The focus on housing affordability as the policy centrepiece of both Opposition and the Government is welcome. But why is it that both sides of Federal politics seem united in the view that housing supply is the key driver of the housing affordability crisis, but neither side proposes to do anything about it?
Both the Government and the Opposition have ignored the housing supply crisis in their respective policy announcements and instead have gone with the politically easy option of offering cash support for home buyers. This has frustrated policy professionals who have consistently identified the problem, the cause and the solution – but just as consistently, they have been ignored.
Both Scott Morrison and Anthony Albanese have been questioned by the ever-diminishing cohort of economically literate journalists, over the efficacy of housing policies which stimulate demand without adding to supply in any meaningful way. Both leaders have simply ducked and weaved, hoping that having some form of policy will get them through. The on-the-ground reality is that it won’t.
Offering handouts to home buyers, whether that is access to government funding through a home ownership equity scheme (Labor), or early access to up to $50,000 of your superannuation balance (Coalition) does nothing more than push up the price of housing, unless there is a significant stimulus for supply.
Demand stimulus (or dressed up cash handouts) represent lazy politics, but it is easier than doing the serious task of holding state governments and local governments to account.
No less than the Government’s led Parliamentary Inquiry into Housing Affordability and Supply, chaired by Jason Falinski found:
“…there is ever increasing evidence that the primary driver of home prices is the lack of market response. That is, price increases are not leading to an expansion in supply, as often builders are prevented from responding.”
“Econometric analysis has shown that in some places in Australia, planning restrictions are responsible for 67 per cent of the cost of housing. Analysis from Finland has shown that increasing housing supply benefits those on low incomes the most.”
Recommendation 2: “The Committee recommends that the Australian Government should institute a grant scheme that pays states and localities for delivering more housing supply and affordable housing.”
Recommendation 7: “The Committee recommends that the Australian Government allow first home buyers to use their superannuation assets as security for home loans….. Implementation of this policy should depend on also implementing policies to increase the supply of housing (such as Recommendation 2). Otherwise, an increase in households’ ability to borrow would likely increase property prices.”
On the final point above, it seems that the Government ignored the Inquiry recommendations and went with the stimulus without addressing the supply constraints.
This is a problem created by state governments and local councils. Planning approvals for new homes has flat lined 25% below the minimum required every year for the last three years. In NSW, Housing Targets were set by the Greater Sydney Commission, not met, then ignored.
In 2017, former Reserve Bank Governor, Glenn Stevens, completed a review of housing affordability for the then NSW Premier, Gladys Berejiklian. He found:
“…we need the supply side of the market to respond to the community’s needs, and to the growth in population and income. It is highly desirable that the supply side of the market meet the demand for shelter for the bulk of people efficiently and at minimum cost.”
“Most observers agree that the supply side of the market in general has struggled to keep up with demand, probably for most of the past decade.”
“Certainly, if our objective is housing being “affordable” in an environment of growth in population and income, we need to have the market clearing at lower prices for dwellings. This means we need to have the supply side able to respond to demand in a more elastic way”
“…things like regulation, zoning, the approvals process and so on are making the supply side less than flexible, these are things that are in our power to change.”
“The thrust of my analysis above is that the supply side of the housing market is too inelastic. That is, when demand increases, the quantity of housing available is very slow to respond, so that the market clears in the short run, and even the medium run, by prices rising.” Glenn Stevens.
Since then, new home prices have sky-rocketed despite COVID resulting in negative migration over the last two years. To be clear, Australia, prior to COVID, anticipated 160,000 net overseas migrants each year. Instead, we have an exodus, with the results coming in at minus 100,000 each year. So over the two years, rather than gaining 320,000, we actually went backwards by 200,000. The overall impact of COVID-19 was a drop in the population, compared to that anticipated, of 520,000 people. It is no wonder that there is a chronic shortage of workers in restaurants, construction, IT, retail, bars, logistics, and even baggage handlers and security staff!
But this is the point – imagine if COVID had not hit. Imagine if we had had 520,000 extra people to house. Where would housing prices be then?
The National Housing Finance and Investment Corporation’s State of the Housing 2021-22 Report has highlighted the important of housing supply and the impact of a lack of supply of market housing has in driving up demand for affordable and social housing.
“Once net overseas migration recovers back to pre-pandemic levels by around 2024-25, new household formation is expected to exceed new supply by a cumulative 163,400 dwelling out to 2032.”
“If housing authorities actively slow or impede the flow of new housing supply, it can exacerbate upward pressure on rents and prices, something that should be avoided if improved housing affordability is a primary objective.”
“Supply impediments and growing lags and lead times in many markets around Australia are increasing housing costs” NHFIC
COVID-19 has given our political leaders an opportunity to get ahead of the game. Some States have done better than others and, in those locations, housing price rises have not been as profound. This will only get worse unless fundamental changes are made in the area of planning regulation.
The current Governor of the Reserve Bank of Australia, Philip Lowe, has also sent political leaders very clear advice on this issue. In a speech in 2019 entitled “The Housing Market and the Economy” he said:
“So, the origins of the current correction in prices do not lie in interest rates and unemployment. Rather, they largely lie in the inflexibility of the supply side of the housing market in response to large shifts in population growth.” Philip Lowe
In NSW, it took a change of Premier, a change in Planning Minister and a change in the Secretary of the Department of Planning before there was any recognition of the housing supply crisis. But with the spotlight on them, it seems that the Federal politicians are also shirking the real issue – housing supply.
The normally polite NSW Productivity Commission was blunt in its assessment of the performance of the NSW planning system. In its 2021 White Paper into Productivity commissioned by the then Treasurer, Dominic Perrottet (now NSW Premier), it found:
“Housing supply policy has not achieved the desired results. Even during the more recent housing construction boom, the number of dwellings completed has, on average, fallen short of planning targets.”
“Since 2006, NSW housing supply has not kept pace with demand or State targets. That has created an accumulated underlying shortage of dwellings. The 2016 NSW Intergenerational Report estimated an accumulated shortage of 100,000 dwellings. The high levels of completions since 2016, along with declines in net immigration due to border closures, have brought the estimated shortage down to around 54,000 dwellings in 2020”
“Undersupply is expected to continue and increase if we do not change the way we plan for housing.”
“Were the planning system less restrictive, higher prices would increase development feasibility, encourage construction, and eventually ensure wider housing choice.” NSW Productivity Commission
The failure of all sides to call a national Ministerial conference with teeth to address this issue is the reason why we face this problem. Federal politicians have ignored supply. That has left the issue in the hands of the States. We can’t afford such an abrogation of responsibility any longer.
This election was an opportunity for Australia’s political leaders to give states and local government incentives to improve planning system efficiency and create an over-supply of housing approvals.
- Making the tax system fair for build to rent investments was an option that has been ignored
- Offering local infrastructure grants to Local Councils that overachieve on housing targets
- Greater involvement of the private sector through access to government finance through NHFIC for market and affordable housing supply and supporting local infrastructure
- Financial rewards (or penalties) for States that increase the flexibility of their planning systems and provide fast track systems to deliver high yield housing supply developments could make a real difference to housing supply and affordability.
There was some good news. The Government’s proposal to allow “empty nesters” to downsize from the age of 55 (down from 65) while increasing the balance of their superannuation beyond existing caps with any profit arising from the downsizing, is important in enabling more efficient use of our scarce resource – land which is serviced by infrastructure and amenity. This was a good announcement and it was good to see it immediately win support from the Federal Opposition.
So there is some hope for millennials that the next Commonwealth parliament will take greater control of this issue which threatens economic growth for our nation.
Tom Forrest, CEO, Urban Taskforce Australia