The substantial under-used capacity within our existing residential built environment offers a quick, and capital light, opportunity to ease the affordable housing crisis. … There are an estimated 90,000 properties empty in Sydney and 83,000 in Melbourne.
The supply and demand chestnut
The housing affordability crisis is often blamed on an imbalance of supply and demand. This is undoubtedly true, but it begs the questions of how, where and in what respect should we increase supply or curb demand without creating other anomalies? How can government play an enabling role without creating undue strain on already stretched government budgets?
Supply side lobbyists, including developer groups, argue with good cause that planning laws and practices are too restrictive and slow. However, careful planning is needed to ensure that the right supply is brought on at the right rate in the right places. For a start, it needs to be within easy access to services, jobs, transport and other infrastructure.
In Sydney and Melbourne, two of the most unaffordable Australian cities, we are ironically now seeing pockets of oversupply in the apartment segment. Despite this glut in housing, median prices (and rents) remain well out of reach for vast numbers of people on lower incomes. Affordability is already so out of whack that average incomes could take many years to catch up with prices and rents.
In other words, new supply doesn’t equal affordable supply. Left to their own devices, developers will always price stock at the highest level the market will bear.
So-called “inclusionary policies”, a form of value sharing, are one way of bringing on affordable, rather than market rate, new apartments. Inclusionary policies require developers to reserve a certain percentage of their new apartments for “affordable housing”, in return for being granted higher densities and therefore more profit.
Inadequate supply is not solely to blame. Many commentators, including the Grattan Institute, believe the problem also lies in distortions on the demand side. They point to speculation-induced price pressure caused by overly generous negative gearing and capital gains tax concessions.
During the last Federal election, Labor proposed that negative gearing be restricted in future to newly built housing stock, which would not only help reduce speculation on housing but also go some way to reducing the government deficit.
This author certainly endorses a winding back of negative gearing. Apart from the undesirable speculation it has encouraged, it has also contributed to raising household debt in Australia to stratospheric levels (amongst the highest in the OECD), rendering many over-geared mum and dad investors highly vulnerable to even modest interest rate increases.
There’s significant under-used capacity in the system
Acknowledging that any meaningful increase in the supply of new housing stock is a long-term plan, what can we do in the short to medium term?
Part of the answer lies in our “other” source of supply – existing housing stock which is un-used or under-used. Not only is it available right now, at no additional capital cost, but the good news is that there’s rather a lot of it.
ABS data from the Survey of Income and Housing (SIH) – more specifically SIH data from 2011-12 – suggests that more than three quarters (78%) of households occupied dwellings that had more bedrooms than were needed to accommodate the occupants, and the figure was even higher (90%) among homeowners who were mortgage free.
An article in the Sydney Morning Herald in March 2016, quoting analysis by UNSW’s City Futures Research Centre, suggests that Sydney’s housing affordability crisis was being artificially inflated by up to 90,000 properties standing empty in some of the city’s most desirable suburbs.
The UNSW researchers found that properties in areas with lower rental yields and higher expected capital growth were significantly more likely to be unoccupied. This result was thought to be due to the investors being primarily focused on capital gains, and enjoying the joint benefits of negative gearing and capital gains tax concessions.
The SMH article also references a December 2015 water usage report by think tank Prosper Australia, pointing to nearly 83,000 unoccupied properties in greater Melbourne, equivalent to approximately 19% of investor owned housing stock.
An enabling role for government
To encourage people to make use of their unoccupied or under-occupied dwellings, government could play an enabling role with both carrot and stick approaches.
Examples of “carrots” include fiscal incentives like the UK Rent-a-Room scheme, which allows home occupiers (owners and tenants) to earn up to ₤7,500 per annum, tax free, from letting out furnished accommodation (either a room or a whole floor) in their home, providing it remains their primary residence.
It is estimated that there are some 19 million unused owner-occupied bedrooms in England alone. Putting just 5% of them into service would house a population not much smaller than Birmingham, England’s second largest city.
Alternatively, or in addition, government “sticks” such as fiscal disincentives from leaving property unoccupied for lengthy periods could be implemented by imposing higher Council rates in such circumstances.
Imagine how much housing stress could be relieved with no capital cost, no lead-time and minimal cost to government simply by harnessing under-used capacity.
Making more effective use of our existing housing stock is not only sustainable, it also offers the chance to make a real difference to the housing crisis in the short to medium term.
Oliver Frankel is a former corporate finance and M&A lawyer, who has spent the second half of his career in finance, investment and management. Most recently, he has taken a strong interest in how to address the affordable housing crisis.