Affordable housing is not just about the purchase price

Solving the affordable housing crisis is a high priority for state governments around Australia.

This is understandable given the hyper-inflated property markets in many Australian capital cities. Rising concerns that interest rates will increase over coming years also fuel the unaffordability fires.

Proposed solutions to this crisis often focus on opening up new greenfield areas of land in the outer suburbs to develop lower-cost housing. Hence the solution to the affordable housing process is often thought to lie in creating housing with a low purchase price. This approach incentivises developers and housing suppliers to keep the price of new housing stock as low as possible.

This leads to houses that are more costly to own and maintain. Construction savings on features such as insulation, passive solar design, and heating and cooling systems mean such houses have high energy demands. That, in turn, means ongoing living costs such as the cost of air conditioning remain high for the life of the house.

Such houses are also constructed to the minimum standards dictated by the building codes. Poorer design and lower-quality materials can lead to large deferred maintenance costs and lower resilience to natural hazards.

In addition, housing in the outer suburbs has poorer prospects for capital growth, effectively trapping poorer households on the fringes of our cities. The residents of these suburbs also generally face higher transport costs to get to work and services.

Exposed to future risks

We are, in effect, encouraging new home owners to take on larger future risks and costs just so they can buy a house. This keeps government happy by increasing the number of new home owners – a proxy for affordable housing.

But this approach ignores the issue that home owners increasingly cannot afford to continue to own a home, not just buy one.

Increasingly, the first cost-saving action for struggling home owners is to be uninsured or underinsured. About 14% per cent of people have no home or contents insurance whatsoever.

Of those who are insured, many know they are not adequately covered. Back in 2012 it was identified that around one-quarter of home owners and renters had no insurance cover for house contents. Other estimates suggest that nearly one-third of households in Australia remain uninsured. Other studies more recently concluded that 41% of tenants do not have contents insurance.

Events like the recent Cyclone Debbie remind us just how exposed many families are to natural hazards, including physical damage to assets and the associated emotional hardship.

In many cases, families have been financially wiped out as a result of their lack of insurance coverage. These families then go back onto the long waiting list for affordable social housing.

Therefore, by defining affordable housing in terms of only purchase price of housing and number of new home owners, we are dramatically understating the problem of housing affordability.

By facilitating families to invest in houses that require high energy demands to be liveable, and which are located in areas increasingly exposed to natural hazards while households are uninsured or underinsured, we are simply mismanaging the affordable housing challenge.

Reframing affordability

A key action that can be taken is to frame housing affordability in terms of whole-of-ownership-life costs. This means we move away from defining affordable housing in terms of the initial capital cost and instead consider the total cost of owning a house over the term of ownership.

This approach explicitly encapsulates the risks of under-insurance and higher interest rates.

This is the approach used when funding infrastructure and major utilities assets. When planning major infrastructure, cost-benefit analyses must now consider the whole-of-life costs. This is to account for enthusiastic infrastructure advocates deferring costs through to increased maintenance obligations so the capital costs remains low, and hence the project becomes more attractive.

It’s the same for housing development. Therefore, the same approach needs to be adopted for home ownership.