More housing hasn’t fixed Australia’s affordability crisis. It’s time for a national settlement strategy

Sydney’s adding more housing stock than London and there’s more cranes in the sky along the east coast than in New York, Chicago, San Francisco and Los Angeles combined. What’s clear is that adding even more housing supply alone is not going to cause prices to drop, argues John Brockhoff. We need a national settlement strategy and demand-side reform.

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In Australia, home ownership has long been the preferred tenure and has been supported both implicitly and explicitly by government, with financial support such as the First Home Owners Scheme and capital gains tax discounts and exemptions.Negative gearing has supported investment in housing as an asset and contributed to sustained house price increases. Typically, these measures have increased demand without addressing supply side issues.

Rental costs have also risen to provide a return in-line with the housing asset value – in response to competition and reflecting the relative insecurity of rental tenure. Unavoidable living expenses such as transport and energy also act to squeeze household budgets already strained by heavy mortgage or rental burdens. These living cost pressures are not distributed evenly. Remote and already disadvantages outer suburbs are typically most exposed – and already have the least access to urban amenities.

The resulting spatial pattern of our cities has implications for wellbeing, social equity and the productivity of the workforce. This is being expressed in stronger divisions between areas with greater disadvantage and areas with greater prospects for growth in wealth.

Sydney is ranked second and Melbourne sixth least affordable city in recent rankings. Notwithstanding the cost pressures, both cities are generating value and jobs in a globally connected service-oriented economy. Both cities remain attractive to overseas immigrants and, along with local growth, show population increases at the top end of comparable cities in the OECD.

Planning is vital to manage growth and change

Good planning is part of the solution to improving affordability of housing and boosting the quality of life in our growing cities. Good planning improves a communities’ capacity to embrace growth and change – where it has improved access to jobs and services and created great places. It is vital for our communities to accept intensification of existing suburbs as well as greenfield growth.

Planning has a role in identifying enough land and redevelopment opportunities in the right places. Planning can resolve development constraints and create conditions that bring forward housing investment by ensuring key infrastructure is in place. Planning can lower the overall cost of new development, reduce risks, open-up opportunities for development, and contribute to the creation of successful places over the long-term. Examples of planning contributions include growth area strategic land use, infrastructure and funding plans, medium density housing codes and establishing a fair and orderly assessment process.

Australia’s largest cities are growing fast, with both Sydney and Melbourne expected to top eight million around mid-century. Some 725,000 dwellings are being planned for Sydney by 2036 and a comparable number for Melbourne (1.6 million by 2050).

The demographics of our cities and their housing preferences are also changing. PIA’s megatrends report highlights that the proportion of over 65s in our population will double by 2055. But growth will occur in all age groups with diverse wants and needs for housing. As the service economy becomes an increasingly dominant source of employment there will be stronger demand for housing that is accessible to city centres and nodes. This will drive demand for medium and high density housing types – and challenge planners and policymakers to meet a “social contract” to ensure that growth is accompanied by improved quality living conditions and reduced exposure to high living costs.

The role of planning to provide for more housing supply should not be considered in isolation. Our settlements integrate employment, housing and social and economic infrastructure needs in ways that promote the economy, liveability and sustainability of our cities and regions. Planners are well equipped to manage the trade-offs, engage communities and achieve a shared vision for productive, fair and liveable places.

Increasing housing supply alone will not lead to price cuts

While housing is an “asset” market, increasing supply won’t be effective in reducing price.

Increasing and diversifying housing supply is important to meet the needs of a growing and changing population – but growth in stock is having little impact on housing prices in a highly distorted housing market.

Housing supply is currently a success story across many of Australia’s cities. Australia currently has one of the highest dwelling completions rates in the developed world. Except for South Korea, Australia is now producing housing faster than other OECD nations at 8.2 completions per 1000 persons, up from 6.8 in 2010, – at 37,000 dwellings a year.

Sydney is currently producing more dwellings than London (32,000), despite having a population less than half the size. At the end of 2016, there were more cranes (528) servicing apartment construction down the east coast of Australia than in major cities across North America including New York, Boston, Chicago, San Francisco, Los Angeles and Toronto (419 cranes). Fifty per cent of all cranes on the east coast are in Sydney (258 cranes). Greenfield growth in Melbourne and to a lesser extent in Sydney is also strong.

The affordability pressures facing the housing market largely arise from demand-side factors, including monetary and fiscal settings as well as record high population growth, driven mainly by net overseas migration. Housing is regarded as an “asset”market – or an investment class with strong potential for capital gain – alongside its role as shelter.

The returns on housing investment that are available in Sydney and other capitals are attracting a strong inflow of capital (offering returns greater than alternative investment classes). The recent jump in approvals and completions in Sydney and Melbourne has much to do with the operation of this assetmarket, in which higher house prices are underpinning development feasibility to a much greater extent than any recent changes in the planning system.

Historically low interest rates have also been a significant cause of Australian capital city dwelling price growth. Together with the tax structure, the low interest rates have increased the demand for dwellings by increasing the number of players in the market as well as the price that purchasers are willing to pay. This, in turn, places upward pressures on prices for owner-occupier purchasers – and this trickles down to other housing costs.

Property owners cannot afford to sell their homes below current market prices. For this reason, housing supply rarely places rapid downward pressure on prices. House prices are set in the established dwelling market (the stock of dwellings) that dominates housing supply so the additional 1-2 per cent of new supply built every year will have little impact.

Increased housing supply alone will not dramatically change affordability in Australia’s major cities.

Negative gearing and other tax incentives superheat demand

The national tax settings for negative gearing, and to some extent capital gains tax (CGT discounts and exemptions), and the treatment of owner occupied housing in accessing the age pension,inflate demand for housing investment.

Housing affordability is a result of demand and supply factors – it is a critical balance – but one complicated in Australia by gross distortions in how demand plays out in our housing markets. Our national tax settings, as well as historically low interest rates, play a role. The settings distort demand for housing and push up prices while making investing in dwellings an attractive option as a both a landlord and an owner occupier.

The introduction of CGT exemptions for owner occupiers and especially further discounts for investors is an attractive advantage that incentivises home ownership – both as an investment asset as well as for shelter.

Negative gearing also has an impact on the housing market. The ability to offset (as tax losses against income) the interest and other costs associated with a landlords’ investment in a property for rent makes investment in this asset class attractive.This also means that the cost of housing is less responsive to additional supply. Commentators including Wood and Daley note that around 93 per cent of properties that are negatively geared are not new, and that the regime is a very inefficient means of promoting new supply.

The negative gearing tax incentive, in particular, improves the prospects of a strong return on investment from housing. It operates as a subsidy– and also reduces available tax revenue to the budget. This revenue could otherwise be used to fund initiatives that to address social housing or housing-related infrastructure needs.

The ability to discount own home ownership on the aged pension asset test is also a factor incentivising home ownership – and has the potential to inflate demand. The extent of market distortion by this factor is debated by industry commentators.

As a side issue, the operation of state taxes – including land tax and stamp duties – also have an impact,but more so on the ability of the market to respond to changing housing needs as owners will delay sale and remain in housing that does not meet their needs.

The tax advantages described also have a distributive effect by favouring higher income earners while the impacts on the cost of renting or owning housing are hard felt by lower income earners.

How have we got to this point?

A range of commentators offer opinions on how and why Australia has created a housing market that is so unresponsive.

Ross Gittins noted that Australian markets have responded to investment incentives with grander, larger and more costly homes and observed that: “you can’t satisfy increased demand for better houses – particularly better located houses”. In addition, the value of homes as an asset has created a social and governance environment where owners are highly defensive of planning controls that – by increasing supply through density– might reduce the value of their asset.

The Grattan Institute acknowledges the distortionary effect of the tax regimes discussed – but argue that this increases the need to either release more capacity for housing through the planning system or wind back population growth if there is not the support or capacity.

Gurran and Phibbs describe a legacy of “policy capture” of Commonwealth and state governments by property interest groups, which has worked against tax reform addressing housing demand as well as incentives for affordable housing delivery.

Instead, a property industry narrative has been spread that planning regulation is restricting supply. Gurran and Phibbs note that the evidence to support this story is thin – and supply is being achieved in Sydney, for example,at unprecedentedly high levels with little impact on price. In fact, Sydney and Melbourne have high completion rates in relation to other advanced Western economies. They conclude that supply-side planning reforms are a way of Commonwealth and state governments appearing to “look busy” while demand side reform remains politically unpalatable.

Moving forward – planning in the context of a national settlement strategy

The Planning Institute of Australia (PIA) asserts that housing affordability is not an intractable policy problem. It can be addressed alongside our efforts to manage population growth and change in the context of a national settlement strategy. A national strategy that involves winding back negative gearing and reducing the impact of other tax-related distortions superheating housing demandwould help the housing market become more responsive to planning initiatives to promote diverse housing supply.

Investment of the corresponding budget gains into infrastructure supporting growing communities as well as social and affordable housingwould simultaneously address living costs, increase capacity for housing supply growth and address a critical housing shortage for lower income earners.

As the availability of (typically rental) housing for lower income earners has not increased relative to total supply there is a need to promote high volume delivery of affordable and social housing. This is practical via direct investment, rental subsidies, public private partnership models and planning incentives such as targets and requirements for inclusionary zoning.

Preparing a national settlement strategy would involve a full evaluation of the Commonwealth policies that influence spatial patterns of settlement– including taxation, infrastructure investment and immigration policies – using scenario analysis to determine the spatial effects these have on housing supply, affordability, city function and performance.

In analysing the alternative scenarios, a national settlement strategy would also inform the growth parameters that should be applied to urban and regional planning strategies across state and local jurisdictions. It would also clarify roles and responsibilities associated with growth management and national scale infrastructure planning within the context of Australian federalism.

It would mean that major infrastructure investments would be prioritised based on their contribution to achieving strategic planning outcomes for growing and changing cities. This could be progressed under a governance framework setting out and integrating the roles of each tier of government in delivering high performance cities and regions.

PIA advocates for the establishment of a role within the office of the Prime Minister and Cabinet, to coordinate and align cities policy issues within the federalism model and drive collaborative development of the national settlement strategy – ensuring alignment between national and state growth strategies. The role would shape the pattern and implications of Australia’s long-term growth prospects gaining insights from scenario analysis of alternative spatial growth strategies through the lens of the megatrends that are shaping our future.

It’s time to act

Housing in Australia’s major cities has become increasingly unaffordable and is considered expensive in global terms. Declining affordability impacts economic performance and labour market efficiency, social cohesion and equality in cities and the creation and distribution of wealth through home ownership.

All Australians should have access to affordable well-located housing that is integrated with transport, employment and services. Equally, housing should be of a suitable design and quality to meet the needs of a diverse, growing population and to enable residents to live a sustainable, energy-efficient lifestyle.

Spatial strategic planning can be effective in improving the amount and suitability of housing supply as well as reducing other living costs by well-integrated infrastructure and services planning and investment. This investment should extend to high volume delivery of social and affordable housing in all its models.

However, the contribution of planning is hamstrung by distortions in the housing market that superheat demand. The wind back of negative gearing, in particular, would improve the capacity for planning measures to have an impact on housing affordability, living costs and city performance in the face of population growth.

PIA calls for a national settlement policy as a framework for delivering diverse housing supply in the right places. It should enable regional planning strategy to be effective in shaping growth, promoting affordable housing and prioritising infrastructure investment in ways that strengthen communities and create great places to live.

John Brockhoff is principal policy officer (NSW and national) at the Planning Institute of Australia.