It’s been a big week for housing policy. Federal Opposition Leader Peter Dutton and Victorian Premier Jacinta Allan both announced policies designed to boost housing supply.
Our housing experts Brendan Coates and Matthew Bowes analyse the latest policies, and discuss what else could be done to ease the housing crisis.
Transcript
Kat Clay: It’s been a big week for housing policy. In Victoria, Premier Jacinta Allan announced a plan to create more housing around 50 train and tram centres through up zoning. Residents of Brighton protested this announcement highlighting the conflict between the need for higher density housing in established areas and the desire to retain local character.
At a federal level, the opposition announced a $5 billion plan to improve infrastructure that would in turn lead to half a million new blocks of land for homes. I’m Kat Clay and here to evaluate both these policies and what they could mean for housing availability, are Housing Program Director, Brendan Coates, and associate Matthew Bowes. So Matt, what has the Victorian government announced?
Matthew Bowes: Yeah, Kat. So, it’s been difficult to keep up with all the announcements. There has been a lot of them. The headline announcement, which was made last Sunday, is that the Victorian government will be changing planning rules that apply around 50 well connected activity centres, which are usually centred around train stations.
And while we don’t have full details on what those planning changes will look like, the broad idea is that in the areas that are being upzoned, apartment buildings that meet certain sets of planning requirements will be what’s called deemed to comply, which means they’ll receive planning approval without having to go through local council planning processes.
Now, this proposal is similar to a set of policies that have been adopted by the New South Wales government over the past year. But they’re a big change from the way things work at the moment, where most of these areas are zoned for low density housing, and councils generally won’t approve apartment developments.
In terms of where these activity centres are, you named Brighton, which is obviously one. Overall, we’ve had 25 centres named, with another 25 to come later this year, and generally they’re in these inner suburban areas which have great amenities and public transport, but these are areas that historically have not contributed much to housing supply in Melbourne. So, again, if you’re familiar with Melbourne geography, we’re talking about areas like Brighton, Oakley, Carnegie and Toorak. Those planning reforms are the biggest announcement to date, but they’ve also complemented it with policies to remove stamp duty for people purchasing off the plan apartments within the next year.
They’ve announced a number of additional land releases, largely greenfield suburbs on the urban fringe. And they’ve also announced that they’ll allow for residential blocks that currently only hold one home to be subdivided to enable construction of more duplexes and townhouses.
Kat Clay: So why are these planning reforms so important?
Matthew Bowes: As I’m sure you’re aware, and as many of our listeners will be aware, housing in Australia is very expensive, both to rent and to buy, and a major driver of those high house prices is that for a long period of time, we just haven’t built enough homes to meet housing demand, especially in the inner suburbs of our cities, where many people want to live.
Now, the Victorian government does actually have quite an ambitious goal to increase housing construction to something like over 80, 000 new homes per year, up from about 60, 000 homes per year at the moment.
But for these homes to be built, they need to get planning approval. And the problem is that the planning rules and processes that control what can get built where in our suburbs, they’re governed by local councils. And those councils generally cater to the views of existing residents, who obviously can already afford to live in these areas themselves and would probably prefer that these neighbourhoods stay as they are.
And so, the result is that Australian cities generally don’t build enough housing, and the housing we do build is usually either right in the middle of the city in the CBD, or on the urban fringe in greenfield suburbs with very little new housing in between. So that’s why it’s really positive to see the Victorian government stepping in here recognising the fact that there are a lot of would-be residents who might like to live in these inner suburbs with good public transport access if we build more housing in these areas.
And as we’ve said, the Victorian government’s not alone in this. So, the New South Wales government is also making moves in a similar direction, but importantly we also have evidence from across the ditch in New Zealand where the Auckland Council instituted a broad and ambitious set of planning reforms starting in 2013, which allowed denser types of housing to be built in suburbs across the city. And since those reforms have gone into place, the best evidence we have indicates that the rate of new housing construction in Auckland has doubled. And rents fell by about 28 percent compared to other cities in New Zealand and Australia that didn’t do upzoning.
So, there’s really strong reason to believe that if the Victorian government can hit its housing targets over the next decade, we could see similar reductions in rent here.
Previous analysis that we’ve done here at Grattan shows that if we can increase housing supply to hit those Victorian government targets, we’d be reducing rents by 13 percent over the next decade with renters saving about 14 billion dollars in total relative to what they’d otherwise be paying.
Kat Clay: So, I mean, that sounds really good for renters, but why did these areas have to change in order to achieve that?
Matthew Bowes: Yeah, well look, Kat, concerns about neighbourhood character are clearly front of mind for many residents in Melbourne and Sydney at the moment, and it’s certainly the case that these planning changes, if they’re successful, they will mean more apartments in these inner suburbs.
But it’s also the case that density comes with a lot of benefits. So, we know from the economic literature that workers in denser urban areas are more productive.
They can earn higher incomes than those who work in less urbanised areas. Many people love living nearer to family and friends or being able to pop round the corner to their local shops or get an appointment with the doctor when they need it.
So importantly, because this upzoning is targeting areas that are already built on, there are already these kinds of infrastructure and services available, and this kind of density doesn’t need to come at the cost of high-quality public spaces in our cities.
Kat Clay: Yeah, and I think there’s a trade-off there that if you want to live near the city, I mean, we all want the detached home. We all want the kind of place with three bedrooms and a nice backyard for the dogs and the kids and things like that. But you can’t always get that at an affordable price in the city and meet housing demand either.
Matthew Bowes: No, exactly. I think there’s a difference between what someone’s ideal home might be and the trade-offs we make when it comes to living in cities, because there is such value in being able to live in cities and making that affordable is a really important policy priority.
Brendan Coates: And I think it’s really worth emphasising here that the government’s not saying people have to live in apartments. What they’re doing is saying that at the moment the planning system means that they kind of can’t in these areas.
If there’s demand to live in a six-storey apartment near Brighton Beach, I suspect a lot of people would take that opportunity if it was available to them. The same with, you know, if you’re going to, can live near, say, Toorak Village you know, you’ve got great access to the city, great access to transport.
So, when no one’s being prescriptive about where people choose to live, it’s just freeing up options so that people have choice. Um, and in fact, it’s worth remembering that at the moment, couples, or families essentially, make up nearly half of those living in apartments in Australia today. And about one in four of those apartments that we’ve already built, at least as of even the 2016 census, were couples with kids.
So, you were already seeing the Great Australian Dream change for many people, because it’s a big difference between living in a greenfield plot which used to be a, you know, a quarter of an acre, a thousand square meters you know, used to only be 20 k’s from the city. Now, it’s not a quarter acre plot, it’s a one tenth acre plot of 400 square meters.
It’s 50 Ks from the city and it will take you a long time to get into work. And with that being the trade off as the population grows, a lot of people are actually happy to take the choice of instead living in a townhouse, living in an apartment, giving up more of the backyard in order to have these other amenities that they end up valuing more.
Kat Clay: Yeah, that’s exactly what I did when I bought my first apartment. I had that discussion with my husband about, well, what do we really want? What do we really enjoy about our lifestyle and what are we prepared to trade off? And I don’t know that everyone’s prepared to have those discussions, but for us, it was very much, we wanted to be able to get to work in a reasonable amount of time.
We didn’t want to be stuck on public transport. And we understood that in our price range as first home buyers, that was going to limit us to an apartment. We ended up buying off the plan as well, so that we could save on the stamp duty. And that was the most economical decision for us to get onto the property market. But you’re right it is about making these trade-offs. If I was starting out again and there was an apartment near Brighton Beach, and I wouldn’t complain about that.
Matthew Bowes: Yeah, another way to express that, Kat, is that I think most people’s ideal home is a detached home right around the corner from where they work and all the amenities that they need and their kids schools that is affordable.
Unfortunately, if that’s the only type of home that we allow to be built in our cities, they aren’t going to be affordable. And so, we need to be able to have governments make policy that allows people to make those trade-offs and allows those homes to be built in the places that people really want to live.
Kat Clay: And look, the level of gardening and upkeep you need to do to maintain a home is very overrated. Now, I just want to move the conversation a little bit into housing construction, because that has really slowed down.
And I’m wondering whether upzoning will actually lead to more housing.
Brendan Coates: Look, that’s a great question, Kat, because at the moment we’ve got housing starts. So, the number of new homes where we’re giving approval to strike ground at its lowest level, more or less for about a decade at the same time as the government federally has put forward this ambitious target of 1. 2 million homes over the next five years. So that equates to about 240, 000 homes per year. And we’re building at the moment, or at least striking ground on something like 150-160000 homes a year. So, we’re a long way short of that target. Now, what’s sitting behind why housing is so hard to get building at the moment is three things.
One, it’s the cost and the availability of materials. So, on some estimates from say, Charter Kitt Kramer, the cost of building a new apartment is about 40 percent from before the pandemic. A lot of that seems to be to do with the fact that apartment builders are competing for workers with projects, for example, in Victoria on the state’s Big Build and similar infrastructure investment pipelines in New South Wales and in Queensland.
There are issues again with labour shortages and availability. Quite a lot of that again seems to be about the infrastructure piece. It’s also a world where unemployment is materially lower than what it was before the pandemic. So, before the pandemic, unemployment was sitting above 5%. You know, now we’re sitting in the sort of mid fours, early 4 percent range.
And then finally, there are issues with accessing finance, because most housing, particularly apartments, are bought, you know, just as you did, off the plan, which means that they typically have to be presold before the developer can actually get financed. The banks won’t lend to them until they’ve presold a certain amount, because development is risky.
And we know that every time interest rates rise by 100 basis points, so 1%, the Reserve Bank estimates that housing approvals fall by 7%. So, we’ve seen interest rates rise by more than 400 basis points, so 4%. And that’s enough to really, on its own, explain the difference between why do we only have 150, 000 new housing starts and 200, 000 housing starts which would put us on track to build a million homes over five years as opposed to the sort of eight, 900, 000 that where we look like we’re on track for at the moment. This is why what the Victorian government has done has been to acknowledge these problems is to do give the stamp duty concession for anyone buying an off the plan apartment in the next 12 months.
So basically, those existing stamp duty concessions for first home buyers they kick in up to property purchases of up to 750, 000. They’re now available for an apartment unit or townhouse purchase in the next 12 months. But we also see that when we do upzone housing we do get more housing built.
So, this is the example of Auckland. So, in Auckland there was a broad upzoning of 75 percent of the land area. That led to, on some studies, a 4 percent boost to the housing stock within six to seven years, a doubling of the rate of housing construction, compared to the counterfactual where researchers think it otherwise would have been.
And a lot of that extra stock was built quickly as townhouses. About 30 percent was apartments, the rest was townhouses. Which sort of implies that if you do upzone quickly, the construction workforce grew by 30%. You basically pull workers from other parts of the economy because that housing is so valuable to people and they’re willing to pay for it that you basically pull workers out of other industries because we prioritize housing because we’ve met the planning system is no longer constraining what can be built.
Kat Clay: As I’m processing that I’m wondering where those construction workers get pulled from. Right. And I guess it’s because housing is a priority because then obviously people can be productive because they’re in homes they have a place to live where they can work from all of that. But I guess like you always say Brendan there’s trade-offs in anything.
Brendan Coates: That’s right, Kat. So, one of the things that will make this easier is that infrastructure pipeline from state governments will start to wind down over the next sort of 18 months. So, we’re kind of in the peak of that right now. The Melbourne Metro, which is just around the corner from us, is more or less done.
That’s workers that are now available to work on other sites, hopefully building apartment buildings. But it also means pulling workers from other parts of the economy.
And one of the challenges in the construction workforce is that it’s so gendered. So historically, you know, 90 percent of electricians, 90 percent of plumbers, bricklayers, even, I suspect if we looked at the genders breakdown of sort of general labourers, they are highly male dominated industries. We’re going to see hopefully a cultural change where we see more women being open to working in that workforce and feeling comfortable and safe in that environment. That’s probably one of the ways that you’ll pull the workers into the economy, but there is just a trade-off here, which is one of the main ways that interest rates bring inflation down is to slow housing. As interest rates start to fall and inflation is under control, hopefully that means that we can get more demand in the housing construction sector because we desperately need those homes.
Matthew Bowes: I think one thing that’s really exciting about this up zoning that’s going on, which will allow more of those kind of apartment mid-rise developments is that there’s probably going to be a creation of a different style of construction industry than we see at the moment. That’s definitely what we’ve seen in Auckland, and there are real potentials for new companies to start up that are targeting different kinds of workers that use different types of skills and that are feeding a different part of the market that currently doesn’t exist. So that, in a medium term, is a really important opportunity.
Brendan Coates: Yeah, that’s a great point, Matt. And one of the things that’s coming out of New Zealand is some early work from E61 Institute is showing that there’s been a boost to construction sector productivity.
Because if you’ve got to build a house, there are some fixed costs there. You know, you’ve got to lay a foundation. You’ve got to get all your plans done. You often still need to get the same workers to come out on the same days, but they’re just doing less work on a smaller floor space. If you’re building to the boundary um, say if you’re taking one house and turning instead of building two townhouses, or if you’re building high density and we can make use of greater use of prefab in construction, then there’s the prospect of actually boosting construction productivity, which is an issue that is a perennial one in Australia.
Construction productivity has really gone backwards in recent decades. And this is potentially one of the ways we can reverse that decline.
Kat Clay: Matt, you mentioned New South Wales before, and I’m wondering whether the changes in New South Wales and Victoria are going far enough to address these issues?
Matthew Bowes: Well, certainly it’s really great to see state governments increasingly recognizing that planning reform is a must if we’re going to tackle housing affordability. But like a lot of areas of policy, planning is really complex, and it can be difficult for governments to know what levers to pull. And I think in the context of these reforms, there’s probably two areas that we need to focus on.
So, the first one is, is around the details of what kinds of apartments and what kind of planning requirements apply around these train and tram activity centres. So, some of the things that could really matter here are how these upzoning changes interact with heritage restrictions, which currently block and preserve a lot of homes in existing areas that were built quite a long time ago and don’t allow those homes to be adapted or knocked down and built upon.
The other question is how they’ll interact with parking minimums, because parking is a huge cost for a lot of developments. So those kinds of details really matter in that policy. I think the second area that we have to think about is, the scope of these reforms. So, both the New South Wales and Victorian governments, they’ve kind of taken the approach of allowing somewhat high density in a particular number of locations, which means that a lot of the city’s urban area doesn’t really change.
So, if we’re comparing the reforms that are underway right now in Victoria, to those that were undertaken in Auckland, their upzoning was really focused on lower levels of density, so mostly they were allowing three story apartments and townhouses, but they’re applying those rules really broadly.
So, they upzoned more than three quarters of their residential land. In the case of Victoria, with the government proposals as they are, it probably looks like those policies will only upzone less than 20 percent of the urban area in those councils affected. So, it’s a much narrower reform. Now New South Wales and Victoria are also undertaking reforms to allow for more duplexes across all residential zones, and that’s really important, but there’s definitely potential to go further there.
Kat Clay: Now, Brendan. I wanted to turn to the federal level because obviously we didn’t just have announcements in Victoria. We also had Peter Dutton making announcements on housing policy on behalf of the coalition. And I’d really love to get your thoughts on that. What has the federal opposition announced?
Brendan Coates: I think this is a real cause for optimism that for the first time since I can remember, we’ve got both sides of federal politics trying to reach across the federal divide to help state governments build more housing. I’ve not seen either a federal government or an opposition be this activist on housing policy in my time working on these issues.
What Peter Dutton has announced is essentially a 5 billion fund that’s available to help speed up new housing, particularly likely in greenfield areas on the urban fringe, by basically covering the cost of some of the infrastructure, the trunk infrastructure, sewerage, water, power, roads, things like that that can often slow down getting those greenfield areas up and going so that housing can in fact be built.
So that’s has the potential to unlock quite a lot of homes. They have suggested it would unlock 500, 000 homes. That number, look, it does seem high. That’s, you know, the equivalent of three years’ worth of housing construction at current rates, which does seem more than I would expect. But nonetheless, it has the potential to be quite impactful, noting that there are a couple of challenges.
Now, one of the issues that this policy will have to overcome is the fact that you’re paying for infrastructure that is normally either provided by developers themselves by local councils that are often pretty cash strapped.
or by local authorities like local water authorities that can be particularly slow in getting that housing built. But you could end up just paying for a bunch of things that would otherwise be done anyway. So, you’ve got to make sure that there’s bang for buck there in terms of your supporting additional supply.
At the same time, if you try to make that process too robust, there is a risk that you end up not getting the money out the door. There have been issues with these kind of infrastructure facilities. There’s been, you know, a national housing infrastructure facility in place for some time. Uh, That the coalition actually set up.
That has had trouble getting the money out the door, as I understand it, partly because of definition of that, about what counts. So, yes, sewerage, roads, water, electricity, but, you know, what about schools? What about other things that are sort of constraining the ability of those suburbs to develop?
A big question came to mind when I first heard this policy, was that how does infrastructure support lead to new homes? What’s the logic there?
Well, often there’s plenty of anecdotal examples where a lack of coordination and resources, particularly at the state level, have led to developments that could otherwise proceed not proceeding.
You know, there’s anecdotal examples of like Sydney Water struggling to be able to connect homes to water, and so homes that would otherwise be ready to go maybe they’re the builders ready to build or they’ve already started to build a lot of it. They can’t get the water connection, or you go as a developer to water authority and say, I’d like to add these, this suburb to the water grid.
That’ll cost, you know, X thousand dollars per home. Then you go back the next time and say, I’d like to add these other homes to the water grid and the cost is five times higher. And it’s just that because there’s a marginal, you know, there’s trunk infrastructure for the water authority. At some point, they need to upgrade their infrastructure, and if you just happen to be the poor developer that is the marginal developer that trips them over into a major investment upgrade, it’s not clear how well they’re pricing and smoothing their pricing of that to developers, which one, adds risk and cost, and two, can add substantial delays in getting more housing built.
Matthew Bowes: Yeah, I think one of the things that you really pick up on when you’re talking about greenfield development is that it takes a lot of time to build.
These kinds of precincts, they take a while to plan, the infrastructure takes a long time to plan compared to trying to expand existing housing supply in inner suburbs. There’s definitely a delay that there is with greenfield development.
Kat Clay: So, we’ve talked about the Coalition’s policy there. How does this compare to what Labor’s put on the table Brendan?
Brendan Coates: Labor’s been quick off the mark to say, well, they’re just copying what we’re already doing, right? Because there’s obviously a lot of politics that housing is going to be one of the top two or three issues heading into the next federal election. That can be great in terms of getting focused attention from the parties and resources on the table to solve the problems.
It’s also a double-edged sword, which is to say that, you know, if there’s a lot of advantage politically in having some disagreement or distinction between the parties. Then it can end up being counterproductive. And you know, I think you just have to look no further than climate change policy in Australia in the last 15 years to see how that can end badly.
The good news is so far things are moving in the right direction. What Labor has committed to that is actually similar to what the Coalition has just announced is there’s about 1. 5 billion of funding that Labor has committed to help do similar work to basically solve for, the infrastructure costs in those particularly greenfield estates, the labour money can also, as I understand it, be used by councils for planning.
So, some councils are pretty cash strapped and actually doing the planning work you need to do to be able to then break ground on the development is in fact a problem. So, there’s probably a broader set of things that money can be used for. The Coalition’s obviously put more money on the table in this particular instance to solve this particular problem, which, at this point, just putting as much resources into solving this problem seems like the right way to go, particularly if you’re targeting them at things that seem like genuine barriers.
And then the other part of Labor’s plan that we have talked about before is that Labor has a target of 1. 2 million homes. But more importantly, they offered 15, 000 dollars to state governments for every home that they build above a baseline of the state’s share of a one million homes over five years. You know, if Victoria can build a lot of housing over the next five years, say, for example, is involved with these planning reforms, then they could get up to a billion dollars over five years. And so if you’re treasurer Tim Pallas and you’ve got a budget problem here in Victoria and you know, it’s a choice between raising a tax or, taking on the NIMBYs of Brighton then maybe it’s worth your time taking on the NIMBYs of Brighton rather than raising some tax to, fix the budget’s coffers.
Kat Clay: That’s a highly motivational trade-off because nobody wants to tax raised, but if you can get that money by building homes and at the same time, improving the amenity of the area, and also improving your approval with voters.
I was reading an article recently about in new south Wales voters actually preferred that high density housing.
Matthew Bowes: There’s definitely a lot of support, Kat, for these kinds of reforms to allow more mid density housing in inner suburbs. I mean, it makes total sense, right? There’s a lot of young people who are currently renting and paying a lot for rent or who would like to buy but can’t buy, especially in the suburbs where they grow up or where their families live.
Brendan Coates: And just on that, the opinion polls say that a majority of New South Wales residents support what the New South Wales government has done. And it’s because housing’s got to the point where it’s not just young people.
It’s you know, those in their 50s worried about can their kids live near them. Will they be able to buy something? How much do they need to stump up to help their kids into the market? Will their grandchildren live near them? So that’s why the politics have shifted. Just to return briefly to the Labor policy though, there, there is a problem with what Labor is proposed, which is basically this new homes bonus because it was a fixed target of 1 million homes is the baseline.
It’s the baseline that matters much more than the 1. 2 million homes. Cause that’s just a target. The money triggers once you meet your share of that 1 million home targeted for the state over five years. That number is too high. Basically, the federal government took a bet on where the housing construction cycle was going to go.
That bet has not paid off. Almost everything since that policy is announced has made it harder to build homes. Interest rates have kept rising. Construction costs have kept rising. It’s been hard to find those workers. So, Labor will need to rejig that baseline and, you know, in our view, probably increase the amount of money per home on the table.
So, the Property Council, for example, has recommended doubling to 30, 000 dollars per home. The Business Council was out in the last week with a report also pushing for more money from the feds to help push the states on supply. Because the fundamental problem here is that the federal government is on the hook politically.
It holds the purse strings, but it’s the states, you know, via the kind of reforms Matt’s talked about in Victoria and New South Wales that actually control most of the levers that will get more housing built.
Kat Clay: So, Brendan, just to wrap up, regardless of political party. What needs to happen now in housing policy?
Brendan Coates: That’s a great question, Kat, because we’ve made great progress, but we’re actually still quite a long way from where we need to be. So, first of all, the federal government, as I just mentioned, needs to rejig those targets to set a new baseline for which the new homes bonus is going to take effect. And at the moment the money doesn’t get paid if you succeed until the end of the five-year period.
That clearly needs to be brought forward. Maybe payments on the way and you can claw it back through the GST if they, if the state doesn’t end up meeting the target. As sort of Matt’s mentioned, what’s missing at the state level is broader upzoning just through the suburbs for the kind of townhouses where the cost of building them have not risen at the same rate as for apartments that compete more with materials and workers with things like the big housing build in Victoria.
And then beyond that at a federal level the federal government could do more to get more housing built by overcoming that financing gap. One of them would be to triple the size of the Housing Australia Future Fund. This was a Grattan recommendation. We recommended a 20-billion-dollar fund.
The federal government went with 10. Tripling that to 30 would allow us to build up to 50, 000 new social housing dwellings in the next five years. And given that there’s such issues with financing, it probably wouldn’t crowd out that many private homes. And if all those 50, 000 homes were additional, that solves about one fifth of the shortfall that the federal government’s got vis a vis its 1. 2 million home target and meets an important social need. The other thing that the fed should do, which Claire O’Neill has sort of signalled at least that stamp duty is a bad tax. She’s been very clear on that. She hasn’t been willing to go further and say that the fed should help, but clearly swapping stamp duty for a land tax would help get more housing built quicker because it would relax the deposit constraint for people say when you bought your first home if you didn’t have to pay any stamp duty then it’s a lot easier to buy a home than if you had to pay a whopping big bunch.
And the challenge there is that we need, the states rely so much on stamp duty, it’s just about the largest tax they collect after payroll tax. If you’re going to get rid of it and keep the schools running and the hospitals open, you need to replace it with something. So, the feds should commit to pay maybe a third of the shortfall that comes from switching from stamp duty to land tax and just have that as a standing offer.
And then finally in the interim, we really need to further raise rent assistance. So rent assistance has increased 26 percent in real terms in the last two budgets. There’s a need for a larger increase to make sure that low-income owners can afford to keep a roof over their heads while we’re waiting for supply to take effect.
Kat Clay: Thank you so much Brendan and Matt. As Brendan said earlier in the podcast, housing is set to be one of the big issues for the upcoming federal election. We provide our commentary here free for you through our podcasts, our research and our advocacy work. Please support us by donating at grattan.edu.au. As always, please take care and thanks so much for listening.