On the Australian Housing Shortage
For anyone who thought that housing policy was tending in the right direction in Australia, a recent statement by ANZ Bank’s senior economist, Paul Braddick should hit like a bucket of cold water. Braddick was widely quoted in the media to the effect that the growing housing shortage is setting Australia up for the “mother of all housing booms.” Commonwealth Securities chief equities economist Craig James predicted that both house prices and rents would be driven higher by the shortage.
And then there was the BIS Shrapnel Residential Property Prospects report, which predicts huge increases in median house prices by 2011. Overall, BIS Shrapnel projects house price increases that would add nearly another year’s median household income to pay for the median priced house. Already housing is more than twice as expensive as it should be relative to historic income norms. Indeed, if the trends BIS Shrapnel projects are accurate, Sydney would become the most expensive market in the Anglosphere, as Californian markets implode due to their unsustainable cost inflation.
But wait a minute. Housing shortage? Australia? Is there not enough land? Are there not enough builders?
True, population growth is greater than in nearly two decades. However, fast population growth is nothing new in Australia. Much higher growth rates were accommodated in previous decades. In the 1950s, the annual growth rate was a full one-half greater than the present elevated rate. During the 1960s, the annual growth rate was a quarter greater. Yet, somehow, Australia was able to provide housing for this strong growth both from both domestic expansion and immigration. Thus, the higher present population growth rates, in and of themselves, do not justify a housing shortage.
There could be a problem if there is not enough land or if the housing industry is not up to the challenge. However, that is hardly the case.
Less than 0.3 percent of Australia is urbanized. That means there is plenty of land in Australia. There is substantial land for growth around all of the nation’s major capital cities.
Australia has, according to international studies, one of the most entrepreneurial home building industries in the world. That industry is capable of providing whatever level of new housing is required to accommodate whatever should be the number of new Australian households.
The problem is thus neither a shortage of raw land for development or a shortage of building capacity. It is policy.
The problem is the land use policies that have been adopted in the states. In every state, as well as the Northern Territory and the ACT, conscious policies have been adopted that to severely restrict the expansion of the housing supply. Arbitrary lines --- sometimes called urban growth boundaries --- have been drawn around urban areas. Generally, new housing must be built within these constraining belts. As anyone remotely familiar with economics knows, restricting supply drives up prices.
The net effect of the restrictive policies is to cartelize the market for land. Owners of land that can be developed ask a higher price. It is important to understand that house prices have not gone up much at all, indeed they have fallen relative to inflation in some areas. What has risen is the price of land. It is the escalation of land prices in a rigged urban land economy that is responsible for Australia’s housing shortage.
There are other issues too, such as huge infrastructure fees and master planning requirements that add so much to the price of housing. The stark reality is that if the urban planning policies of today had been in place in 1947, all of the efforts of Labor and Coalition governments to encourage home ownership would have failed --- as miserably as have the recent efforts.
Put in human terms, Australia’s housing shortage represents the deliberate government withdrawal of the Great Australian Dream for many households. Worse, the economists tell us that things are only going to get worse.
For all the rhetoric about housing affordability, there is a single, simple answer --- the regulations must be relaxed. There is no other affordable or sustainable way to restore housing affordability. It is truly remarkable --- and unfortunate that the “lucky country” may not be able to adequately house its hopeful and growing population.