DUNCAN MACLENNAN ET AL. Housing: New Reapolitik Needs a New Real Economics

Mar 22, 2018

Managing the pressured housing markets of cities such as Sydney and Melbourne poses a major challenge to governments at both state and Federal levels. As has become increasingly clear, such trajectories are wreaking serious damage for younger aspiring homebuyers and for broad swathes of the lower income population. As yet less well-recognised, however, is the wider hit to urban productivity that results from poorly functioning housing systems. Smarter policymaking is eminently possible in this area but will require that Ministers and their advisers resist the lure of simplistic ‘blame the planners’ analyses and adopt cleverer and better-informed approaches to the problem.

The Shaping Housing Futures Group, an international collaboration of academics and housing industry experts, has been reviewing experiences of pressured metropolitan housing markets in Australia, Canada and the UK. Our research on the problematic consequences that can result supports many of the arguments recently put by Ross Gittins about the need for a constructive rethink on entry to home-ownership. But it also argues for expanded affordable rental provision for lower income groups.

The present difficulties of the metropolitan areas covered in the SHFG study, in Australia and the other countries, largely stem from their success in creating and capturing the benefits of agglomeration – the economic gains that arise from co-location of firms and ‘thick’ labour markets. These growth dividends for major cities, and their un-linking from wider regional housing markets, raise two difficulties for housing and other infrastructure policies.

First, at the federal scale, the divergent house price patterns of pressured metropolitan versus other areas weakens the scope for use of monetary/ financial policy instruments in growth management. National governments have been quicker to respond to the financial stability aspects of house price changes than to their productivity consequences. It is worrying that Federal administrations have so little comprehension of how housing and land markets play out in these major chunks of space that provide more than half of national output.

The second concern is that, alongside its benefits, growth also generates congestion costs and shortages. Prolonged scarcity within housing markets arises not just because supply systems are inelastic but because rising prices often tend to boost market demand rather than to suppress it. Housing is, for many, most effectively allocated by market mechanisms. But, rather than resorting to economics 101 explanations, policymakers need a housing economics that identifies where sluggish housing markets fail; a housing economics that can guide a fix for such problems. The key policy failure across the cities and countries involved in SHFG, from Sydney to Vancouver though London and back to Melbourne starts by failing to see housing as essential economic infrastructure within an inherently sticky supply system.

The metropolitan housing markets examined by SHFG (Brisbane, Melbourne, Sydney, Vancouver, Toronto, Halifax, London, Manchester, Edinburgh) appear to have had three common phases to their post-2000 dynamics. Metropolitan economies prospered in the long boom after the mid-1990s. Rising incomes boosted housing demand, not least preferred home-ownership, as Gittins observes. Tax arrangements and political stances reinforced the demands for housing as an asset, not simply to accumulate by steady saving but to shape nations of speculators.  The rising housing wealth gains of the baby boomers, allied to favourable rental investment taxation, then drove increases in rental investor acquisition as a retirement provision, shaping a rental sector that was inefficiently financed and managed. It also sustained the upward drive in metropolitan housing prices. That exacerbated the home ownership exclusion of the 25-40 somethings and, increasingly attracted overseas investors to these ‘safe’ metropolitan places.

The sustained upward shift in prices, as Gittins notes, was shaped by policies and largely nationally driven demand pressures. Overseas investment is a small froth on an increasingly bitter-made brew. Recent research on the London housing market shows overseas investors paying similar prices and purchase behaviours to London locals and Toronto evidence reveals Chinese investor contribution to property market inflation in that city to have been very localised and small in scale. Meanwhile, in Vancouver, two years after restricting overseas demand upward pressures have resumed. It is time for the great cities to focus on policies that will facilitate the economic infrastructure that will forestall rising congestion costs. These costs may now be driving firms and skilled labour away from their most productive long-term locations.

The consequences of housing pressures go well beyond the displacement of younger Australians into rental homes (with the problem of deposit formation masking the persistence of a historically low cost of capital for housing owners). The same pressures have exacerbated homelessness and have imposed acutely high rental payment burdens on lower income households (as the stocks of non-market rental housing have failed to keep pace with population growth).

The increasing concentration of lower income households and a shift of low income housing to the outer suburbs are shaping more difficult housing futures for Australia and Canada. Economic policy interest has been focused on financial stability. Yet the research evidence for Australia and elsewhere is that a range of housing outcomes are hampering productivity growth and attracting the concern not just of poverty lobbyists but business leaders. Small, poor-quality housing and unstable housing tenancies with frequent moves for kids impairs their educational performance. In adulthood, many outer metro workers face long commutes from the ‘affordable edge’. These damage productivity, wellbeing and environmental quality. Chains of connection between poor housing outcomes and reduced human capital capacity can be matched with similar logic chains of how housing outcomes shape small firm formation and growth. More obviously, the restricted consumption that results higher housing payments has a damaging effect on Australian output and productivity (through scale economy effects). Housing outcomes have driven, in Australia, not just the major shifts in wealth and income (after housing costs) highlighted by Thomas Piketty, but they now threaten the Glaeser agglomeration gains.

Gittins is right that policy failure, as much as market failure, is at the heart of these growing difficulties. Policy choices have failed to manage housing change for the Australian economy. Creating the framework for a more flexible and fair housing system for Australia requires some fundamental shifts. Part of the problem is the major vertical fiscal imbalance at the heart of Australian metropolitan growth. Productivity growth is primarily metropolitan, but the tax revenues flowing from that growth and the autonomies to use them lie elsewhere, as metropolitan governance is weak. Australian governance arrangements match neither the geographies of potentials nor problems. Too often the multi-level structure of government is used as an excuse not to fix the problem.

Viewed from outside Australia, the recent Commonwealth government attempt to encourage better quality and strategic state housing strategies was a sensible measure but it has been frustrated as states cried ‘compromised control’.  Perhaps Australia should move housing support to a ‘housing deals’ format that aligns the strategic and resource interests of different levels of government. State governments need to identify the housing and infrastructure packages (otherwise known as places) that will be home to rising numbers of Australians. Housing infrastructure and transport need to be jointly planned and financed. Within state governments there is a serious need for a major injection of applied housing economic capacities (economics 101 is even more dangerous in the corridors of power than in the press), and some serious evidence building and modelling.

This latter point is well illustrated in the emergent policy debate. Ross Gittins is right, wheels are squeaking, and so are the pips. Housing affordability is looming as a major political issue across the OECD. One line of response from those who take a naively optimistic (and theoretically or ideologically driven) view about the functioning of housing markets is that the essential problem is one of supply and that problem arises from regulation/planning.  We can all agree that the dominant problem is about supply (although demand-side boost from first-owner grants and tax advantages matter too). We do however need a more informed view about what causes supply inelasticity. Inelastic supply can reflect planning decisions and processes but infrastructure shortages may deter developers from using zoned, available land. In Sydney, for instance, there is a substantial stock of land with permissions that remains undeveloped. The development industry, where it owns stocks of land in inflating markets, may have firm management incentives that do not involve maximising the short-term flow of new housing. An efficient Australian housing market cannot be assumed into existence but needs to be shaped by evidence-informed policies.

Other key policy ideas need to be trialled that would make for change. From a productivity standpoint inclusionary zoning is an effective housing policy for producing affordable housing as it produces homes from the ‘scarcity rents’ of already wealthy landowners. It does not reduce productive output. Tax financed grants and subsidies to produce the same housing would, somewhere in the Australian economy, reduce productivity and growth. Naturally a settled policy regime is essential. Involving non-profits in owning houses built (as in London and Vancouver) retains the uplift gains for lower income households into the longer term.

For almost two decades some Australian states have dilly-dallied in the social housing space. Most have resolutely failed to invest in new public housing and they have fashioned non-profit sectors that they have then simply failed to support and grow. There is an almost delusional quality to debate within state governments on this issue. UK experience has shown how such organisations can be client oriented, careful investors with patient capital. They have provided low income rental housing, dealt with special needs, brought together different sectors of interest required to renew communities and they have, with effective regulation and acquired scale, made strong, safe connections to national capital markets. Now they are dealing with market failures and helping create new routes into home ownership and exit from it in later life stages. Some major states have preferred to sit unmoved on their public housing assets leaving a major housing equity unlevered and strategically unused. Transfers could be transformative.

Australia has the ideas and the opportunities to shape a new, better housing system. It need not cost governments more but it will require them to think how housing markets really work and how these outcomes can be improved by strategic policy decisions. Australia needs to move beyond blaming planners and relying on separated chunks of short term policies for homeless and first home buyers to shape efficient market and governance systems for cities, states and the nation.

Duncan Maclennan (University of Glasgow and UNSW), Laura Crommelin (UNSW), Ryan van den Nouwelant (UNSW), Hal Pawson (UNSW)

 Shaping Futures has been a knowledge co-production project led by the University of Glasgow and involving UNSW and the University of Toronto working with 21 cities, government departments, non-profits and others to think through better housing futures for Australia, Canada and the UK.

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