Has National Cabinet just solved the housing crisis?

Last year, the federal government struck a Housing Accord with the states. Together, they committed to build 1 million new, well-located homes across Australia over the next five years.

But sky-rocketing rents have turned up the heat on governments to do much more. Last month, National Cabinet responded. The new target is 1.2 million homes over five years, with the federal government offering financial rewards to whichever states do the most to get us towards the new target. And the Prime Minister and the Premiers also promised a better deal for renters.

Will it be enough? In this special Grattan Podcast, our housing experts Brendan Coates and Joey Moloney unpack the National Cabinet package, explain why it’s important, and identify the next challenges for policy-makers as they struggle to make housing more affordable for more Australians.

Transcript

Joey Moloney: Last year, the Federal Government struck the Housing Accord with the States. This was a commitment to build one million well located new homes over five years from 2024. But quickly after, a few issues were pointed out. One was that one million might not be too far above what we’d expect under business as usual over five years in the housing market, but critically, there was no money on the table to really incentivise the states to get going and build these houses.

So pressure was building to do more. This was in the face of rising rents and the Greens urging the government to be more ambitious on housing as part of their negotiations in the Senate on the Housing Australia Future Fund Bill. So National Cabinet met in Brisbane on the 16th of August with a goal to get more ambitious on housing.

The outcome was a two pronged plan. On the supply side, we have the new Home Bonus and the National Planning Reform Blueprint. And for renters, we’ve got a package called A Better Deal for Renters. So I’m Joey Maloney, I’m a Senior Associate in Economic Policy here at the Grattan Institute. I’m joined by the Economic Policy Program Director, Brendan Coates.

And today we’re going to unpack what national cabinet agreed to. We’re going to start with the renters package and then move on to the supply side reforms So on the renters package the focus was really on getting more secure better quality tenure for renters Now states hold the pen on rental regulations.

Every state has their own rental tenancy Legislation, but the goal of national cabinet is to coordinate a better floor So to speak a better minimum experience for renters A key thing that National Cabinet agreed to was to phase out no grounds evictions. Some states have already done this, but some are still behind.

Another commitment was to limit rent increases to one per year, couple that with a ban on rent bidding, and also some limits on lease break fees. Now, National Cabinet didn’t go down the path of harsher forms of rent control. The Greens were urging the government to agree to a two year rent freeze and then 2 percent rent caps thereafter.

Now, we think rejecting that proposal was a good move. We think it probably would have done more harm than good. The fundamental problem we’re dealing with is not enough housing to go around. A rent freeze would have frozen people into place. That would have meant for people who have to move, say people fleeing domestic violence, they wouldn’t have found a flow of housing to move into, and ultimately what that means is that it would have risked more homelessness.

And in the longer term, a harder 2 percent rent cap would have meant less investment in housing, which would have meant fewer, poorer quality rentals. National Cabinet also agreed to align some minimum quality standards for renters. These pertain to things like adequate running water, working stovetops, pretty basic things that you would expect in a habitable home.

And then the package was rounded out by some special provisions for victims of domestic violence, some protections on the personal information that renters provide agencies when they’re applying for properties, And the states agreed to consider options for more stringent regulation of short stay accommodations like Airbnb.

We’ve got all this packaged to try to get a better deal for renters. Brendan, why do we need a better

Brendan Coates: deal for renters? Thanks, Joey. Look, the short answer is because renters aren’t getting a great deal at the moment. Housing is increasingly expensive in Australia and rents are rising particularly quickly.

So we’re talking about rent increases for the total stock of renters that have averaged about 7. 6%. In the years, July asking rents for those that are actually going to market and trying to find a new rental property arising much faster and vacancy rates are historic lows. And the reason why renting is becoming more expensive is because housing is scarce.

The pandemic saw a really big increase in demand for housing from Australia. So while a lot of migrants went home as the borders closed, Australians demanded more housing per person than we ever had before. People wanted. As we are having home offices at home so that you can do your job from home, people moved out of share houses, moved out of living with the family during the height confines of COVID, and that meant that the amount of people living in each dwelling fell from 2.

55 to 2. 48 people per dwelling. Now, that doesn’t sound like much. But you build that out and that’s based an extra 275, 000 homes that we needed that we didn’t need before the pandemic. And now migrants are returning as the borders have reopened. It’s been very big in the press. So we saw 400, 000 migrants as the treasury estimate arrived back in Australia over the course of the last year.

And there’s expectations for another 1. 1 million migrants, additional migrants to be resident in Australia over the next four years that are currently here. And so while that’s still below the pre pandemic trend. It’s still a big increase in housing demand combined with the increase in housing demand from Australians means that we’re demanding more housing.

than ever before. And that’s what’s leading to rents rising as quickly as they are. But then in the longer term, who is renting is also changing. So home ownership is falling. We’ve known that for a long time, but the flip side of that is that more people are renting for longer and renting throughout their lives.

So, you know, so between 2001 and 2020, the share of those age 25 to 34 that were renting went from 40 percent to 51%. So a majority now rent. In that age cohort for those 35 to 44 age 35 to 44, it’s gone from 23 percent to 37 percent and that’s including a lot of middle income earners these days. And so it’s leading to a lot of people renting with kids.

So the majority of single moms now rent in the private rental market. That wasn’t the case two decades ago, nearly a quarter of families. So, you know, where you have kids that have started at least five years ago are still in rentals. And so that means that people are renting throughout their life at a period when they need more stability.

Because when you’re renting with children and you’re renting as a family, you have stronger roots to the place in which you live. You’ve got the local childcare, you’ve got the school, you’ve got local sports teams, you’ve got this whole apparatus that you’re building roots for your life. And the way the rental market works at the moment doesn’t give you that security of tenure, and it means it’s more costly if you have to move against your will, essentially, if your landlord kicks you out.

And that points to the reason why it’s important to improve the rental market, improve security of tenure, is because of the uneven bargaining power that exists between landlords and tenants. So, if it was a landlord, if I kick a tenant out of one of my properties, or if I lose a tenant, I’m losing some rent.

Right. I’m losing rent and I’ve got to go through the process of getting someone else in as a tenant. If I’m kicked out of a property when I don’t want to leave and I haven’t done anything wrong, the costs are much larger. I’ve got to move my stuff. I’ve got to maybe change where my kids are going to school.

I’ve got to arrange this complex tapestry of life, rearrange it in order to, particularly if I’m in a major city in order to continue living in a new property. And so what that shows is that today’s renters need more 10 year security and they need, frankly, better quality. The quality of the rental stock is not that great and the quality of the service that’s provided to renters is often not great.

We hear anyone who’s rental will know it can be very hard to get a tradesperson in to come and fix something, even if it’s quite urgent. That process is very slow. And so the quality of renting in Australia is frankly not what it should be for such an essential service.

Joey Moloney: I think that’s a really compelling case of why the modern renter really needs more assurance that they can stay in a place and make it a home for a prolonged period of time, knowing that they are protected from being kicked out against their will.

So removal of no grounds evictions is a great move, but underneath that, there’s still actually a lot of causes that can cause an eviction. without there actually being grounds. So in Victoria, Queensland and Tasmania, a landlord can still kick a tenant out at the end of the first fixed lease, even if there’s no grounds for the eviction.

And then if a landlord wants to move into a property themselves, or they want to move a family member in, or that they sell the property, again, these are all causes for evictions as well. So removing no grounds is great, but there’s still lots of other things that can cause that uncertainty in a tenant’s mind that can make it harder.

To settle down, make a home, and build those roots in the community. So there’s more that needs to be done to ensure that we’re giving modern renters the security of tenure that they need. But there’s a real, there’s a limit here that we’re bumping up against. Most landlords are pretty small, mum and dad landlords, with a lot tied up in that one or two particular assets.

So 85 percent of the rental stock is owned by landlords with three or fewer properties. And when you have so much tied up in one asset, It makes sense that you would demand as much flexibility as you can get with how you manage that asset, what you can do with that asset. This speaks to the issue that we want more secure and better quality tenure for renters.

But we’ve probably got a stock of landlords that aren’t well positioned to provide that. So Brendan, is there scope to change the landlords that are offering rentals in the country so that we’ve got more bigger landlords? That can offer the security and quality that

Brendan Coates: tenants need. Yeah, that’s right, Joey.

So, you know, landlords are human too. They have their own lives. Things change, right? So, if you’re a landlord and you’ve got a huge share of your wealth tied up in this individual property or two, you might lose your job. You may want to move and therefore move into the property in which you’re currently renting out.

You may have a kid or a family member who you want to have move in. These are pretty understandable impulses. When you’re owning a property and your life changes. And so what’s happening is that you’ve kind of got this zero sum game. Those that are renting obviously want more security and that getting that security comes at the expense of a landlord who is not well placed to manage the risks associated with, you know, essentially running a small business for one of our most.

Vital services that people use in society, which is shelter. And so it’s not surprising that with the market acts as it is today, because moms and dads are not well placed to manage those risks. But there is an alternative. There is an alternative where instead of in many countries, you don’t have moms and dads owning most of the rental stock.

You instead have. Institutions, whether it be government, whether it be not for profits or whether it be private investors, large scale private investors, which is very common in places like the U. S. The value there is that they can offer greater security of tenure because the consequences of an individual moving on from a property are so much less and the consequences of getting someone to rent a property and then they do the wrong thing as so much less.

So if you’re a business that owns a thousand properties and one of them gets trashed by the tenant. Well, that’s not as catastrophic because you’ve still got another 999 properties that you are getting income on, and you know, in your business model that, you know, the chances are you’re not going to, someone’s going to do the wrong thing, and you can offset that cost against all the other tenants.

Similarly, you probably get a better quality rental experience in a world where institutions. Owning the rental stock because you’re going to get a more professionalized service. You can offer, you know, in the U. S. You have superintendents in buildings that can offer fix things if things go wrong, rather than trying to get a real estate agent to call a trades person out in the middle of the night to try to fix something.

The issue is that in Australia, no one institutions don’t really own the market rental housing. That’s very, very rare. We can find very few examples of that, except for maybe a few cases like developers, like, say, Harry Trigoboff, who’s a big developer in Sydney, in particular, in Brisbane, owning the rental stock.

And the reason is because it’s uneconomic to own market rental housing in Australia’s institution because the tax settings make it uneconomic. So the biggest disincentive. Is land tax, which is basically we apply a land tax as a fixed proportion of the value of the land sitting underneath the property, but we tax that at a progressive rate.

So the tax rate rises, the more property you own, the high value property you own, and we apply that progressive rate on the basis of all the property that you own. So if you own a thousand homes. You are paying much more land tax than if those thousand homes are owned by a thousand different people. And given that there’s tax free thresholds for land tax, a lot of single investment property owners fall under the tax free threshold and pay no land tax whatsoever.

Whereas if a super fund owns all those homes, they’re paying a lot of land tax. Now, we think that there’s a deal here that could be done where the state government’s essentially Allow more of the private rental stock to be owned by institutions. It doesn’t involve coming in and fire a subsidy. It involves getting rid of this distortion in the land tax system, which was put in place in the 19th century to break up the squadocracy in the late 19th century in New South Wales and Victoria.

So you got small scale rural farms as opposed to big squatters. But we could do that basically by offering a different land tax regime to large scale investors. They’d say if you own a hundred or a thousand properties where instead of taxing you in your total progressive land to on your total landholding will attack you at a progressive rate even on each individual property you own, and it would remove the distortion.

That means that the moms and dads are willing to pay more at auction compared to an institution on those homes. And the reason that is valuable is because it would lead to over time. More of the existing rental stock being owned by institutions, and they have better place to offer that security of tenure to tenants.

And that doesn’t have to take the form of longer leases. It probably takes the form of more tightly prescribing the reasons that a landlord could keep the tenant out. And as part of that land tax deal, what we would call a housing compact, you could also require the institutional investor if they want to access that better land tax deal to sign it to a more stronger set of tenancy laws that basically says.

If you want to get this land tax deal, then you sign up to a set of rules that says that more tightly prescribe the reasons that you can keep tenants out of properties.

Joey Moloney: All right, I want to pivot now to the supply side of the National Cabinet Package because I think this is definitely the bigger part of the package.

And a lot of the things we’re talking about would be better simply if there is more abundance of housing. Housing outcomes would be better across the board if we get more housing built. So this is really the key element. The core commitment in the National Cabinet package was a new target of 1. 2 million homes over five years from July 2024.

But critically, this was complemented with some money on the table to help get us there. There’s 3 billion in the new home bonus, so that will reward states 15, 000 for each house that they build over the initial 1 million target. And there was another half a billion dollars in the housing support program to help fund the connecting services in areas where there’s lots of new housing being built.

Now, the National Planning Reform Blueprint has laid out the broad directions that we think we need to go in to get this target met. So these pertain to. Planning and zoning regulation reform, more land release, more certainty, less delays in application processes, et cetera, et cetera. Now, all of this is with the goal to get more housing built in well located areas quicker.

Before I move on to that, I just want to make a point that they also committed to Improving building design and certification processes. Now this is really important because if we want to build more homes in well established suburbs, it’s really important that the community is confident that they’re being built in a way that’s high quality.

That’s making a positive contribution to the community. So on the supply side, Australia has about 400 dwellings per 1000 people. When you put that next to other OECD countries, so other comparable countries, We actually are sitting right down the bottom. And more importantly, that number hasn’t really changed over the last 20 years, whereas other OECD countries have added.

More dwellings per person. Now, this is important because it’s not just population growth that drives how much houses we need to build. It’s also people’s preferences, particularly in a post COVID world where we’ve got more people doing hybrid work, which means more people want some more space to themselves, which means people are going to want to live in smaller households.

So you need to build more, you need to build houses quicker than the population grows. Now the key thing getting in the way of that are the rules that dictate what can get built where. These are land use regulations and as you might expect they end up restricting what gets built where. And the result is less housing and less dense cities than actually Australians say they want.

A key thing we’re trying to do here is to stem urban sprawl. Continued urban sprawl is bad. It’s bad socially, it’s bad economically, it’s bad environmentally. Infrastructure Victoria estimated that The cost of the accompanying infrastructure for a dwelling on the urban fringe rather than urban infill is about two to four times more.

And the New South Wales Productivity Commission estimated that it costs about an extra 75, 000 per dwelling to build all the accompanying services and infrastructure at the urban fringe relative to Urban infill. We’ve got a clear idea of what needs to be done, but Brandon, why is it important that the federal government is setting the tone from the top here that the federal government is getting the states together to come up with the objective?

And setting the time from

Brendan Coates: the top. Thanks, Joey. Well, the basic problem is that the restrictions that you’ve outlined are state responsibilities, right? Your restrictions on land use pay and determine what gets built where, but Australia is a single national economy. And so. If any one state alone moves on housing by relaxing planning rules and allowing more housing to be built, it essentially exports some of that housing affordability to other states because people from those other states will choose to move to say, let’s say Victoria does, it will move to Victoria because housing is cheaper in Victoria.

You know, we see this already that a lot of people do, younger people do leave Sydney because of how expensive it is to live there. And the converse would be true. If a state makes that cheaper, then they actually don’t get the full benefit of that themselves. So there’s a coordination problem that the Commonwealth government can help support.

Also, if we do add to the housing stock and make housing more abundant, then there are. probably productivity payoffs and the benefits of the larger economy. And a lot of those benefits actually also accrued to the federal government collects four and five tax dollars in the country, probably close to three and five once you account for the GST that’s given to the states.

So if you’re collecting most of the tax take from a larger economy, you’re also going to benefit the most if more housing is built. So the federal government has a clear interest in incentivizing the states and putting money on the table for that benefit. To reap that benefit for all Australians. Now, the plan itself, it’s really ambitious.

One million homes is the baseline extended to 1. 2 million homes over five years. And there’s extra 15, 000 incentive payments for each one of those 200, 000 homes above the baseline, which is divvied up in between the states in a way that’s not yet public, but presumably something on the basis of population or something similar or population growth.

Now, if that plan is fully implemented, the potential benefits to Australia are pretty big. So, if you build those extra 200, 000 homes within 5 years, we would estimate that rents would be about 4 percent lower than they otherwise would be. But the thing with supply is It’s a bit like going to the gym on day one or week one.

It doesn’t make much of a difference. But if you keep going for a year or two, it makes an enormous difference. And so the longer that you build small homes, then the longer, the larger the benefits are in the long run, because you’re adding in the long term, a high rate of building translates into a much bigger stock of housing.

So we would estimate that that 4 percent decline in rents after five years, if it’s continued for 10 years, turns into an 8% Decline in rents compared to whether otherwise would be, and that would be in a saving to renters of 32 billion in total over the decade. And we’ve seen from other countries, New Zealand, the case of upzoning in Auckland, where if you do large scale planning reforms, you do get substantially more housing.

So some high quality research out of Auckland shows that if you relax planning rules by upzoning a lot of the city, those studies are estimating that that’s boosted housing supply by up to 4 to 5%. Does that make sense? And that’s led to rents being double digit declines in rents compared to where they otherwise would be within a five year period.

And that’s kind of a sign of what we could get in Australia. But there are some caveats. One of them is it’s a very ambitious target, but that doesn’t mean that the target is going to be met. The governments have to do take steps to actually implement it. The incentive is there. And that’s the most important thing.

It’s not the target itself. It’s the incentive, but one getting these kind of incentives right is hard. So we are in the middle of a construction downturn. So we built 1 million homes in the five years prior to COVID. As a baseline, you know, are we going to get a million homes over the next five years?

It’s not really clear that we will. And so there is a concern if depending on how the target is said, and we’d wait to see what the detail is. If a state is too far below that number, the incentive won’t kick in. Until they built substantially more homes than they’re probably going to be able to. So that is one risk.

So we don’t know enough detail about exactly how the targets are set and whether there’s any caveats around market conditions. There are also issues around the construction sector at the moment. So a lot of construction companies are going insolvent. Supply constraints have added materially to costs.

Interest rates make that harder. So this challenges the government’s going to face in meeting this target. But the incentive is there. And if the incentive is real, it should prompt action from the states. And finally, we need more workers. So. We’ve got these bottlenecks in the construction sector and so the federal government should also look at construction pipeline or migration pathways for skilled workers in areas like construction.

So back in the early 2000s or early 2010s when we saw the mining construction boom, we saw a huge jump in temporary sponsored workers as mining companies basically brought skilled workers out to build those mines. We haven’t seen quite the same spike so far on with temporary skilled workers this time around.

And so I think there’s something to look at in the pathways for getting skilled workers in areas like construction, you know, trades into the country would be a valuable thing to look at, but ultimately it’s up to the states to actually reform their planning rules to get this done. Yeah, that’s right.

Joey Moloney: So we’ve got a target.

That’s great. We’ve got incentives. That’s great. Whether or not we can get to the target is subject to a range of things that are outside our control. State government should focus on what’s within their control. Now the specific barriers that get in the way of more housing being built vary state to state.

The effect is the same, less housing in the places where people want to work, but the barriers vary because land use regulations are such a complicated web crossing state and local government lines in each jurisdiction. Now, you can think about this in sort of frameworks and processes. So, you know, every, every state will have different frameworks that set zones and then overlays that go on top of the zones that dictate what can get built where then there’s also processes.

So when development applications get put in, sometimes they face a lot of uncertainty. And they face a lot of delays. Now that that’s time and money. So fundamentally, you know, what state governments need to focus on doing is getting the decision making done higher up and with more certainty. One of the problems with council decisions is that they’re arguably unrepresentative in that council’s job is to represent their constituents.

Their constituents are the existing residents. Existing residents typically prefer their communities to stay and feel the same. Now, what’s not being represented in that process are the benefits to people who might live in new housing were it to be built. So the higher up you take that decision making, the better, more broader view you can get of the costs and benefits.

We’ve also seen, you know, in a few states that sometimes these local government decisions can be corruptible. Now, some point to high levels of approval rates at councils to try to dispel the notion that decision making at the council level is in the way of building more housing in desirable areas. But this kind of belies the fact that you won’t put in an application for something that you won’t, that you know won’t be allowed anyway.

It’s those, those frameworks govern what gets applied for. It’s not just what ends up getting approved that matters. Now, one thing that should also be said is that, you know, state government should do the hard work to reform their land use planning regimes, but they could also to get closer to this target, build themselves.

You know, Brendan was talking a lot about the difficulties that the construction industry is facing at the moment. State governments have the power to just invest and build houses themselves, and that could get them closer to the target. Now the good news is that, you know, the National Cabinet commitment comes after a lot of state governments have really been making the right noises and pushing in this direction anyway.

So just to list a couple of examples, in New South Wales, there’s a push to try to get more density around a bunch of new metro stations being built. They’ve launched the concept of state significant development, which is developments that are over 75 million that have at least a 15 percent affordable housing component.

They get to bypass local councils in their approval processes. And Victoria is promising a plan soon to help get to their 70 30 goal, so that’s 70 percent of new housing being built urban infill. No more than 30 percent at the urban fringe. They’ve also floated the idea of curbing third party objector right.

So curbing the right of existing residents to object to a development. If that development makes a particular affordable housing quota, probably one of the more impressive moves that’s been done so far is in the ICT. So. The ruling government in the ACT, the Labor Party, has adopted in their party platform a broad based upzoning of basically the whole metropolitan area of Canberra to make it easier to subdivide and build more medium density.

So I’m going to wrap it up there in a nutshell. What we’ve seen from National Cabinet is a really, really solid move and probably one of the more impressive. That we’ve seen in the housing policy space in a long time on the renters front. It’s a great 1st step in the right direction, but there is certainly more to do to make sure that that modern renters get the rental security and rental quality that they need.

And on the supply side, it’s a really bold goal. We’re looking at all the right tools and now it’s really up to the devil of the detail of implementation to make sure that we can get as close to that target as possible. So let’s see if the lofty rhetoric ends up being justified. Grattan’s done a lot of work on housing and if you’re interested in reading about that, that’s all up on our website.

And while you’re there, we are a not for profit, which means we do rely on the donations of generous supporters. So while you’re on our website, if you could spare a donation, that would also be much appreciated. Thank you. And goodbye.