Shane Oliver – AMP Head of Investment Strategy and Economics and Chief Economist – has published a detailed report on Australia’s property market, which argued that the big ramp-up in population growth (immigration) from the mid-2000s has contributed greatly to Australia’s housing affordability problems:
So why is housing so expensive?
There are two main drivers of the surge in Australian home prices relative to incomes over the last two decades. First, the shift from high to low interest rates has boosted borrowing ability and hence buying power. Second, there has been an inadequate supply response to demand. Starting in the mid-2000’s annual population growth surged by around 150,000 people per annum and this was not matched by a commensurate increase in the supply of dwellings resulting in a chronic shortage (see the green line in the next chart). The supply short fall relative to population driven underlying demand is likely the major factor in explaining why Australian housing is expensive compared to many other countries that have low or even lower interest rates. And the concentration of Australians in just a handful of coastal cities has not helped either.
A range of other factors have played a role including negative gearing and the capital gains tax discount for investors, foreign buying and SMSF buying, but they have been relatively minor compared to the chronic undersupply. And investor and foreign demand have not been drivers of the latest surge.
So what can be done?…
More fundamental policies are needed to address poor housing affordability. Ideally these should involve a multi-year plan involving state and federal governments. My shopping list on this front include:
- Measures to boost new supply – relaxing land use rules, releasing land faster and speeding up approval processes.
- Matching the level of immigration in a post pandemic world to the ability of the property market to supply housing.
- Encouraging greater decentralisation to regional Australia – the work from home phenomenon shows this is possible but it should be helped along with appropriate infrastructure and of course measures to boost regional housing supply.
- Tax reform including replacing stamp duty with land tax (to make it easier for empty nesters to downsize) and reducing the capital gains tax discount (to remove a distortion in favour of speculation).
As I illustrated in my submission to the parliamentary inquiry into Housing Affordability and Supply, “any housing supply problem is first and foremost an excessive immigration problem”.
The latest Intergenerational Report (IGR) projects that net overseas migration (NOM) will ramp up to 235,000 people a year for decades to come:
This extreme immigration is projected in the IGR to increase Australia’s population by 13.1 million people (~50%) over the next 40 years to 38.8 million people – equivalent to adding another Sydney, Melbourne and Brisbane to Australia’s existing population.
Such a population deluge will guarantee that housing demand swamps housing supply, resulting in worse affordability. It will also consign future Australians to live in high-rise shoe boxes:
The single best thing the federal government can do to ‘solve’ Australia’s housing woes is to ensure that immigration does not return to its manic pre-COVID level, nor is raised to the insane 235,000 annual NOM projected by the IGR.
The first goal of public policy should be to protect the welfare of existing residents and not make a problem worse. ‘Big Australia’ immigration violates this principle.