On Four Corners last night, stories of difficulties in paying off mortgages. One issue is that some lenders are acting in a terrible manner (the non-English speakers with 9 year old translator a big case in point). The other issue is the problem faced by households with high income variation. [See also Harry Clarke]
On that score, in 2003, Stephen King and I proposed to the Prime Minister a HECS-like system that would give a housing lifeline to households that find themselves in temporary distress in mortgage repayments or rents. Over the fold is our article explaining the idea. We have written more here and here.
Needless to say, had the government followed our recommendations, this Four Corners program would not have been possible. New government (supposedly standing up for the problems facing lower income households), time for another look?
Housing lifelines would rescue many
by Joshua Gans and Stephen King
(Australian Financial Review, 6th August 2003)
The announcement of a Productivity Commission inquiry into housing affordability should be welcomed by all. It is precisely because there is a ‘blame game’ surrounding what makes housing unaffordable that an independent inquiry is needed.
In that regard, media attention has focused on the plight of the first home buyer as housing prices rise. The image is of a young couple, likely contemplating children, with little savings, staring down the face of a debt burden for the rest of their lives. To them the issue is how to purchase a cheaper home. And, as a matter of simple economics, the only sustainable way to achieve that is to find a way of expanding the housing stock. Working out what governments can do in this regard is clearly worthwhile.
But, outside the gaze of media attention, there are other real affordability problems. One such class is for those households who have never been able to become homeowners. For them, the problem is as much low income as it is a lack of housing.
But affordability can be an issue for households who have already opted for a large mortgage. When incomes and house prices fluctuate, households with a temporary change in circumstances – such as income loss or the need to move cities to work reasons – find themselves in immediate housing stress. A primary income earner could lose their job or suffer illness and the danger would be that the whole household would have to sell up and move. The loss of income hopefully would only be temporary, but the effect on housing and lifestyle choices, credit rating and family stress would be longer term. Put simply, a short term loss of income could mean foreclosure or eviction, forcing the household to ‘start again’. For those households, the issue is how to afford their current home.
Dealing with this type of affordability problem necessitates new thinking beyond issues of the housing stock per se. In our report to the Prime Minister, we proposed a housing lifeline to deal with this. The idea is that when there is a temporary loss of income the government would step into the breach and offer eligible households (with eligibility based on nothing more than an assets means test) a payment to their housing provider – be it a landlord or a lender – to tide them over the rough patch. When the household’s income rose again, they would face a slightly higher marginal tax rate for as long as it took to repay the loan. This would operate in much the same way as the HECS system operates today for higher education.
The housing lifeline has several advantages over traditional social security. For one, its main benefit is the removal of anxiety. Even a household that never uses the lifeline knows that it is there and faces less risk as a result. Accessing the lifeline is a choice that rests with the household itself, so that the people best placed to judge the need for temporary assistance are the ones who choose whether or not to use the lifeline. Also, remember that the lifeline is not a handout – it is a debt that has to be repaid. But this avoids any stigma and uncertainty associated with working out eligibility or waiting for rent assistance and other programs aimed at long-term assistance. Only if a household has persistent difficulties is a more interventionist long-term approach desired. Under the housing lifeline, households are empowered by having the option to access temporary assistance that it can use if need be.
The hope is that a policy like the housing lifeline might actually prevent households from turning what was a short-run loss of income into a long-term social security liability. Income-based handouts can have undesirable outcomes, creating high levels of taxation for subsequent income earned. The housing lifeline, by being based on long-term lifetime income avoids such poverty and incentive traps. Thus, if should reduce the number of households who need to access basic social security and public housing programs.
For landlords and investors in housing, the existence of a lifeline changes the risk calculation when providing housing for those with low incomes and high risk. This will open up housing markets to households who are currently excluded due to income variations and risk. Ultimately, the lifeline will alleviate the problems of housing affordability for a wide range of the community.