The housing affordability report card for the last 12 months is a mixed one. A welcome reduction in price and rental pressures in some capital cities is offset by rising homelessness and ongoing housing stress for those on lower incomes, for whom more direct help is needed. Policy debate is often still very confused, even amongst some of our most revered institutions, including the RBA.
Some reduction in price pressures, thanks mainly to APRA
Let’s start with the good news. We have had a reduction in price pressures in almost all capital city housing markets except for Hobart. This has been an interesting phenomenon. This tells us a lot about the nature of supply and demand in Australian housing markets. Let’s take the case study of Sydney. It’s not that we suddenly had less people looking for somewhere to sleep. Indeed, in the last 12 months the population growth in Sydney has increased over previous years.
The big difference is that the activity of APRA – Australia’s banking regulator – has reduced the number of investors at auctions because they haven’t been able to get housing finance. This has reduced price growth that has in turn led to less interest from other investors, because capital growth has been less and the upward price spiral has been stopped. Prices in housing markets aren’t really about the number of people that need a place to live but they are about the supply and demand of housing finance.
Increased supply in Sydney is welcome news
The other issue is that the amount of supply coming into the market has also helped reduce prices because developers have had a lot of stock to shift. This much better balance between the supply and demand for a place to live has also had an impact on the rental market – rents in Sydney are now falling. This is the other lesson – if you want to know if there is a shortage of housing, you need to look at the market for what could be called housing services i.e. the rental market.
The capital price of houses is influenced by speculation and purchasers operating in an asset market. Despite the ongoing hysteria about the NSW Planning system which was discussed in the last piece, Sydney’s housing has operated in the way you would like a market to react. In response to rising prices, the supply of housing has increased. For the year ending February 2017, over 40,000 new dwellings were completed in Sydney. We have now built enough dwellings to increase the vacancy rate and decrease rents.
Lower income earners facing even greater pressure
On the bad news side, we have seen increasing pressure on people on lower incomes. For people on low incomes, especially Newstart, rents have increased faster than incomes. Not surprisingly the outcome of this trend has been that homelessness has been increasing. The government’s decision not to increase the Newstart rates in the Budget will lead to ever increasing rates of homelessness. This is a sad indictment on the state of Australian governments. When everyone including Australian governments have been making windfall profits from a very large boom in the housing markets, we have ignored the plight of the people at the bottom of the economic pile. Instead of giving them a hand up we have simply kicked them when they are down. It’s hardly a surprise that the outcome of this situation has been an increase in homelessness.
Reduction in development approvals – strange claims by Urban Taskforce
On the same bad news side, the circus (aka analysis) of the Australian housing market continues. Development lobby groups making weird claims is pretty normal and almost expected. For example, the Urban Taskforce claims that the reduction in development approvals in Sydney is a result of councils passing motions about future increased development charges for affordable housing, although as yet there is no ability for those same councils to levy these charges. This seems a weird claim – normally approvals accelerate as a result of proposed future levies as a way of bringing forward development to avoid being charged the fee. Think back to the surge of development before GST was levied on new housing.
Impact of zoning on prices – faulty RBA analysis
To this chorus of the property lobby, we have the extraordinary claim from a Reserve Bank discussion paper that “zoning raised detached house prices 73 per cent above marginal costs in Sydney” or by a cost of $489,000 per dwelling. This claim is based on a number of dubious assumptions that are simply not plausible, including that Sydney land owners are idiots and that the main objective of a developer is to provide affordable housing and not to maximize their profits. The paper also claims that zoning has raised apartment prices in Sydney by $399,000. The paper comes to this conclusion by making the absurd assumption that without zoning land for apartment buildings would be free. In working out the $399,000 figure, the Reserve Bank had a go at putting together a “feasibility analysis” for apartments by estimating their construction costs. This piece was particularly concerning.
In their job at helping to maintain the stability of the financial system, you would think that someone in the Reserve Bank could work out the cost of an apartment building. Development finance is a major risk for the financial system – think of the Irish Banking system and the GFC. However, the paper significantly underestimates the building costs of an apartment and the margin or profit that developers take out of an apartment project.
When the Reserve Bank joins the chorus of fake housing analysis, you really know that we have a problem in coming up with some basic understanding of Australian housing markets. One of the reasons we have such poor housing policy in Australia is because the analysis of the housing markets is so bad. Housing markets are different than most other markets and conventional economic analysis in understanding them is about as useful as logic in a briefing note for Donald Trump.
What is needed for those on lower incomes
What can we do to help people under severe housing stress? No, the answer isn’t to reform the zoning system. We need to increase rent assistance and payments for those at the bottom of the economic ladder and provide some decent investment into social and affordable housing. Analysis by Everybody’s Home has shown that Federal funding for homelessness and social housing has been cut by 16% over 5 years, whilst demand has been growing. Funding needs to move in the opposite direction.
Download the PDF of Making Housing Affordable articles posted in May 2017.
Professor Peter Phibbs is Head of Urban and Regional Planning and Policy at the University of Sydney and also Director of the Henry Halloran Trust at the same University. He has over 20 years’ experience undertaking housing research.