The need for a holistic discussion of housing in Australia

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.

To be clear, population growth does provide significant benefits to Australia. But the impacts of immigration and higher birth rates on our house prices do need to be considered.

The supply side is also frequently missing from the debate. Higher demand for houses for whatever reason can be accommodated if housing supply increases. It is only because supply is constrained that prices have gone up. We could get more supply either by land release on the outskirts of cities (as long as there is good transport), or by increased densities closer in. But State and local governments are only responding reluctantly to relax planning laws.

This is a classic case of NIMBY-ism. Everyone wants more houses or apartments being built, they just don’t want them being built next door. I know myself about the opposition to proposals for increased density on Sydney’s North Shore. And in Melbourne, there has been opposition to conversion of ‘green belts’ to residential development.

It is sometimes argued that increased demand for houses will encourage an increase in supply. While this is true to some extent, it would never be the case that more buyers (eg foreign investors) will lead to an even larger increase in supply, making prices lower than before. It would be a particularly odd housing market where more buyers lead to lower prices. How many sellers say “Oh people want more of what I'm selling, I should put my prices down”? The standard arguments for a larger market leading to lower prices are economies of scale and innovation, and they don’t apply because no one is producing more land.

The other way that housing could be made more affordable is through reductions in taxes and charges such as stamp duties. But State Governments aren’t rushing to do cut stamp duties (with the exception of the ACT), despite the clear evidence of the benefits of doing this.

Housing policy is caught in a bind. State and local governments are reluctant to increase supply or cut taxes; while the federal government is reluctant to limit demand.

As a result, prices go up.

And the reason for this might be because of another bind: if policies did cause house prices to flatline or fall, this would hurt existing homeowners. I don’t expect to see too many homeowners voting for any such policies. This all seems pretty good for homeowners, particularly in Sydney and Melbourne, but pity those locked out of the market as a consequence.