Ex-RBA head of research turned chief economist at the Centre for Independent Studies, Peter Tulip, has penned an article in Fairfax blaming a lack of supply for Australia’s housing affordability woes:
Many submissions to the federal housing inquiry now underway argue for removal of tax concessions like negative gearing and the capital gains discount. This is a non-issue. Apart from being politically dead, it just doesn’t make much difference to affordability…
The main cause of high prices is land use restrictions — often called planning or zoning — as has been found in a string of official reports. The most recent of these reports were the NSW Productivity Commission’s White Paper and the surveys of the Australian economy by the OECD and IMF. The reason official reports keep saying that the problem is planning is because this is what the research clearly shows, both in Australia and overseas.
Planning restrictions boost prices by limiting the amount of housing that can be supplied. Apartments and townhouses are prohibited on most of our urban land, which is reserved for detached houses. Where apartments are permitted, height restrictions limit the number of dwellings they can provide. Like any other restriction on supply — for example taxi licences or import quotas — this pushes up the price.
The notion that Australia’s housing affordability woes are caused by a ‘lack of supply’ is ridiculous.
Any housing shortage pre-COVID was unambiguously caused by the federal government throwing open the immigration floodgates in 2005:
Australia’s net overseas migration (NOM) jumped from an average of 89,000 between 1991 and 2004 to an average of 215,000 between 2005 and 2020 – an annual average increase in immigration of 140%.
But now that immigration has collapsed, Australia’s ‘housing shortage’ has miraculously disappeared:
The National Housing Finance & Investment Corporation’s (NHFIC) first flagship report on housing supply and demand came to exactly the same conclusion.
NHFIC forecast that “cumulative new supply is expected to be around 93,000 higher than new demand by 2025”, thanks to the fall in immigration:
The lessons from the above are obvious:
- Australia’s housing supply ‘problem’ was caused by the massive increase in immigration-driven population growth from 2005.
- The first best solution to Australia’s housing supply problem is not to return immigration back to its extreme pre-COVID level.
Under the Intergenerational Report’s immigration projections, Australia’s population will balloon by a whopping 13.1 million people (~50%) over the next 40 years to 38.8 million people – equivalent to adding another Sydney, Melbourne plus Brisbane to Australia’s existing population.
Such a population deluge will guarantee that housing demand swamps housing supply, resulting in worse affordability (other things equal) and forcing future Australians to live in high-rise slums:
The first rule in public policy formulation should be not to make a problem worse. The planned reboot of the mass immigration ‘Big Australia’ policy clearly violates this rule.
Curiously, Peter Tulip’s submission to the House of Representatives Standing Committee on Tax and Revenue’s inquiry into Housing Affordability and Supply came to a similar conclusion about immigration, yet is completely absent from his Fairfax article:
Arguably the largest way in which the federal government affects the housing market is through its immigration policy.
In the mid 2000’s, Australia’s immigration intake accelerated quickly. This resulted in large increases in the demand for housing and hence large increases in housing prices and rents…
Actual population growth, shown in the red line in the top left panel, rose from 1.5% in 2005 to 2.4% in 2008. The blue line shows a counterfactual in which this surge did not occur, with population growth remaining at its 2005 rate. As shown in the top right panel, the surge in immigration boosts the adult population by 650,000 or 3.3% by 2018…
The result was that demand outstripped short-run supply, with the rental vacancy rate falling to a near-record low of 1½% in 2008. This boosted real rents (the bottom left panel) to be 9% higher than they would have been otherwise. The increase in rents gradually flows on to a similar increase in dwelling prices (bottom right)…
They raise two important issues for housing policy.
1) Immigration policy does not seem to be co-ordinated with other arms of policy. In particular, the recent increase in immigration was not matched by a commensurate increase in housing supply.
2) There is an imbalance in government incentives. The federal government decides immigration rates. However it is the states and local governments that largely have to pay for the extra infrastructure this requires…
Immigration boosts housing prices and needs to be better co-ordinated with housing supply…
Nevertheless, Tulip does also call on the federal government to provide incentive payments to the states to free-up land supply and planning:
Providing more money to areas that build more housing would rectify a spillover, or what economists call an “externality”.
Many of the perceived costs of high-density construction — crowding, noise, congestion and so forth — are borne locally. So understandably, the neighbours object. However, the benefits, in terms of lower housing costs and economic growth, are dispersed throughout society…
The result is that it is not in the interests of a local or state government to build enough housing. Incentive payments align local decision-making with the national interest…
Payments could take the form of assistance with infrastructure…
It is fair that the federal government take greater responsibility for capital projects like this — the need for them is driven by high immigration, a federal decision.
This part of Tulip’s article I totally agree with and have made similar arguments previously.
The federal government never takes proper account of the costs of big migration – either financial or non-financial – since these are borne primarily by the states and residents at large.
I bet if the federal government was required to internalise the cost of immigration by paying the states $100,000 per permanent migrant that settles in their jurisdiction, so that the states can adequately fund the extra infrastructure and services required, then Treasury would no longer tout the ‘fiscal benefits’ of immigration.
Making the federal government share the benefits and costs of immigration would be a surefire way of reducing the intake back to sensible and sustainable levels.