In August the Morrison Government launched another housing affordability inquiry – this time examining ‘supply-side impediments’.
In the marketing spiel accompanying the announcement, Coalition committee chair Jason Falinski cited “limitations on land and restrictive planning laws as the major causes of shortages in supply”. Falinski also cited the RBA as claiming that “regulatory settings are directly responsible for the unresponsive nature of housing supply in Australia”, which has made housing unaffordable.
On Monday, RBA assistant governor (economic) Luci Ellis delivered a firm rebuke, claiming that Australia’s rapid house price inflation has not been caused by a ‘lack of supply’:
“In Australia, additions to the housing stock have run ahead of population growth for a number of years,” Dr Ellis said in her opening statement.
“This led to higher vacancy rates in the largest capital cities. Vacancy rates in the two largest cities rose further following the onset of the pandemic. With the international border closed, population growth dropped sharply.
“At the same time, the HomeBuilder subsidy and similar state-based grants have encouraged more home-building, and will for a while yet.
“So, we do not have the ingredients of an obvious overall shortage of homes.”
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Instead, Luci Ellis blamed demand-side policies operated by itself and the government for Australia’s runaway house prices:
“At some level, that was our doing”…
“Financial deregulation in the 1980s and the global decline in inflation in the 1990s combined to reduce nominal interest rates,” Dr Ellis explained.
“With lower interest rates, people could service a bigger mortgage with the same repayment.
“Some of this extra buying capacity financed an increase in the quality of the housing stock.
“But, because most of the housing stock was already in place, the main effect was to bid up housing prices; this was captured in land prices”…
“The combination of negative gearing with concessional capital gains means that it is very attractive to leverage into investor property,” Dr Ellis observed.
The RBA’s submission to the housing affordability inquiry is even more blunt on the ‘lack of supply’ canard:
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Population growth from both natural increases and net migration contribute to increases in aggregate demand for housing services…
From the mid 2000s, the Australian population grew strongly, which saw household formation rates increase, raising demand for housing services. This growth reflected increased immigration…
Other things equal these factors will have raised housing demand. Through most of this period there were also steady increases in the dwelling stock.
Over the five or so years leading up to the pandemic, growth in the stock of dwellings increased and exceeded the rate of household formation over some of this period (Graph 18).
More recently, COVID‐19‐related border closures have led to a sharp fall in population growth, while HomeBuilder and other state‐based schemes have provided incentives for new home construction, boosting the pipeline of supply of dwellings.
Nevertheless there has been rapid housing price growth and strong growth in rents in some areas, suggesting that there has been at least a modest increase in household formation despite slower population growth. Increased consumption of housing per household is also likely to have contributed as some households have sought more space. Housing price growth has also been strong in other comparable economies that have not seen the same decline in population growth.
My views on the supply-side argument are well known and were delivered in my own submission to the inquiry.
In a nutshell, if the Morrison Government truly believes that a ‘lack of supply’ is the key driver of Australia’s housing affordability crisis, then why is it seeking to reboot Australia’s immigration intake above pre-COVID levels and grow Australia’s population by 13.1 million people (~50%) in just 40 years?
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Any housing supply problem is really an excessive immigration problem.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
