Supply sceptics beware: without more housing, it won’t be affordable
Presentation to the Australian Conference of Economists, Canberra, Wednesday 11 July 2018.
As Australians grow increasingly concerned about housing affordability, and the costs mount for our economy and society, debate rages over what to do next. Grattan Institute’s recent report, Housing affordability: re-imagining the Australian Dream, showed that while reforms to negative gearing, the capital gains tax discount and property taxes will help, reforming planning rules to boost the number of homes built will make the biggest difference in the long run.
Yet some affordable-housing advocates are sceptical that building more homes will result in housing becoming much more affordable. Some oppose more development unless it’s targeted specifically at low-income earners. Instead they lobby for subsidies for social and affordable housing, and curbs to tax breaks that artificially boost housing demand.
Supply sceptics use several arguments to claim that more liberal planning won’t improve affordability. They argue that there is no housing shortage; that recent record levels of supply haven’t reduced prices; that planning rules don’t constrain supply; ; that the market delivers additional housing that is not suitable for people on lower incomes; and that policies other than planning matter more to affordability.
But in this presentation the Australian Conference of Economists, Grattan Institute’s Australian Perspectives Fellow Brendan Coates shows why supply sceptics are wrong on each count.
The link between more liberal planning and more affordable housing is clear, despite the best arguments of sceptics. The housing shortage is real. Construction has barely kept up with population growth, let alone if household sizes had kept falling as predicted. Planning has inhibited more construction. What has been built has provided a suitable range of options for people on low incomes – there just isn’t enough of it. And other policy levers can’t improve affordability as much as reforms to planning.
Building more homes won’t fix everything. More supply will only make housing more affordable in the long-term. There will still be a need for more support for low-income households to manage their housing costs. State governments should still amend tenancy rules to make renting more secure. And housing tax reforms can make housing more affordable in the short-term, while also helping government budgets and the economy. But without more supply to reduce the gap between what housing costs and what households can afford to pay, we will struggle to make housing more affordable for anyone, let alone the poorest Australians.
Housing affordability is at crisis levels in Sydney and Melbourne. Australia needs to use all the policy levers available to make housing more affordable. That means tackling both demand and supply.