AFTER DECADES OF DEBATE, AUSTRALIA’S HOUSING SHORTAGE HAS REACHED A CRITICAL POINT

The main driver of Australia’s housing shortage is population growth — more people needing more houses. In the year to September 2022, Australia’s population grew by 1.63%, up on its 10-year average of 1.36%. So, not only do we need more houses, but we actually need more than previously thought.

Adding to that pressure is the fact that the average household size has been consistently falling over the past few decades — or in other words, the same number of people need more houses today than they did in, say, the early 1990s. These pressures are not likely to change anytime soon as people these days have fewer kids and are more likely to live by themselves. So, we don’t have enough houses to cater for our existing population, let alone one that’s growing at around 400,000 people per year. And, given that the shortage is nothing new, there’s already an accumulated shortfall.

Fortunately, the Federal Government is beginning to recognise this. In its most recent forecasts, the National Housing Finance and Investment Corporation (NHFIC) estimated that by 2028 we’ll have 100,000 fewer homes than we need. This is an under-estimate because it assumed a population growth of around half what we’re currently seeing, and it also didn’t consider an existing shortfall — but that’s another story.

The Government’s target of building a million homes over five years from 2024 is similarly a positive development. While it won’t be enough to address the housing shortage, it at least provides a bit of certainty for all those sectors that depend on a strong housing market.

One of the simplest and most obvious ways to boost our housing stock is to attract more foreign investment. The argument that foreign investment takes away from Australians’ housing options does not stack up. Foreign investors have been restricted to only investing in building new apartments across Australia and, therefore, do not compete in the established home market. They can only build new homes. Their exit from the market is a key reason apartment supply is contracting.

The reasons why Australia has under-supplied homes for decades revolve around a systemic failure of government. Here we consider what are probably the two main failures of government: taxes and Regulations.

TAXES

There are few items in our economy that are more heavily taxed than new homes. There is a long list of taxes, fees and charges imposed on new home building from Stamp Duty through to a ‘temporary levy’ imposed to recover the cost of the HIH collapse in 2001. Governments tax tobacco to impede its consumption, and by t axing new homes, they achieve the outcome of building fewer homes.

The effect is even more pronounced for foreign investors. Attracting more foreign investment to the housing market is one clear way of alleviating the housing shortage. Unfortunately, both state and federal governments have implemented a raft of Regulations and taxes in recent years aimed at precisely the opposite.

All this adds up. HIA estimates that an overseas investor looking to purchase an average property in Sydney — by far the largest market — must pay $150,000 in stamp duty, land tax and FIRB fees, around three-quarters of which is solely through foreign surcharges. Altogether, stamp duty, land tax and FIRB fees account for between 15-20% of the median dwelling price in major housing markets.

There are also proposals to tax domestic investors, or restrict short-term rentals, all of which would restrict the supply of housing. Apartment construction remains the cheapest, fastest option to increase the stock of housing in locations where there are stable and reliable employment opportunities.

For this reason, given the acute shortage of housing stock, the advice to policy makers at all tiers of government, is stop making new homes more expensive. It only makes the problem worse.

REGULATIONS

Australia ranked at number 80 out of 140 countries in overall burden of government regulation, according to the World Economic Forum’s 2019 Global Competitiveness Report. That’s just behind Vietnam (ranked 79) and well behind China (ranked 19). The housing sector is arguably one of the most heavily regulated sectors in Australia. To be one of the most heavily regulated sectors in one of the most heavily regulated countries does not do much to encourage more housing supply.

Some regulation is necessary, just as overregulation can discourage investment, so too does under-regulation. But Australia is far too heavily swayed toward the former.

For example, owner occupiers, especially first home buyers, have been forced away from ownership by increasingly restrictive lending Regulations. These restrictions have been ramped up over the past 15 years, largely because of the Global Financial Crisis in 2008, despite a lack of evidence that there is a problem with mortgage delinquency in Australia. This has resulted in reduced competition for lending to first home buyers and those with less than a 20% deposit. This further reduces the pool of investment for new home building.

Different states and territories also have a raft of different Regulations, which adds an additional challenge for those who operate across borders — which is most. What suffices for one state may not suffice for another, which adds to the overall cost of regulation. One element of this that is often not fully appreciated is the extent to which a heavily regulated society actually generates more self-regulation. Or to put it another way, the more burdensome government Regulations are, the more internal process procedures that private businesses will put in place to ensure they’re compliant with the government’s Regulations.

There are some promising signs ahead for the housing market and all the sub-sectors that depend on it, but government taxes, at both the state and federal level, and Regulations need to be amended if the sector is to work at maximal capacity.

Todd McInnis, HIA Senior Economist Maurice Tapang, HIA Economist.