Chapter 3
The drivers of housing affordability in Australia
3.1
In seeking to explain the decline in housing affordability in Australia
in recent decades, some of the evidence received by this committee focused
predominantly on either supply-side or demand-side factors. Taken as a whole,
however, the evidence points to an affordability problem that is driven by a
complex interaction of factors. Whether the weight of these factors falls on
the supply-side or demand-side, the evidence points to a substantial mismatch
in supply and demand in the housing market. As DSS explained in its submission,
while:
...demand for housing has increased significantly over the last
30 years, the supply of new dwellings has not responded, with average annual
completions of new dwellings remaining around 150,000 since the
mid-1980s.[1]
3.2
This chapter provides an overview of the drivers of housing
affordability in Australia, and in turn considers the need for government
policies to take account of these drivers so that policy interventions are
efficient and effective.
An overview of supply-side and demand-side
considerations
3.3
Some witnesses told the committee that the problem of housing
affordability was principally one of supply constraints. For instance, MBA
argued:
...that when you really drill down to the problem that needs to
be solved, it is an issue of supply or the lack thereof. That is not to say
that in the short term there are not issues that perhaps arise from cyclical
factors that may need some sort of attention. But our proposition is that
unless governments—and I put this in the plural—address the whole issue of
housing supply then unfortunately and regrettably we may have even more of
these inquiries looking into housing affordability.[2]
3.4
The HIA also framed the issue of affordability as essentially a
consequence of a 'persistent imbalance between growth in demand for housing and
the slow rate at which the nation has added to the housing stock.'[3]
There were various reasons for this constrained supply, it submitted, including
the inadequate supply of developable land (discussed in chapter seven),
the impost of taxes and charges on new housing (discussed in chapter six)
and delays in providing supporting infrastructure for new developments.[4]
The HIA argued that the combination of constrained housing supply and a rapidly
growing population had:
...resulted in a systemic deterioration in housing
affordability. This has meant that households across a wide range of
Australia's housing continuum are now facing increasingly restricted housing
choices. It has now been 10 years since a reasonably tight historical linkage
between population growth and new housing supply disconnected. The current
cyclical recovery in new home building will provide a partial and temporary
reprieve, but we do face a structural undersupply of adequate affordable and
readily available shelter. The housing challenge, be it for first homebuyer
accessibility or those with the most restricted choices along the housing
continuum, has one root cause—that is a lack of readily available housing
supply.[5]
3.5
According to the HIA, over the past 20 years Australia has, on average,
added around 156,000 new houses per annum to existing stock. Yet, it continued,
under the most conservative estimates Australia will need to add about 180,000
per annum between now and 2050 in order to 'successfully house our growing and
ageing population. The difference is very wide and it is growing by the day.'[6]
The HIA submitted that the:
...long term failure of new housing supply to keep pace with
the growth in demand manifests itself in a considerable constraint on the
housing choices available to Australians. Households experience lower levels of
housing affordability when their housing choices are restricted. Restriction to
the point of exclusion is evident in the case of Australia's homeless, while a
severe restriction is evident in the under-provision of low income public and
social housing. Restrictions also exist in the private rental market,
especially for low and lower-middle income renters, but also for low/middle
income owner-occupiers.[7]
3.6
The HIA noted that despite strong population growth over the period 2004
to 2013, largely resulting from net overseas migration, the annual number of
new homes commenced had declined in seven out of the ten years. Moreover, the
HIA noted that since the economic recession of the early 1990s, new home
building in Australia has experienced three episodes of recession—in 1996–97,
2001 and 2009, with a fourth episode narrowly avoided in 2012. While welcoming
a recent improvement in new home building activity, the HIA maintained that
under current policy settings this improvement 'will be insufficient to see
Australia attain building levels commensurate with the requirements of
providing an adequate and affordable level of housing to a
growing and ageing population'.[8]
3.7
The HIA emphasised the interconnectedness of the different types of
housing supply, and explained how shortages in one area flowed through to
others. That is, inadequate supply in one type of tenure (purchase, rental,
community or public housing) has a cascading effect, creating pressures across
the housing continuum.[9]
3.8
BIS Shrapnel also suggested that the 'primary factor underlying the
deteriorating affordability of housing in Australia has been the inability of
supply to keep pace with the underlying demand for new dwellings, and the
resulting emergence of a significant national undersupply'.[10]
The UDIA made essentially the same point, telling the committee:
We simply do not build enough new homes and have not done so
for a number of years. In the face of rapidly increasing demand, this
undersupply of new housing has led to rapidly increasing prices and declining
affordability.[11]
3.9
High population growth resulting from immigration was identified by a
number of witnesses as a key driver of growing demand for housing. The Department
of Immigration noted that Net Overseas Migration (the net gain or loss of
population through migration to and from Australia) 'can fluctuate considerably
from year to year, but has exceeded the natural increase in the population
since 2005'.[12]
The Department noted that the likely continuation of strong population growth
would continue to increase demand pressures on housing supply. At the same
time, Australia's skilled migration policy would:
...go some way to reducing skill blockages and labour shortages
which can impede housing construction, and therefore can contribute positively
to improving housing affordability.[13]
3.10
The UDIA submitted that while population growth offered Australia many
benefits, governments needed to provide for the growing population with
improved processes for land release, house construction and infrastructure
creation. Their collective failure to do so, UDIA argued, has:
...meant that the supply of new housing has struggled to keep
up with increasing demand, and both rents and house prices have risen
dramatically as a result.[14]
3.11
The REIA told the committee that at a recent roundtable it had convened
with industry leaders, housing supply was identified as the main factor that
needed to be addressed to improve affordability.[15]
At that roundtable, the then Minister for Social Services, the
Hon Kevin Andrews MP, noted that the shortfall in housing supply
was projected to rise from 228,000 dwellings in 2011, to nearly 370,000
dwellings by 2016 and 663,000 dwellings by 2031.[16]
3.12
The RBA explained that Australia's urban structure created particular
constraints on the ability of supply to respond to demand. Australia's urban
population, it noted:
...is unusually concentrated in two large cities, and these and
the other large cities have unusually low population densities compared with
cities in other developed countries with similar population sizes. It is more
costly to build additional housing supply in a limited number of locations;
land prices could be expected to be lower if there are more undeveloped
locations competing for buyers.[17]
3.13
Professor Terry Burke contended that the housing supply shortage in
Australia was in part due to the nature of the Australian construction
industry. Most countries, he explained, have speculative construction industries,
where builders add stock in anticipation there will be buyers for it. However,
Australia has a contract building system in which a consumer needs to
commission new construction. As a result, it was hard to have an oversupply in
Australia, but quite possible to have an undersupply.[18]
3.14
Prosper Australia disputed the idea that an undersupply of housing was
driving price increases. Prosper Australia researcher, Mr Phillip Soos,
told the committee that since the 'price boom' had begun in 1996, Australia had
built one new dwelling per 1.9 new people, not far from the long-term
post-war average of one new dwelling per 2 new people and well below the
average household formation of 2.7 people per household.[19]
Mr Soos pointed to the recent booms and busts in housing markets in the United
States and various European nations, where claimed housing supply shortages
during boom periods had subsequently proven non-existent:
During the boom it is difficult to see that supply,
especially when the vested interests—anywhere from the real estate institutes
to the banks to the government—all get together in a chorus saying that there
is a shortage. In Ireland and Spain they had strong immigration rates,
approaching two to three per cent, as we have had in Australia in the last half
a decade, but those markets still went down-under, because if immigration had
an effect on prices you would see it in rents as well. Rents have remained
mostly flat over the last decade or so.[20]
3.15
According to Prosper Australia, price inflation is not caused by supply
shortages, but rather by debt-fuelled speculative demand driven by the
preferential tax treatment of land.[21]
3.16
Contrary to the evidence presented by Prosper Australia, the HIA told
the committee that over the past decade rents in Australia have increased by
about 55 per cent, which is roughly in proportion to the
62 per cent growth in residential property prices. On this basis, the
HIA rejected the idea that strong price growth in residential property prices
has been due to speculative demand:
Rental prices reflect the value of housing services rather
than any entitlement to future growth. Strong concurrent growth in home prices
and rental prices is consistent with the demand for housing services exceeding
the supply.[22]
3.17
Against Prosper Australia's suggestion that housing supply relative to
population growth was more or less trending near to the historical average, Mr
Eslake observed that from the end of World War II until the early 1990s,
housing stock increased at a much faster rate than population growth. The
growth in housing stock, Mr Eslake wrote, slowed in the decade from 1991 to
2001 (18.3 per cent), but still outstripped population growth
(11.5 per cent). However, in the decade from 2001 to 2011, population
growth (15.9 per cent) actually outstripped housing stock growth
(15.2 per cent), the first time this had occurred in the post-war
era. The failure of housing stock growth to keep pace with population growth
had occurred despite demographic trends that, according to Mr Eslake, would
have warranted a reverse scenario (that is, housing stock growth exceeding
population growth) if supply was properly responsive to demand. These trends
included:
-
average family sizes declined between the early 1960s and the
early 1990s, implying that more dwellings are required to accommodate the same
number of people;
-
family breakdowns have meant that more dwellings are required to
accommodate the same number of people; and
-
population ageing has resulted in more people living alone, again
increasing the number of dwellings required to accommodate the same number of
people.[23]
3.18
A number of witnesses argued that declining housing affordability could
not be viewed simply as a function of supply constraints. As noted later in
this chapter, Dr Winter recommended that government housing assistance and
subsidies should be directed towards increasing housing supply. However, he
also noted that supply was not the only consideration, and pointed to research
showing that Sydney prices had experienced strong growth despite a significant
rise in dwelling completions:
City dwelling completions doubled from 14,000 to 28,000, so
that is a doubling of supply over that period of time, yet house prices still
went up by 21 per cent. An exclusive focus on supply is not going to solve the
problem. It is obviously one very important part, but it cannot be the be-all
and end-all of trying to solve affordable housing problems in Australia.[24]
3.19
A similar point was made by Mr Adam Mills, Senior Strategic Planner for
the City of Melbourne. According to Mr Mills, the City of Melbourne:
...is seeing unprecedented levels of new housing. In 2013 the
City of Melbourne was the fastest-growing local government area in Australia,
with 11,000 new residents. Last year there were more than 3,000 dwellings
completed, which is expected to increase to over 5,000 this year and then up to
8,000 new dwellings in 2015. This is against the historic average of around
2,000 dwellings, so it is significant. Yet this increased supply in the central
city is not improving housing affordability. In fact, affordability is worsening.[25]
Financial
deregulation and disinflation as drivers of housing price growth
3.20
In its submission, the RBA observed that in the decade or so up to 2003,
Australian house prices had increased by about two-thirds relative to income.
This increase, it explained, was primarily the result of a secular shift
resulting from disinflation and financial deregulation:
[T]he primary driver of this large increase in housing prices
relative to income was the secular decline in average interest rates brought
about by the decline in inflation in the 1990, together with some increase in
borrowing capacity enabled by financial deregulation.[26]
3.21
The RBA stressed, however, that housing price growth should not be
conflated with declining affordability. To the extent Australian borrowers were
better able to service larger loans with the same repayment, affordability
could not be said to have worsened. This was the case, it argued, even if house
price growth had outpaced household income growth.[27]
3.22
Moreover, it was reasonable to suppose, the RBA told the committee, that
the structural shift in housing prices in the decade prior to 2003 was unlikely
to recur, even if prices had recently started to rise out of ratio to household
income growth:
Both the shift to low inflation and the comprehensive
deregulation of the financial system are things that happen only once. In broad
terms, the adjustment of the housing market to this new environment seems to
have been completed by around the middle of last decade. Since then, the ratio
of housing prices to incomes has been relatively stable but, for reasons I have
already alluded to and which I will come back to, it has been rising recently
and is now at the upper end of its recent range.[28]
3.23
DSS also noted that since the introduction of financial deregulation in
the mid-1980s, Australians have had greater access to capital for both
consumption and investment. This had in turn flowed through to house price
growth:
[T]his increased access to capital has largely been used by
households to increase their consumption of housing. The additional consumption
of housing by both owner-occupiers and investors has increased significantly as
official interest rates have continued to fall to record lows. This increase in
'financial' demand for housing has been supplemented by an increase in 'actual'
demand for housing, driven by increases in Australia's estimated resident
population by around 48 per cent since 1984 and by around 9 per cent since
2008.[29]
3.24
Associate Professor Yates provided a useful summary of how structural
supply and demand trends had interacted to drive price increases since the
1980s. In doing so, she located these trends within a global context:
From the mid-1980s until the series of global crises that
began in 2007, global trends fuelled housing demand. Real household incomes
increased; disinflation meant that nominal interest rates fell and borrowing
capacity increased; deregulation and financial innovation meant that finance
was more readily available. These demand pressures have been exacerbated in
Australia by population growth and by increased longevity. Increased demand,
together with a sluggish dwelling supply response, contributed to dwelling
prices rising ahead of household incomes and reduced access to home ownership
for first home buyers.
Rising prices have contributed substantially to the wealth of
home owners and this has reinforced the demand for larger and better located
homes. This, in turn, has added to difficulties faced by first home buyers
(and, consequently by renters). For over a decade, supply has failed to keep
pace with increased demand. Any lack of confidence by Australian households in
the Australian economy, depresses effective demand, but also aggravates supply
shortfalls. In the longer term, if no intervention is undertaken to improve
supply, underlying demand pressures are likely to keep aggregate house prices
at levels that remain unaffordable for low and moderate income households and
rents are likely to continue to increase.[30]
The impact
of foreign buyers
3.25
The effect of foreign investment in residential property was not a key
concern of this inquiry, although it was raised by a handful of witnesses as a
potential cause of recent house price inflation. In this regard, the committee
notes Professor Andrew Beer's point that while in recent years some
private investment in property appeared to be coming from offshore, and in
particular China, 'there is a lot of debate about the quality of the data in
terms of understanding the full size of that impact.'[31]
3.26
The committee notes that the House of Representatives Standing Committee
on Economics held an inquiry on the subject and released its Report on
Foreign Investment in Residential Real Estate in November 2014. The inquiry
produced four key findings. They were that: there is a lack of accurate or
timely data that tracks foreign investment in residential real estate; there
had been a 'significant failure of leadership' by the Foreign Investment Review
Board (FIRB), which was 'unable to provide basic compliance information to the
committee about its investigations and enforcement activities'; there needs to
be a greater willingness to enforce foreign investment rules in order to
improve compliance; and the Australian taxpayer currently 'foots the bill' for
the administration of FIRB and the Foreign Investment and Trade Policy Division
of Treasury. The committee made 12 recommendations following from these
findings.[32]
Ensuring policy interventions responses are
effective
3.27
While witnesses tended to focus on either supply-side or demand-side
drivers of housing costs, many acknowledged that housing affordability could
not be rightly characterised as a 'supply-side problem' or a 'demand-side
problem'. Similarly, several witnesses reminded the committee that the drivers
of poor affordability were not uniform across the country. Rather, as AHURI put
it, the 'causes and nature of Australia's affordable housing problems are
complex, diverse and interact differently in different parts of Australia'.[33]
3.28
Given the complexity of the causes of the housing price growth, it
follows that a policy response that focuses simply on supply or demand will be
found wanting. As Professor Beer told the committee, housing affordability:
...is a multiple challenge and something that should not be
underestimated. It needs multiple solutions operating in all dimensions of the
housing supply and demand equation. Solutions that focus only on demand will be
inadequate and solutions that focus only on supply will be inadequate.[34]
3.29
Similarly, the RBA told the committee that trying to cast housing
affordability as a supply-side or demand-side problem missed the point.
Instead, as Dr Edey explained, it was necessary to understand that:
...housing prices and affordability are affected by the
interaction of both supply and demand factors. The factors that I have
mentioned so far—household incomes, the cost and availability of
finance—primarily affect the demand side of the market. In the short to medium
term it is those sorts of factors that will tend to have the predominant
influence on housing price movements. The reason for that is that the supply
side of the market is dominated by a large existing stock of dwellings and new
supply takes time to come on stream. In the longer term, however, supply
factors are critically important. It is the supply response that determines the
extent to which additional demand results in higher prices over time. Our
submission highlights that Australia faces a number of longstanding challenges
in this area. These include regulatory and zoning constraints, inherent
geographical barriers and the cost structure of the building industry. There
are also obstacles to affordable housing created by Australia's unusually low
density urban structure, although this is gradually changing.[35]
3.30
Dr Edey noted that the RBA was not seeking to offer policy prescriptions
to improve housing supply. However, he nonetheless made the general point that:
...we cannot improve housing affordability simply by adding to
demand. Targeted assistance can certainly help particular groups, such as first
home buyers, but without a supply side response any generalised increase in
demand will just be capitalised into prices. An important emphasis in our
submission is that due attention needs to be given to supply side factors in
any policy response to perceived problems of affordability.[36]
3.31
A number of witnesses argued that poorly considered housing policies not
only fail to achieve their objectives, but risk compounding the problems they
were intended to address. This was particularly true if policies simply served
to stimulate demand in supply-constrained markets, or inhibited otherwise
efficient market-driven supply responses to housing needs. As the CFRC
explained, governments have traditionally intervened in the housing market to:
...improve allocative and productive efficiency by addressing
market failures, to enhance equity and to contribute to macroeconomic stability
and growth. Ideally, such intervention enhances people's housing opportunities
and ensures equitable access to housing.
Badly-designed housing interventions, however, can have
substantial negative effects. Assistance that increases demand for housing is
unproductive if it is capitalised into dwelling prices because of sluggish
supply responses in housing markets. Supply side subsidies may crowd out
private investment that would otherwise have occurred or may displace those who
are already disadvantaged in housing markets.[37]
3.32
In its submission, DSS went to the heart of what government housing
policy should be directed toward: in the end, it concluded, housing
affordability would only be improved through a structural reduction in demand
for housing, or an increase in supply. To this end, the best way governments
could improve housing affordability was to 'seek to alter the framework within
which the housing market operates, rather than through direct interventions in
the operation of the market'.[38]
Committee view
3.33
The committee acknowledges the complexity and urgency of housing
affordability in Australia, and does not believe the issue is rightly
categorised as either a 'supply-side problem' or a 'demand-side problem'. With
this in mind, it is clearly evident that supply is currently not keeping pace
with demand in the housing market. In this context, policy interventions that
add to demand without addressing or at least accounting for supply-side
constraints risk inflating housing prices and compounding affordability
problems.
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