Pearls and Irritations

Improving housing affordability is the key to resolving the cost-of-living crisis, but the policy options are limited and will inevitably take time to have their desired effect.

Yesterday’s article showed that the cost-of-living crisis mainly reflects a decline in housing affordability. Accordingly, any government response to the cost-of-living crisis needs to focus on what can be done to improve housing affordability.

Demand-side measures

Understandably it is commonly believed that renters are the poorest people who most need housing assistance. Targeted rent subsidies and an increase in social housing therefore make sense.

However, as yesterday’s article showed, renters have not experienced the same decline in their living standards over the last four years since covid as new home buyers.

In response the Coalition wants to assist first-time home buyers to buy a home by allowing them to drawdown funds from their superannuation accounts. Labor on the other hand, argues that allowing these people to prematurely draw down from their superannuation before retirement is contrary to the purpose of superannuation.

Another argument against this sort of assistance to help finance housing purchase is that the housing market is heavily supply-constrained. Consequently, any extra funding is unlikely to increase the number of dwellings available for purchase, but rather will just add to their prices.

Supply-side measures

Thus, a key response to the cost-of-living crisis would be to increase the supply of dwelling available for purchase. But the problem is that it inevitably takes time to increase the housing supply. Not much can be achieved in the next year or two.

This is principally because of

• shortages in the supply of skilled tradesmen needed to build the new houses,
• zoning restrictions limiting building of new dwellings where people most want to live.

Governments are taking action to remove these impediments to increasing the housing supply, but that takes time. Although the Albanese Government has increased the subsidies to encourage people to undertake the training to become a tradesperson with the necessary qualifications, that takes some years before they can complete their courses.

Equally governments are now starting to over-ride the objections of local councils to the increases in housing density that will be required to make our major cities workable. But again, those changes take time to steer through the various forms of community consultation needed, and further time before the building industry responds to the new development opportunities.

The cost of finance

As reported yesterday the living standards of mortgaged households fell by 5.6% between 2019 and December 2024. In contrast, the living standards of renters climbed by 2.9%, while the living standards of out-right owners climbed 8.5%.
Yesterday’s article also showed that the year from June 2022 to June 2023 was by far the worst year for the rise in living costs. This was especially true for people purchasing a new home, and that was of course the twelve months during which most of the increase in interest rates occurred.

The counterpart is that as interest rates fall that will lead to a much lower rate of increase in future living costs. But again that will take time, and will only occur as government and Reserve Bank policies succeed in bringing inflation down and back inside the target range.

Conclusion

The Opposition, under Peter Dutton, has sought to make political capital by heavily criticising the Government for the cost-of-living crisis. But as so often, Dutton has failed to announce what exactly he would do instead.

The reality is that what is needed is to increase the housing supply and get interest rates back to normal. But both of these take time, and in addition the national government has only limited influence over both these necessary policy outcomes.

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