Supply sceptics beware: without more housing, it won't be affordable - Brendan Coates, Fellow, Grattan Institute Australian Conference of ...
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Supply sceptics beware:
without more housing, it won’t be
affordable
Brendan Coates, Fellow, Grattan Institute
Australian Conference of Economists, Canberra
11 July 2018
Without more housing, it won’t be affordable
Housing has become less affordable, especially for low-income earners
Housing construction hasn’t kept pace with additional demand
• Population growth jumped, and dwelling construction did not respond for almost a decade
• Mismatch between demand and supply ultimately clears through larger household sizes
• Even current record housing construction is barely keeping up with population growth
Planning policy is a problem
• Rising house prices mainly reflect land values, not dwellings
• The zoning premium in Australia is large
• We’re not building the housing people want, where they want it
Building more homes would make housing more affordable
• Building an extra 50,000 homes a year for a decade could see house prices 10-15% lower
Other policies alone are unlikely to be enough, or produce collateral impacts
• (Premature) interest rates hikes have economic costs
• Macro-prudential rules have short-lived impact
• Tax reforms would make housing modestly more affordable
• Slower migration would improve housing affordability, but has collateral impacts
2Without more housing, it won’t be affordable
Housing has become less affordable, particularly for low-income earners
Housing construction hasn’t kept pace with additional demand
• Population growth jumped, and dwelling construction did not respond for almost a decade
• Mismatch between demand and supply ultimately clears through larger household sizes
• Even current record housing construction is barely keeping up with population growth
Planning policy is a problem
• Rising house prices mainly reflect land values, not dwellings
• The zoning premium in Australia is large
• We’re not building the housing people want, where they want it
Building more homes would make housing more affordable
• Building an extra 50,000 homes a year for a decade could see house prices 10-15% lower
Other policies alone are unlikely to be enough, or produce collateral impacts
• (Premature) interest rates hikes have economic costs
• Macro-prudential rules have short-lived impact
• Tax reforms would make housing modestly more affordable
• Slower migration would improve housing affordability, but has collateral impacts
3Home ownership is falling particularly fast
among younger low-income earners
Home ownership rates by age and income, 1981 and 2016
Age group
25-34 35-44 45-54 55-64
90
1981
80
2016
70
60
50
40
30
20
1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5
Equivalised household income quintile
Notes: This graph updates Burke et al 2014 using Census data obtained from the ABS. Limitations in Census calculations of household incomes means
that changes in home ownership rates by age and income are indicative and small changes in ownership rates should be ignored. Excludes households
with tenancy not stated (for 2016) and incomes not stated. Uses age of household reference person and equivalised household income quintiles.
Source: ABS Census; Burke et al 2014 ‘Generational change in home purchase opportunity in Australia’; Grattan Institute 4There are three hurdles to home ownership
1. Can you save the deposit?
• Saving the deposit is harder than the past
2. Can you afford to service the mortgage?
• Mortgage costs are affordable now
• Paying off a loan is likely to be harder with inflation, wages lower in future
3. Are you comfortable with the level of risk you’re taking on?
• What if interest rates rise?
• Few new buyers are taking out high LVR loans
5(Quality-adjusted) rents have grown in line
with wages
Nominal, index, 1997 = 100
450
400
House prices
350
300
250
Rents
200
150 Wages
CPI
100
50
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Notes: Nominal house price growth; All Groups CPI; Wage price index (excluding bonuses; private and public)
Source: ABS 6401.0 Consumer Price Index, Australia; ABS 6345.0 Wage Price Index; OECD Affordable Housing Database 6Rents have risen fastest for low-income
households, well above inflation
Rent prices and CPI, indexed to December 2000
250
Rent index,
low income
households
200
All rents
150 Inflation
100
2000 2003 2006 2009 2011 2014 2017
Source: Productivity Commission (2018), Reforms to Human Services: Social Housing in Australia, Figure 6.1
7Without more housing, it won’t be affordable
Housing has become less affordable, particularly for low-income earners
Housing construction hasn’t kept pace with additional demand
• Population growth jumped, and dwelling construction did not respond for almost a decade
• Mismatch between demand and supply ultimately clears through larger household sizes
• Even current record housing construction is barely keeping up with population growth
Planning policy is a problem
• Rising house prices mainly reflect land values, not dwellings
• The zoning premium in Australia is large
• We’re not building the housing people want, where they want it
Building more homes would make housing more affordable
• Building an extra 50,000 homes a year for a decade could see house prices 10-15% lower
Other policies alone are unlikely to be enough, or produce collateral impacts
• (Premature) interest rates hikes have economic costs
• Macro-prudential rules have short-lived impact
• Tax reforms would make housing modestly more affordable
• Slower migration would improve housing affordability, but has collateral impacts
8In countries that built more housing, prices
grew more slowly
Change in real house prices, 1990-2015,
200%
NOR
150%
AUS
DNK IRE
100% UK
SWE FRA
CAN
50%
USA ESP
0% DEU FIN
ITA
PRT JPN
-50%
-5% 0% 5% 10% 15% 20% 25% 30%
Change in housing stock per inhabitant aged 20+ (per cent)
Note: Australia data to 2015. Includes all dwellings 9Population growth jumped, but
construction did not
Population increase per year, ‘000 Dwellings completed per year, ‘000
500 250
400 200
2005 to 2016 SA Other
average
300 150
WA
200 100 Qld
1990 to 2004
average
100 50 Vic
NSW
0 0
1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015
Source: ABS 3101.0 - Australian Demographic Statistics 10For its population, Australia has relatively
little housing stock (and it hasn’t grown)
Dwelling stock per 1,000 people
Portugal
Bulgaria
France
Finland 2000
Switzerland
Austria 2015
Germany
Cyprus
Sweden
Denmark
Netherlands
Hungary
Norway
Lithuania
Ireland
UK
USA
Luxembourg
Australia
New Zealand 2016 for Australia
Poland
Chile
250 300 350 400 450 500 550 600
Note: Figures are for total dwellings, not just private dwellings, and include unoccupied dwellings. Figures for Australia updated to 2016 using ABS Census.
Source: OECD Affordable housing database; ABS Census; ABS Demographic Statistics 11Housing construction lagged population growth
for much of the 2000s, but picked up recently
Dwelling completions per additional thousand people Between 450 and 550
1,500 new homes are needed
per 1,000 new residents
1,000 NSW Queensland
500
0
1,500 Victoria Australia
1,000
500
0
1985 1990 1995 2000 2005 2010 2015 1985 1990 1995 2000 2005 2010 2015
Notes: Does not take into account demolitions. The Victorian series spikes at 3,500 in 1993 (cut off to improve readability). Higher rates of home building per
additional resident in the 1990s in part reflect declines in average household size among the existing population. Average household size fell from 2.8 people
per household in 1991 to 2.6 by 2001. Average household size has been flat at around 2.6 people per
household since 2001.
Source: ABS 8752.0 Building Activity, Australia; ABS 3101.0 Australian Demographic Statistics; Grattan analysis
12Housing construction in Australia has been
strong, but so has population growth
Dwelling completions in 2015
5
Completions per additional person (2014 to 2015)
4 Completions as percentage of the existing housing stock
3
2
1
0
-1
Notes: Estonia, Japan and Poland not shown due to large negative numbers. Dwelling construction data for 2015 or closest year.
Source: OECD Affordable Housing Database; United Nations population database 13Household size flat-lined from 2000 due to
worsening affordability …
Average household size, actual and projected
4.0
3.5
Actual
3.0
ABS 2015
2.5 McDonald &
ABS 1999 Temple 2013
ABS 2004
2.0
1.5
1966 1976 1986 1996 2006 2016 2026 2036
Notes: ABS projections are series II/B projections. ABS 1999 projection for 2021 is for average household size to be between 2.2 and 2.3
Source: ABS; McDonald and Temple (2013) 14Recent construction does not meet housing
targets, let alone actual population growth
Average annual net housing construction No 2017 data for
Melbourne and
50,000
To meet Brisbane
2017 Plan target
40,000
2011-
30,000 2016
2006-
20,000 2011
10,000
0
Sydney Melbourne Brisbane
Notes: Draft Greater Sydney Region Plan: 725,000 additional dwellings over 2016-2036 (excludes the Central Coast). Plan Melbourne 2017: 1,550,000
additional dwellings over 2015-2051 (based on Victoria in Future projections). For 2006 to 2016 data, growth in dwelling stock is calculated using 2016
Greater Capital City Statistical Areas. Data for 2017 dwelling completions in Sydney from NSW Department of Planning and Environment (2018). No
2017 completions data available for Melbourne
15
Sources: Greater Sydney Commission (2016); Victorian Government (2017); NSW DPE; Queensland Government (2017).Victoria and NSW populations are growing
much faster than in the past or projections …
Net population growth, four-quarter rolling sum, thousands
160 Average annual
long-run projections
140
120 Victoria
NSW
100
80 Qld
60
40
WA
20 SA
Tas, NT, ACT
0
1990 1995 2000 2005 2010 2015 2020 2025
Notes: Annual average population projections from state government departments: NSW (2016) 2011-2031; Vic (2016) 2011-2031; Qld (2015) 2011-2036.
Source: ABS 3101.0 - Australian Demographic Statistics; state government population projections 16Without more housing, it won’t be affordable
Housing has become less affordable, particularly for low-income earners
Housing construction hasn’t kept pace with additional demand
• Population growth jumped, and dwelling construction did not respond for almost a decade
• Mismatch between demand and supply ultimately clears through larger household sizes
• Even current record housing construction is barely keeping up with population growth
Planning policy is a problem
• Rising house prices mainly reflect land values, not dwellings
• The zoning premium in Australia is large
• We’re not building the housing people want, where they want it
Building more homes would make housing more affordable
• Building an extra 50,000 homes a year for a decade could see house prices 10-15% lower
Other policies alone are unlikely to be enough, or produce collateral impacts
• (Premature) interest rates hikes have economic costs
• Macro-prudential rules have short-lived impact
• Tax reforms would make housing modestly more affordable
• Slower migration would improve housing affordability, but has collateral impacts
17Housing prices increased mainly due to higher
land values, although buildings are also better
Real market value of Australian property, $2016, trillions
7
6 Residential
improvements
5 (3% Compound
4 Annual Growth
Rate)
3
2 Residential land
(6% CAGR)
1
0
1990 1995 2000 2005 2010 2015
Notes: ‘Residential improvements’ consists of the value of the stock of dwelling construction; historical figures are deflated by the Consumer Price
Index to $2016.
Source: ABS 5204.0; ABS 6401.0; Grattan analysis. 18Planning restrictions have pushed up the
price of houses in Australia’s major cities
Contribution to the price of an average detached house, $000s
Sydney Melbourne
$1,200 Zoning effect
$1,000 Physical land
$800 Structure
$600
$400
$200
$0
Brisbane Zoning effect, % of price (RHS)
$1,200
Sydney
50
$1,000 40
$800 Melbourne
$600
30
Brisbane 20
$400
$200 10
$0 0
2000 2004 2008 2012 2016 2000 2004 2008 2012 2016
Notes: Zoning effect as % of price is negative for Brisbane from 2000 to 2001, so not shown. Zoning effect is the sale price less structure and land costs.
Source: Kendall and Tulip (2018) ‘The Effect of Zoning on Housing Prices’, Reserve Bank of Australia. 19There’s a shortage of medium density
housing compared to what people want
Per cent of housing stock, actual and preferred
100
4 storeys and
above
80
Up to 3
storeys
60
Semi-
40 detached
20 Detached
house
0
2006 2016 Preferred 2006 2016 Preferred
actual actual stock actual actual stock
Melbourne Sydney
Notes: ‘Preferred stock’ is from the survey of 700 residents about housing preferences from Grattan’s 2011 report, The housing we’d
choose. Data may not sum to 100 due to rounding. Excludes dwellings listed as ‘Not stated’ and ‘Other dwellings’, such as caravans.
20
Source: Census; Housing we’d choose; Grattan analysisWithout more housing, it won’t be affordable
Housing has become less affordable, particularly for low-income earners
Housing construction hasn’t kept pace with additional demand
• Population growth jumped, and dwelling construction did not respond for almost a decade
• Mismatch between demand and supply ultimately clears through larger household sizes
• Even current record housing construction is barely keeping up with population growth
Planning policy is a problem
• Rising house prices mainly reflect land values, not dwellings
• The zoning premium in Australia is large
• We’re not building the housing people want, where they want it
Building more homes would make housing more affordable
• Building an extra 50,000 homes a year for a decade could see house prices 10-15% lower
Other policies alone are unlikely to be enough, or produce collateral impacts
• (Premature) interest rates hikes have economic costs
• Macro-prudential rules have short-lived impact
• Tax reforms would make housing modestly more affordable
• Slower migration would improve housing affordability, but has collateral impacts
21Building more homes could substantially
improve affordability, in the long-term
Housing demand is price inelastic
• Abelson (2005) – a 1% increase in housing stock per capita led to a 3.6%
fall in real house prices, based on 1970-2003 in Australia
• Girouard et al (2006) – an analysis of 20 studies across 12 countries
found that elasticity of real house prices to housing stock is ~3.1%
Building more homes would make housing cheaper
• Building an extra 50,000 homes a year = 500,000 extra homes in a
decade
• Roughly equivalent to an extra 4% of the existing housing stock
• Given observed elasticities, house prices could be 10-15% lower after a
decade
22Without more housing, it won’t be affordable
Housing has become less affordable, particularly for low-income earners
Housing construction hasn’t kept pace with additional demand
• Population growth jumped, and dwelling construction did not respond for almost a decade
• Mismatch between demand and supply ultimately clears through larger household sizes
• Even current record housing construction is barely keeping up with population growth
Planning policy is a problem
• Rising house prices mainly reflect land values, not dwellings
• The zoning premium in Australia is large
• We’re not building the housing people want, where they want it
Building more homes would make housing more affordable
• Building an extra 50,000 homes a year for a decade could see house prices 10-20% lower
Other policies alone are unlikely to be enough, or produce collateral impacts
• (Premature) interest rates hikes have economic costs
• Macro-prudential rules have short-lived impact
• Tax reforms would make housing modestly more affordable
• Slower migration would improve housing affordability, but has collateral impacts
23Other housing policies are likely to prove
unattractive, or only modestly effective
Housing Economy Budget
Interest rate hikes Would substantially reduce Hiking rates prematurely
house prices (if they rise) has large economic costs
Tighter macro- House prices fall short-term, Positive if used to mitigate
prudential rules little impact long-term financial risks; otherwise not
Abolish negative Prices ê ~2% overall, more Reduces over-investment in $5 bn / yr
gearing + 25% CGT at bottom housing
discount Rents won’t rise
Home above $500k in Prices ê ~1% overall $1-2 bn / yr
pension assets test Few pensioners downsize
Stamp duty – land tax Better use of housing stock Big economic benefits Budget
swap (i.e. spare bedrooms) (~$17b / yr) neutral
Prices ê ~6% swap
Curb migration House prices 6-7% lower Small reduction in GDP per Hits budget
(i.e. 50,000 less a than otherwise after a capita balance
year) decade
Notes: Excludes policies explicitly intended to improve affordability for low income earners via housing subsidies, such as more social housing, or increases
in Commonwealth Rent Assistance. 24All the important reforms are difficult;
all the easy reforms are cosmetic
Social, economic and budgetary impacts
Home in pension
Positive assets test
Abolish stamp duty Boost density in
Congestion Improve transport project middle suburbs
charging selection
Improve renting Reform state land taxes
conditions CGT discount Boost density along
Negative transport corridors
Tax empty Foreign gearing
SMSF dwellings investor Macro-prud. ↑ greenfield land supply
borrowing Social housing limits/ taxes rules CGT on primary residence
Neutral bond aggregator ↓stamp duty Reduce Impact on housing
Shared equity for downsizers immigration
Deposit schemes affordability
Downsizers
schemes keep pension /
Regional exempt from
development super rules
FHB grants /
concessions
Negative Minimal Small Medium Large Very large
Political difficulty: Easy Medium Difficult
Source: Grattan analysis.
Notes: Prospective policies are evaluated on whether they would improve access to more affordable housing for the community overall, assuming no other policy
changes. Assessment of measures that boost households’ purchasing power includes impact on overall house prices. Estimates of the economic, budgetary or
social impacts should not be treated with spurious precision. 25For more …
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