Over the past few years, I have heaped praise on Family First senator for South Australia and former HIA president, Bob Day, for tirelessly advocating for affordable housing and lobbying for much-needed fundamental reforms to Australia’s constipated urban planning system, which has precluded affordable housing from being built in response to rising demand.
Today is not one of those days.
On Tuesday, Day spoke during a Senate debate on housing affordability in which he sensibly outlined how supply-side barriers have made housing less affordable, as well as the distortion to the domestic economy from the mis-allocation of resources into housing:
For more than 100 years the average Australian family was able to buy its first home on one wage. The median house price was around three times the median income, allowing young home buyers easy entry into the housing market. The median house prices now in real terms—that is, relative to income—are more than nine times what it was for 100 years between 1900 and 2000. That equates to approximately $600,000 more spent on mortgage payments than would have been the case had house prices remained at three times the median income. That is $600,000 lost to the economy in consumption and spending on other things.
The economic consequences of this change have been devastating. The capital structure of our economy has been distorted to the tune of hundreds of billions of dollars and, for those on middle and low incomes, the prospect of ever becoming homeowners has now all but vanished. The real culprit for the slump in business conditions over the past years has been the massive redirection of capital into high mortgages. The distortion in the housing market, this misallocation of resources resulting from the supply-demand imbalance is enormous by any measure and affects every other area of the economy. A terrible policy mistake has been made and it needs to be corrected.
Let’s be clear here as well: the problem is not the affordability of constructing a home. The previous speaker, Senator O’Neill, should make a note of this fact. The cost of building a home has been approximately the same for decades due to efficiencies gained over the years. The cost of building a house has not even risen with indexation. In fact, I have said in my home state of South Australia as we lose the automotive manufacturing, why can’t we build cars as cost-effectively as we build houses?
The affordability problem is with the land on which the house is built. Land prices have gone through the roof. The Demographia international housing affordability survey, which ranks 378 cities worldwide, list all Australian cities as seriously unaffordable…
However, Day then let himself down badly by completely disregarding the role played by tax distortions, such as negative gearing and capital gains tax discounts, in making homes less affordable and mis-allocating capital:
…the Greens are right: this is a crisis. The solution, though, is not to target the demand drivers of housing like capital gains tax discounts, negative gearing, low interest rates, first home buyer grants or immigration.
Take negative gearing for a moment. The Housing Industry Association said last September, with the backing of research by Independent Economics, that restricting access to negative gearing would reduce housing investment, erode affordability and put upward pressure on rents.
As anyone with even the basic understanding of how markets work would know, increases in demand do not cause prices to rise. What causes prices to rise is lack of supply. Let me give a good example: when demand for technology like flat-screen televisions and mobile phones increased markedly a few years ago, prices did not rise; they fell. Why? Because supply increased. That is how markets work…
What is it with the whole housing policy debate in Australia that garners such extreme views?
On the one side, there are the demand-side fanatics, who claim that Australia’s housing affordability woes are caused sorely by factors such as easy credit and tax distortions (including negative gearing). On the other, there are the supply-side fanatics, such as Day and the HIA, who believe that Australia’s unaffordable housing is caused purely by restrictions on supply.
The answer, of course, is somewhere in between, with excessive demand (caused in part through negative gearing) pushing up against supply-side constraints, such as artificial barriers to land supply (e.g. urban growth boundaries and restrictive zoning) as well as the first-user-pays-all approach to infrastructure provision.
To completely ignore one side of this housing equation, while blaming Australia’s poor affordability solely on demand-side or supply-side factors, is myopic and only half right.
Sure, if Australia operated Houston-style housing policies in place – i.e. liberal planning, minimal artificial restrictions on urban land supply, and adequate provision of housing-related infrastructure – then the opportunities for overall land prices to escalate would be reduced, lowering rents to land owners. And distortions caused by Australia’s tax regime (including negative gearing) would not be so much of an issue, since the extra demand caused by these policies would manifest more in increased construction rather than higher prices.
However, this is merely a pipe dream in Australia. Supply-side rigidities exist, and like it or not are likely to remain a feature of the Australian housing market for the foreseeable future. Therefore, it makes absolutely no sense to pump demand via Australia’s tax system when supply remains so constipated, and in doing so, raising prices. Again, to only focus on the supply-side distortions, while completely ignoring distortions on the demand-side, is overly myopic and not particularly realistic from a policy perspective.
Day’s claim that “restricting access to negative gearing would reduce housing investment, erode affordability and put upward pressure on rents” is also laughable when one views the next chart showing first home buyers being totally crowded-out by investors:
Blind Freddy can see that there is an inverse relationship between the two, and it is no surprise why first home buyer mortgage demand is running at a record low level just as investor demand is at a record high.
Nor is it a surprise that there is a very strong correlation between investor mortgage growth and house price growth:
And then there is Day’s dodgy claim about pushing-up rents, which defies logic given investors are buying-up existing homes en masse, not investing in new construction, therefore are merely turning homes for sale into homes for let:
Seriously, how can Day ignore these most basic of facts?
While Day’s comments on the need for supply-side reform are welcome, he has completely ignored the demand-side policies that have exacerbated Australia’s housing affordability problem, and effectively said that “only supply matters”.
Another missed opportunity.
