State budgets have come and gone leaving their individual housing markets more or less untouched.
That’s both strange and a bad thing. In Australia, housing is the least affordable it has been in living memory, and probably ever, and is one of our most pressing problems, meaning politicians should be paying attention to it.
It is leaving a whole generation without hope of a stable financial future, like their parents had.
Until last year, Demographia scaled cities from “Affordable” to “Severely Unaffordable.”
In 2023 they introduced a new category “Impossibly Unaffordable,” which is where our three eastern seaboard metropolises ended up under.
It seems to be partly an Antipodean problem, as New Zealand was just behind Australia, and both were well ahead of other Anglosphere countries like the United States and the UK. Singapore was the most affordable.
There are three contributing factors to our high house prices—huge immigration, Reserve Bank interest rate policy, and restrictions in supply of land, labour, and materials.
Immigration and interest rates are outside the control of state governments, but they have a significant role to play in the supply of land.
What’s Weighing Down Our Housing Market?
My think tank, the Australian Institute for Progress, produces a quarterly Australian housing affordability index for each of the six state capitals as well as Darwin and Canberra. We can draw a number of conclusions from it.The first is that there is a 70 percent, or better, correlation between interest rates and house prices.
As the Reserve Bank of Australia pushed the cost of money down to unprecedented lows, purchasers were able to borrow more on the same income, allowing them to bid up the price of housing against each other.
House prices actually hit a peak on average across Australia in the fourth quarter of 2021, which was the bottom of the interest rate cycle, confirming the correlation with interest rates up to that point. (You may live in a town where prices continued to rise, but these figures are for averages, and there are always exceptions).
But when the Reserve started dramatically raising interest rates, instead of receding, house prices more or less maintained their value—or even rose in some markets.
In 2021, housing was expensive, but not unaffordable. The damage has since been done in less than three years.
It’s easy to blame the Reserve Bank, and they deserve criticism for pushing rates so low for so long, but they seem to have realised their mistake and raised rates to more or less their long-term average.
The market is not responding to interest rates as it should because it is constrained by supply and demand issues.
That’s why the Commonwealth needs to ignore special pleading from the vested interests in the “people importing” business, and dramatically restrict immigration to skilled migrants in areas in genuinely short supply, like construction.
It also needs to do a number of other things, like running a fiscally conservative budget, and tempering its roll-out of infrastructure.
However, more than anything else, they need to rapidly expand the supply of land.
Instead, they are all tinkering around the edges, and in some cases, actually making things worse.
All the state governments are making extravagant promises about building social housing, and their political opponents are often trying to outbid them. This is the worst way to try to fix the housing crisis.
Governments just aren’t very good at building things or managing them. Lacking financial incentives to make a profit, they waste resources.
They also tend to build high or medium rise projects, which are much more expensive than single storey ones. And they use union labour, which is significantly more expensive and less productive than private contractors.
High Taxes Slowing Down Construction
If house prices are so high, why aren’t the private developers out there, with or without government help?Well, some of them are, but not in the numbers we need when we are importing the equivalent of a Canberra each year.
The reason why they aren’t able to cope, apart from the sheer immensity of the task, is the way states have loaded their tax systems onto the housing sector.
They do this via stamp duty, land tax, and infrastructure charges which interact not just with house prices, but with availability as well.
Some states also tax the uplift in value of rezonings, making it unprofitable to develop.
Stamp duty, which is levied on the value of a house when it is sold, makes it harder for people to buy, and less likely to move once they have.
State governments tend to discount stamp duty for first home buyers, then claw the foregone tax back from second and later home buyers and investors. This discourages down-sizing and moving for work.
Land tax has an impact on development and investment.
It’s an efficient tax and Adam Smith, the father of modern economics, favoured it more than other taxes. But we only levy it on investors, and at high rates, starting at some threshold, generally around the median house price.
For investors, this means that the first rental property they own probably falls below the land tax threshold, but the second one will take them above it. This changes the investment math and discourages landlords from owning more than one property.
If people are going to be renters, they need someone to rent from, but this tax structure encourages that potential landlord to invest anywhere but housing after their first housing investment.
It also penalises developers because it makes the cost of holding land more expensive.
State governments also tend to tax overseas investors more heavily than local ones.
Only Big Developers Stand a Chance
But the really big problem is in infrastructure charges.While infill development—development in existing urban areas—can meet some of the demand, broadscale subdivision is where the real grunt comes from.
The land available for this sometimes comes in very large parcels.
North Lakes in Brisbane, for example, was a pine plantation. And sometimes it is fragmented amongst a large number of small landowners.
North Lakes needs a very large developer. The original developer wasn’t large enough, went bankrupt, and almost took his financier Elders Lensworth down with him.
They are now the joint venturer in the project with Stocklands, an even larger developer than the first.
One of the reasons it takes a large developer isn’t just the size of the parcel, but the fact that the state government loads all the infrastructure costs onto the developer—things like upgrading highways, road intersections, water, sewerage, electricity, and social infrastructure.
This adds billions to these large developments that have to be outlaid before a single house block has been sold, so only really large developers can undertake the project, and they have to load the costs onto the house buyers.
If the land is not in large parcels, by definition it is fragmented.
Here the problem is that unless you can amalgamate an impossibly large number of properties, no one can afford to pay for the trunk infrastructure required to unlock the land, so it remains sterilised from development.
These infrastructure costs should be regarded as an investment by the state in the development.
Our States Must Become Competitive Again
What this country desperately needs is for one state government to implement a revised tax system that doesn’t penalise developers or new home buyers, and returns us to the competitive development markets that we had in states like Queensland as little as 30 years ago.This would re-introduce competition into the market as smaller developers could compete against mega-developers.
