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Is housing affordability the egg we canít unscramble?

By Ross Elliott - posted Friday, 10 February 2017


The new NSW Premier Gladys Berejiklian has made housing affordability a commitment of her government and our Federal Treasurer Scott Morrison has been to London investigating alternative means to providing low cost and social housing, while Opposition Leader Bill Shorten claims only Labor has the solution to housing affordability. Politicians are starting to get the message, but is it all too late? Has the affordability horse bolted, permanently?

It was ten years that a research paper I wrote for the Residential Development Council first started doing the rounds of various Parliaments in the country. "Boulevard of Broken Dreams" as it was titled, warned – ten years ago mind – of the impending problem with housing affordability. It got plenty of political attention at the time and the debate over housing affordability was a key issue in the 2007 Federal Election. No one can say there weren't warnings back then. Here's what it predicted at the time:

While much media and political attention is focused on the role of housing interest rates, these do not explain the very high costs of housing in Australia. [Indeed not – we now have record low interest rates and record high housing prices] The root cause of worsening housing affordability lies squarely at the feet of various public policy settings, identified in this discussion paper. If these policy settings continue on their present path, there is no question that housing costs will continue to spiral beyond reach of many Australians. As this happens, dependency on rental housing will increase. Future generations of Australians will not be able to afford a home of their own, and will increasingly be consigned to rental housing - and rising rental costs.

Home ownership will be in the hands of an increasingly elite group of Australians: those wealthy enough to afford a home and those who bought into the housing market before the affordability crisis reached a tipping point.

Housing standards will fall - due to price constraints - and new homes will be built on smaller and smaller lots, with cheaper and cheaper materials to stem the tide of ever increasing government and regulatory costs.

The signs of a deepening crisis are now evident, and industry groups are united in voicing their concerns that present policy settings will only lead to a worsening problem. Failure to act now will leave future generations of young Australians a dismal legacy of housing stress - in a country which by any other assessment should boast the highest standards of home ownership and affordability.

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It's worth a read if you want a reminder of how ineffectual governments can be in dealing with the bleeding obvious, or of ignoring good advice when there's plenty of bad advice to be had. There is a copy of "Boulevard of Broken Dreams" you can download here.

Ten years have since passed and – as predicted – the problem is now much worse. Which also means that remedies are now more complicated since the problems are more deeply rooted. If we really wanted to do something meaningful about housing affordability today, there are quite a few more issues for politicians and policy makers to deal with. Here's a sample:

Are we even measuring the right thing?The city wide median house price is primarily a reflection of second hand (established) housing in established urban areas. It's the half way price point and can be distorted by heightened activity at either end of the price scale. What this doesn't measure is the typical cost of new housing supply, being either house+land, or apartments. Nor does it measure within established markets what proportion of houses fall into the lower quartile, and whether these are accessible to new entrants or lower income households. As a market wide measure, the median has some use but in the affordability debate, it can tend to disguise as much as it reveals.

Land supply. It's no longer a simple case of adding to supply, given that new supply is more heavily taxed than second hand (established) supply. Adding to land and housing supply with highly taxed and over regulated new stock is hardly likely to make things instantly better – it just adds more needlessly expensive stock to the market. So for improving supply to work the distortionate tax system as it applies to new land and housing needs to be addressed first.

Economic concentration. There has been an increasing concentration of economic opportunity in the inner urban regions of (mainly) Sydney and Melbourne – which is also where the worst housing affordability is. A report earlier this year noted that half the country's new jobs were within a couple of kilometres of the Sydney and Melbourne CBDs. Decentralising some of the jobs - both government and private - into suburban business centres and into the regions would remove some of this pressure cooker effect, but few seem willing to do so. I'm with Barnaby Joyce on this one – if you want affordable housing and views of Sydney Harbour, you're being unrealistic. But without higher order jobs and more of them, Barnaby is unlikely to be welcoming hordes of housing refugees into Tamworth, where the housing is - like many regional towns and cities - quite affordable if you have a job.

Regulatory reform. Urban Growth Boundaries, introduced in the late 1990s and early 2000s, sought to contain outward growth. "Sprawl" as it was pejoratively called, was an evil that would lead to social decay, dislocation, congestion, obesity, pollution, environmental degradation, loss of farmland – pretty much a full catalogue of sins, most of them unverified. But these growth boundaries immediately limited supply and saw land prices escalate. To address housing affordability, especially of new housing, we'd have to have a grown up discussion about the effect of urban growth boundaries, which itself will be a challenge.

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Planning regulations. More regulatory reform, this time on a host of planning regulations and prescriptive policies which can mean that even a car port application can become a topic of council debate in some places. There is too much planning and not enough doing but we are so attached to "having our say" that the community now seems entitled to advise other property owners what they should and shouldn't do with their properties. There are regional plans, state planning policies, council town plans, neighborhood plans, plans for everything and the red tape and delays (and costs) that go with it. In the history of this country, I struggle to think of one government at any level which has actually left office with fewer rules and regulations than when it entered, so hope on this front seems remote.

Industrial relations.The militancy of building industry unions is a matter of public record. This particularly affects multi-level or large scale housing projects and adds significantly to the costs of new housing supply. But our appetite for taming the excesses of building industry unions doesn't seem sufficient to achieve meaningful reform. Without it, new housing will continue to cost more than it needs to.

The GST.The GST adds directly to the cost of all new housing and the cost is borne by the buyers while the tax revenue flows to the federal government and is redistributed to the states. The GST does not apply to established housing. This distortion remains little discussed but it does mean that new housing is taxed at a higher rate than established housing. Talk of reform to the GST seems to end in political apoplexy so we tend to avoid it if we can. Fixing or countering this tax anomaly would be another component needed in any moves to improve housing affordability.

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This article was first published on The Pulse.



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About the Author

Ross Elliott is an industry consultant and business advisor, currently working with property economists Macroplan and engineers Calibre, among others.

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