Matter of Public Importance – The crisis of housing affordability in Australia

house with dollar signSenator Bob 17 June 2015
Family First Comment: FamilyFirst is a political party in Australia, but Senator Bob Day is a good guy and an expert in the Building Industry, and his conclusions are correct. We should build OUT, not UP.

This motion correctly describes the housing affordability problem in Australia as a crisis. It does not, however, correctly diagnose the cause of the crisis. For more than 100 years the average Australian family was able to buy its first home on one wage. The median house price was around three times the median income, allowing young home buyers easy entry into the housing market. The median house prices now in real terms—that is, relative to income—are more than nine times what it was for 100 years between 1900 and 2000. That equates to approximately $600,000 more spent on mortgage payments than would have been the case had house prices remained at three times the median income. That is $600,000 lost to the economy in consumption and spending on other things.

The economic consequences of this change have been devastating. The capital structure of our economy has been distorted to the tune of hundreds of billions of dollars and, for those on middle and low incomes, the prospect of ever becoming homeowners has now all but vanished. The real culprit for the slump in business conditions over the past years has been the massive redirection of capital into high mortgages. The distortion in the housing market, this misallocation of resources resulting from the supply-demand imbalance is enormous by any measure and affects every other area of the economy. A terrible policy mistake has been made and it needs to be corrected.

Let’s be clear here as well: the problem is not the affordability of constructing a home. The previous speaker, Senator O’Neill, should make a note of this fact. The cost of building a home has been approximately the same for decades due to efficiencies gained over the years. The cost of building a house has not even risen with indexation. In fact, I have said in my home state of South Australia as we lose the automotive manufacturing, why can’t we build cars as cost-effectively as we build houses?

The affordability problem is with the land on which the house is built. Land prices have gone through the roof. The Demographia international housing affordability survey, which ranks 378 cities worldwide, list all Australian cities as seriously unaffordable. So the Greens are right: this is a crisis. The solution, though, is not to target the demand drivers of housing like capital gains tax discounts, negative gearing, low interest rates, first home buyer grants or immigration.

Take negative gearing for a moment. The Housing Industry Association said last September, with the backing of research by Independent Economics, that restricting access to negative gearing would reduce housing investment, erode affordability and put upward pressure on rents.

As anyone with even the basic understanding of how markets work would know, increases in demand do not cause prices to rise. What causes prices to rise is lack of supply. Let me give a good example: when demand for technology like flat-screen televisions and mobile phones increased markedly a few years ago, prices did not rise; they fell. Why? Because supply increased. That is how markets work. The majority of the Senate acknowledged this wisdom and reality in supporting my motion on 13 May this year—co-sponsored by no less than five other senators—confirming that the lack of supply—the restriction of available land for housing—was the problem.

I was elected to this place on the platform, ‘Every family, a job and a house’. I have built the odd house or two in my time. The Australian Dream remains, to this day, to have a big house on as big as a block as possible. Those who live in tiny housing only do so because they have no other choice. In my home state, the South Australian government wants to lock those young people out of affordable housing by legislating an urban growth boundary, virtually legislating urban densification.

This urban densification has been advanced on the back of a number of arguments: that it is good for the environment, that it stems the loss of agricultural land, that it encourages people onto public transport, that it saves water, that it leads to a reduction in motor vehicle use and that it saves on infrastructure. None of these claims are true. Whatever you want to call it, urban densification—urban consolidation, urban infill—has been a disaster wherever it has been tried.

The answer to solve the housing affordability crisis is to increase supply of housing.