It seems unlikely that commercially minded developers would produce brand new apartments targeted at low income earners. 

For one thing, it is doubtful they could feasibly produce new housing at a price or rent within reach of those on lower incomes.  Based on the 30% rent to gross income rule of affordability, a single person household at the first quintile of the income distribution could pay around $16,800 per year for their housing.  At a yield of 6%, this would support a housing investment envelope of about $280,000 per unit, with this to cover land, construction, infrastructure contributions, all project delivery and operating costs, and a margin for profit and risk.

Direct supply of lower income housing by market developers may be a tall order, especially in our bigger cities.  But this does not mean that market supply has no role in fulfilling needs for lower cost housing.

Market supply of new housing generates lower income housing through ‘downward filtering’ and ‘vacancy chains.’  Newly built housing is occupied by households who typically leave behind dwellings which become occupancy opportunities for other households which, in turn, leave behind vacancies for others.  Assuming households in the vacancy chain are generally upgrading their living circumstances by way of location and/or dwelling attributes, a pool of depreciated housing in less favoured locations ultimately becomes available for lower income earners.

Through vacancy chains and downward filtering, efficient market supply of new housing can ‘lift all boats’ so to speak.  A sharp focus on supply elasticity and productivity in the policy agenda is certainly warranted.

But is it wise to put all our eggs in the market supply basket if we want to make sure our neighbourhoods are adequately equipped with housing affordable to low and moderate income earners?

Solving housing affordability for low income earners solely through market turnover would likely see these households accommodated in dwellings that are the least well maintained or which are close to the end of their useful lives, that is, homes that are the most drafty, leaky and costly to heat and cool.  These are significant enough challenges for the average household to manage let alone those on the tightest of budgets.  There is an equity issue here.  There are also costs to the wider community in higher health care expenses, foregone engagement in the labour market and poorer outcomes from schooling when households have to contend with poor quality housing as well as low income.

Vacancy chains end up in the least well served and accessible neighbourhoods across our communities.  This is an expected outcome of any market allocation process; those with greatest budget constraints will inevitably have less choice over product quality.  They must deal with more stringent trade-offs in their consumption behaviours.  This might be acceptable for regular commodities where the consequences of consumption choices are essentially confined to the households in question.  But housing is different.  Corralling lower income households into less connected places is likely to exacerbate their income constraints to the detriment not only of themselves but also of the wider community.  Again, the community is likely to pay avoidable costs in diminished human capital, lost workers and higher health care outlays.

The cost and reliability of services that rely on low and moderate income earners, such as health, education, policing, hospitality and property care, can also be expected to come under increasing pressure because the required essential workers cannot find local housing which is affordable.

Because of the wider consequences (or externalities) associated with provision, or non-provision, of a dependable supply of low and moderate income housing, it is best regarded as a form of infrastructure, rather than a regular market commodity.  If this threshold proposition is accepted a number of implications flow.

One is that provision cannot be left to the market.  By definition, commercially oriented buyers and sellers do not consider the wider community consequences of whether housing is being provided locally for low and moderate income households.

Secondly, as with other forms of essential infrastructure serving our neighbourhoods like roads, parks and public transport, provision of a sufficient and enduring stock of local housing for low and moderate income earners is a shared obligation between the Commonwealth Government, which has responsibility for protecting households from undue rental stress, State Governments, which are responsible for the efficiency of labour markets and education and health services, and developers, who invest in place making.

Efficient market supply of housing will lift all boats.  But it does not host the signals and mechanisms by which all communities may be equipped with the essential infrastructure they need by way of social and affordable housing.  This is a job for governments and city builders to address, urgently.

DR Marcus Spiller, Principal & Partner, SGS Economics & Planning Pty Ltd

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