurer in a speech he gave to the Urban Development REIA Housing Affordability Index
Institute of Australia (UDIA) in Sydney on 24 October 2016 titled 50
Keeping home ownership within reach1.
There is no doubt that Australia, like other international jurisdictions, 45
is experiencing a worsening housing affordability problem. The
driver of reduced affordability has clearly been the rapid increase in More affordable
40
the price of housing, relative to a more benign adjustment in
household incomes.

Index Number
35
In his speech the Treasurer highlighted that a key policy goal for
Governments at all levels, including the Commonwealth, must be
an improvement in housing affordability right across the housing 30
spectrum2. Further, he also noted the Government response
must be well targeted and ensure that the actions of each level of 25
Government is integrated and uses the levers they have in a way Less affordable
that best addresses the challenges faced3.
20
KPMG appreciate all these sentiments, and in fact, have been
advising public and private sector organisations over many years on
the problems and possible solutions to housing affordability. Yet, AUST NSW VIC QLD 10-year average
despite it being on the mind of government and politicians, the Source: KPMG Economics, REIA

problem remains.

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The problem
At the outset, it is important to acknowledge that many of the drivers changes in the stock of unoccupied dwellings;
of house price increases and affordability pressures on some
ease of obtaining finance;
households are occurring globally, are largely macroeconomic and are
the product of a complex interaction of demand and supply side household incomes; and
factors. No single policy intervention will address the entire issue,
the role of investors in the property market.
because as the Treasurer rightly acknowledged in his speech, there is
no single housing market in Australia4. Further, we also found that housing supply is inherently slow to adjust
to changes in demand. While this is true, KPMG Economics also
As shown in Chart 1, the relative affordability of housing ebbs and
found that differences in tax systems, the structure of the financial
flows over time, dependent not only on the price of houses, but also
systems, legal systems, government housing policies, and
our ability to pay for them. In general, periods of high wage growth,
geographical features are all factors that not only have an impact on
low interest rates, or declining (or stagnant) house prices, all contribute
the responsiveness of housing supply to an increase in demand for
to making housing more affordable to purchasers, and conversely
extra dwellings, but also the speed, magnitude and duration of house
when wages growth is low, interest rates are high and house prices
price escalation.
are rising, then these are times when purchasers find it most
challenging to buy a home, particularly those entering the market for There is also an extensive body of literature which indicates that the
the first time. urban planning system and urban planning policies of a country
contributes to house price outcomes through their impact on housing
About a decade ago KPMG Economics completed a detailed review
supply. These studies suggest that urban planning policy and
into housing affordability in Australia. This review, and our subsequent
regulation is an important policy lever for addressing systemic barriers
work on the topic, highlighted a range of factors influencing the
to the production of affordable housing.
demand and supply side of the housing market in Australia.
In particular we found the factors contributing to housing demand
include:
household formation, or the change in occupied dwellings, which is
itself driven by population growth (natural increases, net overseas
migration and net interstate migration), changing age structures;
and trends to smaller households, including a substantial increase in
the number of single-person households;

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The economic drivers
As part of our earlier study we also completed detailed empirical Chart 2
analysis using sophisticated econometric modelling techniques, and Median House Prices - Forecast and Actual
at the time we found that the change in median house prices were
140
mostly influenced by the underlying strength of the economy, the
performance of the share market, and the proportion of housing
120
being purchased by investors relative to owner occupiers.
Interestingly, we have just reinvestigated the relationship of median 100

Index Value
housing prices in Australia (as shown in Chart 2) to the key drivers
identified a decade ago and found GDP and investor activity remain 80
key influences, but the share market no longer had such an
influential role. However, wages, interest rates and housing supply 60

are factors whose influence on house prices have strengthened over

40
the past decade.
The fact that wages and housing supply are now statistically 20
significant factors influencing house prices suggest housing
affordability has become exacerbated due to increased planning 0
restrictions on residential development and the growth in low-wage
and part-time employment. Local land use regulations that limit lot
size and density have also helped to drive up housing prices and
rents relative to incomes. MHP Actual MHP Forecast Source: KPMG Economics, ABS

2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. 6
All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
The demographic influences
Chart 3 Federationists Frugals Baby Boomers Boomers II Generation X Generation Y
Die 1954 Die 1982 Die 2016 Die 2025 Die - 2038 Die - 2050
Age at inheritance Age at inheritance Age at inheritance Age at inheritance Age at inheritance
33 years 34 years 27 years 49 years 48 years
Years of access Years of access Years of access Years of access Years of access
Life expectancy = 53.0 years 28 years 34 years 43 years 22 years 25 years
Life expectancy = 61.3 years
Life expectancy = 68.4 years
Life expectancy = 70.0 years
Life expectancy = 70.9 years
Life expectancy = 72.9 years

Federationists Frugals Baby Boomers Boomers II Generation X Generation Y

Born 1901 Born 1921 Born 1948 Born 1955 Born 1967 Born 1977

Parent / Child Source: KPMG Economics, ABS

relationship

One point that seems to be intuitively understood but not often discussed is a point associated with the impact of ageing on the housing market.
Home ownership provides more than shelter to a population it is a store of wealth, it allows the risk of variations in costs associated with
accommodation to be reduced, and it provides a security of accommodation more than renting.
While housing wealth acts as a store of value for households, it has the capacity to do this intergenerationally as parents die and pass on the family
home to their children via inheritance. However, with improvements in health outcomes, which is enabling individuals to live longer, that
intergenerational access to housing wealth is being delayed, and potentially eroded.

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As Chart 3 illustrates, average access to intergenerational equity Chart 4
Affordability Ratings for Australian Capital Cities
being the average amount of time a generation has access to potential By Inner, Middle and Outer SLAs
wealth via inheritance from the immediately preceding generation is 7%
anticipated to be greatest for Baby Boomers, and least for 64% 6%
Generation X. 74% 7%
In the context of housing affordability, family wealth which has 37% 0%
traditionally been inherited by successive generations and is often
utilised for investing in dwellings, is therefore not being accessed by
current generations as readily.
2001 2011
This point is particularly relevant for people who need to save for a
Inner ring
deposit to purchase a property. If house prices are growing more
rapidly than wages, then a potential purchasers ability to save the Middle ring

minimum deposit which is expressed as a percentage of the house Outer ring

prices becomes harder and harder. So access to intergenerational
family wealth becomes more important in these circumstances. Source: AMP, NATSEM

Further, as Baby Boomers live longer, and potentially draw down on

the equity of their housing investment to fund their retirement, it is
Another challenge associated with the housing affordability story is
also likely that Gen Xs will not only access family wealth relatively
that low income households are only able to afford housing stock that
later in life, but it may also be of lesser value, relative to the
is located on the fringe of cities and even then this has become more
inheritance Baby Boomers received from their Frugal parents.
difficult as shown by the analysis completed by AMP and NATSEM
A consequence of this is that we are now seeing a change in behavior (see Chart 4)6.
by current generations regarding home purchasing which is new
However, this outwards push of the urban fringe also creates broader
compared to previous generations. That is, some young people are
issues for society around provision of infrastructure into these
now collaborating to buy, some are assisted by parents, while others
greenfield locations, and the false economies associated with
are simply choosing not to buy because they dont want to be
cheaper housing but more expensive private and public transport.
committed to a location for 30 years of a mortgage5.

2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. 8
All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
The elephants in the room
It is not hard to pinpoint the genesis of the Global Financial Crisis on Taxation and regulatory arrangements that distort investment
the fact that the United States sold the idea to its population that you decisions.
must own your own home, and if not for the fact that Australia has a
Recognising there is nothing wrong with promoting the virtues of
range of prudential controls and recourse financing, the promotion of
home-ownership, but whether Governments should focus on the
the Great Australian Dream could have pushed us down the same
affordability of adequate accommodation, irrespective of
path.
ownership.
As shown in Chart 5, even with the prudential controls found in our
Societal norms of adequate has exacerbated the problem, and
banking system, investment decisions in Australia are heavily biased
could be partially resolved by the community accepting that less is
towards housing.
better than more.
One might reasonably ask why should the government be worried
about the affordability of home-ownership? Is owning your own home Chart 5
some sort of virtuous right that government should facilitate for the Value of Residential Housing and Land
and Total Household Net Worth
Australian population?
10,000
There is a social standard in Australia that people have a right to 9,000
adequate and affordable shelter. The real question in this standard is

$ Billions (Current)
8,000
whether adequate shelter is affordable, not whether you own the
7,000
shelter or someone else does.
6,000
Also, the question of adequate has to address the issue of quality 5,000
how many bedrooms and bathrooms per inhabitant is adequate ? In
4,000
todays world it seems that a couple need three bedrooms and two
3,000
bathrooms to survive, while in the 1970s a family of six happily lived
in a house with three bedrooms and one bathroom. So, if we 2,000

measured housing capacity by the number of bedrooms we might find 1,000

that there is significant over-supply of accommodation for our 0
population.
So the elephants in room regarding the problem with housing
affordability relate to:
Residential land and dwellings Other net assets
Source: KPMG Economics, ABS

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Some solutions
KPMG acknowledges the challenges associated with resolving the
problem of housing affordability are complex even without tackling
the elephant in the room issues and they involve a range of both
supply and demand side factors that need to be resolved.
We also recognise that a more aggressive and comprehensive
national reform agenda would need to tackle macroeconomic factors
and the affordable rental market.
KPMG understands that some types of interventions in fact create
perversity, worsening the situation rather than improving it. For
example, increasing access to finance can produce demand side
pressures which, if not combined with an increase in supply, can in
and of themselves lead to an escalation in prices and a decline in
affordability levels.
In our submission to the Commonwealth Treasury in July 2015,
KPMG outlined a number of tax reform options, which included a
number that would contribute to alleviating the problem of housing
affordability. These proposed reforms included:
1. CGT reduction: reducing the capital gains tax discount from 50%
to 25%, thereby making property investment marginally less
attractive; and
2. Aggregate property tax: abolish stamp duty on the transfer of
residential property and conflate rates, land tax, insurance taxes
and emergency service levies into a new Property Services Tax7.
2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.
All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
In addition to these taxation based reforms, we have also recognised
there are reforms, both systemic and targeted, that are readily
available for Government to implement that has the potential to
improve the Australian housing market for prospective home owners.
Such reforms include:
3. Systemic reforms aimed at maintaining the supply and diversity
of land and housing in established and growth areas through:
a. Set targets: a stronger role for target setting for net
additions to stock to drive Local and State Government
planning schemes;
b. Affordable product: target setting would also focus on
encouraging greater diversity of housing stock and
deliberately encouraging smaller, well designed affordable
products;
c. Streamline planning: making further improvements to the
planning system to capitalise on the Governments planned
use of structure plans as a means of reducing the holding
costs associated with planning delays and providing
developers in both the private and public sector with greater
capacity and incentives to bolster supply at times when the
market is under substantial demand pressure; and
d. Empower public supply: supporting a stronger role for
government land authorities to focus on housing affordability
for middle income households within the context of a broader
sustainability agenda.
10
4. Targeted Reforms aimed at improving access to those groups
who are the most excluded from affordable home ownership.
This package would focus on:
a. More low cost housing: the production of a greater
volume of more sustainable, well-designed, lower cost
house and land packages;
b. Improve assistance: better targeting of existing State
first home owner assistance to increase the overall value
and impact of that assistance; and
c. Promote shared equity: the introduction of a shared
equity program with a percentage of that equity exempt
from rental interest charges for the life of the loan or a part
of it to be provided by Government and/or the private
sector.

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Final thoughts
Final thoughts
The challenges associated with housing affordability have been
problematic in Australia and many countries for decades. Solving
them will take time, and involve a comprehensive reform agenda
that targets both supply side and demand side factors as
piecemeal solutions are only likely to exacerbate the problem.
It seems politicians and bureaucrats have acknowledged
affordability is a fundamental barrier for many in society to be able
to purchase and enjoy their own homes, but havent been able to
offer any tangible reforms to help the situation. Rather, the
solution adopted appears to be one where if we wait, the problem
will decline as the economy strengthens, wages grow and
affordability improves until of the course house prices rise and
interest rates increase, pushing affordability back down from that
brief window of hope.
KPMG has offered a number of a solutions that as a start provide
some way forward for housing affordability to be improved on a
more permanent basis. However, we also believe that the solution
for Australia must involve all levels of Government working
together given the elements that are driving the problem are not
under the remit of any one level of government control. And this
collective action by Government should be an immediate priority,
otherwise a generation will miss out on experiencing the Great
Australian Dream.

2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. 13
All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
Endnotes
1. http://sjm.ministers.treasury.gov.au/speech/020-2016/
2. Ibid
3. Ibid
4. Ibid
5. Insights contributed by Bernard Salt
6. The Great Australian Dream: Just a dream, AMP and NATSEM, July 2011
7. Tax Reform, KPMG submission to Treasury, July 2015

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Contacts
Brendan Rynne
Partner and Chief Economist
Ph: 03 9288 5780
Email: bjrynne@kpmg.com.au

kpmg.com.au

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International Cooperative (KPMG International), a Swiss entity. All rights reserved.
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
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