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It’s too simple to argue lack of supply pushes up house prices

Animal spirits: the Reserve Bank will be asked to explain itself on what is means by macroprudential tools. AAP/Dan Peled

Is there a national housing supply problem? No, but there is a problem of access to affordable housing in certain regions.

Last month, Reserve Bank Governor, Glenn Stevens commented on the need for “animal spirits” to respond to the exceptionally accommodative monetary policy setting and boost the supply of housing. More than 12 months have passed since the RBA last adjusted the cash rate to the current record low of 2.5%. This has stimulated investor demand, particularly in metropolitan Sydney and (to a lesser extent) Melbourne. Yesterday’s Reserve Bank of Australia aggregate credit demand figures show loans to investors rose 9.2% year-on-year.

Housing supply, however, is “sticky” and lags in responding to changing demand. The resulting mismatch between demand and supply has led to a year-on-year increase in the RP Data residential property index for Sydney of 16.20%, relative to a long-term average of closer to 4% per annum.

This in turn is affecting people’s ability to pay for their housing needs and places vulnerable households at risk of affordability stress. Housing affordability is a complex issue, affected by housing market and economic conditions as well as labour force and demographic trends.

Federal and state governments have for a number of years recognised the need to address the joint issues of housing affordability and supply, having introduced at the 2008 COAG meeting a multibillion dollar National Affordable Housing Agreement. Yet housing affordability and supply remain on the political agenda with no clear policy response.

Can’t we just build more houses?

A simplistic approach to the problem advises increasing the stock of housing. However this ignores the myriad frictions in property development. Vacant land itself is costly and takes a significant amount of time to develop, including provision of infrastructure and transport.

An additional factor that must be considered is the asymmetry between incomes and property types. In other words, the “right” properties must be built to supply the people who are looking.

Currently, there is a lack of suitable land for residential property expansion that is also accessible and suitably positioned for instance, near employment opportunities and social and physical infrastructure.

Traditional models of housing costs argue that houses are expensive as a consequence of the land they are built on being expensive. More recently, housing economists have studied the effect of government regulation on house prices and property development. Research from the US-based National Bureau of Economic Research identifies zoning laws, and the barriers to development that such regulation creates as a more significant factor driving prices and affordability stress than undeveloped land values.

For many Australians looking to purchase a property, the transaction costs and duties are a major impediment to an efficient property market. Furthermore, fragmented government policies on land use and development, with separate rules at each level of government and typically involving a range of regulatory bodies further compound this.

In Australia, it has been identified that the current lack of a “whole of government approach to housing” needs to be addressed in order for an effective response to housing supply shortages.

Time to consider other options

In the mean time, regulators should consider their other policy options to increase the supply of affordable housing.

On Thursday, the RBA will appear in front of the Senate Standing Committee on Economics investigating the issue of housing affordability. One expected proposal is a tightening of lending standards to property investors. There is only cautious support for any such measure. Renters are among the most exposed groups to housing affordability stress. Reducing the availability of rental properties through constraining investment activity will further exacerbate the effect of price pressures and record low vacancy rates.

An alternative policy may reconsider regulation of foreign investment and stronger regulation of the flow of cash through the “grey economy”. The research is mixed as to the national impact of relaxed foreign investment rules, though growing evidence suggests the current rules, intended to help stimulate those animal spirits and increase supply, has seen foreign investors effectively push potential local homeowners out and keep them in the rental market. The government could look to adapt these policy incentives so as to promote co-investment in affordable developments.

Surplus bedrooms

Another possibility may be exploring how to better utilise the existing housing stock. The ABS’s 2013 Survey of Income and Housing found that over three-quarters of Australian households had surplus bedrooms. Share housing picks up some of this space and now account for around 1-in-10 households. Legal and taxation uncertainties may reduce this as an option, following recent reports of local governments threatening $1 million fines for households offering short-term share accommodation service through Airbnb.

There is no single solution to the range of issues relating to housing supply. Government at all levels and regulators need to work together.

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