Two world views are contesting the public policy space on social and affordable housing.  The first I will call ‘Let the Market Do its Work’ (LMDW).

LMDW has held sway with policy makers for more than three decades.  It abruptly seized the ascendancy from the alternative ‘Social Housing is Essential Infrastructure’ (SHEI) view with the advent of the market liberalizing Hawke-Keating Government (1983 – 1996).

According to LMDW, an efficient housing market free of unnecessary regulatory fetters will deliver almost all of the community’s housing needs, including those of low and modest income earners.  Its policy prescription has two prongs.  Firstly, ensure that income support is both tightly targeted to, and adequate for, renters of limited means.  Secondly, create a ‘highly elastic housing supply curve’; that is, a development sector that will respond swiftly with additional housing when price pressures signal unmet demand.

Under LMDW, developers would not ordinarily build new housing for lower income households. These households would benefit indirectly.  Those moving into newly constructed housing will leave vacancy chains which will ultimately feed into a pool of affordable rental opportunities.  Governments would then only need to provide social housing for a residual group of tenants who are unable to participate in rental markets due to extremely low income, discrimination or disability.

The great appeal of LMDW lies in its promise of lower cost for governments, and the agency and choice which is afforded to low income households.  They are not captive to the offerings of state housing authorities or other subsidized housing providers, and the stigma that might attend these.

LMDW takes a top down ‘whole of market’ approach.  Housing is assumed to be amenable to production in competitive markets; policy prescriptions have a heavy emphasis on deregulation, reducing barriers to entry and mitigating administrative and tax measures that might distort free, well informed, transactions between providers and consumers of housing.

LMDW eschews normative prescriptions about things like settlement patterns, housing density and alignment of dwelling type with household type, which so exercise urban policy makers.  LMDW would leave the shape of the city to the individual choices of people buying, selling and renting dwellings.  Rather than prescribing how households should live in the interests of sustainability, policy would focus on making sure market transactors are fully aware of the costs and benefits of their choices, including, if possible, any externalities.

In contrast, SHEI is premised on a normative proposition about what every community needs by way of housing, including accommodation that is affordable to low and moderate income earners, if it is to function well for citizens, economy and environment.  The presumption is that no matter how efficient, the market cannot ensure these housing outcomes in each community.  Accordingly, government needs to step in to fill the gap.

LMDW would counter that no such conclusion can be drawn, because markets have not been given a chance to show what they can do, principally because of the dead hand of planning regulation.

In the decade running up to 1984, notionally the year when LMDW took the social and affordable housing policy baton from SHEI, Australian governments were building around 15,000 social housing units per year.  Under LMDW, this investment has dwindled to a trickle, apart from a two year spurt orchestrated by the Rudd Government as part of the nation’s response to the Global Financial Crisis.

After three decades of LMDW hegemony, Australian cities are enduring their biggest housing affordability and availability crisis since World War II.  One might have thought that another baton change might be warranted.  Instead, the grip of LMDW on thought leadership in housing policy is as tight as ever.  This is evident in the Productivity Commission’s 2022 Review of the National Housing and Homelessness Agreement.  The PC sidesteps the question of how much social housing Australia needs and doubles down on a deregulatory agenda for market housing supply.  The National Housing and Homelessness Plan Issues Paper released by the Commonwealth Government in August 2023, defers to the PC framing of Australia’s affordable housing challenge.

In truth Australia needs a policy mix that draws on both LMDW and SHEI; that is, both more efficient housing supply and a commitment to build social and affordable housing infrastructure in all communities.

By itself, the LMDW strategy is doomed to failure.  Achievement of a highly elastic housing supply as theorized by LMDW advocates is most likely a pipe dream, especially in a situation where Australian cities need to grow up rather than out.  Housing is not a commodity market where multiple suppliers can be quickly tapped to meet surging demand and quell price rises.  New housing supply has to contend not only with planning regulations (which can easily be improved if they haven’t been already), but lot fragmentation, land withholding and local infrastructure deficiencies.

Furthermore, vacancy chains and downward filtering of dwellings do not guarantee that communities will have the local affordable housing they need.  The accommodation that ultimately becomes available to low and moderate income households as a result of apartment construction in good locations will likely be of low quality and in places with relatively poor access to jobs.  This is how vacancy chains work; the least desirable housing becomes the most affordable stock.

Time for a baton change.

By Dr Marcus Spiller, Principal & Partner, SGS Economics & Planning Pty Ltd

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