WENDY HAYHURST. Why adequate and affordable housing matters to productivity

A growing body of research is demonstrating the adverse productivity impacts of inadequate or unaffordable housing in Australia (and elsewhere).

These include impacts on human capital through the mismatch between the availability of suitable housing and employment, and the distorting impact that high house prices and high rents can have on consumption, savings and investment. Governments at both Federal and State level continue to ignore these impacts to the disadvantage of our economy.

With this year’s bushfire calamity threatening to push Australia’s economy into recession, Treasurer Josh Frydenberg is facing renewed calls for immediate economic stimulus measures. But underlying this situation, as the Treasurer knows, the nation faces a more fundamental challenge in boosting economic productivity, crucial to longer-term wage growth and overall prosperity. As yet, however, officialdom has failed to grasp the reality that fixing our under-performing housing system needs to form part of Australia’s economic productivity solution.

The wider productivity problem is, of course, well recognised both by government and financial regulators. Indeed, in a recent speech the Treasurer noted that ‘Our productivity growth over the last decade has slowed and we cannot simply rely on high commodity prices to boost national income’. He went on to identify labour productivity growth rates as the main culprit – averaging only 1.1% in the last five years (and even lower recently). But although recognising that, in Frydenberg’s words, ‘a key enabler of higher productivity is publicly provided infrastructure’, government continues to adopt a one-eyed perspective on what constitutes ‘infrastructure’ for these purposes – failing to recognise that it is not only roads and ports that should be in the frame here, but also housing.

It was therefore heartening to learn, in 2018, that the NSW Productivity Commission set up at that time understood its focus as including ‘tackling some of the state’s most pressing challenges including the recent deterioration in housing affordability and cost-of-living pressures’. It was heartening because while affordable housing advocates have long argued that inadequate or over-expensive housing is a serious welfare concern, we are now accumulating evidence that housing system dysfunction is also imposing mounting economic costs on Australia.

A growing body of research demonstrates the links between housing and the economy. Concerned about worsening housing affordability in Sydney and its economic productivity impacts across the metropolitan area, a multi sector partnership has commissioned a series of studies on the issue over the past two years.

The first such study ‘Making Better Economic Cases for Housing Policies’ (March 2018) argued that housing’s weighty economic role is largely ignored in Australia, just as in most of our comparator countries. It identified that housing has two types of productivity impact.

The first affects human capital through the mismatch between housing and employment which limits access to jobs and constrains job mobility, thereby damaging labour force participation. This mismatch also imposes health costs which impact on economic performance, with low income renters increasingly concentrated in specific neighbourhoods thus compounding disadvantage.

The second feature is the impact of high house prices and rents on consumption, savings and investment. The housing boom has locked up capital in residential property that adds little to growth and productivity. It has also increased economic instability, as rising housing wealth has tended to lead to more consumption in economic upturns – so-called procyclical spending – amplifying metropolitan economic cycles. This will increase instability and reduce productivity. Beyond this, when rising housing costs capture a disproportionate share of disposable household income there is likely to be a significant hit to broader household consumption.

The second such study ‘Strengthening Economic Cases for Housing Policies’ (Feb 2019) modelled how housing outcomes impact economic growth and productivity, with a particular focus on Sydney. This revealed strong, positive productivity effects from investing in a notional portfolio of 100,000 rental housing units affordable to low income workers and located close to transport, services and jobs.

Over a 40-year timescale, by comparison with a ‘business as usual’ scenario where low-income workers occupy expensive housing distant from employment centres, the cost to government was easily out-weighed by broader productivity gains. Thus, an investment in housing capital subsidy of $7.27 billion NPV would over that period generate $17.57 billion NPV in human capital uplift. Returns of this order would be comparable to most standard infrastructure investments, including transport investments.

There remains much scope to deepen insights on housing system impacts on productivity. Not least the economic consequences of high housing cost burdens experienced by many renters, and newer owners. Further work to quantify these impacts is planned by a partnership of organisations across the housing sector.

So what of the NSW Productivity Commission and its October 2019 discussion paper ‘Kickstarting the Productivity Conversation’ releasedto inform the productivity reform agenda? While acknowledging that urban growth can undermine productivity (e.g. through ‘road congestion, more crowded public transport, more intense use of public land [and] increased pollution’), it was largely silent about housing unaffordability and its impact on productivity. Regrettably, the 2018 announcement suggesting that these issues could be central to the Commission’s agenda has so far proven unfulfilled.

If the Commonwealth and NSW Governments are serious in their shared pledge to restore productivity growth, they cannot afford to ignore evidence of housing system dysfunction and impaired economic performance. A clearer appreciation of the links between housing and productivity would do three things:

· Articulate the urban economic productivity benefits that will inure from well-located housing made available at a price affordable to middle and low-income workers;

· Lead to a broader consideration of the action Government could take to alleviate housing unaffordability (acknowledging that the solutions are linked to household incomes and the feasibility of a market response); and

· Enable a conversation about the relative merits of investing in housing compared to other forms of infrastructure.

It is to be hoped that, in its forthcoming productivity Green Paper, the NSW Productivity Commission broadens its agenda to recognise the importance of housing in this sphere. Such recognition would, if taken to its logical conclusion, result in housing being accorded a far greater priority in government deliberations at both state/territory and federal levels.

Wendy Hayhurst is CEO of the Community Housing Industry Association, the community housing industry’s national peak body

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3 Responses to WENDY HAYHURST. Why adequate and affordable housing matters to productivity

  1. Teow Loon Ti says:

    Ms Hayhurst,

    I believe that the Singapore HDB system might provide some answers to the housing problem here. I saw the republic grow from a poor port of the Malay Peninsula when it was booted out of Malaysia to become one of the richest countries in the world. Much of their wealth came from careful and prudent planning of the economy of which housing was an important component. There is a lesson to be learnt there, especially for a place in turmoil like Hong Kong where a lack of housing for the poorer sectors of the society is said to be a major contributor to the despair and unrest.

    I have written to both sides of politics in Australia recently suggesting that they take a look at the Singapore model. I was ignored.

    Thank you for the nice article.

    Ti

  2. Alan Luchetti says:

    A clearer understanding of how our currency issuer, the federal government, could finance the provision of affordable housing, would also help. There is no point in trying to address the problem hobbled with the Thatcherite myth that taxation funds currency issuance when the opposite is the case.

  3. Wayne McMillan says:

    Hi Wendy, It’s true labour productivity has slowed since 2013, and average
    labour productivity growth decelerated from 1.4% per year over the 2000-13
    period, to 1.1% per year since 2013. From 2000 through to 2013, real labour productivity growth was about half-again faster on average than real wage growth, with productivity rising 1.4% per year, versus 0.9% for real wages. Since 2013, however, the gap between productivity and wages has widened notably, with real productivity growing almost four times faster than real wages 1. (Please also have a look at the work of Jim Stanford at The Centre For Future Work, he has done excellent work in this area.) The state govts are budget constrained, not so the federal govt, it could provide cheap fixed housing loans for first home buyers and put more funds into new housing construction and accompanying social and economic infrastructure if it wanted to do so. The macroeconomic myth that a fed govt that is a sovereign issuer of its own free floating currency must balance the budget over the business cycle, has been proven by the modern monetary theorists to be fallacious. So the only thing stopping any fed govt to allocate funds to housing is political will or a need to hoodwink the Australian public that a federal govt budget is like a household budget. Under the conditions mentioned earlier where a federal govt is the currency issuer and it has a free floating exchange rate, it can always find the funds to spend on whatever unutilised resources are available for sale in the economy.

    1. The Wages Crisis in Australia, Uni of Adelaide, pp.32-33

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