Remedying Australia’s Ailing Housing Market
By Anthony Sims
Australian homes are, relative to the rest of the world, objectively unaffordable – not just for students, but for workers and families too. The average person has more familiarity with critically acclaimed series House M.D. than residential property; though you could be forgiven for thinking the show is actually about housing.
Dr. House: “Why are we here?”
Dr. Cuddy: “We’re talking about cutting off a kid’s hand.”
House: “Yes, we’re talking about cutting it off, not subdividing it and putting in condos. It’s not a legal issue.”
Cuddy: “Are you being intentionally dense?”
Regardless of whether Cuddy intended to make a double entendre referring to House’s density, the premise of subdivision being a ‘legal issue’ severely understates the disastrous impacts of inadequate zoning laws, and it remains just one of many ailments afflicting Australia’s housing market.
While the windfall post-COVID growth appears to have eased, a study by The Australia Institute concluded that the average Australian dwelling costs 16.4 times the average household income (as of December 2023). In terms of easing affordability, the RBA’s recent 0.25% cut to the cash rate target simply will not cut the mustard.
A recent study by Abelson and Joyeux (2023) estimates that a 1% increase in the housing stock reduces rents and prices by 2.3%. This goes to show that a little impact can go a long way – although when prices have risen 38.4% since 2020, a far stronger response is required than that which was delivered.
In August 2023, Anthony Albanese’s Labor government ambitiously promised to deliver 1.2 million new homes within five years, starting from July 2024. To achieve this, the 2024 budget focused on four areas to improve housing: 20,000 more fee-free TAFE positions for trades, $1bn to states and territories to build roads and amenities for new developments, 40,000 more social homes and regulating universities to provide a greater supply of student housing.
To achieve this target, 240,000 homes must be built every year, but last year only 170,000 homes were built – well short of the target. Furthermore, their policy mechanisms are proving to be ineffective; after nearly 18 months of existence, the Housing Australia Future Fund (HAFF), the organisation delivering the government’s social housing expansion, has only constructed 358 new dwellings. Additionally, more than 70% of these are in Western Australia, away from urban areas in the eastern states where the lack of affordability is most sharply felt. While there are more than 5,000 projects still underway, each of these policies is simply one inadequacy to the next; Albanese is trying to fix problems which only marginally contribute to the housing crisis, and is struggling to fix even those.
So what are the big issues which contribute to the housing crisis? It is simple to identify. Anyone could tell you that a healthy housing market would respond to an increase in demand by building more dwellings. And while input costs are rising, given the extent of price growth, a profit incentive certainly exists for housing suppliers, so it is not particularly a supply-side issue. So why does Australia still lack affordable housing? The answer, of course, boils down to poor government policy.
Zoning laws are the single biggest impediment to affordable housing that exists in the Australian property market. They impose strict housing density in urban neighbourhoods and artificially create higher rents and property prices. In 2018, the RBA estimated that zoning restrictions have raised prices 73% above the cost of supply. Alongside administrative and government costs, including stamp duty, these policies only worsen the impact of supply-side factors and rising input costs.
The perpetuation of zoning laws is largely driven by NIMBYism (‘Not In My Back Yard), a parochial ideology whose proponents advocate against development in their local area. While many would expect NIMBYs to thrive within humble local council chambers, they can be found in all levels of government – in fact, a 2019 petition ‘Wind Farms for Warringah’ gathered over 31,000 signatures in a tongue-in-cheek response to local MP Zali Steggall’s unabashed insistence on developing wind turbine projects, with no proposed projects for her own electorate.
Perhaps the most perplexing element of NIMBYism is the NIMBY paradox – the more widespread NIMBYism is, and the lower the density of dwellings in an area, the smaller the tax base and the greater the cost of services, public and private. Many NIMBYs will complain about the lack of services or quality of services provided to their area, all the while actively campaigning (and voting) against more affordable dwellings for workers who could hypothetically operate such services. In fact, NIMBYism is now so widespread that new, more dangerous ideologies have been derived; CAVE people (Citizens Against Virtually Everything) and BANANA people (Build Absolutely Nothing Anywhere Near Anything) are on the rise.
However, the NIMBYs do make one valid point – you cannot build more dwellings in an area without first expanding the infrastructure capacity and amenities of that area. That’s why a critical element of easing housing pressure is infrastructure development to allow for higher-density housing. This is one area in which government funding is directed, yet despite the best intentions, is still not delivering tangible results.
The life of a critic is easy, so naturally, a renowned economist such as myself would have recommendations beyond repealing bad zoning laws, reducing government costs, and re-educating NIMBYs. Indeed, the focus of the government should be to increase the supply of amenities and infrastructure in urban areas. However, since successive governments have failed to carry this out effectively, a market-based approach appears to be the best option, and fortunately for Australia, there are many successful examples of privatised infrastructure. The Japanese rail network, arguably the most efficient transport network in the world, features multiple competing private rail companies which primarily service urban areas. The government’s role is limited to the regulation of fares, leaving private corporations the ability to run vertically integrated business models of developing residential, retail and commercial land and the commuting methods used by people to travel between these planned areas. Such a system would provide the best of both worlds – housing, infrastructure, and amenities provided at little cost to the taxpayer, while the government can retain control of maintaining fair transport prices which Australians have acclimatised to.
However, in the true spirit of House M.D., diagnostics is only half of the issue. The practice of remedying this affliction is an entirely different story; and one which remains to be seen.