Rent, Rage, Repeat: Housing’s predictable election comeback

Our political debates about housing repeat as regularly as the property cycle

Housing is a central policy focus for all political parties in the lead-up to Saturday’s federal election.

There are many strong views on whose housing policy is better, often fuelled by partisanship. Here, I want to help you make sense of it all by sharing some relevant economic, political and historical context.

What are the main housing policies?

Here’s what we have been promised by the sitting Labor government.

The main features are a public housing developer with $10 billion of funding allocated, publicly-subsidised mortgage insurance for mortgages up to 95% of the home value, a shared-equity scheme, and some money set aside to incentivise investment in prefabricated and modular housing.

What about the main opposition party, the Liberal-National Coalition? Here’s their housing platform. It involves promises about funding public infrastructure, training trade apprentices, and avoiding new construction codes and standards.

Their platform also includes banning temporary residents from buying existing homes, and reducing immigration rates.

They propose to make interest on the first $650,000 of a mortgage tax deductible for five years for first-home buyers who buy or build new homes, though there are income limits for buyers in this scheme.

They will also allow up to $50,000 of superannuation to be used for a home purchase.

The Greens get a mention because they were the first to adopt my policy proposal of a national housing developer selling homes to first home buyers at discounted prices. Here’s their housing platform.

The Greens also want to limit rent increases to 2% every two years, and improve the rights of tenants. They want to require banks to offer mortgages with interest rates 1% above the cash rate, and they propose to scrap the capital gains tax discount and negative gearing while grandfathering negative gearing for one investment property already owned by each investor.

A quick lesson on housing politics and history

Before we dig into the effects (or not) of these policies on the market price or rent of housing, and on the distribution of homeownership, we should reflect on the political and historical context.

I don’t want to sound like an old man, but I’ve heard all this before.

In The Great Housing Hijack (TGHH), I explain the history of public concern with housing affordability. Even way back in 1836, when the population of New South Wales contained just 19,000 people, housing was deemed scarce and expensive.

Biologist Charles Darwin wrote in his diary entry on his first day in Sydney in 1836 that:

…the number of large houses just finished & others building is truly surprising; nevertheless every one complains of the high rents & difficulty in procuring a house.

I covered the long history of housing inquiries and political debates over the past 150 years in this FET article. Here’s a snippet:

Housing rents are a timeless social and economic issue, though their political salience rises and falls with the macroeconomic cycle. For example, after the financially strained 1890s depression, the political pushback against the power of landlords resulted in the Landlord and Tenant Act 1899.

…

In 1911, the NSW Parliament created a select committee on the increase in house rents, which reported in 1912. This led to the Fair Rents Act 1915 and a variety of other changes to rental regulations. Like today, regulations that increased renter protections and security were argued by landlords to have “the effect of discouraging investment in rental housing”.

The federal government’s Inter-State Commission conducted the Piddington Inquiry into housing rents in 1919, finding that the states should be in the business of building homes and that high rental prices were due to a shortage of housing (see left panel of Figure 1 for news reporting at the time).

Figure 1: Sample of historical newspaper headlines and book on Australia's timeless "housing crisis"

In the 1930s, multiple inquiries were conducted into housing rents, especially late in the Depression. A 1939 Rents Inquiry formed the backdrop to a later rent freeze that was enacted nationally due to the outbreak of the Second World War. Near the end of the war in 1943, the worsening underinvestment in housing led to numerous reviews, books, meetings and inquiries about how the government should actively involve itself in housing finance, land development, and construction.

In the 1880s, it was the land boom in Victoria that led to frustration. I discussed the economic conditions and political ramifications of that period in this FET article.

Does Victoria's rollicking 1880s land boom have lessons for today?

That period revealed the underlying political and economic dilemma that I call the symmetry of property markets. This term describes the idea that for every homebuyer who enjoys a low housing price, there is a seller missing out on a high price. For every renter with a cheaper home, there is a landlord with a lower income. Making homes cheaper to rent or buy costs property owners, dollar for dollar.

It is no surprise that housing is back on the political agenda.

The symmetry of property markets in fact ensures this must be the case. If one group, property owners, gains too much relative to the other group, aspiring owners and renters, it becomes a political issue for the latter. Then when property owners are on the losing end of the deal, during any cyclical downturn, policy promises shift from making homes cheaper to making them more expensive.

If 100% of households were renters, the political balance would always be in favour of lower rents. If 100% of households were owners, the political balance would always be in favour of higher rents and prices.

When you push a politician to say they want rents and prices to fall, they will usually back away from promising cheaper housing to appease the 67% of households which own their own home (the Greens are the only exception to this rule).

Here’s a Liberal Party response to this direct question:

We don't want to see house prices go backwards—because if they do, it's everyday Australians with mortgages who suffer.

Under a Dutton Coalition Government, we're committed to steady, sustainable growth in house prices…

Here’s the Labor Housing Minister’s response to a similar question:

We want to bring house price growth into something sustainable, so we're not trying to bring down house prices, but we don't want to see some of the growth that we’ve seen in some parts of the country,where you’re getting double digit increases in house prices year-on-year.

Why don't you want to be seeing house prices drop? Because if you’re looking to get into the market, if you’re a young person looking at what’s ahead of you, you definitely want to see house prices come down.

Well, that may be the view of young people, it's not the view of our government. We want to see sustainable price growth, we want to see more houses come online, we want to see that rental vacancy rate go up a bit, because that will relieve pressure on renters, and we certainly want to see more homeowners... Our government's policies are not going to reduce house prices, we want house prices to grow sustainably.

I think it’s important to consider policy reform in the context of the politics of housing. In The Great Housing Hijack, I explain how the symmetry of property markets leads over and over to the political sweet spot of subsidising first-home buyers, in order to help people buy homes without reducing the value of the biggest asset owned by 67% of households.

There’s one final piece of political context: these policies typically arrive at the end of a boom market period for housing. They are properly implemented only after the market itself begins to turn, as it does with surprising regularity, often coinciding with a period when the political problem has become that home prices are falling.

This is why we see a long-term cycle of housing problems, policy debate, policy adoption, and ultimately policy removal, before the cycle repeats again.

The image below shows a selection of old media articles from the 1940s onwards about the problem of high home prices, compiled from New Low Observer on X.

How to make economic sense of these policies?

The housing policies proposed by Australia’s major parties fit into four rough categories:

1. Subsidies to first home buyers (Chapter 21 of TGHH digs into these)

   1. Shared equity

   2. Tax-deductible mortgage interest

   3. Subsidised mortgage insurance

   4. Requiring banks to provide lower-cost mortgages for first home buyers

   5. Super for housing

   6. Reducing tax incentives for investor buyers

2. Attempts to reduce the number of buyers

   1. Lower immigration

   2. Foreign and temporary resident buying restrictions

3. Attempts to reduce construction costs (and increase the quantity of homes)

   1. Subsidies directed to housing construction innovation

   2. Freezing the National Construction Code for 10 years

4. Expanding non-market housing options (Chapter 24 of TGHH)

   1. A new public housing developer

   2. HAFF subsidies to community housing providers (existing Labor policy)

First home buyer subsidies

Subsidies to first-home buyers (FHBs) are now widely believed to be backfire due to the increase in purchasing power ultimately driving up housing asset prices. These latest FHB policies are focused on new homes only, which is an improvement, since it ties extra homebuying closer to extra homebuilding.

However I don’t think any price effect from FHB subsidies can be more than a short-term adjustment effect, meaning that these policies are still likely to achieve their goal of shifting the balance of ownership towards owner-occupiers and away from investors.

Consider what happens if prices rise because more FHBs suddenly try and buy all at once. This lowers the yield on housing for investors (higher prices and unchanged rents mean each dollar invested in housing gets a lower return), who will sell their homes or avoid buying more due to returns being superior in other assets. Other first-home buyers will see rising prices, and think it best to hold off buying rather than pay a price that high relative to the rent they are paying.

The only long-term market equilibrium is where housing assets are priced such that the total return on a dollar invested is similar to the return on offer in other equally-risky assets (I explain this in detail with charts and examples in this FET article for paid subscribers).

Using superannuation for housing makes this asset pricing trade-off clearer.

To use superannuation to buy a home, you must give up the assets in your super fund. If you are renting a property that has a 3% gross return (e.g. paying $30,000 per year to rent a $1 million home), and your super assets are earning an 8% per year return, using super for housing means giving up an 8% return on the portion withdrawn for a 3% return on each dollar rellocated to housing.

Asset returns and pricing are volatile, but this will be the general rule. The short-term price effect from subsidising FHBs will not be sustained after other adjustments have taken place. Right now is also not a bad time to enact such policies, as we are still in the wake of the 2021-22 doubling of FHB activity, meaning there are fewer potential FHBs active in the market and ready to take up these subsidies today.

Ultimately, FHB subsidies shift the composition of buyers towards FHBs rather than investors, sustaining a higher level of homeownership, not a higher level of asset prices, even if there are short-term price effects in suburbs attractive to FHBs.

Another way to shift this balance is to punish investor buyers with higher taxes or lower future returns. During the WWII rental control periods, landlords would often sell to cash out of their low-return homes and invest money elsewhere, shifting the balance in favour of first home buyers. The Greens’ policy to regulate limits on rent increases will cut into investor returns slightly during periods of high rental growth, similarly reducing returns to investor buyers.

The same economic principle lies behind the Greens’ proposal to reduce the value of negative gearing and capital gains tax breaks—by making returns relatively worse for investor buyers than first-home buyers, the composition of the buyer cohort shifts towards FHBs and homeownership rates rise.

Reducing non-resident buyers

A similar logic sits behind the second category of policies, which aim to reduce home buying by foreigners and new migrants. Any effects are likely to be smaller than expected, and temporary.

As I explain in Chapter 15 of TGHH, the simple story that immigration leads to a sustained increase in home prices is wrong. Unexpected changes in immigration do lead to short-term price and rent effects in many suburbs, as FHB subsidies do, and we have observed this effect over the past two years. Over time, however, these effects wash out as other market adjustments take place—people relocate, form new households, build new homes, and so forth.

Consider the experience of the 2010s.

Australia had an immigration surge at the end of the 2000s that lasted throughout the 2010s, until COVID. It began with a period of rising rents, but adjustments across the market, from relocations of households to more homebuying and homebuilding, ultimately led to rental inflation being a drag on overall consumer inflation for half a decade prior to COVID, even as the same high immigration levels were sustained. Asking rents in Sydney, for example, did not return to their 2016 levels in nominal terms, let alone real terms, until 2022, according to SQM data.

Reality is more nuanced than many popular economic stories would have it.

Yes, the unexpected surge of immigration over the last few years has increased rents and prices, especially in some popular capital city suburbs. Yes, reversing this, by implementing an unexpectedly low rate of net immigration, would help temporarily reduce rents and prices. But most of the recent rise was purely part of the global inflation pulse, which was experienced by many countries, even those with low population growth.

Cheaper construction and more homes

The third category of policy involves trying to get more homes built by focussing on construction productivity. This is not likely to be fruitful, as I explained recently in a detailed two-part series for paid FET subscribers. Construction costs affect housing markets mostly via density and quality choices, not sales prices.

There is a persistent view that construction productivity is a big contributor to recent trends in housing rents and prices—hence the regular policy focus on construction innovation, and on higher immigration for trade-skilled people.

Policies like “unlocking new homes” by funding more infrastructure are equally likely to fail to accelerate homebuilding, since they misdiagnose the economics of new housing production.

A strange premise lies behind the “just increase supply” mantra—the idea that property owners actually want to build faster, and can be induced to do so. But the relevant trade-off these owners face when considering developing housing is not the cost of construction versus the price. It is the benefit of developing property today versus developing it tomorrow. The trade-off is between the profits from development and profits from speculation. Building new homes always involves a timing choice—and new supply only begins when speculation ends, as I have explained in great detail here.

There is a chance that, with a new public developer creating a reliable customer base for new prefabricated and modular technologies, we might accelerate new technology adoption. That would be a bonus for general productivity, but it won’t make homes cheaper to buy or rent.

Non-market housing

Which brings us to the final category of housing policy: non-market housing, which was the main policy lever I recommended in TGHH. Wealthy high-income cities can generally only retain lower-income households in good locations via non-market options—after all, an open market will always see trades and relocations, leading to the person willing and able to pay the most renting or buying the best location.

Quaranting some housing from price competition between all possible buyers or renters is how non-market housing keeps prices down. Of course, this often means that homes are allocated with queues rather than auctions. That’s fine. Indeed, that’s the point.

Labor has proposed to:

invest $10 billion to build up to 100,000 homes reserved only for first home buyers, with no competition from property investors. Funding will support enabling infrastructure, land purchases or construction to get these homes built – near work and family, only for first home buyers.

Many have interpreted this as meaning that a public developer will use the money to buy land and build homes, and have suggested that $10 billion divided across 100,000 homes comes to only $100,000 per dwelling, which is far from enough to build a home.

But the $10 billion is the value of the subsidy, not the total construction or development cost. FHBs will still pay for the bulk of the cost of these homes, though they will be subsidised in a variety of ways so as to buy out the option a developer would otherwise retain to sell these homes to non-FHBs. The Greens’ public developer would do similar things with a new public institution.

As with any new policy area, such schemes will have teething problems. I am wary that the promised $10 billion of subsidies will end up being a handout for housing that would have been built and sold to FHBs anyway, thus offering no public benefit, but providing a freebie to those who get the funds.

So what?

Go out and enjoy the election. Regardless of the result, the same macroeconomic and financial factors that always regulate the rent and price of homes will continue to do so. Our housing policies will continue to follow, rather than lead, the macroeconomic cycle. And by the end of the next election cycle, perhaps, the new meaning of the ‘housing crisis’ may be that rents and prices are finally falling.

Finally, I’m sorry to all the minor parties out there with substantive policies not covered here. Please add a comment with links to any interesting policies from minor parties not discussed here.

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