Australia's affordable housing crisis: the price of poor public policy

The Productivity Commission is tackling Australia's affordable housing issue. While the Commission's brief is to focus on the needs of first-home buyers, they will soon discover the causes of declining affordability are widespread.

Solid population growth combined with demographic shifts, such as the declining number of people per dwelling, are revving demand for housing which is further fuelled by aspiration and the cheapest money since Neil Armstrong walked on the moon.

It is when supply cannot meet this demand that prices rise. These supply constraints are due chiefly to poor government policy. To cut to the chase, housing is less affordable because home prices include the cost of substandard policy making.

This policy failure occurs on several fronts:

• poor strategic planning;
• inefficient taxation;
• poor governance;
• archaic development assessment processes; and
• poorly targeted housing welfare schemes.

A serious public policy effort would tackle several dimensions of the "affordability" challenge. First, there are the homeless, whose circumstances are critical. Next are the welfare dependent, who generally require government assistance to pay for basic shelter. Then there are those workers who can't bridge the "deposit gap", or are burdened by high mortgages.

While solutions need to be crafted for all aspects of the problem, there are common threads to the initial causes of house price inflation. A prime culprit for rising asset values is ad hoc and poorly considered land supply programs. Since the 1970s governments have shunned long-term strategic planning, which includes land release programs and the thoughtful allocation of vital infrastructure - road, rail, water, telecommunications and the like. Even today, some governments release land without adequate infrastructure, thereby causing dislocation, all of which has a human toll.

The Melbourne 2030 strategy, launched earlier this year, is one of the few attempts by an Australian government to plan strategically. The Melbourne plan has its critics. Nevertheless it recognises that most public policy initiatives have a spatial implication.

Many Ministers privately boast of their dislike for planning. In truth, they prefer the flexibility of expending taxpayer's money on the basis of the electoral cycle and political imperatives. Strategic planning doesn't necessarily involve Stalinist five-year schemes, or reviving the Department of Urban and Regional Development, graced with statues of Tom Uren. Strategic planning is needed precisely because it is extremely difficult to balance urban consolidation and sustainability with growth. Not surprisingly, poor planning leads to poor budgeting, particularly for capital works. The result is a funding short fall for social infrastructure.

That leads to our next sure-fire house price inflator - transaction taxes, such as stamp duty. Even more inimical are so called "producer charges". That is, levies on new development. governments now see developer charges as a quick, low-visibility solution to decades of infrastructure neglect. It's easy for many to cheer when a developer is slugged for higher taxes.

The recent Parry report in NSW seems to feel comfortable in this territory. Why shouldn't these developers pay for more roads, railway stations, sewerage and all the rest? Well, we do not need an econometric model to estimate the second and third-round impacts of such charges. Look at housing prices, the developer passes on new taxes straight away. There is no doubt developers should assist with capital investment in communities. However, it is inequitable for new-home buyers to fund infrastructure that will be used by the broader community. There is no need for such inequitable and inefficient taxes, as a recent Allen Consulting Report (pdf, 414Kb), commissioned by the Property Council, illustrates.

By far the most efficient means of funding capital works programs is by way of government borrowing. In short, bonds - the very method used to build the nation's infrastructure in the first place. Of course, bonds are ultimately repaid with taxes. However, the cost of infrastructure is amortised over a longer period that reflects the long lives of social infrastructure.