The Australian election campaign has seen a flurry of new proposals for dealing with the problem of housing affordability. There are some good elements, but mostly these proposals are bad.
The most promising idea is the Coalition’s proposal to allow first home buyers to borrow up to 40 percent of their superannuation balance.
The loan would be repaid, with capital appreciation, when the property is sold. So, unlike previous proposals to withdraw super for housing, this would not jeopardise the bipartisan retirement income policy. Indeed, if the policy is successful in getting more families into homeownership, overall security in retirement will be enhanced.
However, the super-for-housing policy has two major flaws, shared with other housing policies from the major parties. These other policies include the Australian Labor Party’s (ALP) plan for the government to share equity in homes and the Budget announcement to provide loan guarantees.
The first flaw is that these policies boost demand and do nothing for supply. Homebuyers will use the assistance to bid up prices. So, while the lucky recipients are better off, affordability for everyone else will be worse. Unless something is done to increase supply, demand-side assistance just reshuffles a fixed stock of housing.
The second flaw is that these policies are trivial relative to the scale of the affordability problem. Housing costs have been soaring for hundreds of thousands of Australians who buy homes every year and millions of renters. But the announced policies will benefit very few.
Specifically, the ALP’s shared equity scheme will be restricted to only 10,000 home buyers a year. The loan guarantees in the budget will only help 50,000 buyers.
It is not clear how many buyers would be able to borrow from super. However, the median superannuation balance of 25- to 34-year-olds is only $25,000, of which only $10,000 (US$7,000) would be available to be lent. Compared to the average dwelling price of $920,000 (US$650,000), that’s a drop in the ocean.
On top of these problems, both the ALP’s shared equity scheme and the budget’s loan guarantees shift the risks of home lending onto the taxpayer. This encourages risky lending, amplifying future housing bubbles.
What should be done instead?
The appropriate policy for lowering housing costs is well known. Expert report after expert report has found that the reason housing is expensive is restrictions on supply.
Our planning system—often referred to as “zoning”—limits what can be built and where. Most of our urban land is restricted to low-density housing, with townhouses and apartments prohibited. Where higher density is permitted, height limits restrict the number of dwellings.
Just like other restrictions on supply, such as taxi licences, patents or import quotas, this raises the price.
In principle, these restrictions are intended to prevent undesirable side-effects of overdevelopment; such as traffic congestion, overshadowing, crowding, ugly buildings, and so on.
In practice, very few observers think these side effects are of a comparable scale to the effect on affordability. Moreover, researchers have difficulty finding significant harm from development. In many cases, local neighbourhoods are estimated to be more attractive after high-density housing is built.
Planning restrictions are the direct responsibility of state and local governments. So what should the federal government do?
This question was a major focus of the recent Parliamentary Inquiry into Housing Affordability. That inquiry recommended that the federal government provide incentive payments to state and local governments to encourage extra supply. If extra funds were provided for local infrastructures, such as parks or transport upgrades, anti-development opposition would presumably be allayed.
These incentive payments could replace discretionary programs, like the Urban Congestion Fund, that many observers think encourage corruption and waste. And/or they could replace unconditional grants currently made to state and local governments.
It seems reasonable for the federal government to expect improvements in housing supply in return for the billions of dollars it currently provides.
Proposals for incentive payments have been attracting wide support from think tanks, industry groups, international economic agencies, and newspaper editorials.
Hopefully, our next government, whoever is elected, will give them serious consideration.
