Stop blaming a ‘lack of supply’ for Australia’s housing woes

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

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:

  1. Australia’s housing supply ‘problem’ was caused by the massive increase in immigration-driven population growth from 2005.
  2. 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:

Sydney dwelling composition

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.

Unconventional Economist
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Comments

  1. pfh007.comMEMBER

    It does not make sense to argue that supply is not a problem when it is crystal clear that the Big Australia ponzi population program is about to re-start with rockets attached.

    And it is not as though we suddenly had a major over supply of housing when the borders were shut.

    All through the pandemic rental vacancies across Australia have been very tight….even in the cities like Sydney and Melbourne which were packed to the rafters with temporary residents before the pandemic who flew home when the bat flu bit.

    Talking about empty bedrooms or boomers living out their years in 4 bedroom family homes is meaningless if housing to rent is in SHORT supply right across Australia.

    People don’t live in a graph showing a “theoretical” abundance of housing.

    If housing is not available to rent it is of no help to the average person.

    A few residential vacancy numbers for capital cities.

    Hobart

    https://sqmresearch.com.au/graph_vacancy.php?region=tas::Hobart&type=c&t=1

    Brisbane
    https://sqmresearch.com.au/graph_vacancy.php?region=qld::Brisbane&type=c&t=1

    Adelaide
    https://sqmresearch.com.au/graph_vacancy.php?region=sa::Adelaide&type=c&t=1

    Even Sydney and Melbourne have slid back below 3%.

    As for the cost of new housing well the first buyer pays all approach to funding the provision of gold plated services and turning the state land development agencies into shakedown outfits explains that.

    • “It does not make sense to argue that supply is not a problem when it is crystal clear that the Big Australia ponzi population program is about to re-start with rockets attached”.

      Sure. Then the first best solution is not to ramp-up immigration.

      “All through the pandemic rental vacancies across Australia have been very tight….even in the cities like Sydney and Melbourne which were packed to the rafters with temporary residents before the pandemic who flew home when the bat flu bit”

      Sure. But we are currently going through the biggest building boom ever. And these homes will hit the market next year as they are completed. Extreme immigration is the biggest risk.

      “Talking about empty bedrooms or boomers living out their years in 4 bedroom family homes is meaningless if housing to rent is in SHORT supply right across Australia”.

      Sure, but how will the proposed ‘supply-side reforms’ (which I actually agree with in this case) solve the problem right now?

      “If housing is not available to rent it is of no help to the average person”.

      Agreed. But as Tulip himself noted in his submission to the inquiry, the tightness in rental vacancies was caused by extreme immigration. So the first best solution is not to reboot it.

      “As for the cost of new housing well the first buyer pays all approach to funding the provision of gold plated services and turning the state land development agencies into shakedown outfits explains that”.

      Agreed, which is why I support the proposed reforms.

      But what I hate most is that everyone bangs on about supply and sheds crocodile tears while supporting extreme immigration. Totally contradictory.

      • pfh007.comMEMBER

        “..But what I hate most is that everyone bangs on about supply and sheds crocodile tears while supporting extreme immigration. Totally contradictory…”

        Yes – I hate them as well.

        But until the population ponzi droids stoppiong driving policy, supply is always going to be a problem as it is very easy to dump 50,000 new arrivals into our capital cities but very difficult to quickly build the 20,000 – 35,000 homes to accommodate them.

    • Mass immigration is not a given, it’s a policy decision, and hence Supply would not be a problem, if Immigration was returned to Net 70,000 per year once the borders were re-opened.

      • It is also the fact that if you have a 2,000 plot for subdivision you will go broke building infrastucture for 2,000 lots up front. Roads, sewage, water, gas, changing the grade of land, clearing trees/shrubs is impossible to do all up front. Hence everything is done in tranches, what you may call rationing is simple development economics.

  2. Mak The KnifeMEMBER

    Until Australia starts to consider how other countries have dealt with their housing shortage, housing prices will keep heading up. Little tip: high speed rail brings in those folks to create competition for jobs!!! and the housing shortage goes away. The reason housing prices are so high is that there is little competition.

    • No other developed country has immigration anywhere close to ours, on a per capita basis, so their housing shortages wouldn’t be as bad as ours. Simplest solution is to cut Immigration back to reasonable levels.

  3. blacktwin997MEMBER

    Sometimes you just need to see a name to feel the red mist descend, e.g.:

    Peter Tulip
    Innes Willox
    Liz Allen
    Katy Perry
    Shane Geha
    Jan Fran
    Dominic Perrottet
    Peter McDonald
    Nerida Conisbee
    Waleed Aly
    Daryl Maguire
    Jennifer Westacott