A million extra homes won’t fix affordability headache - The Centre for Independent Studies
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A million extra homes won’t fix affordability headache

The budget’s announcement of one million houses over the next five years will do very little to improve housing affordability. One million homes is about what we built in the past five years (974,732 dwellings, to be precise). Relative to the size of the economy, one million will in fact be a step down.

The demand for housing has risen due to low interest rates and working from home.  Looking forward, immigration and rising incomes will add further pressures. In a well-functioning housing market, extra supply would cover that demand.  But our housing supply has been unresponsive.  The result has been a record low vacancy rate, soaring advertised rents and some of the highest house prices in the world.

We are essentially being promised similar levels of supply to those that have produced these sorry outcomes. Consistent with the unambitious target, specific policy announcements were small. The centrepiece was an increase in subsidised housing. On top of the 30,000 dwellings previously announced, there will be a further 10,000 from the federal government and 20,000 from the states.

This adds up to 60,000 new dwellings, which is an increase of only 0.6 per cent of our national housing stock of 10 million dwellings. That tiny increase will have a negligible effect on housing prices, though a large cost to the taxpayer.  Subsidised housing has other objectives (security of tenure, a safety net) — it should not be framed as addressing overall affordability.

What we failed to see on budget night, but desperately need, is a policy that will substantially increase housing supply. As a rough rule of thumb, every 1 per cent increase in the housing stock reduces the cost of housing by 2.5 per cent. So, for example, were the 1 million houses to be additional to what we are already doing, that would increase the national housing stock by 10 per cent — which would lower prices and rents by 25 per cent. They are the sort of numbers we need to be discussing. This need not cost the budget a cent. We have builders ready and eager to build, and potential residents willing to pay the cost. All that is needed is to relax regulations that prevent building.

Doubts are often raised that extra supply of market housing will not help those most in need.  Those doubts are misplaced.  When residents occupy new housing, the old housing they vacate falls in price.  These indirect effects on prices and rents are widespread and important.  As the recent Productivity Commission housing report discussed at length, extra supply of housing, in any segment of the market, will improve affordability for low income households.

There is strong relationship between average housing costs and conditions for the least well-off.  US research finds that the most important determinant of the level of homelessness in a city is its average rent.  In Australia, there is a very close relationship between average rent and rental stress of low income earners. These arguments are well-known. They were emphasised in the Productivity Commission’s report on housing last month and the parliamentary inquiry into housing affordability chaired by Jason Falinski earlier this year.

Those reports noted that, although planning regulations are a state responsibility, the Commonwealth has an important role. In addition to guidance and coordination, it should make grants to state and local governments conditional on allowing more housing. Federal funding for infrastructure, like Melbourne’s suburban rail loop or Canberra’s light rail, should be conditional on high density being built at stations.

To be fair, the government showed it understands many dimensions of the crisis. The Treasurer’s speech echoed many of the key findings of official reports and academic research. It acknowledged the housing crisis as a top priority and that limitations on supply underlie it. The speech noted that most supply will come from the market and called for zoning reform.

The government resisted the temptation to shovel more subsidies to first home buyers, as previous governments of both parties have done — to counterproductive results. Of longer term significance, the government has called for more discussion, research and education. It wants the nation to rethink housing policy.

This is occurring through a new Housing Accord with the states and the establishment of a National Housing Supply and Affordability Council. Both these new processes have been directed to reconsider our objectives and alternative policies for attaining them. The design of planning restrictions and land release figure explicitly on both agendas.

These moves are welcome. The Productivity Commission housing report emphasised that too many of our housing policies are considered in isolation from each other. So policymakers have not realised that alternative policies could achieve objectives at lower cost.

Moreover, there is an important need for public information. Ultimately, we will not get more affordable housing until the public accepts the need for higher density. That requires greater education of how planning restrictions harm affordability.

Tuesday’s budget did not provide immediate relief from the affordability crisis. However the institutional reforms it put in place, together with a positive response to the Productivity Commission housing report, may put us on the path to a solution.


Dr Peter Tulip is Chief Economist at the Centre for Independent Studies and the author of many research papers on Australian housing policy.

Photo by The Lazy Artist Gallery