Life on the West Island - Solving the housing crisis

Senior academics from three West Island universities have recently published a paper setting out five suggested strategies to solve the much-hyped “housing crisis” facing the nation. While these proposed plans might have a substantial effect, there are several underlying issues which are not being addressed either by the academics or the major political parties in the current election campaign. These include:

• Are we stimulating the building of the sorts of houses first home buyers need or want? Our nation is currently building the largest homes of any nation on earth – energy guzzling McMansions containing multiple bedrooms, two or three bathrooms, two kitchens, huge family rooms, home theatres, two offices, three undercover car parks and even swimming pools. At a time when family sizes are decreasing, house sizes continue to grow. This market mismatch is pushing home prices to ridiculous, unaffordable levels for first home buyers and those on average earnings.
• We continue to reward investors with unjustifiable and inequitable tax incentives which have the effect of supercharging home prices. An investor sitting at home in front of the TV pays half the rate of tax charged on capital gains compared with that levied on a labourer or aged care worker in back-breaking work. On top of that, the greedy investor can claim a raft of expenses as tax deductions through negative gearing, free of means testing.
• The West Island does not have a shortage of housing, with over a million homes vacant at present – more than enough to accommodate every person wanting a home. But there is a shortage of available homes, especially in the rental market, with so many being held back for expensive short-term holiday rental clients and international visitors through schemes such as Airbnb.
• The popular media has to an extent invented the “crisis” by assuming that young West Islanders should be able to leave school, get a job and immediately put down a deposit on a home. This has never been the case, as anyone older than 30 can attest. Just ask your parents or grandparents how they managed to buy a home when inflation was at 17%!

Until these issues are adequately understood, fiddling with demand or supply issues – as the political parties are doing – will never solve the “housing crisis.” That said, it is worth considering the five strategies suggested by the learned academics, which will at least ease the current problems. These are:

1. It’s a cluster problem that needs a cluster solution

When we talk of the affordability crisis, what we’re really talking about is a complicated cluster of interrelated problems that make housing unaffordable to buy, build and rent. Unaffordable housing comes from the interaction between the global economy, interest rates, inefficiencies in our construction and planning systems, as well as the outcomes of poor government policies. We should be wary of hitching our wagon to any of these alone. Reform of the planning system, for example, is held up by some as the simple solution. While the planning system needs to be improved, it does not make up the entirety of the housing production pipeline – and it’s definitely not a magical solution. Equal attention needs to be given to workforce shortages, productivity concerns in the construction industry, development financial risk and developer behaviour. These are all arguably as important as planning in delivering new supply.

2. It’s not about supply versus demand. It’s both

Many major housing policy announcements are either supply-focused or demand-focused. What Australia needs are coherent and integrated policy packages addressing both sides of the problem at the same time. During this election campaign, both major parties have made a series of demand-boosting policy announcements in rapid succession, designed to put more cash into the hands of first homebuyers. All these measures will further fuel increases in house prices at a pace that income growth cannot match. It is true both parties have proposed supply measures, but supply lags mean these houses will not be delivered in time to offset any rise in demand (and price) from the expansion of the demand-boosting schemes.

3. Think beyond new supply

The shortfall of dwellings in Australia is certainly a problem, but even an ambitious construction target is likely to add only about 2% to our existing stock each year. We need to look to the homes already built and how they can better meet demand. This might include measures to promote granny flats, or enable additional subdivision.

4. Aim before shooting

Too many housing programs are poorly targeted. We need to zero in on those in housing need. We shouldn’t be providing assistance to those who don’t need it. Policymakers need to confront the targeting errors that afflict their proposed plans. Currently, 11% of aspiring first homebuyers are able to meet deposit and repayment requirements to purchase a home. Labor’s plan to lift the income limits and caps on available places will open up the scheme to many homebuyers who don’t need government-funded assistance for a home purchase. The Liberals’ super for housing plan will also benefit higher-income and older groups.

5. Design policies through an intergenerational lens

As we live longer, policymakers must embrace the challenge of meeting the housing needs of multiple generations. This co-existence in society is the new normal. For instance, economists have consistently called for the abolition of stamp duties in home purchases, favouring instead a broad-based land tax. This removes a major upfront sum that would otherwise be paid by both young people looking to buy their first home and older “empty nesters” looking to downsize. Australia’s reliance on stamp duty is second only to South Korea among OECD countries. But even if stamp duties are not abolished, we could better use this revenue to meet housing needs, including building additional social housing, bolstering homelessness services and constructing new housing infrastructure.

Taken together, the issues raised above make clear that what is needed is an all-encompassing West Island policy approach to solving the housing crisis, not just more subsidies and one-off “sugar hits” which end up making the situation worse for buyers while giving more and more to rich developers and investors.