Entrails and Crystal Balls: Tracking rents in Sydney

Much like pinning the tail on the donkey, setting rents is an inexact game for landlords. Too much and no one can afford to rent the place, too little and you're missing out.

And if you're a tenant, you'll want to have an idea of where rents are going, particularly if you're looking at a new tenancy or if you've got a notice of rent increase in your current one.

Now, there is an industry of statisticians, researchers and pundits more than happy to help track and sometimes predict what everyone else is doing.

We’ve looked at three ways to track rents that use quite different methods to come up with an answer. And the answers they come up with are quite different. Some of them may be more useful, and more reliable, than others. 

Unfortunately, the least reliable measure may be the one that gets the most attention.

APM

Australian Property Monitors is a Fairfax-owned group that, amongst other things, tracks the asking rents for Sydney properties on the Domain property website and paper form as its measure.

As a Fairfax subsidiary, it is unsurprising that their quarterly results on asking rents are published with much fanfare. Fairfax journalists pore over the results looking for meaning in the numbers.

A quick search on Domain showed 14 873 properties available for rent in the Sydney region on their website on the 4^th of August, so APM's sample size is considerable. The problem is that these are 'asking rents' – and what landlords ask for, they may not actually get.

Also, from time to time APM revises past figures with corrections. The corrections are not that common but first impressions do last. For the analysis present below, where there is a difference we have used the numbers published when first publishing that quarter’s reports, and not any corrections made later. APM’s publications with their current methodology extends only back to 2010 so we’ll be looking at an admittedly small duration. And finally, these figures are for Sydney only – not the rest of the State.

CPI

The Australian Bureau of Statistics calculates CPI by looking at costs of a range of standard living costs and comparing those costs over time. 22% of the CPI is made up by housing costs- both purchasing and renting. From the ABS:

“Rental payments for privately owned dwellings in the metropolitan areas of each capital city are obtained from real estate agents under a matched sample approach, i.e. prices are collected for the same sample of private rental dwellings every quarter.”

Public housing rents also factor into the rents index. The ABS gains this information from the various state housing authorities.

The CPI – Rents index for Sydney, then, comes from a sample of Sydney real estate agents as well as Housing NSW for the actual rents paid on some of their properties. This means it includes current rents on properties that may have been tenanted for some time. And the index goes back a fair way – to the 1980s (here we'll stick to the shorter period also covered by APM). What the CPI – Rents index misses are rents for properties outside Sydney, and rents for properties not managed by real estate agents. Rents are for all dwelling types, where APM divides into houses and units.

Rent and Sales Report

Our final measure is from the Rent and Sales Report, published by Housing NSW every quarter. Its figures on rents come from the information on bonds lodged with the Rental Bond Board for the previous quarter, so it tracks the actual rent paid on newly leased properties in Sydney and elsewhere in New South Wales. What the Rent and Sales Report misses are rents in established tenancies. The sample the Rent and Sales Report uses almost complete (about 44 000 bonds for Greater Sydney per quarter), because the vast majority of landlords require payment of bonds and it is a legal requirement that bonds are lodged with the RBB.

Rent and sales data is published for houses (~20%) and units (~50%), and about 30% are not identified as either. (In the 2011 census, NSW rented dwellings were about 60% separate houses (including 15% terraces), and 38% units.) The Rent and Sales Reports go back to the 1980s: for the present analysis, we refer to its Sydney figures, over the shorter APM period. Readers will notice that the following charts are missing data from June 2014 for the Rent and Sales Report – this is because they are published on a 2 month delay, so 
June will be released in August.

So, let's compare the results of these different methods of tracking rents. For the CPI measure, we have taken the median rent for Greater Sydney from the 2011 Census and applied the CPI rents index to it. This means that it is measuring the actual rents of established tenancies, leading to a much lower figure. Looking at results for houses first:

It is immediately noticeable that in the Houses list the asking rents stayed at $500 per week in December 2011 and except for two quarters haven't moved since. Both CPI and Rent and Sales figures show growth over the period. So, for quite some time, asking rents were way out of line with the rents tenants were actually paying. By way of illustration, here is the margin of error for both houses and units between the asking rents in the APM data and the actual rents from Rent and Sales. Houses certainly do over-reach by quite  a long way.

So when APM talks about "flat growth" for houses, that's only because it was APMs measure of asking rents on houses that didn't move at all. In fact, what landlords were asking for was declining in real terms – even as the rents tenants were actually paying was increasing!

It was probably naive to think that a surge of activity would lead to an oversupply of rentals, given that we have had such low vacancy rates, and even more so to think that rents would go down as a result. The last time that new rents overall went down in NSW was June 2004! 

In relation to units, the asking rents measure is nearer the mark, and if you squint you can see the asking rent leading into rises in the actual rents in following quarters, though not towards the end of the series.

To demonstrate the relationship between the actual rents and the asking rents, we'd like to look at a couple of statements made in the most recent article about APM's Rental Report in the Sydney Morning Herald.

Sydney rents have surged to an all-time high, new figures show... after a prolonged period of flat growth, house rents also [along with units] rose by 2 per cent to $510 a week,

The statement is true, though not very useful, and as we'll see not really borne out by the APM figures. It is a basic fact of the way we run our economy (and print our money) that prices should always trend up in nominal terms- it’s more important to look at how fast a particular price is rising in comparison to other prices, particularly compared to income. 

So we might look at the Rent and Sales Report (to March) and APM’s Rental Report in today's money-

For houses, not only is the most recent result from APM not the highest in real terms, but since their series began it has come up from its lowest point so far! However, the actual rents for houses have been on the rise for the last year, and almost certainly will be at their highest point thus far. Units also recorded their highest result under the Rent and Sales series in March and we'll see where June leaves us!

For both houses and units however, this probably shouldn't have come as a surprise. According to the Rent and Sales Report, rents for both houses and units increased by more than 2% in 3 of the last 4 quarters for an average of 1.59% in houses and 1.6% for units over the last year. CPI rents also recorded just under 1% over the last year.

So what's happening here? Maybe landlords and agents were just off their game. Or maybe they believed the following bit of analysis reported with the APM figures.

The persistent surge of investors, who make up more than half of all home loans, was expected to lead to an oversupply of rentals and push weekly rents down.

We agree there has been a surge in so-called 'investor' activity over the last year. This can be seen in the amount of finance that's been thrown around by 'investors' in NSW particularly in the last 2 years. 

The surge of 'investors' was never going to have this effect, because they've all been buying existing dwellings, including from the owner-occupied sector. And they've been doing so as negatively geared speculations on future price gains. This means they've been bring into the rental sector higher-value properties, for which higher rents are being paid – particularly by the higher-income households who might otherwise have been owner-occupiers, but who are still renting, because they keep getting outbid by rampant speculators. 

So it would be more accurate to say that the persistent surge of speculators, who make up half of all home loans, has distorted the shape of the rental market and pushed weekly rents up.

We mentioned that the Rent and Sales data will be released this August. In fact, they are due for release on Monday, the 11th of August. We'll be watching carefully to see how close the asking rents are to the actual rents – hopefully, Fairfax, APM and the ABS will be too! 

The June 2014 Rent and Sales Report has been released! The short story? The median rent went down for both houses and units. June has traditionally been a slow quarter for rents, being the only quarter to average negative growth in both houses and units over the periods examined above. After one brief quarter of advertising and receiving the same amount of rent, landlords have returned to their overreach as the asking rents went up. So there was truth in the expectation of rents going down, though we suspect for confused reasons.

Overvalued Ownership

A young couple walk into a bar, and have a look at the wine list. The first wine they see is $50 a glass, and the second is a more reasonable $8. They decide to buy one of each to test this apparently amazing wine. To their surprise, the more expensive wine is only slightly nicer than the other. They conclude, quite rightly, that the first is overvalued. The comparison of two basically similar products is the gist of the analysis recently published in relation to housing by the Reserve Bank of Australia in a paper entitled "Is Housing Overvalued?"

It is an interesting approach, and not one that often appears in media, with price-to-income (such as Demographia's Housing Affordability Survey) and price-to-rent being the common measures. Whilst we don't agree with the RBA authors when they say that it doesn't matter whether house price rises are outpacing incomes when discussing whether house prices are overvalued, looking at the alternative does provide a useful insight into why people might choose one or the other.

Their answer is, at first glance, a little surprising. They find that if the house price appreciates at the same rate as it has, on average, over the last 60 years, then there's no clear financial winner between renting and owning. They go on to say that if, as the RBA expects, house prices appreciate at less than that rate then you will be better off renting than buying. The less expensive wine leaves a nicer taste in the mouth.

They do make it clear that they are only talking about the financial position, and so there may well be a premium people are willing to pay to own rather than rent. This is for a range of reasons that the authors try not to take into account, however this leaves a number of assumptions in their data that may change the numbers significantly. The authors note some of these assumptions but proceed nonetheless, dismissing them as insignificant. It is looking at only some aspects of the wine, and ignoring other factors.We'd like to take a closer look.

Demographics
This form of user cost analysis relies on the person being able to make the choice. But there is no choice if you cannot afford the alternative! So this analysis is useful only for those able to choose between buying and renting effectively the same property. Having access to the finances, both cash and credit, for the deposit, stamp duty, and other sale fees limits the cohort of people making the choice to a fairly limited number.

We know for instance, that the particular market that this choice is most relevant to - first home buyers - are buying less and less property as investors take advantage.

Respondents to our own affordability survey cited being unable to buy as the main reason they rented, and while it is a small sample-size, the margin of error would need to be truly astounding to ignore the result.

Tenure costs
Whilst inevitably we need to allow some lee-way with the data, there are a couple of crucial differences between the experience of home ownership and the experience of renting that do change the financial situation.

Chiefly, the length of tenure- the paper uses an average length of home ownership of ten years as the basis of comparison. The authors note that they "exclude moving costs, which would be incurred whether one owned or rented."

This is true, though incomplete. We'll accept the average length of home ownership as 10 years, though the source for that may include investors, who buy and sell at a much faster rate. We also know that of the bonds held by the Rental Bond Board in NSW, two thirds are returned within 2 years. This is supported by our affordability survey in which 79% have moved within the last 5 years, and our respondents averaged moves every 2 years.

When excluding moving costs the authors have removed a cost that renters bare approximately 5 times as much as owners- and given we're talking about a cohort of people who are choosing whether to be renting or buying, we can't say that they simply have less stuff to move.

There are a host of costs, both economic and non-economic, related to moving including removalist fees, breaking utility and communication contracts, time spent updating records like driver's licenses, increased travel times, changing schools, and even the possibility of missing out on money entirely.

The researchers also set rent as the rental yield on a property, and leave it to sit at the rental yield every year, so that rent is effectively increasing at the same rate as the property appreciates. Given they are expecting the appreciation to occur at relatively low levels, they also come up with low rent increases year on year.

Unfortunately, this doesn't really play out in the real world. The best data we have available to compare to their data is the CPI for rent across Australia. The series runs back to September 1972, and averages 6% per year over that series- about 3% per year higher than the increases considered in the paper.

This wouldn't matter if the renter in the RBA's calculation was staying in the premises for the whole ten years. Unfortunately, they are moving about 5 times, and leasing out a vacant property is the easiest time for a landlord to increase the rent. This is an important factor that is missing from the data.

We thank the RBA for this research, as it highlights in a number of ways the inequity between renters and home owners plays out in the real world, and the gaps in knowledge in the way many policy makers talk about renting. We have created differences between home ownership and renting through legislation, taxation and expectation that make it difficult to compare the two tenure forms very simply. In other words, its possible you may be better off financially with the cheaper wine, but the headache is worse.

Is government debt a burden on future generations?

The Treasurer, Joe Hockey, concluded his Budget speech and its agenda of cuts with an appeal to think of the next generation of Australians:

But unless we fix the Budget together, we will leave the next generation a legacy of debt, not opportunity.

As Australians, we must not leave our children worse off.

The Treasurer is talking about government debt. But is it really a burden on future generations?

Actually, no. In this admirably brief and clear article, Robert Skidelsky explains that while fears about one's own debts and legacies run deep, it really is wrong to apply them to government debt.

Says Skidelsky:

the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had
Read more at http://www.project-syndicate.org/commentary/does-debt-matter#1PgjEUp3Mb2hH1w5.99

the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had
Read more at http://www.project-syndicate.org/commentary/does-debt-matter#1PgjEUp3Mb2hH1w5.99

The national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had.

There are two sides to a debt. On one hand, it's a financial liability to the debtor. On the other, it's a financial asset to the creditor. That's the same for government debt (issued in the national money, as government bonds), which is a financial liability for the government, and a financial asset for bond-holders (and if you don't own a government bond yourself, you're probably in a super fund that does).

The practice of governments is to issue bonds that pay interest and, as Skidelsky says, this stream of interest income to the next generation of bond-holders, particularly if the Government feels the need to balance it with tax revenues, may be 'disagreeable' as a matter of the equitable distribution of income throughout society.

But the Government, as the issuer of a sovereign currency, is always able to pay this interest: as we discussed recently, it cannot run out of money. And for that reason, the Government could, as an alternative to issuing interest-bearing bonds, simply spend by issuing currency (that is, crediting the bank accounts of payees, via banks' reserve accounts at the Reserve Bank).

Spending, of course, has two sides too. Money spent by the Government is money received as income by the private sector. In the name of 'saving' money (that it cannot run out of), the Budget will reduce income to the private sector by the equivalent of 1.3 per cent of GDP relative to last year; that's $20 billion taken out of an economy that is growing below trend and in which labour is underemployed, and in which there are useful and productive things to be done and investments to be made. But with less money, as Skidelsky observes, less of that will happen, to the disadvantage of future generations.

*

It should be said: the Budget papers do not envisage such a reduction in activity in the wider economy. But if government spending is reducing, the Government's forecast levels of production can only be met by... a huge expansion of private debt. But can households – real households, not fallacious ones – incur much more debt, on top of their already massive burden of past promises to repay?

(Source: RBA Chart Pack – Household Sector.)

the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had.
Read more at http://www.project-syndicate.org/commentary/does-debt-matter#1PgjEUp3Mb2hH1w5.99

 

Can the Australian Government run out of money?

The Federal Treasurer, Joe Hockey, is worried that the Australian Government is 'running out of money'.

From the perspective of Modern Monetary Theory, the Treasurer's worries are misplaced (he'll still have worries, just not this one). The Australian Government is centrally involved in the creation of Australian money, and cannot run out of it.

For all practical purposes, the money we use in Australia is Australian dollars. Anything that's for sale here can be paid for in Australian dollars, and just about all financial liabilities incurred here are accounted for in Australian dollars.

Australian dollars don't stand for anything else: not gold, for example, and not some other currency, such as the American dollar. (You can buy these things with Australian dollars, but you don't have the right to insist on your Australian dollars being converted into gold or $US, and there's no fixed price for either – it is up to you to find a willing seller and strike a bargain.) At the end of the day, one Australian dollar will always get you... one Australian dollar.

This means there's no necessary limit on the number of Australian dollars in existence. A relative few exist physically in the form of polymer notes and copper alloy coins; very many more exist merely as electronic entries in the accounts of the institutions – the banks, and the Reserve Bank of Australia – that make up our financial system. 

And this is where our money comes from. Money is created when banks advance it to someone; it is, so to speak, loaned into existence by clerks stroking keys on the banks' computers. Apply to a bank and, if you're creditworthy, the bank will keystroke up for you an agreed-upon number of electronic dollars (in return, the bank gets from you a promise: that you will pay, over time, that number of dollars, plus interest, to the bank). These dollars, so created, sit in an account to your credit at the bank, to be transferred to other persons' accounts, in payment for whatever you're buying.

Transfers between accounts at the same bank can be settled by the bank itself. To settle transfers between accounts at different banks, banks participate in the payments system operated by the Reserve Bank. This is effected by banks maintaining reserve accounts ('exchange settlement accounts') at the Reserve Bank. These reserves ensure that payments between banks can be cleared and settled. They, too, comprise electronic dollars – keystroked into existence by the RBA, to the credit of each bank.

If, at the end of the day, a bank needs more money in its reserve account, it can borrow from another bank (in return, the first bank promises to repay the money with interest). Banks with surplus reserves not lent to other banks earn interest on them from the Reserve Bank; these interest payments get keystroked into existence by the Reserve Bank. Alternatively, the bank can borrow reserves from the Reserve Bank's liquidity facilities, which will keystroke up for the bank the necessary dollars (in return for the bank's promise of repayment or transfer of assets).

Alternatively again, it may be that a bank cannot get those reserves, because it cannot make convincing promises of repayment (because its assets are lacking: eg a bunch of loan contracts with people who are a dubious prospect). If things are so bad that not even the Reserve Bank will lend to them, it's game over for this bank. People who have deposits with the bank will be in trouble too – but they may get their money back under the Government Financial Claims Scheme, under which the Australian Government will direct the Reserve Bank to keystroke up for the claimant the appropriate number of dollars in the reserve account of their (new) bank.  

The Australian Government makes and receives payments through the same payments system, using its bank accounts – the Official Public Accounts Group – at the Reserve Bank. To make a payment to someone, the Bank keystrokes a debit against the Government's account and keystrokes a corresponding credit to the reserves of the recipient's bank. The Government receives payments into these accounts too, but it does not need prior receipts for the bank to keystroke up a payment from the accounts. (Note that the OPAG has an overdraft facility – 'strictly limited' by the Reserve Bank, but really that's a limit on government by itself).

There's the polymer notes and the copper alloy coins that the Reserve Bank issues to banks for the purposes of cash withdrawals. When a bank asks for some of these forms of money, the Reserve Bank keystrokes the appropriate debit against the bank's reserve account; and when a bank returns notes and coins to the Reserve Bank, the latter keystrokes a credit to the bank's reserve account.

Ultimately, it is only Government payments that effect a net increase in reserves in the system. Individually, banks may need more reserves (because they've increased their lending and advanced more money to people) or have reserves to spare (because they've reduced the amount they've advanced), and can make transfers amongst themselves with no net increase in reserves; but when the system overall has advanced more money, the additional reserves can only come from the Government keystroking them into existence.

As you can see, the Australian Government creates money – Australian dollars – through its spending, its lending and crediting of reserves to banks, and its issuing of notes and coins, and there's no necessary limit to how much it can create. The Australian Government cannot run out of Australian money. It issues the currency.

You'll also notice that this account has not referred to the Government's ability to impose taxes or issue bonds – and in particular, we've not referred to either taxes or bonds as the source of the Government's money (because they're not). We'll return in future posts to taxes and bonds, and just what it is they really do in an economy such as Australia's.

Too much money

Many tenants are frustrated would-be owner-occupiers. In the present housing market, this is what they're up against:

(ABS, 5671.0 Lending Finance, Australia, table 8)

There's never before been so much money lent to would-be landlords, and over the past year or so it has shot up fast. That's the case for all of Australia, and for New South Wales.

(ABS, 5671.0 Lending Finance, Australia (New South Wales), table 19)

This great wave of money is not powering the construction of a whole lot of new houses –

 (ABS, 5671.0 Lending Finance, Australia (New South Wales), table 19)

– instead, it's just swelling house prices and swamping would-be owner-occupiers.

We often talk about the problem of unaffordable housing as a problem of not enough money. Certainly, that's how it will appear to frustrated would-be owner-occupiers, particularly those on low- or moderate incomes (and, we might add, our low-income-earning state housing authorities). And all too often politicians will propose that the solution lies in giving them (the would-be owner-occupiers; not, sadly, the state housing authorities) more money, in the form of First Home Owner Grants.

There's another way of looking at the problem of unaffordable housing: as a problem of too much money burning through the pockets of some sections of the population. Too much borrowed money, facilitated by low interest rates, and sent barreling by our tax policy settings (particularly in relation to capital gains tax and negative gearing) into our housing markets.

What to do about too much money? 

The last thing this problem needs is a First Home Owners Grant. You can lever that grant several times over into more borrowed money to pay for a house, but in a fast-rising market those would-be landlords can lever their own earlier-acquired housing wealth into even greater purchasing power. 

Higher interest rates? That might work, but it would also mean less money for other sectors of the economy that really need it, and a higher price for our already costly dollar. A national housing debt ceiling? Well, maybe something a little like that.

(ABS, 5609.0 Housing Finance, Australia, table 12)

Our finance sector regulators could implement policies of 'macroprudential regulation', which more precisely target the specific problem in our housing markets than interest rates can. These policies might include limits on the size of loans relative to the value of the property to be purchased (ie the loan to valuation ratio, or LVR) – or even relative to the market rent for the property. These policies would restrain the amount of money lent for housing investment. And of course, we should reform our tax regime, to reduce the preferential treatment of housing that incites so much borrowing for housing.

More and more commentators are turning on to macroprudential policy; so should our political leaders.

A new way home? The National Housing Conference 2013

Last week, while many of my colleagues in the Tenants Advice and Advocacy Program were gathering for their annual Regional Network Meeting in Newcastle, I hopped on a plane to check out the 8th National Housing Conference in Adelaide.

The National Housing Conference is convened by the Australian Housing and Urban Research Institute and is generally considered the prominent meeting of minds on all things housing in Australia. Representatives from numerous Australian governments, universities and other academic institutions, finance corporations, community organisations and housing providers gather for several days to hear of and discuss the latest developments in housing related research and policy.

These are my thoughts based on the sessions I attended and, to be fair, the prejudices of my position. I'm interested to hear from others who might have a different take on the conference. I'm also interested to hear from others who were not at the conference - I'm sure there are countless doers and thinkers within the housing realm who were not in attendance.

***

I approached the conference with equal measures of skepticism and pessimism, knowing that there are a great number of challenges faced by housing policy workers across Australia, and probably always will be. Of course, these challenges pale into insignificance when compared to the standard daily experience of low income 'consumers of housing' - those for whom housing policies manifestly fail. But it is hard to shake the sense that if only 'someone' could talk this or that department into acting on the right advice, even just once, then we could take a step towards a better, fairer housing system...

My interest is in how current housing related research and thinking might be of benefit to tenants, and particularly to tenants in the private rental market. That is, after all, where the bulk of people on low incomes turn for their housing. For that matter, it's increasingly where many people on moderate or high incomes turn for theirs, too. But the more I looked for signs of recognition that the driving force behind our housing crisis is a series of assumptions - that we must deliver financial independence to the relatively well-off by offering incentives to acquire assets that perpetually increase in value - the harder it became to imagine holistic housing policies ever seeing the light of day in this country. All I got were the usual platitudes - how can we arrest the decline of home ownership in Australia? If we can't do this, how can we build more social housing? How can we get 'markets' to take care of the lot, so that we don't have to dip into consolidated revenues? Because it's pretty clear that our governments do not want to pay for housing. (A recurring theme of the conference - occasionally a good suggestion or question came from the floor, where it was met with the usual response: "the political will is not there...")

Perhaps I'm being too hard on the conference... perhaps I should just accept that housing is expensive, and will remain so while ever so much of our economic growth is reliant on its value going up and up and up. The only landlords represented at this conference came from the not-for-profit housing sector; and these 'social' landlords seem to believe they have just as much of an interest in rising asset values as any other speculative investor. The more they're worth on paper, the more cheaply they can buy their next batch of money, the more they can invest in 'affordable housing'.

Maybe that's okay if it means more properties can be rented out to more people down the track at affordable rates, if only we can get our policy settings right in the meantime? Or maybe that's just the kind of paradox that's got housing policy in such a tangle from the start. If that's what we're prepared to accept, then we end up in a very difficult place indeed: the only way that we can deliver affordable housing is to rely on housing becoming more expensive.

But it's not surprising that amateur 'mum and dad' investors were nowhere to be seen. Perhaps it seems naive to even mention this - after all, they're not exactly an organised cohort and their 'consumption' of housing is not really consumption at all - they merely park money there, hoping that it will multiply and expand. Any interest they might have in housing policy is likely to be an afterthought - something to worry about if the market doesn't deliver the kinds of returns they might have been hoping for. Amateur landlords are unlikely to bring much of use to a conference about housing.

The irony is that we need them to. If we're looking for market based solutions to a housing affordability crisis then we need to take a closer look at what the markets are doing. It's no good to simply discuss what we'd like our markets to look like, if only we could... I don't know... if only we could talk this or that department into acting on the right advice. We need to bring these players to the table, to engage with them, to hear from them and learn from them as much as to try to convince them that the part they play in our housing system carries just a hint of social responsibility.

... because right now our markets are not delivering affordable housing. They are delivering wealth to those who are able to buy in. And those who take this option on that basis - and let's face it, that's pretty much every property owner there ever is, was and will be - are making it ever more difficult for others to even consider the option a valid one. This applies to social housing landlords who want to use their growing wealth for social good, as much as it applies to slumlords, amateurs and everyone in between.

The good news is that markets are delivering expensive homes to tenants just as much as they are to owner occupiers. It's just that they do so on very different terms. If we are prepared to accept that this is simply the way of all things, then so be it. But if that's how it is then let's put some thought into what it means for the interests of tenants, and what we might come to expect...

... and if we're not prepared to accept that, how do we build the case for change, given neither governments nor markets are ready to deliver?

Getting passed on

Any Brown Couch readers ever had an interest rate cut 'passed on' to you in the form of lower rent?

No? Didn't think so.

Maybe we need to get the Federal Treasurer to include that message in his pre-RBA Board meeting media messages. For the past week Wayne Swan has been in the media saying that there would be 'absolutely no excuse for the banks not to pass on any rate cut that was delivered by the Reserve Bank'.

OK, so he wants to put what pressure he can on the banks – there's no harm in that, is there? Actually, we think there is, when it distracts the government from our real problem with debt, and particularly housing debt. The really important problem is not interest rates, but the huge size of the debt on which interest is levied.

(Source: RBA Chart Pack – Interest Rates, October 2011)

(Source: RBA Chart Pack – Household Sector, October 2011)

But it is the banks' interest rates that have caught the government's attention, so that its reform agenda is directed to increasing competition amongst lenders – including by encouraging new sources of credit (and there's been about $14 billion worth of tax-payer funded encouragement so far, through purchases by the Australian Office of Financial Management of residential mortgage backed securities).

The risk is that lenders will compete not only through lower interest rates, but also by drumming up more business through reduced lending standards – hence more debt, and more risky debt.

What the banks really need is not the supposed discipline of the market, but the discipline of regulation, that actually gets at the amount of debt that households, and the economy, is carrying. Countercyclical captial adequancy requirements, perhaps? New controls on credit, such as maximum loan-to-valuation ratios? For more, have a look at the Joseph Rowntree Foundation's recent report on 'Tackling Housing Market Volatility' in the UK, around pages 35-40 or so.