Housing supply

Australia needs to increase housing supply to improve affordability

The intent behind federal government policy First Home Loan Deposit System is well placed, but good intentions do not necessarily translate into good policy.

The winning soundbite that the government hopes will echo in the media is: “We are helping young people buy their first home sooner”.

This is a result worth pursuing. Home ownership remains an integral part of the Australian dream. It is a widely held aspiration that represents the stability and freedom of reaching adulthood, providing both long-term social and economic benefits. The only problem is that these housing subsidies worsen long-term housing affordability, making home ownership even more out of reach for aspiring buyers.

There are two parts to the story.

First, the federal government is trying to improve affordability by increasing demand for housing. And second, state and local governments have failed to address the fundamental problem that chronically restricts housing supply: onerous zoning and planning regulations.

Based on first principles, when you increase demand for housing but do nothing to increase supply, the only direction prices go is up.

Researchers at the Reserve Bank of Australia conducted an analysis in 2018 which found that zoning laws (such as minimum lot sizes, maximum building heights and planning approval processes) contributed to 40 % of house prices in Sydney and Melbourne. In dollar terms, zoning laws have added up to $489,000 to the price of a detached house in Sydney, $324,000 in Melbourne, $206,000 in Perth and $159,000 in Brisbane.

“The effect of zoning has increased significantly over the past two decades, likely due to existing restrictions binding more tightly as demand has increased,” the study says.

In addition, recent research from the Economic Development Organization (OECD) has cited these planning restrictions as the main reason why Australia has such unusually high inelasticity of housing supply. In other words, changes in housing prices have little impact on the quantity of housing offered. The Productivity Commission, the International Monetary Fund, the Grattan Institute and the Center for Independent Studies all agree that planning is the problem. The evidence is overwhelming.

So, faced with this long-standing problem, the federal government decided to throw more oil on the fire. To his credit, Treasurer Josh Frydenberg acknowledged the role of state and local government in loosening planning regulations to increase housing supply. But will he acknowledge his government’s role in exacerbating the affordability problem?

With a federal election looming over Frydenberg’s head, of course not.

Meanwhile, the media too often focuses on tax breaks like the abolition of negative leverage and the reduction of the capital gains discount. Although the Grattan Institute has recommended this, other studies show that such policies will only make a minor difference to house prices (and, as AMP Capital’s chief economist explained, Shane Oliver, could introduce other problems such as tax distortions).

Giving Australians access to their super early to buy a first home has also been launched recently (notably by Liberal MP Tim Wilson). Again, that wouldn’t solve the problem. This would have the same effect as federal government subsidies to drive up house prices. Ultimately, these policy proposals should be secondary to fixing the supply side of the market. This is what will make the biggest difference to improving long-term affordability.

All levels of government have a responsibility.

The federal government should resist the expansion of programs that only serve to inflate housing demand. Meanwhile, state and local governments should vigorously pursue supply-side reform by reducing planning red tape. It was also recommended that the federal government provide incentive payments to support this process (major think tanks seem to agree on this). Engaging in this process would make housing supply more responsive to demand, bringing the dream of home ownership back within reach of aspiring buyers.

For now, at least, the government has taken the easy route, which was abundantly clear in its federal budget largesse — pursuing uninspired pre-election policies aimed at winning votes.

The problem is that by improving access to housing for some potential buyers in the short term, housing becomes more expensive for all others in the long term. This was a clear case of a short-sighted government picking winners and losers, making the problem worse (despite some of their rhetoric).

Prices will continue to rise as demand outstrips supply, paving the way for the next election cycle. If long-term reform is not tackled head-on, the situation will only get worse for aspiring buyers.

So much for the country of “fair go”.

Sebastian was a 2021 Scholar at the Mannkal Economic Education Foundation and a Research Assistant at Curtin University.

Do you have something to add ? Join the discussion and comment below.