Grattan’s ‘supply-side’ solutions sing property developers’ hymn sheet

The Grattan Institute has penned another piece in The Conversationcalling for the middle suburbs in our major cities to be bulldozed into higher density in order to squeeze in millions of extra migrants and ‘solve’ Australia’s housing crisis:

Rising house prices have increased wealth inequality. Rising housing costs have dramatically widened the gap between high and low disposable incomes…

Home ownership is increasingly benefiting the already well-off. Since 2003-04, increasing property values have contributed to the wealth of high-income households increasing by more than 50%. Wealth for low-income households has grown by less than 10%…

As we’ve noted previously rising housing costs have widened the gap between renters and home owners. As property prices have escalated, the higher deposit hurdle has seen rates of home ownership falling fast among the young and the poor…

The big winners of the property boom have typically been older typically Australians lucky enough to buy a house before prices took off. Housing has thus compounded inequality between the young and old…

Despite the clear evidence housing is key to inequality in Australia, housing policy is thin on the ground…

Addressing inequality requires a clearer view on what to do about rising housing costs…

Supply-side economics

Housing is a A$6.6 trillion market. Subsidies can only paper over market failures arising from overly strict zoning rules that prevent greater density in our major cities.

Housing inequality will really only fall if housing costs fall. That requires building more houses. We estimate building an extra 50,000 homes a year for the next decade would make house prices and rents 10% to 20% lower than they would be otherwise.

This is primarily a challenge for state governments. They govern the local councils that set most planning rules and assess most development applications. But the federal government can and should encourage the states to boost housing supply by reforming land-use planning and zoning laws.

The housing crisis is real. But Grattan’s ‘supply-side’ solution is a distraction that might as well have come from the Property Council, Housing Industry Association or Master Builders Australia under the guise of “planning reform”. These ideas are not only pandering to the ‘Big Australia’ agenda, they are undemocratic as they sideline due process and community input and appeal rights.

Nowhere in this article did Grattan propose dealing with the problem at its source: by lower immigration back to historical levels and preventing the housing and infrastructure shortages from developing in the first place:

The fact of the matter is that the mass immigration ‘Big Australia’ policy that Grattan supports has locked residents in our major cities into falling standards of living.

We know this because the empirical evidence of 15-years of hyper immigration-fuelled population growth has seen economic and social infrastructure become crush-loaded, forced residents into living in smaller and more expensive housing, and eroded wages.

Moreover, Infrastructure Australia’s projections for Sydney and Melbourne show that traffic congestion will soar and access to jobs, schools, hospitals and open space will all decline by 2046, irrespective of how these cities build-out to cope with populations of 7.4 million and 7.3 million people respectively:

What Grattan does not seem to comprehend is that increasing density in established suburbs will inevitably result in greater demand for land in these privileged locations. Increased demand equals increased cost as the amount of land is fixed. This will inevitably result in smaller and more expensive housing, less public open space, a greater concentration of people in taller and more concentrated buildings, leading to increased temperatures (the ‘heat island effect’), greater traffic congestion, overcrowded schools and hospitals, etc. Again, these impacts are projected by Infrastructure Australia above.

Moreover, with Melbourne’s and Sydney’s populations increasing by around 200,000 people (combined) a year, no amount of increased spending on infrastructure will ever be enough. In these built-out metropolises, where land prices are already insanely high, the cost of widening existing transport corridors or tunnelling to handle increased traffic flows are simply prohibitive. It’s playing catch up to something that just gets further out of reach every year, as the past 15 years has clearly demonstrated.

Dr Cameron Murray has also expertly rubbished Grattan’s magical solution of boosting dwelling construction by 50,000 a year as a pipedream and a waste of Australia’s economic resources for minimal gain:

The greatest housing policy fraud is what I will call The Supply-side Distraction. A recent presentation by Grattan Institute’s Brendan Coates was called: “Supply sceptics beware: without more housing, it won’t be affordable.”

Sounds ominous. But here is the conclusion: “Building an extra 50,000 homes a year for a decade could see house prices 10-20% lower.”

Really? That’s less exciting than John Alexander’s preferred outcome of prices rising 5% per year instead of 10% per year!..

A frank approach would see that in the three months to June 2015 Sydney home prices increased 9%. This is the scale of the ambition– reverse a few months price growth with an insanely large decade-long construction program.

And the economic cost of that low ambition? That would be a 25% increase on the already high number of homes being built of over 200,000 per year, enough to accommodate half a million people.

We are currently building a new Newcastle-worth of homes a year, and we would need to add to that a new Ballarat, Toowoomba, or Darwin’s worth, every year, for 10 years, to reduce prices by just the amount they grew in the second quarter of 2015 in Sydney, or the past 10 months in Hobart. Some suburbs of Sydney have seen prices fall by more than that in the past year from tightening of credit. It is a colossal investment task for a minute reduction in housing costs.

Currently, a record 9.5% of the labour force is in construction, which was just 7.5% prior to the financial crisis. To meet this supply ambition over ten years, to reverse a few month’s price growth, would take an extra 2.5% of the workforce to stop what they are doing, stop producing what they are producing, and shift into housing construction. That’s an extra 330,000 people, or about the labour force of the Gold Coast, and even higher than the labour force of Canberra.

The real resources required for this 10% price effect make me wonder how serious followers of this view can be. Even worse, The Supply-side Distraction does not involve actually building any new homes at all but hoping that minor tweaks to planning rules will stimulate the greatest construction boom in the history of the nation where property developers left, right, and centre, will be building thousands of new homes even though it reduces their profits by doing so because it reduces prices!

That’s the truly bizarre part of the story. Not only do the economics show that supply’s effect on price is tiny, making it a strange target for an affordable housing policy, but the way that supply-siders plan to get there is, essentially, to hope the market works like it does in their clearly flawed model!

I have many times asked that if you really believe this story, why not create a public agency tasked with building and selling 50,000 new homes a year, regardless of their own profitability. No. That’s getting too close to being an effective way trimming 10% off the price of housing. We wouldn’t want that!

I like Grattan’s analysis on Budget issues. But on urban planning, it acts like another ‘Big Australia’ lobby group and a mouthpiece for the property development industry.