What is housing "Policy X"?

A lesson in how to think clearly about what we want to achieve with housing

After agreeing that there is a housing crisis the Australian federal and state governments do something rare in politics and enact a very effective Policy X.

With this magic trick of a policy, the following situation occurs.

Before Policy X

Here are the numbers on the Australian housing market before the policy change. They are close to describing the true market situation a few years ago.

There are 10 million privately owned homes worth $10 trillion, or a million dollars each on average.

Of these homes, 6.7 million are owned by their occupants and 3.3 million are owned by 2 million different landlords.

The average rent paid is $400 per week, or $20,000 per year, providing a total rental income of $66 billion to those landlords. Each owner-occupant also saves $400 per week in rent avoided.

After Policy X

Housing Policy X reduces rental prices by a clean 25% nationwide. A major housing affordability win.

This reduces property values in proportion. Household incomes remain unchanged. Such is the magic of Policy X.

The 10 million privately owned homes before Policy X are now worth $7.5 trillion instead of $10 trillion—a $2.5 trillion loss in asset value, or $250,000 per home on average.

The country’s 3.3 million renters now spend only $300 per week out of their pocket, or $15,000 per year for housing. Policy X reduces net rental income for the existing 2 million landlords to $50 billion per year.

The net change in cash flows to existing property owners and renters is:

1. Property owners: -$5,000 per year

2. Renters: +$5,000 per year

In terms of asset values, the net effect is

1. Property owners: -$250,000

2. Renters: +$250,000

Although non-property-owning renters don’t record this asset value gain, it is as economically real as the loss to property owners. The value gain arises from the decreased rental liability over their lifetime (in terms of the present value of their lifetime housing consumption cost).¹ This lower cost of a lifetime of renting is then reflected in the lower price of buying a house, since the benefit of owning (i.e. not renting) is lower in value.

What is Policy X?

Now the fun part.

Let’s guess what’s behind the magic of Policy X.

We can start with the observation that for the existing owners of the country’s 10 million dwellings, there is a $5,000 per year cost.²

Is this a tax? Or is it a rental regulation that affects their net rental income?

Then we can turn to the observation that renters each save $5,000 per year.

Is this is subsidy?

Here’s the magic.

It doesn’t matter what policy led to this outcome.

It really doesn’t.

Any policy that achieves this outcome has economically equivalent redistributive effects to any other policy that achieves it for Australia’s 10 million current households.³

If Policy X is rent control, it creates a net transfer of $5,000 a year from property owners to non-owners. If it is a tax and subsidy, it creates a $5,000 per year transfer from landlords to renters. It’s the same outcome.

And suppose Policy X is upzoning, which many think can achieve such outcomes. In that case, it is economically equivalent in terms of its redistributive effect to the two above scenarios of rent control or taxing existing owners of housing and subsidising existing renters.

This means that, for example, if you hold the view that we can’t afford to offer cheap public housing options to all renters because of the size of the subsidy (the required redistribution), then you are also implying that we can’t afford any policy that makes housing cheaper, including changing zoning, since any Policy X involves the same net economic transfer from property owners to non-owners.

If we can’t afford any one of these policies, then we can’t afford any other, since they are all economically equivalent in terms of their redistributive costs.

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One reason for posting about the mysterious Housing Policy X is that tomorrow night, Monday 20th May, I will be speaking at a panel in Brisbane pondering the question of what we want to achieve with housing.

It is hosted by The Brisbane Dialogues. I hope to see some FET readers there. Tickets here.

Lastly, here’s some great comedy from Punter’s Politics about the housing supply debate.

punterspolitics

A post shared by @punterspolitics

1. A good way to think about this is that saving $5,000 per year in rent for 50 years is worth roughly $250,000, though a little less becuase of the time value of money. The more economically accurate way to think about it is that the price reduction of houses reflects the market estimate of the present value of rents saved by renters.

2. For owner-occupiers, they are best thought of as being both a renter and their own landlord. So their cashflow effect remains unchanged.

3. There are other margins where policies can differ. In terms of overall efficiency, each alternative must be judged on its meritd. But I want to think about the main effect on the distribution of values and cashflows to the owners and occupants of the existing 10 million homes. Because the size of the redistribution will be much larger in the short term than the size of any efficiency effect, since we only build a couple of percent extra housing stock each year, but redistributive price effects hit all 10 million households immediately.

Think of the example of stamp duty on property sales. A stamp duty paid by the buyer is economically equivalent to a stamp duty paid by the seller. Either the tax reduces the market price by the stamp duty amount (when the buyer pays) or it reduces the net sale revenue by that amount if the seller pays. Either way, sellers get the exact value of the stamp duty less money when they sell and buyers pay the same total cost.