Stop Blaming ‘Lack of Supply’ for Australia’s Housing Problems

Former RBA research director turned chief economist at the Center for Independent Studies, Peter Tulip, has write an article in Fairfax, blaming the lack of supply for housing affordability issues in Australia:

Many submissions to the federal housing inquiry currently underway argue for the removal of tax benefits such as negative debt and reduced capital gains. This is a false problem. Besides being politically dead, it doesn’t make much of a difference for affordability …

The main cause of the high prices is land use restrictions – often referred to as planning or zoning – as found in a series of official reports. The most recent of these reports were the New South Wales Productivity Commission White Paper and the OECD and IMF Surveys of the Australian Economy. The reason official reports continue to say the problem is planning is that this is what research is clearly showing, both in Australia and overseas.

Planning restrictions drive up prices by limiting the amount of housing that can be provided. Apartments and townhouses are prohibited on most of our urban land, which is reserved for single-family homes. When apartments are permitted, height restrictions limit the number of units they can provide. Like any other restriction on supply – such as taxi licenses or import quotas – it drives up the price.

The idea that housing affordability problems in Australia are caused by a “lack of supply” is ludicrous.

Any housing shortage before COVID was unambiguously caused by the federal government opening the immigration floodgates in 2005:

Australia’s net overseas migration (NOM) increased from an average of 89,000 between 1991 and 2004 to an average of 215,000 between 2005 and 2020, an average annual increase in immigration of 140 %.

But now that immigration has collapsed, Australia’s “housing shortage” has miraculously disappeared:

The National Housing Finance & Investment Corporation (NHFIC) ‘s first flagship report on housing supply and demand came to exactly the same conclusion.

NHFIC has expected that “The new cumulative supply is expected to be approximately 93,000 higher than the new demand by 2025”, thanks to the drop in immigration:

The lessons from the above are obvious:

  1. Australia’s housing supply “problem” was caused by the massive increase in population growth due to immigration from 2005 onwards.
  2. The first best solution to Australia’s housing supply problem is not to reduce immigration to its pre-COVID extreme level.

According to the intergenerational report’s immigration projections, Australia’s population will grow by 13.1 million people (~ 50%) over the next 40 years to reach 38.8 million people, which is equivalent to adding another Sydney, Melbourne and Brisbane to the existing Australian population.

Such a deluge of population will ensure that the demand for housing overwhelms the housing supply, resulting in lower accessibility (all other things being equal) and forcing future Australians to live in high-rise slums:

Housing composition in Sydney

The first rule in formulating public policies should be not to make a problem worse. The planned restart of the “Big Australia” mass immigration policy clearly violates this rule.

Strangely enough, Peter Tulip’s submission to the House of Representatives Standing Committee on Taxation and Revenue investigation into housing accessibility and supply came to a similar conclusion on immigration, but is completely absent from his Fairfax article:

Arguably the biggest way the federal government affects the housing market is its immigration policy.

In the mid-2000s, Australian immigration accelerated rapidly. This has led to a sharp increase in the demand for housing and therefore strong increases in housing prices and rents …

Real population growth, shown by the red line in the upper left panel, increased from 1.5% in 2005 to 2.4% in 2008. The blue line shows a counterfactual scenario in which this surge did not occur. , with population growth remaining at its 2005 rate. As shown in the panel at the top right, the surge in immigration increases the adult population by 650,000 or 3.3% by 2018 …

The result was that demand outstripped supply in the short term, with the rental vacancy rate falling to a near-record low of 1½% in 2008. This pushed real rents (bottom left panel) up to 9% higher than they would have been otherwise. . The rise in rents is gradually extended towards a similar rise in house prices (bottom right) …

They raise two important questions for housing policy.

1) Immigration policy does not seem to be coordinated with other branches of policy. In particular, the recent increase in immigration has not been accompanied by a proportional increase in the supply of housing.

2) There is an imbalance in government incentives. The federal government decides on immigration rates. However, it is the states and local communities that have to pay in large part for the additional infrastructure that this requires …

Immigration drives up housing prices and needs to be better coordinated with the housing supply …

Nonetheless, Tulip is also calling on the federal government to provide incentive payments to states to free up land supply and planning:

Providing more money to regions that build more housing would rectify an overflow, or what economists call an “externality.”

Many of the perceived costs of high density construction – overcrowding, noise, congestion, etc. – are supported locally. So naturally, the neighbors oppose it. However, the benefits, in terms of lower housing costs and economic growth, are scattered throughout society …

The result is that it is not in the interest of a local government or a state to build enough housing. Incentive payments align local decision-making with the national interest …

Payments could take the form of infrastructure aid …

It is right that the federal government takes more responsibility for capital projects like this – the need for them is driven by heavy immigration, a federal decision.

I totally agree with this part of Tulip’s article and have made similar arguments before.

The federal government never gives due consideration to the costs of major migration – whether financial or non-financial – as these are primarily borne by states and residents in general.

I bet if the federal government were required to internalize the cost of immigration by paying states $ 100,000 per permanent migrant who settles in their jurisdiction, so states can adequately fund additional infrastructure and services necessary, then the Treasury would no longer tout the ‘tax advantages’ of immigration.

Having the federal government share the benefits and costs of immigration would be a surefire way to reduce admission to reasonable and sustainable levels.

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