How do we fix Australia's housing crisis?

By Gary Anders

In the 1950s and 1960s, aspiring to home ownership was widely known as the Great Australian Dream.

By the mid-1960s, most Australians were living that dream. Between 1947 and 1961, Australia’s home ownership rate surged from 53 per cent of the population to 72 per cent.

That was thanks to the success of a massive program of initiatives at various levels of government designed to boost new housing supply.

In fact, increasing housing supply was then a national priority. Huge immigration flows after World War II and a baby boom had seen Australia’s population swell from fewer than seven million people in the late 1940s to more than 10.2 million in just over a decade.

Faced with a housing supply shortage, the federal government, under Prime Minister Robert Menzies, working together with the states, territories and local government authorities, leapt into action.

In addition to freeing up large tracts of government-owned land for sale to private developers, governments raised capital from bonds issued to build tens of thousands of homes that could be used for public housing or sold directly to private buyers.

For all intents and purposes, the threat of a housing crisis at that time was averted.

The new supply crunch

Fast-forward to today, and Australia has another housing supply crisis on its hands.

However, unlike the 1950s and 1960s, the causes are far more complex and much harder for governments to resolve.

The 2021 Census data shows that Australia’s home ownership rate is 67 per cent, which is not substantially lower than the percentage rate back in 1966.

Delving deeper, the latest overall number masks the bigger picture of home ownership rates in Australia – they are declining.

The home ownership rate of people aged 25 to 34 is now just 43 per cent. This is the lowest it has been since 1947 when it was 42 per cent, and down from its peak of 61 per cent in 1981.

For people aged 35 to 44, it is 61 per cent, which is the lowest rate since 1954, when it was also 61 per cent, and down from a peak of 75 per cent in 1981.

For people aged 45 to 54, it is currently 70 per cent. That is down from a peak of 81 per cent in 1991. About 82 per cent of Australians aged 65 and over own a home, but that rate is also falling.

What is driving this downward trend? In reality, there are many causes behind the broad decline in Australian home ownership, but the root of the problem is a lack of supply.

Successive shifts in government policies over decades, including tax measures, have served to inflate housing demand without adequately addressing supply constraints, particularly in capital cities.

This demand–supply imbalance has pushed residential property prices to record levels, while minimal wage growth has made housing less affordable than ever for many.

Compounding the supply problem are current events. The pandemic and resulting manufacturing shutdowns have created global supply chain bottlenecks, including for imported construction materials.

As such, materials costs have skyrocketed, adding to inflationary pressures. To combat inflation, central banks around the world, including the Reserve Bank of Australia, have lifted interest rates quickly and sharply.

Higher rates typically dampen housing demand, reduce dwelling prices and at the same time bring more stock onto the market because of forced sales.

Yet, any impacts on housing supply from higher interest rates are likely to be temporary and unlikely to address the long-term structural issues fuelling the lack of housing supply.

While migration levels to Australia came to a standstill during the height of the pandemic, the rate of foreign workers and students entering the country is increasing steadily once again. This increase is adding to the existing strain on housing supply.

Australia is not alone when it comes to housing supply shortages.

A 2021 study by financial research firm Moody’s Analytics found the US was short of 1.5 million homes, with less housing available for sale or rent than at any time in the past three decades.

The US Government has now pledged to offset the country’s housing supply shortage in five years through incentives aimed at relaxing state and local land use laws and regulations that limit housing density.

The Scottish Government has also recently outlined plans to increase supply by 2040 through a range of policies, including funding mechanisms to build affordable housing.

 

"Our [State of the Nation's Housing] report anticipated that there would be a shortfall of apartments over the next few years, and this could be exacerbated by higher-than-anticipated interest rates and the increasing cost pressures affecting project feasibilities."

 

Meanwhile, Japan has streamlined its zoning framework to fast-track planning permissions and development and to increase housing density.

“There are other countries, particularly in Europe, where governments have a bigger role in supplying housing than Australia,” says Saul Eslake, independent economist and vice-chancellor’s fellow at the University of Tasmania.

“There are some countries – Germany, France and Austria principal among them – where home ownership is not the thing that it is in Australia, or in other Anglo countries and southern European and eastern European countries.

“They seem to do all right. It’s probably a cultural difference, but the laws around renting are very different than they are in Australia.”

How to address the supply-demand imbalance

Eslake says Australia’s problems with regard to housing affordability and home ownership are the result of “persistent mismatches” between supply and demand, for both established and new housing.

“Ever since the mid-1960s, housing policy has increasingly tilted towards inflating demand and actively constraining supply at the state and local level,” he says.

“The answer therefore is, in a sense, to adopt policies that boost supply and step back from policies that needlessly inflate demand.”

Australian Bureau of Statistics data shows dwelling approvals have been on a declining trend for some time now.

After reaching a high of more than 23,000 in March 2021, total dwelling approvals on average have fallen below 15,000 per month.

Cameron Kusher, REA Group’s executive manager, economic research, says the decline partly reflects the end of the federal government’s Homebuilder stimulus program in 2021.

The program provided eligible owner-occupiers (including first home buyers) with a grant of up to A$25,000 to build a new home or substantially renovate an existing home.

“In the last couple of years, we’ve had a big increase in supply off the back of Homebuilder and record low interest rates,” Kusher says, “but from here the outlook is not as strong.”

Kusher adds that he expects Australian housing approvals and commencements to pull back over the next 12 to 18 months.

“That’s going to exacerbate the challenges in the market. Obviously, property prices are falling at the moment after really strong price growth, but if we look at the rental market there’s a real lack of rental supply available, and that will be exacerbated by the fact there’s not a lot of new construction going on.”

 

"First home buyers have been squeezed out of the market by property investors and have been forced to rent. They, in turn, increase the demand for rental housing, pushing up rents at the expense of those who would never have been able to afford to buy their own homes."

 

The federal government’s National Housing Finance and Investment Corporation (NHFIC), which provides low-cost finance and building assistance to registered community housing providers for the provision of social and affordable housing, expects to lower its housing supply forecasts next year.

“Our State of the Nation’s Housing report, released earlier this year, projected that supply would remain strong and see about 550,000 new dwellings built [net of demolitions] over the three years to 2023-2024,” says Hugh Hartigan, head of research at the NHFIC.

“But given the higher-than-anticipated trajectory of interest rates, together with spiralling building costs and supply constraints, there is considerable downside risk to our supply projections.

“Our report anticipated that there would be a shortfall of apartments over the next few years, and this could be exacerbated by higher-than-anticipated interest rates and the increasing cost pressures affecting project feasibilities.”

Is tax reform the answer?

Eslake says a turning point for the Australian property market was the widespread use of negative gearing on property investments since the 1990s, when lenders began reducing their investment loan margins to bring them more in line with owner-occupied housing rates.

Shortly afterwards, the capital gains tax regime was changed so property investors were only taxed on half of the capital gain instead of their full marginal tax rate.

“That turned negative gearing from a strategy that historically had been about deferring tax, to one that became both deferring and reducing what you pay,” he says.

“So, we saw a significant increase in the proportion of the Australian population who were negatively geared landlords – and, overwhelmingly, property investors buy established dwellings, not new ones.”

Eslake says negative gearing continues to contribute to the housing supply shortage and a spike in rents.

“While defenders of property investors like to say they’re creating additional rental supply, every time a property investor outbids a first home buyer to secure an established property, what they’re doing is creating additional demand for rental housing.

“First home buyers have been squeezed out of the market by property investors and have been forced to rent.

“They, in turn, increase the demand for rental housing, pushing up rents at the expense of those who would never have been able to afford to buy their own homes.”

Eslake says a review of tax incentives is one way of tackling housing supply.

“I often find myself recalling, as a long-time advocate for reducing tax preferences for property investors, that the American variant of negative gearing was abolished by the Reagan administration in 1986.

“The British variant of it was abolished by the Conservative government of David Cameron in about 2015.”

The federal government’s home downsizer measure, which enables eligible homeowners to sell their principal place of residence and contribute up to A$300,000 of the proceeds into superannuation (A$600,000 for couples), has helped to release some housing stock onto the market.

“Since its introduction in 2018, the downsizer measure has allowed over 41,000 older Australians to sell their homes and collectively contribute over A$10 billion into superannuation,” says an Australian Taxation Office spokesperson.

It is likely the number of homes sold using the downsizer scheme will increase now that the age limit for using the scheme has recently been lowered from 65 to 60.

Again, however, the overall impact of the scheme will be limited in terms of addressing the housing supply shortage.

Barriers to break down

Kusher believes reducing or eliminating red tape and changing certain laws will go a long way towards improving housing supply.

“I think the best thing we could get is policies that make it easier for developers to build,” he says. “And that’s easing restrictions on land usage in inner city areas, quicker approvals, but also maybe looking at ways to encourage developers not to landbank properties and actually bring them to the market in a timely manner.

“I think, overarching at the moment, the biggest restraint on new supply is how expensive it is.

“With construction costs going up, it’s hard to find labour, and developers and builders don’t usually build on margins as big as 15 per cent – that’s how much their costs are going up.

“I don’t see a short-term fix. Obviously, once some of the cost escalations slow, then it’s all about getting supply to market quicker, getting approvals through councils quicker, and councils approving more.”