Restrictions hinder housing affordability

Peter Tulip

23 October 2020 | Ideas@theCentre

Restrictions on new building are one of the main reasons housing is so expensive, especially in Sydney.  Local councils want to make this worse.

Ku-ring-gai Council, in Sydney’s affluent North Shore, recently voted for “no increase in housing numbers or building heights” in defiance of state government targets.

Several other Sydney councils, including Ryde, Canterbury Bankstown and Randwick have called for reductions in the housing targets.

These calls are ostensibly in response to a reduction in population growth following the COVID-19 pandemic.

Alister Henskens, the local state member, argues that, because of the pandemic, “no new housing may be required in the next 5 years in Ku-ring-gai as there is likely to be an excess of housing supply over demand in Sydney in the medium term.”  Many other politicians have made similar claims.

There are three problems with this argument.

First, it ignores Sydney’s long history of under-building.  This has accumulated to a large shortage. The NSW Productivity Commission’s recent Green Paper estimates that since 2006 housing supply has fallen short of underlying household formation by 70,000 dwellings.

This shortage is expected to grow to 170,000 dwellings by 2040. These projections take into account the pandemic and current building targets.

Second, a more relevant way to gauge the need for housing is to compare sale prices with supply costs.  Homebuyers in Sydney are paying $350,000 more for the average new apartment than it costs to supply.

The unaffordability of housing is further evidence of a housing shortage.  High housing costs are an unavoidable consequence of supply restrictions like those of Ku-ring-gai council.

Third, the construction industry is already undergoing a sharp contraction.  However, unlike hospitality, entertainment and many other industries that have been hit by the pandemic, construction is a “COVID-safe” activity.  It is an area of the economy that can be readily and safely expanded to reduce unemployment.

Unlike industries being supported by fiscal stimulus, market-rate housing provides goods of lasting value that households really want.

With high prices and negative real interest rates, now is a great time to be building houses. The construction industry can rapidly create jobs at no cost to the taxpayer.

All that is needed is for planners to get out of the way.

The alternative of letting the local councils reduce their targets will make housing even more unaffordable.

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