Within living memory, Australia was a place where people of all ages and incomes had a reasonable chance to own a home. But the great Australian dream of home ownership is rapidly turning into a nightmare for many young Australians.
Home ownership rates are falling. Between 1981 and 2016, the share of 25 to 34 year-olds who owned their own home fell from more than 60 per cent to 45 per cent. Half of the poorest 40 per cent of Australians aged 25-34 owned their homes in 1981. Now it’s just 30 per cent. Increasingly, younger Australians’ best chance of owning a home is to have parents who already own one.
The growing gap between the housing haves and have-nots is a big reason that wealth inequality is on the rise. The average house in Victoria made its owner $140,000 this year, more than twice what the average Australian worker takes home each year – and the average house in NSW made its owners more than $200,000.
What should the federal government do to fix the mess? It could do far worse than look across the ditch to New Zealand, where a bipartisan bill just passed Parliament that will make it easier to build more houses in the country’s biggest cities.
The new legislation forces local councils of major cities such as Auckland, Wellington, and Christchurch to allow townhouses up to three storeys tall “as of right” in city suburbs, without requiring approval from the local council.
Builders will still need to satisfy basic rules. They will also need to meet minimum green space requirements and setbacks.
Crucially, councils can amend these requirements to make them more permissive (such as allowing higher buildings), but they are not allowed to make them less permissive.
The latest changes follow an earlier move to allow six-storey developments “as of right” within walking distance of city centres and major transport networks.
The federal government should encourage the states to reform land-use planning laws in ways that will boost housing supply.
These reforms attack one of the key impediments to greater density – the structure of government – that lead to too few homes being built.
In New Zealand, as in Australia, the benefits of population growth accrue to society as a whole, whereas decisions about development approvals largely sit with local councils.
Existing residents usually prefer their suburb to stay the same and worry that more development will mean more traffic congestion, more crowding on public transport, more noise, and less “street appeal”.
Meanwhile, people who would like to live in the area cannot vote in the local council elections, and their interests are left unrepresented. Unsurprisingly, fewer homes are built than what’s needed.
Modelling by consulting firm PwC suggests the new rules in NZ could result in 48,000 to 105,000 new homes being built in the next five to eight years. Allowing more dense housing will also lower carbon emissions and enable better transport links.
Like New Zealand, Australian cities are not delivering denser forms of housing – townhouses and apartments – in the quantities that Australians say they would prefer.
But unlike New Zealand, it’s the states, rather than the national government, that have constitutional responsibility for land-use planning. The states set the planning framework, and they govern local councils that assess most development applications.
So instead of taking direct control over planning decisions, as in New Zealand, the federal government should encourage the states to reform land-use planning laws in ways that will boost housing supply.
There’s plenty of precedent. Under the national competition policy, the federal government paid the states nearly $6 billion over 10 years in exchange for much-needed regulatory and competition reform. The Productivity Commission later concluded that the benefits of the policy massively outweighed the costs.
A similar approach today could help solve Australia’s housing affordability crisis and also boost Australia’s lagging rate of productivity growth.
Other measures could have a quicker impact
Of course, boosting housing supply will improve affordability only slowly, because it takes time to build more houses.
By contrast, scaling back tax and welfare settings that inflate demand for housing would have an immediate, albeit smaller, impact on house prices.
Here too, New Zealand is leading the way. The national government is removing tax deductibility on loans for residential property investments. And investors who sell a property within 10 years of purchase will be subject to capital gains tax, up from five years previously. New homes will be exempt from these changes.
In Australia, concessions such as negative gearing, the capital gains tax discount and exempting owner-occupied housing from the age pension assets test and state land taxes all add to house prices. Remove them, and our house prices would fall.
New Zealand is finally tackling the housing crisis. Australia should do the same.
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