October, 2019

Mortgage Debt Is Drag On Economy


Australia has one the world’s highest levels of household debt, and research shows that adults who have fallen behind on repayments are cutting back on expenses such as food and utilities. But how pervasive is the impact of debt on spending, and how does it affect the broader economy? Are only financially constrained households making cutbacks?

Economists at the Reserve Bank of Australia (RBA) recently found that households pare back their spending when their mortgage debt rises – a phenomenon called the ‘debt overhang effect’. The study shows that this effect has spread across households with owner‑occupier mortgage debt – and is not solely driven by households that are financially strained or need precautionary savings. This demonstrates the extent of mortgage debt’s impact and how it could adversely affect businesses relying on consumer spending.

Explains weak spending

According to the RBA economists, a 10% increase in debt leads households to reduce consumption by 0.3%. Their findings suggest that the rise in aggregate owner-occupier mortgage debt since the global financial crisis has weighed on total spending across the economy.

This can be seen in the numbers today. Australian household consumption has remained weak since the financial crisis, and the RBA has revised down its economic growth forecast for 2019–20 from 2.75% to 2.5% – in part due to uncertainty around household spending.

“We estimate that annual aggregate consumption growth would have been around 0.2 to 0.4 percentage points higher had mortgage debt remained at its 2006 level,” said Fiona Price, Benjamin Beckers and Gianni La Cava, authors of the RBA study.

Australia’s total household debt has steadily risen relative to income over the past three decades, driven mainly by mortgages. The ratio rose from around 70% in the early 1990s to 190% in 2018.

Figure 1: Australian household debt and consumption

Source: RBA paper ‘The Effect of Mortgage Debt on Consumer Spending: Evidence from Household-level Data’.

Figure 2: Debt-to-income ratio for household mortgages*

Source: RBA with data from the Australian Bureau of Statistics and the Australian Prudential Regulation Authority.

Spending cuts even as assets rise

Notably, the RBA researchers found that households trim spending even when their gross asset values grow by the same amount as their debt. “In other words, a deepening of household balance sheets is associated with less household spending, even if it is not associated with rising net indebtedness,” said the researchers. “This directly violates conventional consumption theories such as the permanent income hypothesis, which assumes that the composition of household balance sheets does not affect consumption.”

Economic policymakers have generally not expressed alarm over the impact of elevated levels of household debt on the economy.

The RBA, for example, has acknowledged that highly indebted households pose a key risk to financial stability. But it expected these households to potentially cut spending when macro-economic conditions decline – not during favourable or ‘normal’ times. The study’s findings might change this view.

In good times and bad

Not surprisingly, the study found that household spending is more sensitive to debt during adverse economic conditions and housing price shocks. But remarkably, households scrimp even when the economy is doing well. “We find evidence that indebted households reduce their spending by more than other households during adverse macro-economic shocks, such as the global financial crisis, but the negative effect of debt is also pervasive at other times,” said the researchers. This finding might call into question the effectiveness of the Coalition Government’s $158 billion tax cuts package in stimulating the economy. The Government expects more than 10 million individuals to benefit from the package, mainly through refunds starting with this year’s tax returns. But will they spend their windfall or simply use it to cut their debt?

September, 2019

Use Your Banking Data to Your Advantage


Open banking is here, having kicked off its first stage on 1 July 2019. But what does it mean for you as a business banking customer? Have you thought about how you can gain from it?

Open banking makes it easier for individuals and businesses to view their banking data, such as their credit cards’ historical transaction data, and take advantage of it. It is the first application of the government’s Consumer Data Right, which aims to give Australians greater choice and control over how their data is used and disclosed.

From 1 July 2019, banks only have to publish generic product information to help you compare banking products. But by 1 February 2020, you will have access to information on your:

Data on all other products proposed under open banking will be available from 1 July 2020. But keep in mind that only the four major banks – Commonwealth Bank, ANZ, Westpac and NAB – will need to make customer data available starting July 2020. Other banks get a one-year lag.

Products to be included in open banking

Source: Department of Treasury

What’s in it for you?

At present, it’s hard to get your business’s comprehensive banking data, let alone share it with other banks or financial services providers. This makes it hard to shop around for better deals and switch providers.

But with open banking, you can ask your bank to transfer your business’s data to your authorised accredited third party via a secure dedicated platform. An accredited third party can be a financial services provider, fintech firm, product comparison site or another bank.

Your authorised third party can aggregate your data to help you find a better deal or develop products that suit your business’s financial position. For example, using information on your firm’s income, expenses and financial commitments, an accredited financial services provider can tailor a business loan and an interest rate based on your ability to meet repayments.

You are in control of your banking data

You have to give your consent before a third party can access your business’s data

Source: KPMG Australia

Open banking will usher in greater competition in financial services. Banks, for example, will want to retain their customers and offer them competitive deals. Smaller lenders will be able to compete with large banks through having more data to assess borrowers’ serviceability and being able to offer loans to more customers.

What risks should you be aware of?

While open banking lets you harness the value of your business’s data, it can pose a risk to the privacy and security of your information. That’s because data will be moving from one firm to another.

But don’t fret. The regulators and agencies responsible for open banking are addressing potential data security issues. The Australian Information Commissioner, for example, has to ensure companies participating in open banking follow rigorous standards for accessing and keeping information.

It also pays to know exactly what you can do under open banking. For example, when asking your bank to share your business data, you can specify what information you want shared, who can access it, and for how long. And in your arrangement with a data recipient, be clear about what your data is for.

Your customers will have the same ability to use their data, so assess risks and opportunities for your business. For example, if you’re a mortgage broker, instead of seeking your help, a potential customer could go straight to a lender, to ask them to assess their data for their borrowing capacity. But you could take this as an opportunity to highlight how you could help borrowers in other areas – for example, you could advise them on the various types of home loans and what’s suitable for them.

Finally, be selective about the providers you work with. Assess their security protocols for handling your information. There’s power in your data, so only share it with firms you trust.

September, 2019

Time To Worry About Rising Mortgage Arrears?


The number of Australians behind in their mortgage repayments is higher than it has been since the fallout from the global financial crisis. This could have implications for banks, especially because it coincides with the ongoing decline in national housing prices. Falling property values could expose banks to losses on home loans.

The share of bank mortgages in arrears is now around the 2010 level of 1%, according to the Reserve Bank’s head of financial stability Jonathan Kearns. This is well below the 2% figure of the early 1990s recession but indicates weak economic conditions, said Kearns at a recent property summit.

Australian banks’ outstanding loans as a percentage of all domestic loans

* Housing loans only; 90+ days past due and well secured ** Housing and personal loans; impaired loans are 90+ days past due and not well secured or otherwise doubtful; non-performing loan rates before September 1994 are likely to be understated because the denominator includes lending by banks and non-banks, while the numerator is for banks only

Source: Reserve Bank of Australia, with data from the Australian Prudential Regulation Authority

Rising arrears also represent an increased risk to the financial system, given the high value of housing loans in banks’ books.

As Kearns pointed out, mortgages account for about 40% of Australian bank assets. And within property lending, banks’ greatest exposure is to housing loans.

Data from the Australian Prudential Regulation Authority (APRA) shows that housing loans from authorised deposit-taking institutions totalled $1.65 trillion in 2018, up by nearly 5% on the previous year.

The average balance of an Australian mortgage also continues to increase – from $266,500 in 2017 to $275,500 in 2018, according to APRA. The Reserve Bank’s figure is even higher: $300,000.

Such high levels of debt can make households and the financial system vulnerable if economic conditions greatly decline.

Economic factors and lending standards

Kearns attributes rising arrears to sluggish income growth, falling home prices and increased unemployment in some places.

“Weak conditions in housing markets make it hard for borrowers to get out of arrears by selling their property,” he said.

But economic factors are not solely responsible for the upswing in arrears. Lending standards also contribute, according to Kearns.

Previously, loose loan origination standards allowed borrowers to get larger and higher-risk mortgages, such as those on interest-only terms. This let borrowers who were likely to struggle to repay their loans get a mortgage, contributing to higher rates of arrears, said Kearns.

Now that regulators have bolstered lending requirements, the stronger standards are influencing the rate of arrears, albeit temporarily.

For example, in 2017 APRA introduced a 30% limit on the share of new interest-only home loans. Although it has since scrapped this cap, banks continue to charge higher interest rates on interest-only mortgages. They also assess borrowers more rigorously. This has led interest-only lending to hit a record low of 15% in its share of total lending over the March 2019 quarter, down from its peak of 45% in mid-2015.

“As a result, some borrowers who may have anticipated being able to roll over an interest-only period are finding they cannot,” said Kearns. “Some are then facing temporary difficulty servicing the higher principal and interest payments at the end of the interest-only period.”

A continuing trend

Investment manager PIMCO estimates that monthly repayments for a typical owner-occupier switching from interest-only to principal-and-interest payments will rise by more than 20%. It expects this to push up arrears as the five-year payment window for many existing interest-only borrowers ends in 2019 and 2020.

Over the three years from 2018, around $120 billion in interest-only mortgages is scheduled to switch to principal loans annually, according to the Reserve Bank.

This massive volume is not unprecedented, said the bank. “What is different now, however, is that lending standards were tightened further in recent years.”

Expiry of interest-only period for outstanding securitised interest-only mortgages
(as of December 2017)

Sources: Reserve Bank of Australia

With lending standards robust, Kearns doesn’t expect the rising arrears to reach levels that pose a risk to the financial system – as long as overall unemployment remains low.

However, he expects the influence of some of the drivers behind the arrears trend to remain in the near future. “And so, the arrears rate could continue to edge higher for a bit longer.”

August, 2019

Tech is Now the Fastest Route to Riches


Australian property developers seem to be surviving the housing slump quite well. According to The Australian Financial Review 2019 Rich List, property remains the most common industry for those featured in the annual ranking of Australia’s 200 wealthiest individuals. Indeed, there are now 63 property rich-listers, up from 51 last year.

Despite a recent NAB report that declared the retail sector “clearly in recession”, success in retail has also propelled markedly more individuals to this year’s rich list – there are now 29 rich-listers from retail, up from 22 last year. Resources, investment and financial services also continue to spawn rich-listers.

However, the trajectory of one group is most noteworthy of all.

Source: 2019 AFR Rich List

Technology entrepreneurs are growing their wealth faster than other rich-listers, according to the AFR. Atlassian co-founders Scott Farquhar and Mike Cannon-Brookes, for example, grew their estimated wealth from $5 billion each in 2018 to more than $9 billion each this year, the largest jump in absolute terms of anyone featured. This elevated them into the top 10 for the first time, in fifth and sixth spots. The duo only debuted on the rich list in 2013 and were then near the bottom rungs in 190th and 191st places.

Another tech billionaire, Richard White, founder of logistics software provider WiseTech, grew his wealth by more than 99% over the past year to $3.31 billion, moving him up from 44th to 20th spot. He was new to the rich list as recently as 2016.

Seven other tech entrepreneurs landed on the rich list for the first time. They include Nick Molnar and Anthony Eisen, founders of Afterpay, and Kayla Itsines and Tobi Pearce of the fitness app Sweat.

Technology now accounts for a total of 14 individuals on the list. This may seem small, considering that the first Australian tech entrepreneur debuted more than 20 years ago. But in an economy still dominated by traditional industries such as property and resources, this is already a record number and is only likely to increase.

More billionaires

The club of Australian billionaires has grown considerably – from 76 in 2018 to 91 this year.

Together, Australia’s 200 richest individuals control $341.8 billion in wealth, a rise of 21% from last year.

This means that the country’s wealthiest had to be richer to make it to the list. Specifically, they needed to have at least $472 million – up from the $387 million belonging to the ‘poorest’ person on last year’s list. This led to the exclusion of famous names such as vitamins tycoon Marcus Blackmore, Temenos founder George Koukis and actress Nicole Kidman.

Familiar faces

Long-time rich-listers Anthony Pratt (manufacturing), Gina Rinehart (resources and agriculture) and Harry Triguboff (property) remain in the top three spots. Together, they hold nearly $43 billion in wealth.

Source: 2019 AFR Rich List

Pratt’s estimated wealth of $15.57 billion made him Australia’s richest individual for the third year in a row. The AFR attributes the 20% surge in his wealth largely to President Donald Trump’s corporate tax cuts in the US, where Pratt’s company has extensive operations.

“[Trump’s] slashing of the corporate tax rate and granting of instant write-offs for business investment has bolstered the bottom line of Anthony Pratt,” said AFR Rich List editor Michael Bailey.

August, 2019

More Rate Cuts Are Coming, But Are They Effective?


Australia’s official cash rate is now down to 1%. And if we are to believe one prominent economist, it could reach a historic low of 0.5%.

According to AMP Capital chief economist Shane Oliver, rate cuts are a bit like cockroaches. “If you see one, there is normally another nearby.”

The last time the Reserve Bank of Australia (RBA) trimmed the cash rate – the interest rate charged on banks’ overnight loans – in 2016, it did so twice.

This time, Oliver expects four cuts in total, predicting a further cut later this year and another in early 2020 as the RBA tries to reach its employment and inflation targets. The central bank aims to bring unemployment down from 5.2% to 4% and reach an inflation rate of between 2% and 3%, up from 1.6% as of August.

Figure 1: The RBA’s cash rate target

Source: RBA

Interest rates are the bank’s primary tool to boost inflation and economic activity. The RBA itself signalled the possibility of further cuts to the cash rate in its June and July monetary policy statements.

In August, RBA governor Philip Lowe said that it is reasonable to expect “an extended period” of low interest rates to trim unemployment and meet the bank’s inflation target.

But would this be enough to stimulate spending? Would everyone benefit?

Savers disadvantaged

Mortgage holders would gain, but savers would lose as banks cut deposit interest rates. ANZ, for example, slashed its rates for a number of deposit products by 0.25% the day the RBA announced the June rate cut, according to comparison site Canstar. This could pare savers’ incomes, and retirees relying on their savings are likely to see their spending power weaken.

But Australian household deposits are estimated to be less than half the total household debt, which is mainly in mortgages. So, paring the cash rate will benefit more households than holding it steady.

“The responsiveness to changes in spending power for a family with a mortgage is far greater than for retirees,” said Oliver.

A full 0.50% cut on a $400,000 home loan could save a mortgage holder $116 a month, according to one estimate.

Rate cuts also help Australian businesses compete overseas by keeping the value of the Australian dollar lower.

Reducing interest rates will help the economy as a whole, according to Lowe.

“In aggregate, the household sector pays around two dollars in interest for every dollar it receives in interest income,” he said. “Lower interest rates reduce the net interest payments of the household sector and so boost overall disposable income.”

Tax offsets more effective

But Lowe admitted that relying on monetary policy has limits, and there are other options to spur spending and bring down unemployment.

“The best approach to delivering lower unemployment and a stronger economy is through structural policies that support firms expanding, investing, innovating and employing people,” he said.

Figure 2: Australia’s rates of unemployment and underemployment

Source: RBA using data from the Australian Bureau of Statistics

Commonwealth Bank chief economist Michael Blythe suggested cutting income tax is a better option to stimulate consumer spending than trimming interest rates. It would benefit most consumers and not just mortgage holders.

The Coalition Government’s $158 billion tax cuts package aims to do exactly that. It expects more than 10 million individuals to get some cash back starting with this year’s tax returns.

The policy debate too often focuses on the monetary aspect as the only accessible lever, as Blythe pointed out. “But the return to budget surplus means we have other policy options available.”

July, 2019

A Quick But Expensive Fix?


The Coalition Government promised before the federal election to help first homebuyers get into the housing market. That help is the First Home Loan Deposit Scheme. Instead of saving for years to get a 20% deposit, you could buy your first property sooner with the Government acting as your guarantor.

As good as it may sound, this route to home ownership comes at a cost: almost an extra $53,000, according to property portal Domain.

Under the program, you can buy your first home with a deposit as low as 5% of the property’s value if you earn up to $125,000 a year ($200,000 for couples). The Government would pay the lenders mortgage insurance (LMI), which banks typically require for any deposit below 20% of the home value. This could mean a saving of around $10,000.

The scheme, set to kick off in January 2020, would help up to 10,000 of the estimated 100,000 first-time buyers each year. There would be a limit on the value of the property you could buy based on your region. But details have yet to be released.

What’s the cost?

The scheme could substantially cut the time it takes to save for a deposit and get into the market. If you’re an average first homebuyer in Sydney, you could buy a home 4.8 years earlier with a 5% deposit than with a 20% deposit, research by Domain shows. However, as the charts below illustrate, you would have to pay an extra $53,000 over the life of your loan, mainly because of interest.

Total housing costs in three mortgage scenarios
Breakdown of costs

Total cost


Source: Domain with data from the Australian Securities and Investments Commission

Using a 4.61% interest rate, Domain estimates that a 5% deposit without LMI would require you to fork out a total of $845,808. That is significantly more than the $793,102 you would pay with a 20% deposit.

Having just a 5% deposit means you would be taking on more debt – and increasing your risk of falling behind in your repayments if your circumstances change. This goes against the more prudent lending practices regulators have tried to encourage in recent years, according to Domain research analyst Eliza Owen.

Don’t get caught up in the frenzy

Even before Domain crunched the numbers, analysts and some property industry members had warned against using the scheme.

The Real Estate Buyers Agents Association (REBAA) had said that first-time buyers could get caught up in the rush to take advantage of the scheme and fail to research the market properly.

“It’s all well and good to jump on the property ladder as long as the ladder isn’t leaning on the wrong wall in the wrong suburb,” said REBAA president Rich Harvey.

Falling house prices could disadvantage homebuyers using the scheme, according to economist Saul Eslake. “In a market where prices appear to be falling, there’s a risk that someone who enters this scheme may find themselves in a negative equity position,” he said in a recent report.

As of May 2019, national house prices had tumbled 8.2% since their peak in October 2017. It remains unclear when the market will bottom out.

Know your options

Before you decide to use the scheme, it’s important to do your research and understand the risks. Importantly, know your options.

“As a first-time buyer, if you get it wrong, it can be a very long and protracted process to get out of, but if you get it right, it can set you up for life,” said Harvey.

July, 2019

SMEs Eschew Bank Lending


Small and medium-sized enterprises (SMEs) are turning to non-bank lenders as funding through banks becomes increasingly out of reach.

Accessing business loans through traditional bank borrowing has become tougher since major banks started tightening their serviceability requirements in response to the Australian Prudential Regulation Authority’s (APRA’s) measures. APRA has called on banks to review their serviceability metrics and ensure they are set at appropriate levels based on current conditions. Although changes in APRA’s guidelines were meant for residential mortgage loans, they have affected banks’ SME lending.

According to The Australian Financial Review, its analysis found negative growth in bank business loans of between $100,000 and $500,000 for the last three quarters ending March 2019. Growth in these loans dropped by 0.5% in the December 2018 quarter, the weakest annual rate in seven years.

Now reports show that many SMEs are seeking greater flexibility through alternative lenders such as finance companies and fintech players.

Figure 1: Annual change in business loans by size

Source: The Australian Financial Review using data from the Reserve Bank of Australia

For example, research by banking analysts East & Partners for lender Scottish Pacific found that the number of SMEs turning to their main bank for funding has dropped below the 20% mark, to 19.5%, for the first time in five years. The Scottish Pacific SME Growth Index for March 2019 reveals that SMEs looking to finance growth are almost as likely to approach a non-bank lender as they are to ask their main bank. Nearly 18% of participating business owners identified non-bank lenders as their first choice when it comes to funding growth – up from 15% six months earlier.

Non-bank lending is picking up

Data from Commonwealth Securities (CommSec) also confirms that non-bank lending is gaining steam. Loans and advances by non-bank lenders rose by 11.4% over the year to September 2018, up from the annual growth rate of 10.3% recorded the previous month. This was the strongest annual growth in non-bank lending in 11 years.

On the other hand, loans and advances by banks grew by only 4.9% over the year to September 2018, up from the 4.7% annual growth rate recorded the previous month. Bank lending grew by just 4.6% over the year to July 2018, its slowest annual growth rate in 26 years.

Figure 2: Small-business lending by Australian banks*

Source: Reserve Bank of Australia with data from APRA

Non-bank lenders to be the main funding source 

If the current trend in non-bank lending continues, East & Partners expects alternative lenders to overtake banks as SMEs’ main source of funds for new investment by the second half of 2020.

The Scottish Pacific SME Growth Index shows that 96% of SMEs prefer alternative lenders, mainly because they involve faster credit approvals and less stringent compliance requirements. They also allow business owners to borrow funds without needing to use their home as security.

By contrast, taking out a business loan from a bank typically involves providing property – usually the family home – as collateral. But as house values have declined, this practice has put many SMEs at risk. That’s because entrepreneurs have reduced levels of equity to prop up their businesses. To avoid the stress related to the housing market downturn, SME owners are increasingly exploring alternative routes to funding their business expansion.

According to Scottish Pacific CEO Peter Langham, SMEs’ dislike of putting up property as security is one reason entrepreneurs are turning to non-bank lenders to fund their business growth.

“Alternative finance is building momentum, underlined by the clear reluctance of business owners to borrow against property,” says Langham. “The SME Growth Index found that nine out of 10 SMEs would be willing to accept a higher interest rate if it meant they didn’t have to provide property security.”

June, 2019

Population And Supply Dynamics Drive Home Prices Down


Tightening credit supply has been largely blamed for the slowdown in Australia’s housing market. Adding fuel to this sentiment last year was the banking royal commission. Economists frequently warned about how banks’ tougher lending requirements in response to the inquiry could push house prices further down.

But according to Reserve Bank of Australia (RBA) Governor Philip Lowe, the slump in house prices has more to do with housing supply and demand. This suggests that growth in house prices would likely stabilise if supply could flexibly adjust to changes in demand.

Speaking at The Australian Financial Review Business Summit, Lowe said the correction in prices largely originated in the inability of housing supply to meet demand as population growth surged. Australia’s population grew markedly in the mid-2000s, but it took nearly 10 years for the rate of home building to catch up with demand.

“It took time to plan, to obtain council approvals, to arrange finance and to build the new homes. Not surprisingly, housing prices went up,” said Lowe.

As the number of houses has increased at the fastest rate in more than two decades, prices have moderated. The housing construction market boomed in 2016–17 when about 234,000 new homes were started, according to home building peak body Master Builders Australia.

Figure 1: Growth in population and housing stock

Sources: RBA with data from the Australian Bureau of Statistics

Data from property consultant CoreLogic shows that national house prices fell by an average of 0.6% in March 2019, which was slightly less than the 0.7% drop in February. Home prices were down 6.9% a year earlier.

Decline in foreign demand also a factor

Lowe said that the dynamics between population and housing supply are most apparent in Western Australia and New South Wales (NSW). In NSW, for example, the recent rate of home building has been the highest in decades. And as population growth has moderated, home values have sunk.

Decline in foreign investor demand has also affected prices, according to Lowe. As Figure 2 shows, foreign buying activity peaked in 2016. Residential real estate approvals from the Foreign Investment Review Board (FIRB) – which foreign investors need to secure before they can buy property in Australia – dropped to 10,036 in 2017–18 from 13,198 previously.

Figure 2: Number of FIRB residential real estate approvals
(financial year)

Sources: FIRB and RBA

Foreign demand for housing, particularly from mainland Chinese buyers, nosedived in 2017 following a spate of government-led restrictions on foreign investors. These include less favourable tax treatment, additional or higher stamp duty, and a cap on new development sales. China’s restrictions on the outflow of capital have also affected demand from mainland Chinese investors.

An issue of reduced demand

On the issue of credit supply and its role in the housing slump, Lowe acknowledged that lending standards have tightened in recent years. He said that on average, the maximum amount loaned to new borrowers has dropped by about 20% since 2015.

“This reflects a combination of factors, including more accurate reporting of expenses, larger discounts applied to certain types of income and more comprehensive reporting of other liabilities.”

The Australian Prudential Regulation Authority has introduced stricter lending policies in recent years, including stringent mortgage serviceability requirements. This has made bank housing loans out of reach for many potential borrowers.

According to Lowe, lenders became more risk-averse last year – at the height of the banking royal commission – amid concerns about the consequences of failing to meet their responsible lending obligations.

Lowe pointed to evidence that the tightening credit supply has contributed to the slowdown in credit growth. “The main story, though, is one of reduced demand for credit, rather than reduced supply.”

June, 2019

Building Affordable Housing Near Jobs Could Boost Income


Workers typically earn more when they live closer to where the jobs are. But years of soaring property prices in cities like Sydney have put housing near city centres and employment areas out of reach for many low- and moderate-income households. According to research firm CoreLogic, many of Sydney’s inner-city areas had a house-price-to-income ratio higher than 10 as of June 2018, compared to the city’s overall ratio of 9.1.

Now research shows that a $7.3 billion government subsidy to build 125,000 affordable rental homes near Sydney’s job and transport hubs could lift disposable household incomes by a total of almost $18 billion over 40 years. Bringing workers closer to jobs centres and transport hubs would benefit both employees and businesses. For property investors, it could boost the housing market in inner-city areas and neighbourhoods near employment hubs.

Bolstering productivity

According to a report by the University of New South Wales (UNSW) City Futures Research Centre, building affordable housing closer to jobs would cut travel times and costs to households. Travel time savings could amount to $2.26 billion in today’s dollars over 40 years and help boost labour supply.

The study’s findings suggest that for any given skill, age or gender group, wages are higher for people who live closer to jobs. For example, unqualified workers living close to their workplace earn $11,793 more a year on average, or $56,000 over their lifetime, than those who travel long distances to work. Employees with higher degrees make an extra $41,170 a year, or $425,000 over their lifetime.

Figure 1: Effects of providing better housing outcomes to workers in Sydney

Source: UNSW City Futures Research Centre’s Strengthening Economic Cases for Housing

“If we ensure that these individuals had access to affordable housing and had some government grant to bring down the costs of the housing [$8,500 a year over 10 years], then they would be able to save on travel-to-work times, and an average $2,500 per person per year,” says UNSW Visiting Professor Duncan Maclennan, who led the research.

While spending on housing is generally viewed as a social rather than an economic function of governments, the study shows that investing in affordable housing has a strong impact on productivity and economic growth.

“There is a productivity link. Housing policy is not just about redistribution, it’s about growth and productivity too,” says Maclennan.

Addressing the affordability problem

Maclennan calls on governments across Australia to address the housing affordability problem, which he says has disadvantaged younger people disproportionately.

Housing policies typically aim to cap rent at no more than 30% of household income, but the study reveals that low- to middle-income renters in Sydney pay an average of $6,000 a year more than that.

“That’s a huge proportion of their disposable income,” says Maclennan. “It determines not only the savings of younger households, it determines when they become homeowners. It determines how they will accumulate assets throughout their lifetime.”

Treating housing like transport

Maclennan also urges governments to consider housing as economic infrastructure – and treat it just as they would transport investment. He says the productivity gains from building affordable housing suggest that they can have as much economic impact as other infrastructure investments including transport.

City Futures Research Centre Director Bill Randolph believes the research gives momentum to the debate about the economic value of investing in social and affordable housing.

“It also fundamentally shifts the focus to the role of government investment in housing as a key component of economic growth in our cities.”