Friday, July 20, 2012

The real housing supply problem - part 2

In part 1, we discussed the National Housing Supply Council's analysis of what we called the real housing supply problem in Australia: the supply of affordable rental accommodation to the lower-income households who need it. 

Across Australia, 60 per cent of lower-income households renting privately are in 'housing stress' (in New South Wales, it's 65 per cent); 25 per cent are in 'housing crisis' (in New South Wales, 28 per cent).

Those figures are, for the most part, worse than previously. And they are not affected by the overestimate of household formation that has undermined the NHSC's headline claim of a 'housing shortfall.'

The NHSC presents the rental affordability problem as a supply problem in the section of its report headed 'Affordable and available rental properties'.

We've discussed this part of the NHSC's work in a previous report and, as we said there, it can be tricky to get one's head around – but once you do, you get a clear view of the problem.

Here's the headline claims; we'll then discuss how they're calculated:
  • In 2009-10, there were 1,256,000 private rental dwellings that were affordable for the 857,000 private renter households with incomes at, or below, the 40th percentile [so, an apparent surplus of 399 000 affordable rental dwellings].
  • Of these, 937,000 were occupied by households in higher income groups. As a result, the apparent surplus of affordable rental dwellings for the lowest two income quintiles was actually a major shortfall of 539,000 dwellings (over 60 per cent of underlying demand), up from a shortage of 473,000 dwellings in 2007-08.

What the NHSC has done here is to basically separate the Survey of Income and Housing data into the data about households and their incomes, on the one hand, and the data about what rents are being charged for their dwellings, on the other hand.

Looking at the households, the NHSC says, 'OK, let's divide the households into groups by income'. They use five groups, each with 20 per cent of households ('quintiles'), so the bottom two quintiles represent the bottom 40 per cent (ie the 'lower-income households' we're talking about).

Looking at the rents data, the NHSC says,  'OK, we have so many dwellings rented for this amount, so many for that amount, so many for that other amount – indeed, for a whole range of rent amounts.'

As a first step, the NHSC then says 'Our first quintile of households (ie the lowest 20 per cent) would find such-and-such a number of dwellings affordable (that is, they'd pay not more than 30 per cent of their income in rent); the next quintile would find this-and-that number of dwellings affordable, and so on.'

Then the NHSC takes a second step: 'Now, in real life not everyone gets lined up with the dwelling that's affordable for them. Let's go back to the data and see how many of those affordable rentals are actually getting to the lowest two quintiles.'

And that's the basic problem. There's lots more dwellings that go for rents that are affordable for lower-income households than there are lower-income households – but too few of the affordable dwellings are getting to those households.

Now, you'll notice that the NHSC is again using absolute numbers of households and dwellings. These numbers, as we've said, are based on the data from the Survey of Income and Housing, scaled up according to the ABS's estimate of the number of households in Australia – which, as we know, was an overestimate. This means that the absolute number of households referred to by the NHSC is over-inflated – but so is the number of rental dwellings to which they relate. In other words, both sides of the relation have been inflated – so while the absolute numbers used are off (by ten per cent, roughly), the shape and relative dimensions of the problem described by the NHSC still hold.

And the shape of the problem is depicted in the graph below. Once again, it is tricky to get one's head around, but persistence pays off, because it shows you what's happening in more detail, within those quintile groups.

The horizontal axis (marked 0, 2, 4, 6, 8 and 10) is all those renter households lined up in order of their incomes (lowest to highest), with the quintile groups marked (the NHSC has, a little unhelpfully, slipped into using 'deciles' (ie 10 per cent groupings) here, but just think of that 2 as marking off the lowest 20 per cent, and the 4 marking off the lowest 40 per cent, and so on to 10, which marks off 100 per cent – that is, all households).

The vertical axis is the surplus (up) or shortfall (down) of affordable dwellings, relative to households. As we said, you should knock about 10 per cent off the numbers marked (200,000 etc), but it is the shape of the lines that's important.

Looking at the red line first: this shows the first step in the NHSC's analysis, as described above, in terms of the shortage or surplus of affordable rental dwellings. Imagine that you're some sort of uber-bureaucrat, allocating households to dwellings that are affordable for them.

Starting at 0, move along the horizontal axis – the line of households – and observe what the red line does.

About half way into the first quintile (so, about the bottom 10 per cent of households), you'll see the red line has dipped down. This means that there is a shortage of dwellings affordable for these very low-income households: if you tried to allocate each household to a dwelling that's affordable for them, you'd quickly run out of dwellings, and you'd have to start allocating households to dwellings that are unaffordable for them.

But once you get to about the end of the first quintile (ie the bottom 20 per cent), you'll find that the red line has turned up and is just about at zero again. This means as you've moved along the line of households, allocating them to dwellings, you've found more and more dwellings that are nearly affordable, such that by the time you get to around the end of the quintile group, you're allocating them to affordable dwellings.

And as you keep moving into the second quintile, the red line keeps going up: meaning that if you tried to allocate each household to a dwelling that's affordable for them, you'd have dwellings to spare. Keep allocating households, and the spare dwellings keep mounting until you're past halfway along the line of households. After this point, the red line dips down – but not to worry, this is just you leisurely drawing down on your surplus of dwellings as you allocate increasingly high-income households to dwellings, until you allocate the last (highest-income) household to the last dwelling.

Looking now at the grey line: this shows the second step in the NHSC's analysis. This is real life, where households have gotten their dwellings themselves. You're not an uber-bureacrat allocating households to dwellings; this time, you're just an observer, armed with a clicker counter, counting the households who are paying more than 30 per cent of their incomes for the rental dwelling they actually occupy. 

Starting at 0 again, you move along the horizontal axis, counting the households renting unaffordably. For every one you count, the grey line heads down.

As you move through the first two quintiles of households, you're clicking your clicker counter a lot and the grey line heads down at a steady clip – 60 per cent of households in the line so far you've counted as renting unaffordably.

As you move along the axis into the middle quintile, you find yourself clicking less often, as fewer of the households you encounter are paying more than 30 per cent of their incomes in rent. The grey line starts to level out. In fact, once you're past halfway, you scarcely click at all – and the grey line flattens out.

So that's the size and shape of the real housing supply problem: we've got affordable rental properties, but not enough for everyone who wants one, and certainly not enough for all the lower-income households who really need them. Most of those households – 60 per cent – are missing out, and renting unaffordably as a result.

As for the causes of the problem, and what to do about it – we'll discuss that in part 3.

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