A Housing Debate We Don’t Need To Have 6

Monday, May 4th, 2015
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It is no surprise that former Prime Minister John Howard labelled housing affordability as a BBQ stopper.

The dream of home ownership matters a great deal to Australians, and it remains a hot topic today.

As such, it is deeply disappointing that the housing affordability debate has been hijacked by side issues such as the impact of foreign buyers, lax foreign investment rules and negative gearing as a cause for the house price increase. Instead the debate should be properly focussed on the real problem, which is lack of supply or more correctly, the lack of land supply.

Seasoned house builders, who have seen many housing cycles come and go, know that house prices increase more rapidly during residential upturn. Builders also know that a house price boom does not last forever and that house prices also subside.

The latest upturn is highlighting the fact that, as with previous upturns, housing supply is unable to keep up with housing demand.

Master Builders research shows Australia’s population growth, continued high levels of immigration combined with demographic changes are major drivers of increasing demand. These findings are backed up by similar findings by the Reserve Bank of Australia, the Federal Treasury and various Parliamentary inquiries.

The undersupply of housing has led to, as in all cycles, a jump in house prices, but the populist approach by the ‘commentariat’ is not helping to get our politicians focused on the real problem.

A complex array of structural impediments are standing in the way of supply being able to meet demand. These structural barriers are well known and include the full gamut of development approval processes for residential zoning, higher density developments, unreasonable developer charges, the third party appeals process and so on.

There is no simple one-size-fits-all solution to this issue. The supply side problems that lead to deterioration in housing affordability are different between states and yerritories. Accordingly, Industry has called for the reintroduction of National Competition Payments (NCP) as one of the core reforms to free-up housing supply.

The NCP proposal would have the federal government pay state and territory governments for the permanent removal of the structural impediments to housing supply. That will lead to significant improvements to housing affordability. Tinkering with foreign investment rules and negative gearing is, at best, tinkering at the edges and simply misses the point.

Master Builders Australia has developed a multi-point, package approach to improve the housing affordability challenge in Australia. In addition to NCP payments, the plan calls for:

  • A commitment by federal, state and local governments to implement a coordinated and proactive housing affordability agenda
  • Streamlined and simplified development approvals processes
  • Local councils to develop practical and achievable residential land release plans over a ten year ahead rolling time horizon
  • A rigorous and enforceable building code and regulatory system to ensure the development and continuation of an efficient and competitive building industry
  • Assurances that state and territory governments will honour their commitment to abolish stamp duties on business conveyances of real property
  • Annual publication of a national stock-taking of developer/infrastructure charges levied by all local councils on both greenfield and brownfield developments

Importantly, housing supply reform proposals are designed to ensure that the intergenerational home ownership gap does not widen for first home buyers. Home ownership is an essential social and economic pillar that must be protected. Making sure that households have access to appropriate and affordable housing must remain a policy priority for all politicians, both at the federal and state levels.

Access to appropriate and affordable housing should also be a priority for public and social housing where there is an equal urgency for fundamental reforms about how housing is delivered in these sectors.

All politicians and commentators to bring the focus of the debate back to the main game, which is housing affordability and how best to increase the housing supply.

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  1. Ross Elliott

    Well put. It is remarkable how many reports from 'economists' and other observers fail to understand the supply side issues. Those who claim to have taken them into account clearly have never tried to produce a single block of land. Our supply blockages are all policy induced and can be remedied with policy reform, but demand side distractions like attacking foreign investment will only take the focus off the real issue. It is the cost of producing new residential land lots which is rising. The cost of the house which sits on it has barely changed after inflation. We should be able to provide basic new housing on city outskirts for no more than four times average individual incomes, as we have done for generations. All that buys you now is the land and this change came about because of land supply policies introduced in the late 1990s.

  2. At face value, some of the latest foreign investment reforms put forward last Saturday do have merit, such as greater penalties for those who flout the law.

    Still, no matter what the role of foreign investors, the cold hard reason Australia faces an affordability problem is an underlying structural deficit of supply, which BIS Shrapnel puts at around 100,000 dwellings.

    Addressing these problems is more politically challenging than blaming foreigners, but is absolutely necessary if we are to avoid a generation of Australians being effectively locked out of home ownership.

  3. David Collett

    "Master Builders research shows Australia’s population growth, continued high levels of immigration combined with demographic changes are major drivers of increasing demand."

    Your own research has shown you that high levels of immigration has increased demand (and therefore prices and therefore is influencing housing affordability) and yet in the same breath you say that it is just a side issue:

    "the housing affordability debate..has been hijacked by side issues such as the impact of foreign buyers, lax foreign investment rules…"

    As you well know, if you restrict the supply of a product and increase demand for it, the price of that product will rise.

    So how does phasing out negative gearing (and keeping it for new builds) benefit builders in Australia?

    Currently the majority of residential buyers are investors who can outbid a homeowner and will just put the property up for rent without any major changes.

    If the majority of residential buyers were home owners, guess how many of them would be motivated to renovate their property and make substantial changes?

    Your job as CEO is to expand the market for your builders.

    Negative gearing gives you that.

    • Bea Lasalle

      I'm confused, where does the author suggest that he wants to restrict supply? On my reading he is asserting the exact opposite and that increasing supply is the key to affordability. In my observation there is consensus on all sides of the debate that increasing supply is the key.
      On negative gearing, the latest data released by the Australian Taxation Office show that the majority of those claiming losses on investment properties are middle to lower income earners such as security guards and other occupations. So its actually used by people who don't have the means that higher income do to increase their family's wealth. Why is it wrong for lower and middle income people to do this? Surely you are concerned for the rights of taxpayers?

    • David Collett

      Hi Bea,

      The author does not suggest that he wants to restrict supply. I was pointing out that the current arrangement where supply is restricted and demand is encouraged leads to higher prices.

      What matters here is where we want to go. If we want to continue reducing home ownership rates in Australia (they have dropped from about 43% in 1991 down to 32% in 2011 where home ownership is those households that have finished paying off a mortgage) then we should let everything be as it is and make no change.

      If we want to increase the rate of home ownership then increasing supply as Wilhelm suggests will help achieve that.

      Continuing to encourage Australians, whether they are security guards, teachers or lawyers to buy negative cash flow houses that have already been built by outbidding a potential home owner will only lead to higher house prices and lower rates of home ownership.

      It is wrong for people to use a handout to outbid a homeowner on an existing house where the deal loses money every month and requires even more buyers to come along in the future to drive prices up to be able to breakeven or make a profit, no matter whether they are cleaners or brain surgeons.

    • Bea Lasalle

      ABC TV ran a program from the UK called the super-rich and us. Check it out on iview. The program asserts that there is a growing gap between the super-rich and everyone else. Not to digress unduly, the a key issue seems to be that when individuals cross a certain threshold of wealth it's starts to diminish returns to the community because there is just no way all of it can trickle through the economy.

      But to get back to my point, the program hears from historians and economists who suggest that in the recent past from WW2 to perhaps the last decade, British society had a growing economy and growing wealth because individuals had a realistic aspiration to achieve home-ownership. Home ownership levels are in decline in the UK which is posited as a source of the growing inequality.

      So, I don't know you but increasing the supply of housing in Australia to make sure home ownership is accessible to current and future generations is an idea I sign up to.

      I'm also glad you agree that increasing supply is the key way to achieve this.