Australia's Housing Supply & Demand Mismatch
Australia is in the grip of a supply and demand mismatch, which, while I shudder to use the word ‘crisis’, is worsening and there’s not much good news in sight.
You may have heard that Australian governments have agreed to a target of 1.2 million homes to be built in the next five years. Of course, governments aren’t responsible for building homes - they’ve just set the target, and there’s not much hope that the target is going to be met. Indeed, in many ways they are making the problem worse. Here are some of the realities:
Governments aren’t good at building houses. Their failure to do so over the past 30 years, as well as the Kiwibuild debacle across the Tasman (which has produced just over 2,000 homes of a target of 100,000), should have taught us this.
The much ballyhooed Housing Australia Future Fund, aims to build only 40,000 houses. If it’s like any other government program, it won’t come close to achieving this. Even if it does, it will do absolutely nothing for the overall market.
The current ‘Build to Rent’ fascination is not the answer. It has a small role to play, but overall it discourages home ownership and will inject more questionably-built, high-density rent-only ghettos similar to the public housing towers of old.
Developers are facing high interest rates, spiralling construction costs and builder insolvency risk. Governments have made the problem worse by increasing inflation through overspending across the board, by drawing away skilled tradespeople through poorly-considered infrastructure projects (Yes Suburban Rail Loop I’m looking at you), failing to include enough tradespeople as part of the massive immigration numbers arriving in the country, and increasing the cost of construction through abolishing the ABCC, re-regulating the workplace and making sweetheart deals with unions, such as QLD’s ludicrous Best Practice Industry Conditions policy
Governments need to stop governing by policy announcement and actually delve into the bowels of the problem.
We know that home buyers (and investors) want to purchase in established locations, close to work, transport, services and amenity. They want to buy properties that they rightly believe will retain their value and grow over time - properties that are well-designed, well-built houses, townhouses and lower-density apartments with a degree of underpinning land value. These properties are (aptly) known as ‘The Missing Middle'.
Instead, what are we seeing built? Ultra-expensive properties targeting wealthy downsizers (which, let's be honest, are often second homes). High density apartments of variable build quality crammed into limited space in over-crowded suburbs, often built on main roads with nowhere near enough open space or greenery to compensate. Outer-suburb houses on undersized blocks in estates without shops or services, which only follow years later. Which means the vast majority of home buyers are left to pick over the ever-shrinking established market to find what they want.
Home buyers want well-located properties where they can be confident about future value and build quality.
Do I blame developers for this? Not really, they are there to make a profit, and they are following what governments are telling them to do. This may not be in the public messaging from government, but it’s the messaging in practice, through taxation, incentives and planning policies. With margins tight and risk high, it’s harder than ever for developers to build the kind of stock that home buyers really want.
As a country, we should be encouraging responsible home ownership. For one, it’s great for the individual: it’s one of the best financial decisions you can make, and far better than almost any other investment. Moreover, it’s important for our society - home owners are a stabilizing force, they create neighbourhood pride, help reduce crime and contribute more back to their communities. They’re also far less of a burden on the country in their later years.
But we won’t get this if people can’t buy the right kind of housing. If governments are going to intervene, they need to do more than simply pump up demand through first-home buyer grants and low-deposit loans, or building tiny amounts of ‘affordable housing’ for a select group of people. They need to make the right kinds of property affordable for as many people as possible. They could start with some of these measures:
Reduce the upfront tax burden on ‘missing middle’ property types to reduce costs. Taxation can make up to a third (or more) of the total cost of a new build
Take on some of the development risk through partially-guaranteed loans for the right kind of housing stock
Change developer contributions to incentivise lower density development
Proactively work to free-up land and almagate sites to allow for more economical development
Streamline planning laws to allow sensible missing middle development in established suburbs, instead of emotive and counterproductive policies such as ‘saving city X’s backyard’
While many sound like local government remits, it is state governments that ultimately drive planning, and the federal government that ultimately bankrolls the states.
Combined with smarter policies to reduce mismatch and free up stock in the established housing market, such as the reduction or removal of stamp duty, we could start to see the trend move back in a direction that makes the right kind of properties more affordable and that encourages home ownership. The reality is that the housing market isn’t purely a private one, and that governments of all stripes actively intervene in it. We might as well have them intervening in a way that enhances rather than detracts from our progress as a nation.
