Australia's housing crisis is a pressing issue, and many are wondering if building more homes is the magic solution. But here's the catch: it's not as simple as it seems.
A Herculean Effort, a Modest Payoff
Christian Nygaard, a housing economics expert, has some eye-opening insights. He argues that even an ambitious plan to build 1.2 million homes over five years, repeated over the next 15 years, would barely make a dent in housing affordability. His model predicts a reduction in the national house-price-to-income ratio from 8.0 to 6.7, which is not nearly enough to address the crisis.
In Sydney, where the ratio is even higher, the impact would be even more minimal. So, why is the payoff so weak?
The Complex Web of Factors
Economist models reveal that increasing supply by 1% faster than household growth reduces house prices by only 2-3% over several years. While the proposed target exceeds projected household growth, other factors come into play. Our increasing wealth boosts housing demand, and our tax system makes homeownership financially appealing. Add to that the changing borrowing costs over the past two decades, and you have a complex web of influences on housing affordability.
Nygaard explains, "The sum of all these additional parts means that the overall efficacy of producing more housing becomes more limited than the isolated price impact suggests."
Beyond the Numbers
Nygaard supports increasing supply but emphasizes that the current debate lacks clarity on how simply "building more homes" fixes affordability. His research shows that focusing solely on construction numbers doesn't achieve the desired outcomes in terms of affordability, societal challenges, or wellbeing.
To address these broader objectives, policymakers must shift their focus to the distribution of housing rather than just the overall quantity. We need to ask who these extra homes are being built for and why.
The Supply-Side Dodge
Nygaard argues that overemphasizing supply allows politicians to avoid a crucial conversation about the tax incentives that make investing in housing so lucrative and the economic and urban policies that influence where people choose to live. He believes that potential changes to capital gains tax discounts for investors could have a symbolic and practical impact but suggests that more radical thinking may be necessary.
"Touching the capital gains in the owner-occupied sector is politically difficult, but misdiagnosing the problem and believing that the solution is solely to build more housing could lead us down the wrong policy path," Nygaard cautions.
So, while building more homes is a part of the solution, it's not the entire answer. The debate must consider a broader range of factors and policies to truly address Australia's housing crisis.
