You may have heard about the latest idea to help with the growing problem of housing affordability in Australia – half price housing. If you haven’t heard about this it is based on a house purchasing system which is currently available in the US. Basically it promises to halve the cost of buying a property in Australia because you don’t actually own the land the house is sitting on – just the roof. If you’re struggling to afford to buy your own home your first thought might be “Great! Where do I sign?”. But we as financial planners see this as just another scheme which could potentially add fuel to the fire and actually increase housing prices over the long term.  The opposite affect to the one intended.

Why Could Half Price Housing Make Things Worse for Housing Affordability?  Supply and Demand 101

In order to understand the main driving force behind housing affordability we need to do a bit of background explanation.  Economics 101 – Supply and Demand.  The basic idea behind supply and demand is that the cost of something will go up or down depending on two things: how much there is of that thing available (supply) and how many people want that thing (demand).   When you combine a low supply with a high demand, that equals a recipe for driving up the cost of that thing quite significantly.  This is what has occurred in the Australian property market.  There is a relative shortage of houses (supply) and an increasingly larger demand for that housing (demand) due to a number of factors such as population growth, etc.

Now that you have a basic understanding of the concept of supply and demand, consider that if you introduce the Half Price Housing idea that more people will be in a position to be able to afford to buy a house (increasing demand).  This doesn’t change the fact that there is still a shortage of housing (supply).  Another example of this is:

Let’s say that the drop the price of a flight from Sydney to London to $200 return – is that going to make it cheaper? Certainly, it will. Will there be any free space left on the planes? No, not a chance. In fact, you’ll have to start booking your trips 12-24 months in advice, or even further. There are only a limited number of seats on planes in the world, and once they are full, they are full.

You can’t fix a supply and demand problem by giving the demand side more money – in fact in the long term, you’re just making things worse.  As financial planners we are disappointed when we hear industry spokespeople saying the government has to do more about housing affordability, and then go on to discuss ideas such as further grants, cutting stamp duty and other ideas that put more money in the pockets of consumers, so more of them can go out and continue to spend more and more money on what is currently a limited commodity.  Measures like these can only make the housing affordability problem worse in the long run.

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