W ILL BUILDING MORE HOUSES HELP HOUSING

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1 W ILL BUILDING MORE HOUSES HELP HOUSING AFFORDABILITY 1? Bob Graham: RPIA(Fellow) Planning and Housing Affordability A recent discussion paper on Housing Affordability for The Planning Institute of Australia 2 identified several factors associated with demand and supply which influence the availability of housing: housing demand, housing supply, demand supply gap and mismatch between demand and supply. The paper then sets out some planning policy levers which can be used to facilitate affordable housing. My paper looks at housing affordability and in particular the key drivers of escalating house prices in Tasmania. It concludes that the relationship between demand and supply aspects and rising house prices is weak and that there is a need better understand other factors, particularly the financial settings within which the housing market operates. Planning may be able to contribute to improving affordability but without a better understanding of the multi-faceted nature of housing in Australia, reliance on design and spatial solutions will contribute little to the affordability crisis. Tasmania s Housing Affordability Crisis This paper focuses on Tasmania as it is rarely seen by people in Mainland Australia as a place where housing is unaffordable. The reality is that housing affordability in Tasmania has declined rapidly in recent years. House prices have risen much more rapidly than incomes. According to Core Logic Hobart s median house prices rose by 14.3% in the 12 months to September 2017 (Mercury, October 19, 2017). At the same time real wages growth over the 12 month period was less than 2%, and median household incomes in Tasmania are $200/week less than the National average (Australian Treasury, 2017). The overall housing market has become more difficult for buyers, renters and those on very low incomes. Both new and existing homes have become more costly, there are fewer rental properties available, and the amount of social housing has declined. This situation is not new - housing affordability has been declining steadily in Tasmania since the late 1990s, despite a consistently low population growth. Since 2000 there have been a number of changes which operate across the country (including Tasmania) and which have meant that Tasmania s affordability crisis is fast catching up with the rest of Australia. The crisis is usually blamed on a number of things; dwindling housing supply, increased population (particularly from migration), increased demand for housing, reduced involvement by the State Government in social housing, lack of regulation of the rental market, failure of planning authorities to give approvals quickly, taxation concessions to home owners and investors, high government costs, investment in housing by interstate and overseas interests, negative gearing, lack of planning, and growth in demand for short term visitor accommodation. All of these factors affect housing affordability but a focus on any one factor in isolation does not help to understand the crisis and is unlikely to increase housing affordability. There is a widespread belief that the crisis has arisen because of an imbalance between the demand for and supply of housing. The perceived imbalance is often looked at in simplistic terms and the assumption that there is a single housing market which operates under a simple set of rules in accordance with the laws of demand and supply. This is exemplified in a recent statement by the Property Council of Australia. If we keep seeing a gap emerge between supply and demand, it will be homebuyers that suffer through higher prices from the failure of governments and planning systems to respond. 3 This has led to a number of solutions intended to address the crisis. Increase supply of housing There is little evidence to support the view that increasing supply will reduce demand and thus the price of housing. 1

2 Using ABS data 4, the following statistics are relevant. Table 1. Population, household and dwelling unit changes Tasmania Change % change Population % Households % Dwellings % Between 2001 and 2016, the State s population increased by 11%. The number of occupied dwellings by 16.6%. (for Australia the equivalent figures are 24.6% increase in population and 27.4%) 18 Chart 1. Population, households and dwellings - % increases Chart 1 provides a comparison between the rates of increase for population, household formation and occupied dwellings. Over the 15 year period population has increased by a factor of 1.1 household formation by 1.3 and number of dwellings by Population Households Dwellings Over the same period, median house prices rose rapidly across the State. Across a sample of 35 urban and rural localities with diverse demographic characteristics, median house prices rose by an average of over 350% in the 15 year period 5. In alone the median house price in Hobart rose by a further 16% 6 and they are projected to rise by a further 9% over the next 3 years 7. Median house prices have risen at a rate 32 times that of the rate of population increase. 400 Chart 2: population, dwellings, households and median house prices - % change Note For the sake of consistency, the population figures used in this chart are usual resident population as recorded on census night. Population Households Dwellings Price 2

3 Both the supply and price of housing are rising more quickly than increases in population. This fact underlines the reality that the relationship between housing demand, supply and cost is far more complex than is generally accepted. It is not a simple matter of demand and supply and just building more houses is unlikely to have a significant effect on house prices. Efforts to increase supply usually lead to a surge in new house building on green fields estates at the urban fringe in localities that suffer serious locational disadvantages. The demand for new housing is greatest in the inner suburbs Housing is becoming less affordable, and the capacity of people on low and middle incomes to enter the housing market has declined at the same time. Reduce the rate of population increase Tasmania s population growth has remained reasonably stable over the past 15 years. Over that period the State s population has risen by 11% or 50,653. Over the same period median house prices have risen dramatically (350%). Chart 3 shows compares the actual population increase for the three five year periods between 2001 and Chart 3 Population change - Tasmania Population increases are not sufficient on their own to explain the dramatic increase in prices. Providing incentives to new home owners Both State and Federal Governments have used incentive schemes for first home buyers over the past 20 years. They include first home owner grants, stamp duty relief, discounts on land purchases and public housing purchases. They are politically popular, and incentives are part of the Tasmanian Government s housing affordability policy. However, all assessments of the different schemes have concluded that they are policy failures. Once an incentive is given to all first home buyers, then the price of new housing is bid up and the winners are sellers, banks and real estate agents. First home buyers, particularly those who try to enter the market at a later date, end up paying more than they would have otherwise. They need larger mortgages, their interest bills are larger, and the fees paid are higher. Two example illustrate the extent of this failure Census date The Howard Government introduced a $7000 grant for first home buyers in House prices subsequently went up by more than the grant was worth. In June 2017, the Victorian Government introduced stamp duty relief for first home buyers on properties below $600,000. In the six months after the incentive was introduced the median house 3

4 price in outer suburbs (where most first home buyers are able to afford a dwelling) have risen by an average of 12%. So a house worth $550,000 in June 2017 in a suburb like Melton, was worth $616,000 by December In other words housing affordability has actually decreased 8. Rental housing Little research has been done in Tasmania on why the supply of rental housing has decreased. Both the loss of 2000 public rental housing units between 2011 and 2016 and a shift from long term rental accommodation to much the much more lucrative visitor accommodation market have likely affected the availability of rental housing. This chart shows the number rental properties across the State at the different census dates. Over the 15 year period there has been only a 5.1% in the number of rental properties available increase compared with an 11.1% increase in population. As it has become more difficult for many would be home buyers to buy a home the demand for rental housing has increased. At the same time the stock of housing available for rent has increased only marginally. There is no substantive research on why this is the case. However, the sale of public rental properties between 2006 and 2011, the increased yields available for short term visitor rentals, the rise in visitor numbers to the State and the increasing price of housing have all played some part. Number of properties rented for long term accommodation Given that much of the rental stock is owned by private investors and often supported by tax incentives such as negative gearing, it is not surprising that owners are seeking higher yields from their investments. Short term visitor accommodation provides the opportunity for a much better return on investment than long term rental. With the rapid increase in visitation to Tasmania in the last seven years there has also been a loss of long term rental stock to the short term market, particularly as a result of Air BnB - a form of accommodation that has increased by more than 290% in Hobart since At the same time it has become more difficult to enter the owner occupier market because of higher prices and more people are looking for rental accommodation. The number of owner occupied dwellings in Tasmania increased by only 8.3% (between 2001 and 2016) compared to an increase in the total number of dwellings of 11.1% over the same period. The number of households in rental accommodation increased by 19.2%. Anecdotal evidence suggests that these changes are working together to reduce the amount of rental housing available. At the same time, house price increases and the need for higher yields by investors has increased the amount of rent that has to be paid to secure a rental property. The likelihood of intervention by Governments to relieve these pressures is extremely low. The recent negative response by the Federal Government to the Opposition s proposal to reduce negative gearing and capital gains tax g incentives highlight the difficulties of achieving realistic long term change. 4

5 Planning restrictions Over the last 25 years all States, including Tasmania, have undertaken reform of their planning systems. In essence this has been reform of planning and building approval processes. Over $20million has been spent in Tasmania on reform. The primary focus has been on developing and implementing a single Statewide Planning ordinance known as the Statewide planning scheme. This scheme allows a large number of residential developments to be undertaken without a planning permit. This has removed what was seen as a major cost and time burden on development. However, there has been no obvious effect on house prices. Evidence from research undertaken at the University of Tasmania in the 1990s for the Commonwealth Office of Local Government 10 indicates that approval costs and delays can add between 1 and 1.5% to the cost of a new home. Many of the costs associated with those calculations no longer remain because of process reforms (all States have carried out similar reforms) but even at that level they do not account for a great proportion of the total cost of a dwelling. The real planning issues and associated costs exist at a more fundamental level. For example, the difficulty in getting approvals for larger scale developments - particularly rezoning, the inability to do staged developments, lack of integration between different parts of the approval process, lack of support for different forms of residential development, referral procedures between and within agencies, and opposition to increasing residential densities. These are policy issues that exist in all spheres of Government, and can add significantly to the cost of housing. There is a need for more fundamental reforms but these have been strongly resisted in the past and resistance is likely to continue given recent indications from the newly re-elected State Government. However, despite the need for reform there is little evidence that by themselves they would have a significant impact on the cost of housing. Why aren t supply side approaches working? Australia has long had a commitment to maximum levels of home ownership. To achieve that outcome a financial structure that enables and encourages home ownership was put in place in the 1950s. This included: no capital gains tax on the family home, public housing authorities which purchased large tracts of land and built lower cost housing for both purchase and rental, rental purchase schemes for state owned housing, subsidised home loans through State owned banks, Initially, these policies assisted hundreds of thousands of families to enter the housing market and to achieve the Great Australian Dream of home ownership. Housing is more than just having a place to live. It is also an asset and a source of investment profit. With financial changes in the 1970 s and 80 s (financial deregulation, investment incentives, tax breaks for investors), the latter role assumed a greater significance in the overall housing market 11. As this role became more significant many new players, whose primary aim was to produce a return on their investment, entered the market. Housing increasingly became a market commodity that could be bought and sold like any other product.the effects of these changes were exacerbated by the introduction of negative gearing and tax concessions to investors in the housing market in the 1980s and 90s. This was also a time when the costs associated with urban sprawl were becoming apparent and different forms of housing (flats, units and condominiums) were appearing. These housing forms provided significant opportunities for larger mass home construction companies and cashed up investors in the multi unit housing market. There are many different views on the effects of these changes, particularly as to their effect on housing affordability. But there is consensus that they have had a big impact on house prices. One thing is absolutely certain, concessions, tax breaks and incentives given to owners of and investors in housing are a no go area for policy makers. In my view these changes have changed the nexus between supply and demand relationships and the cost of housing. As outlined above there are only weak direct relationships between the two. 5

6 The effect of easy credit One matter that has a profound effect on the price of housing, but does not feature widely in public debates and pronouncements is the availability of credit. The ease with which credit to finance house purchases (either as a place to live or for investment) can be obtained has a direct effect on house prices. Since the Global Financial Crisis of 2008 Australia s Cash rate has been lower than in any previous period since This has reduced the cost of mortgages which in turn has allowed borrowers to access more credit (which the major banks have been only too willing to provide). If a borrower can service a loan, they are able borrow substantial sums to finance a mortgage. House prices have risen consistently in response to the fact that purchasers can borrow ever increasing amounts of money because of its lower cost. This, in turn has led to a substantial increase in personal indebtedness as families take on ever larger and larger mortgages. Home builders also contribute to price hikes through marketing ever larger houses (the average size of new dwellings across Australia has increased from 100m2 to 240m2 since ). Easier credit availability makes it possible for purchasers to pay for these increases. For purchasers who occupy the house it is a prudent investment (at least while prices keep rising) as they have an appreciating asset that attracts significant concessions and on which no tax is paid when sold. Financial incentives for investment in housing, such as negative gearing and capital gains tax concessions, have encouraged individuals and institutions to enter the market to get financial returns rather than accessing a place to live. In many cases these players can outbid individual home purchasers seeking a place to live - particularly in localities where prices are higher - for example inner and middle suburbs. These matters provide a clue as to why there is little or no simple cause and effect link between supply, demand and house prices. In a situation where lending institutions can increase the amount of credit available to borrowers without regard to other aspects of the housing market house prices will be driven up. Competitive bidding between would be purchasers with access to substantial credit, the increasing capacity of older family members to provide money to their children, the desire of sellers to maximise returns, increased costs to developers to provide infrastructure and the increasing size of houses work together to ensure that house prices will rise. It is worth noting in this context that when the Australian Prudential Regulation Authority in 2017 restricted the ability of borrowers to use interest only loans, which in turn reduced access to easy credit, the price of investor housing in Sydney and Melbourne fell. A recent analysis of a number of factors affecting house prices concluded that the availability of easy personal credit in the form of mortgages and the loans contributed 27% of the total impact on house prices, investment lending contributed 18%, and the low cash rate 14% 13. The factors that are spoken about most - property supply, population growth planning restrictions, migration, and development costs delivered a total of 22% of the impact. If the rate of credit growth is allowed to rise above the rate of wages growth, the affordability crisis will worsen. What all of this demonstrates that tackling the affordability crisis is much more fraught than Governments, industry and many commentators are willing to admit. A recent report by the Grattan Institute 14 summarises the hurdles to faced in increasing affordability:..neglectful Governments.. preferred the easy choices that merely appear to address the problem. The politics of reform are fraught because most voters own a home or an investment property, and mistrust any change that might dent the price of their assets. But if governments keep pretending there are easy answers, housing affordability will just get worse. Older people will not be able to downsize in the suburb where they live, and our children won t be able to buy their own home. What are the implications for planning? Existing planning policies and statutory controls, together with Government incentives are driving cities and towns across Tasmania to favour forms of housing and associated land development which result in urban sprawl, larger sized dwellings, continued low density fringe development, greater reliance on private vehicle transport and increasing costs of providing physical and social infrastructure. These development forms add 6

7 further to the living costs of home owners and renters as they try to overcome the additional financial burdens of living in poorly serviced areas long distances from employment and services. Planning reforms and policies over the last 20 years, including the new Tasmanian Statewide Planning Scheme, have favoured the construction of separate houses on greenfield sites at the fringes of existing development 15. Meanwhile it has become increasingly difficult to find affordable housing in areas where services, alternative housing forms, employment, and social infrastructure are available. At the same time, existing financial arrangements, taxation policies, housing incentive schemes and benefits for investor housing are all working against improving the affordability of housing. There is also resistance in the financial sector to supporting alternative housing forms. The continued marketing of larger and larger homes and the failure to provide real affordable options to home buyers further exacerbate the situation. Proposals to further reduce the cost of borrowing will only exacerbate the situation. Whilst addressing supply issues and ensuring that design of new housing is of a high standard are necessary, they are not sufficient to deliver lower cost housing or address the rental crisis. Current planning policy settings will do little to reduce the cost of housing, particularly when locational disadvantage costs are taken into account. Unless underlying planning policy settings become of a much broader reform program, including financial and taxation reforms, then they will have only a marginal effect on house prices. New financial models are required that allow purchasers wishing to buy or rent a place to live on a long term basis to avoid competition with players who see housing as an asset and whose best interests are served by increasing prices. Planning can be part of that by providing innovative approaches to land and building development that fit with alternative financial models. The causes of the affordability crisis are complex and simple one off solutions will only worsen the crisis as well as creating a raft of related problems - many of which are the stuff of planning. In my view the planning profession needs to become more aware of the impact of current policies and approaches, including the financial and broader policy settings, and better understand the complexities underlying the price, availability and affordability of housing. There are no easy solutions to addressing the affordability crisis and certainly no easy fixes. The policy levers referred to in the PIA paper may have an effect on affordability, but on their own they are more likely to create upward pressure on prices, rather than allowing more people to find adequate, permanent accommodation at a price they can afford and in localities that can meet their needs and aspirations. April 2018 rgraham@bordernet.com.au Endnotes 1 Housing affordability here refers to the price of housing across the entire housing market in relation to the capacity of purchasers to pay. It is distinct from affordable or social housing which is housing targeted specifically at low income groups and generally provided by government or subsidised NGOs. 2 Planning Institute of Australia, PIA Policy Position Housing Discussion Paper 3 Property Council of Australia, New housing supply data confirm a worrying trend. Media statement, 2 February This article relies on published data from the 2001, 2006, 2011 and 2016 Censuses of population and housing 5 6 Real Estate Institute of Tasmania - suburb reports. ( Mercury (ibid.) 7 ABC News 25 October

8 8 The Age. Help for First Home Buyers Inflates Prices 10/2/2018. P.6 9 The Hobart Mercury, 20/02/ Department of Immigration, Local Government and Ethnic Affairs, 1991; Local Government Regulation of Land and Building Development. Government Printer, Canberra. 11 See for example Paris, C., Housing Australia Macmillan Education Australia, South Melbourne. 12 Stephan, A. and Crawford, R. 2016: Size does matter: Australia s addiction to big houses is blowing the energy budget, The Conversation, December Digital Finance Analytics, 2018 Popping the Housing Affordability Myth 14 Daley, J. and Coates, B.: March 2018: Housing affordability: re-imagining the Australian dream. The Grattan Institute, Melbourne. 15 The total number of other forms of housing remained static over this period as a result of a reduction in the number of flats, units and apartments (4,474) and an increase in the number semi-detached, row or terrace houses (3,795) 8