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The need for a holistic discussion of housing in Australia

By Michael Potter - posted Monday, 9 March 2015

Many conversations around Australia start and end on house prices – particularly for those lucky (or unlucky?) enough to live in our major capitals.

Prices are out of control, with quite extraordinary price increases over recent years. I would know, I have struggled to buy a house myself.

The constant refrain is that something must be done to fix the problem. But what?


It should seem obvious that prices will ease if there is a fall in demand, an increase in supply or a cut in taxes on houses. Those really are the three options.

We have seen some ideas that will cut the demand for housing (I will use this term to cover apartments as well). First, there could be tighter restrictions on foreigners buying houses. Or at the very least, better enforcement of existing rules. This is likely to be one of the goals of the Government’s proposal to impose a fee on foreigners who invest in housing and enhance enforcement. This may be a good revenue raiser, and solicit headlines. However, it isn’t clear that this will have a substantial impact on the housing market and it could harm other foreign investment in Australia.

A second idea is for higher interest rates to reduce the demand for housing. But the Reserve Bank is caught in a bind: higher rates will stunt economic growth, while lower rates will make housing more unaffordable (it is also debatable whether their mandate really covers housing affordability).

Third, borrowing by housing investors could be limited, though action so far on this seems half-hearted. With a deregulated financial market, it is also probably difficult to limit borrowing by investors only. For example, what is to stop me saying to the bank I am an owner-occupier, and then getting a tenant after a short wait? And how would such a limit apply to sub-letting?

And of course, a perennial favourite is limits to negative gearing, which is allegedly driving excessive demand by investors. The Henry Tax Review discussed this issue and made some useful recommendations which would decrease the incentive for negative gearing. However, it needs to be noted that limits on negative gearing may lead to higher rents. And neither major party is rushing to implement any such limits.

Improved transport also has potential to ‘rearrange’ the demand for housing – reducing demand near the city and increasing it on the outskirts. Here again there are offsetting factors – road and rail construction can be incredibly expensive, and better transport networks can just add to congestion as existing residents just choose to travel more frequently. Increased travel may be beneficial, but it doesn’t assist with housing affordability.


All these arguments about cutting demand miss some more significant drivers of demand.

In particular, population is likely to be the largest driver of housing demand. Pretty obviously, more people results in an increase in demand for housing. However, I don’t see much of a debate about immigration or population policy when house prices are discussed. The commentators who focus mainly on interest rates or negative gearing are blinkered if they ignore the impact of population growth.

The most obvious reason why people don’t discuss population growth is that this debate can easily morph into xenophobia or even racism, which should be abhorred. However, ignoring population is largely a cop-out. Immigration policy is being determined in isolation of the impacts on housing, similarly too the impacts of policies that encourage births. For example, a Productivity Commission study into migration in 2006 only gave passing mention to the impact of migration on the price of land and houses. This seems a surprisingly narrow-minded approach.

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About the Author

Michael Potter is an economist and public policy commentator and authored the papers Fix it or Fail: Why we must cut company tax now and The looming crisis in business investment for the Centre for Independent Studies.

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