WILL BUILDING MORE HOMES MAKE HOUSING CHEAPER?_Brendan Coates

By Brendan Coates (ESA Victoria Council Member).

Proposition: A sustained increase in the number of new homes constructed each year, all else equal, will make housing cheaper than otherwise.

Public anxiety about housing affordability is on the rise in Australia. According to one survey, housing affordability has risen to become the second most important issue people want governments to address.

House prices more than doubled in real terms over the past 20 years. The strains have been most acute in Sydney and Melbourne. Since 2012, house prices have risen 50 per cent in Melbourne, and almost 70 per cent in Sydney.

Rates of home ownership are falling among the young and the poor. Home-ownership increasingly depends on who your parents are, a big turn-around from 35 years ago when all income groups had similar home-ownership rates.

People on low incomes – increasingly renters – are spending more of their income on housing. And homelessness is on the rise.

While house prices are now falling across our major cities, the falls are modest compared to the price rises of recent years.

Meanwhile public debate rages about what to do next. The Federal Government insists building more homes is the answer. RBA researchers recently estimated that zoning rules, which restrict the supply of new housing, contribute around 40 per cent to the price of houses in Sydney and Melbourne

But some critics question whether more homes are necessary, arguing instead for demand-side reforms such as abolishing negative gearing and reducing the capital gains tax discount. Others still point to lower migration, higher interest rates or tighter lending standards as options to make housing cheaper.

So what do some of Australia’s leading economists think? The vast majority of the 26 respondents to this month’s National Economic Poll agree that boosting the number of new homes built would improve affordability.

Some 21 respondents (81 per cent) either agreed or strongly agreed that building more homes would make housing cheaper than otherwise. Respondents also reported a high degree of certainty in their answers: when weighted by each panellist’s confidence, 85 per cent agreed with the proposition.

Nigel Stapleton argued it does not make sense to blame factors unique to Australia, such as negative gearing and the capital gains tax discount, because high house prices are not unique to Australia. Joaquin Vespignani pointed to an “evident lack of supply of housing in Australia, especially in Sydney and Melbourne”.

Peter Abelson noted that building 50 per cent more homes will have only a small impact on house prices, at least in the short-term, because house prices (and rents) are determined by the balance of demand and supply of the stockof housing. Australia adds at most 2 per cent to the stock of housing each year via new construction. But what if we sustained a higher rate of homebuilding for the next decade?

Several respondents who agreed that building more homes would make them cheaper also noted that demand-side factors, such as the tax treatment of housing, foreign investors or record low interest rates, were important drivers of rising house prices (Foster, Eslake, Sibly, Roy). Tony Makin pointed to the role of strong population growth.

Just three panellists disagreed with the proposition that building more homes would make housing more affordable, and one strongly disagreed. Rachel Ong argued that “simply building more housing will not make housing cheaper”, instead pointing to demand-side drivers of rising house prices. Brian Dollery identified “unprecedented levels of migration” as the main driver of recent house price rises. Garry Barrett argued that “research shows that the relative growth in demand factors is critical”.

Taken together, the responses demonstrate that there is wide (but not total) agreement that building more homes would help improve affordability.

But the results also demonstrate that addressing housing affordability is not an “either-or” proposition. Although not the focus of this month’s question, the responses suggest support among economists for demand-side reforms to improve affordability.

Australia should pursue both supply- and demand-side reforms: building more homes could go hand-in-hand with abolishing negative gearing and reducing the capital gains tax discount.

One challenge is our federation. The Federal Government has identified supply as the priority, but it does not directly control planning rules; the states do. Several state governments have pointed the finger at housing tax rules such as negative gearing: a federal government responsibility.

Australian governments have a long history of doing what’s politically expedient on housing affordability, rather than what would work. But this month’s Poll underscores the need for both supply and demand reforms if we’re going to make housing more affordable. Recent surveys suggest voters have figured out that unaffordable housing is a real problem in Australia. We should use all the policy levers at our disposal to help solve it.

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