Does housing supply impact on inequality?

Since 2010, 54 per cent more homes have gained building approval in metropolitan Melbourne than in Sydney, and 11 per cent more than the entire state of New South Wales.

That's an extraordinary set of numbers. Their significance is underlined in Mr Guy's next sentence: by building more homes, he says, Melburnians "are ensuring we won't have the drastic and harmful housing shortage Sydney is experiencing".

As I've explained before (Are apartments cheaper than houses?), a 2010 study of dwelling costs by the National Housing Supply Council found it cost $186,000 more to deliver a typical three bedroom house and land package on Sydney's fringe than on Melbourne's fringe.

Infill and high-rise housing is more expensive in Sydney too. The Council found a typical two bedroom apartment within 2-10 km of Sydney's CBD cost $554,000 at the time; in Melbourne, a comparable apartment cost $490,000. Anecdotal reports suggest the cost difference has subsequently widened to well north of $100,000.

Most of Melbourne's additional supply relative to Sydney came in the form of detached dwellings. Even so, there were 13,478 more medium and high density dwellings constructed in Melbourne over the period, notwithstanding this form of housing makes up a much larger proportion of the Sydney market.

These differences are down to a number of factors including Sydney's more constrained geography and (much) higher developer contributions. But a key one in relation to medium and higher density housing is likely to be land use regulations that restrict the redevelopment potential of land and consequently constrain the supply of new dwellings. Higher prices lead to lower demand.

We already know from recent books by writers like Edward Glazer (Triumph of the city), Ryan Avent (The gated city) and Matthew Yglesias (The rent is too damn high) that throttling dwelling supply has a pernicious effect on housing affordability and consequently has negative distributional consequences.

There's been a renewed focus this year on the role of housing in increasing inequality, sparked by the international debate around the new book by French economist Thomas Piketty, Capital in the twenty-first century.

Here's what Harvard economist and former US Secretary of the Treasury,Lawrence Summers, has to say in his review of Piketty's book:

Probably the two most important steps that public policy can take with respect to wealth inequality are the strengthening of financial regulation to more fully eliminate implicit and explicit subsidies to financial activity, and an easing of land-use restrictions that cause the real estate of the rich in major metropolitan areas to keep rising in value.

University of Canterbury economist Eric Crampton draws on responses to Piketty's work by MIT's Matthew Rognlie, The Brookings Institution's Justin Wolfers, and The Economist's Ryan Avent, and concludes that "restrictive zoning laws exacerbate inequality". He says:

Would that Kiwi campaigners against income inequality came to recognize the important role played by both anti-density and anti-sprawl regulations in fairly directly helping the rich at the expense of the poor.