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Yes, in our backyards: how to give the kids a fair crack at home ownership

Sydney and Melbourne are now the third and sixth least affordable housing markets in the world, and other Australian cities are seeing rapid price rises. Headlines about record house prices reappear every time the notch is pegged higher. Nevertheless, these stratospheric price tags are remarkable — and are having significant social effects.

With deposits shifting further out of reach, the dream of home ownership is evaporating. The proportion of people aged 25 to 34 owning a home has fallen from 61 per cent in 1981 to 37 per cent in 2018, and pandemic-driven price rises are likely to have exacerbated the drop.

Associated with this, the proportion of young adults living with their parents rose from 24 per cent in 2010 to 32 per cent in 2018. Other potential buyers are trapped in insecure rental accommodation.

Higher housing costs increase inequality. Elderly rich homeowners are doing well, while renters and young homebuyers are falling further behind. Moreover, many buyers can only borrow from the bank of Mum and Dad. So home ownership is becoming hereditary.

What do we do about this?

On the day the latest house price data were released, we also learned of the NSW Productivity Commission’s White Paper on boosting the state’s economy. Among other topics, this included a detailed examination of the housing market and how housing policy should change.

Low interest rates are the main proximate cause of rising prices. But, as the commission argues, the fundamental problem is inadequate construction. Fluctuations in demand may cause year-to-year variations. However, for high prices to be sustained for any length of time, supply needs to be unresponsive or “inelastic”. If output increased, prices would moderate.

If our buses were overcrowded we would not complain there were “too many passengers” — we would supply more buses. Similarly, if we responded to growing housing demand by building more housing, prices would stop soaring.

The commission attributes the supply rigidity (and hence high prices) to our stringent land use restrictions. Our planning system reserves most of our urban land for detached houses and imposes maximum building heights. Regulations like these limit housing supply. Like any other restriction on supply – let’s say taxi licences or import quotas – this interacts with growing demand to drive up the price.

The paper is the latest in a long string of reports to argue this. That, in turn, reflects a large body of research that finds land use restrictions have large effects on housing prices.

In a recent research paper for the Reserve Bank of Australia, Keaton Jenner and I estimated that planning restrictions increase the cost of the average Sydney apartment by $355,000, or 68 per cent. In Melbourne, the effect is $97,000, or 20 per cent. Other research papers estimate different effects in different cities and at different times, but the finding of large effects is very common.

Planning restrictions are typically defended on the grounds of preserving neighbourhood character. Local residents complain that new apartment towers would be ugly, bring traffic and crowds, block out the sun … and so on. Recent protests in Little Bay are an example, and NSW Planning Minister Rob Stokes has echoed these residents’ concerns.

However, if apartment towers harmed neighbourhood amenity – as the opponents of density argue –then nearby house prices should fall. That does not happen.

In a recent Centre for Independent Studies paper, Zac Lanigan and I studied five prominent concentrations of high-density construction in Sydney (Chatswood, Forest Lodge, Green Square, Liverpool and Turrella) and three in Melbourne (Box Hill, South Yarra and Footscray). We find that nearby house prices are essentially unaffected by new development.

It seems that for every recalcitrant neighbour who dislikes the new apartments, there are other homebuyers who want a walkable, lively community.

The Productivity Commission provides a roadmap towards greater housing supply. This involves centrally determined targets based on measures of unmet demand, which local councils will need to follow.

If the state government adopts these recommendations, housing in Sydney may once again become affordable.