Housing Crisis: Beyond The Band-Aids
Could population be the real elephant in the housing room?
The topic du jour in Australia is the “housing crisis”. I write this in quote marks because it isn’t a crisis for some, but a boon.
We all know about population growth swamping available dwellings.
At the time, rising rates have done two things: give landlords excuse to increase rents and give developers pause on starting new projects, which have resulted in a drop in housing approvals over the past 18 months.
Meanwhile, Governments have tried to mollify the nation with talk of housing targets and boosting zoning densities for developers, which isn’t really amounting to much, or setting themselves up for disappointment come election day.
Not everyone is losing
Firstly, whenever people talk about a “cost of living crisis” or “affordability” crisis, I think of it really as an income crisis. People’s incomes aren’t catching up to the cost of living or housing. The next thing I think of is what has changed from the status quo?
For example, if we wake up and there’s a big war in the Middle East and petrol prices shoot up to $5 a litre, I would not be reluctant to call it an oil crisis. This is because it is sudden, and exogenous.
The reason I doubt we have a housing crisis is two-fold.
Firstly, for every loser there is a beneficiary. Renters and buyers are losing. But landlords and — as inflation data and their own results have demonstrated — banks and, spectacularly, insurers are gaining.
I get furious whenever I visit Sydney Airport — not for any flight delays or cancellations, but that it is a privately-owned monopoly, and it is scrupulous about ensuring every aspect of my experience makes them as much money possible… for using an asset I have no choice over.
The same can be said for the tolls. These businesses used to be publicly owned assets, but were privatised by the Government in the 1990s under what is now an ideological spell of deregulation. More on this below.
This brings me to my second point. Any ‘man-made’ policy can be reversed. Particularly around economic matters.
If a funding unconstrained Federal Government accelerates migration in a country where states (who are sort of funding constrained) and local government (who are definitely funding constrained) need to maintain a first-world standard of life for its residents, is it a “crisis”? Or is it a discrete policy, the effects of which can be reversed?
It has always been a choice of Government to privatise assets, to introduce “user pays” and force increased costs on developers as well as increasing the population. Here is a great post of a builder’s personal experience with the increase in levies and deregulation.
Fighting fire with fuel?
The first thing people think of when they read about the “housing crisis” is a demand shock. And the natural response to a demand shock is a…. supply shock.
But it isn’t as simple as that. From building approvals data, it seems Australia only has the capacity to build 240,000 dwellings a year. More could be built, but it would probably add to the cost of building.
The construction industry believes that importing more workers is needed, but let’s be straight — wouldn’t they also add to demand?
You could then say, “well we need to reduce the cost of building” to prompt more supply. That would definitely help. But buildings sit on land, and that gets scarcer with population growth, not less. Land is finite. There’s also a large chunk of the cost of developing a dwelling going to local and state Governments, as per my prior point about being funding constrained.
It is all pretty complicated, and I could write a lot about it. However, there’s a great research paper by LongView and PEXA that goes into great detail.
But there’s something you won’t hear much of in the media and certainly not from the major parties and business leaders.
What if the real solution is less demand?
It almost feels bad to say it because most business leaders and economists are talking about increasing supply, without mentioning demand.
But, if we all agree we have a pretty superb quality of life in Australia, how can we maintain it while growing the population? Especially considering land and available resources are finite.
The latest polling I could find of Sydneysiders shows a decline in satisfaction, with generally lower satisfaction for Western Sydney residents. The latest research on traffic congestion in Sydney was in 2018, and it showed a steady decline in average speeds (increase in travel time). Long-time Sydney residents witnessing such change do notice these things.
As an economy, I fundamentally believe we are restrained by resources, not money. Is the “Big Australia” policy still working for Australia? Perhaps it would be an opportune time, while everyone is talking about a “housing crisis”, to talk about reducing population growth.
Great read.
Australia, especially it's capital cities are extremely desirable as a place of permanent residence for those living abroad for many reasons, regardless of how expensive it is to live here. As such, I find it difficult to see the tides of this desirability changing, meaning immigration will continue to rise and supply side will continue to be the focus point of policy makers.
Another point, it's sometimes easier for people and policy makers to point to supply side issues than to delve deeper into fundamental issues, such as you have here.