Housing affordability and equality: part 2

Apr 5, 2024
Housing and home

Yesterday, Part 1 of this article discussed the decline in housing affordability and the consequent increase in wealth inequality. Today, Part 2 will discuss possible policies to restore housing affordability in the interests of a more equal and cohesive society.

Policies to improve housing affordability and thus increase home ownership have traditionally focussed on reducing the cost by subsidising the home purchase or improving the supply. But if we are to seriously consider the various options, we first need to better understand the reasons which have been given as to why housing prices have risen so much relative to incomes.

Population pressures

The Leader of the Opposition, Peter Dutton, has argued that population growth due to high rates of migration is leading to excess demand for housing and that this is a principal reason for the present rapid rise in the cost of housing. But Dutton does not know and cannot tell us how much the surge in migration since the border re-opening after Covid is leading to an increase in demands for housing and thus its price.

In fact, as Table 1 shows, over six of the last seven years the increase in the number of dwellings has exceeded the rate of population growth. It is only in the latest financial year that the rate of increase in the population may have exceeded the increase in the number of dwellings. In short, there is no evidence that population growth has outstripped the supply of housing and thus been putting pressure on dwelling prices.

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Furthermore, the recent surge in migration is largely a one-off and will not endure, as much of the surge represented students returning to their studies as the borders were re-opened. Also, the measures the Government has taken will reduce the number of migrants from now on.

Most importantly, as many have pointed out what matters most is the composition of the migrant intake. Right now, increasing the intake of migrants with trade skills would do more to increase the housing supply than the demand, and the Government is doing this. Also, the students represent a major form of export revenue for Australia, and if they plan to return to their home country then they are unlikely to aspire to home ownership in Australia. While if the students decide to stay, and are allowed, that also represents a desirable increase in Australia’s skill base.

Construction costs

The ABS price index for the cost of constructing and altering dwellings has increased very rapidly in the last two years by 8.8% in 2021-22 and 13.1% in 2022-23. However, as can be seen from Chart 1 below dwelling construction costs have a track record of exceptionally rapid increases in economic booms when inflation is high, with increases as high as 16% in 1988-89 and 12% in 1989-90, and again 13% in 2000-01.

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Whether or not these rapid increases in dwelling construction costs in the last two years really indicate a lack of building capacity is therefore uncertain. Alternatively, the recent rapid increase in dwelling construction costs may be just a temporary surge typical of an over-heated economy. In any event, the Government has taken steps to increase the number of migrants with trade skills and is also encouraging a higher take-up of trade qualifications at TAFE.

Readjusting planning constraints

There is a considerable body of expert opinion, particularly among economists, that restrictive urban planning constraints and zoning are curtailing the supply of dwellings and pushing up prices, especially in the areas where people want to live rather than on the city fringe with poor access to jobs, entertainment and family.

For example, RBA staff estimated in 2018 that zoning restrictions raised the average price of detached houses by 73 per cent in Sydney, 69 per cent in Melbourne, and 29 per cent in Brisbane. For apartments. the figures were 85 per cent in Sydney, 30 per cent in Melbourne and 26 per cent in Brisbane. These are massive price increases, and that is without including the impact of local government planning decisions which add further to dwelling costs.

This RBA research also found that on average the cost of the land accounted for two thirds of the house price in Sydney and Melbourne, and half in Brisbane. No doubt the value of the land would have risen further relative to the value of the dwelling structure since then in 2018.

Indeed, data for the last twenty years in Table 2 show that house prices have always risen faster than dwelling construction costs. And as the increase in house prices is essentially a weighted average of the increase in land prices and construction costs, this means that the land prices have been rising significantly faster than construction costs for a long time.

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Clearly if we want to make housing more affordable we need to increase the density of existing suburbs where people want to live. However, the existing home-owners in these inner suburbs typically resist any attempt to change the planning restrictions to allow an increase in density.

From their point of view, they resent the loss of amenity as their neighbourhood becomes more crowded and traffic congestion rises. Equally important, they fear that their wealth will decline as the increased density results in a reduction in land values, and they will not willingly make that financial sacrifice.

Furthermore, it is the existing home-owners who live and vote in each local government area, and not the citizens from elsewhere who would like to come and live there. So, it is not surprising that local councils tend to support the status quo and resist all attempts to make our cities more liveable for the disenfranchised from outside their area.

State Governments are, however, beginning to realise that there is no solution to housing affordability without increasing density, and especially the NSW Government is biting the bullet. It is mandating an increase in density in inner suburbs, especially within 400 metres of designated train stations, and while it is prepared to negotiate the details with councils, it is insisting on achieving the targeted increases in density. These initiatives should be supported.

Financial support

For many years financial assistance from both Federal and State governments has been the main way that governments have sought to assist housing affordability.

The principal forms of such assistance have been:

  • First homeowner grants
  • Shared equity schemes
  • First homeowner stamp duty exemptions
  • Rent assistance
  • Construction of public housing.

The problem with the first three forms of assistance to increase home ownership is that when there are supply constraints – as there are – these forms of assistance tend to push up the price of dwellings and are therefore counter-productive. The impact on house prices will be less if the schemes are tightly targeted with limited access to them, and this is particularly true of the shared equity scheme that the Albanese Government is pursuing, and which could be more tightly targeted.

The Opposition’s policy of allowing people to access their superannuation accounts well before retirement to assist in finding the deposit for a home is equally likely to be dissipated through price increases. In addition, the reduction in home ownership reflects not only the difficulty in finding the necessary deposit, but as discussed in Part 1 of this article yesterday, there is also the difficulty of servicing the mortgage and raiding one’s superannuation account will not solve this problem.

Rent assistance on the other hand is highly targeted to poor people and is a very effective way of improving their housing affordability. Over the last fifteen years, however, rent assistance has not increased as fast as rents. The Albanese Government recently increased rent assistance substantially, but a further increase should be a priority.

Of itself, however, rent assistance does little to increase the supply of housing, especially when this constrained by a lack of building sites where the people want to live. In the past governments built a large amount of public housing which assisted low-income families to rent and/or buy a home. Between 1947 and 1961, the housing stock in Australia increased by 50 per cent, and governments directly built 24 per cent of that increase. Today, however, public housing for rent accounts for only about 4 per cent of Australia’s housing stock.

Again, like rent assistance, it would be desirable to increase the amount of money available for public and social housing by doubling the size of Housing Australia Future Fund from $10 billion to $20 billion as proposed by the Grattan Institute.

However, there is a budget constraint, and if we really want to improve housing affordability the main emphasis will have to be on measures to increase the supply of homes where people want to live by changing the planning and zoning systems to increase density.


Part 1 of this two-part feature:

Housing affordability and equality: part 1

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