Tuesday, September 7, 2021

Housing supply… another inquiry

Dwelling assets are being repriced globally, as expected by central banks who have sought to achieve this with their interest rate policies.

Part of political theatre that comes with rising dwelling asset prices is to fake concern for the non-homeowners. In the past two decades, this has taken the form of blaming supply and town planning for the fact that investors arbitrage returns and leverage into housing when interest rates fall.

It is nonsense from top to bottom.

We know this because the most recent of many UK reviews into housing supply concluded that it was not desirable to implement any new incentives for housing developers to build faster if that meant they had to accept lower prices.

We know this because a 2004 Australian review concluded that the stock of housing changes by such a small amount each year that even very large changes to the rate of new supply will have small price effects.

We know that it suits vested interests in the property market to focus the debate on non-solutions that provide them windfall gains in the form of rezoning.

Housing markets are quite easy to understand. The difficult part is first unlearning all the nonsense that fills the newscasts and journals.

Australia’s latest inquiry into housing supply has begun. I took the chance to make a submission outlining my views on the housing market and writing a document that I hope provides some lessons about how to understand housing.

Please enjoy it here.

The following summarises
  • There are more, bigger, better, dwellings per capita in Australia in 2021 compared to any point in history.
  • Multiple government inquiries at all levels over the past two decades have ostensibly sought to find the cause of house prices hidden in the pages of local zoning laws.
  • Dwellings are assets and are priced based on financial market conditions.
  • Density (dwellings per unit of land) and the rate of supply (new dwellings per period of time) are conceptually different but often confused in housing supply discussions.
  • This submission argues that market housing supply has exceeded household demand. State planning systems have flexibly accommodated new supply while regulating the location of different types of dwellings.
  • Compared to household incomes and rents, the cost of buying a home (measured by mortgage payments) in 2021 is historically cheap. This is due to lower interest rates and is why intercensal homeownership is expected to rise in 2021. However, asset price adjustments will mean that this situation will not persist.
  • Taxes on property are efficient and fair and do not add to housing costs but rather subtract from property values.
  • Affordable housing is cheap housing. Cheaper housing means lower rents and prices. Any “affordability” policy that reduces market prices will remove billions in landlord revenues each year, transferring that value to tenants, and trillions in housing asset values, with that value transferred to future buyers. 
  • Fostering parallel non-market housing systems, just as public healthcare provides a non-market medical system, can be an effective way to improve housing affordability. 
  • There are no local, international, or historical examples of planning reforms leading to cheaper housing. Indeed, a Productivity Commission review concluded “given the small size of net additions to housing in any year relative to the size of the stock, improvements to land release or planning approval procedures, while desirable, could not have greatly alleviated the price pressures of the past few years.” (p154)