INSIDER MAGAZINE: How governments can spend nothing, free the housing market and save the Australian dream

Australians, on average, would have paid just $200,000 for a home in 1992. That figure, published by property data analytics firm CoreLogic in August last year, is equal to about $425,000 when adjusting for inflation. However, as of 2022, the average asking price for a house had nearly quadrupled to $760,000, equating to a 453.1 per cent increase in value over 30 years. Such steep price growth has for decades proven to be a political headache. That was why, in 2000, the Howard government introduced the first homeowner grant, a direct subsidy intended to alleviate pressure on first-time buyers. As the problem has become more acute in recent years, though, housing policy has become an increasingly vexed and expensive issue, with the Federal Government’s $10 billion Housing Australia Future Fund intended to provide an ongoing funding source for public and social housing. That followed an election at which housing took on significant prominence among both major political parties, with the Liberal Party proposing buyers be allowed to use part of their superannuation to stump up for a deposit. Ask property developers and economists for their views, though, and more often than not they’ll talk about a broader supply problem. That’s the issue Ben Lisle, one half of Perth-based property development firm Hesperia, delivered to dozens of colleagues and industry observers earlier this year when, addressing an event hosted by the Urban Development Institute of Australia, he sought to quantify the extent of the problem in WA. According to his estimates — informed by consultation with industry — Perth currently needs about 8000 dwellings to meet demand. Simple enough. But when accounting for population growth, demolition of existing houses and the speed at which developers can actually build new dwellings, he argued anywhere between about 16,000 and 84,000 will be needed over the next four years to fill the growing hole in supply. Lisle explains why this shortfall is significant when speaking with Insider. In his view, Perth’s isolation, coupled with WA’s mineral wealth, means the city struggles to accommodate for rapid economic growth, thereby leading to successive boom-bust cycles across sectors. That includes housing and construction, which he says struggles to respond to surging demand. “When (we) have these very large capital projects, they generate a huge demand for people, and you then need to scale up housing and people very quickly,” he says. “But we’re a very, very isolated city, and our build cycles are slow. So how do we create a more liquid supply response?” It’s a question industry and policymakers across Australia have pondered frequently in recent years. From the planning side, data from the Australian Bureau of Statistics shows the steep rate at which building approvals have dropped in just the last two years, with the national rate nearly halving from a peak of about 20,000 in March 2021 to just 11,850 in April this year. That’s the lowest they’ve been since February 2012, when Australia’s population was about 13 per cent smaller than it is now. At the same time, the likes of the Reserve Bank of Australia have sought to connect planning system blockages to rapid price growth, with a 2020 research paper from the central bank suggesting housing in Sydney is as much as 41 per cent overpriced due to building restrictions. Peter Tulip, who obtained his PhD in economics from the University of Pennsylvania in 1999, worked for the Reserve Bank of Australia and the US Federal Reserve and is nowadays chief economist for free market think tank The Centre for Independent Studies, had a hand in writing that report and has spent years researching the intersections between housing affordability and planning policy in his hometown of Sydney. He tells Insider that, based on his observations, declining affordability is almost entirely a supply problem. “We have had increasing demand for decades now, arising from rising population and rising income, and the supply of housing has just not been increasing as quickly. So the housing market is just getting increasingly tight,” Tulip says. “Demand outstrips supply and that results in higher prices and higher rents.” That view was echoed by e61 research economist Matthew Maltman, who tells Insider that, while Australia’s ageing population, taxation regime and extended period of low interest rates partly explained why house prices were high, most of the issue was down to supply. “We have a lot of houses in Australia, but we haven’t kept pace with underlying demand,” he says. Politically, this view has gained some currency in recent years. Jason Falinksi, the former Sydney-based Federal Liberal MP, has been among the most vocal, using a parliamentary report published in March 2022 to argue “the primary driver of home prices is the lack of market response”, while Treasurer Jim Chalmers in February described the pace at which Australia builds houses as “one of the perennial challenges” facing the economy. Historically, though, governments have not tended to support supply-side reform of the housing market. Many instead have opted to support buyers, with the Federal Government administering the FHOG, which can total up to $10,000 for buyers of newly built homes carrying an asking price of up to $750,000, and the WA State Government making stamp duty exemptions available for first-time buyers. Some economists debate how effective these policies have been, though, with Tulip among notable critics. Where he lives, in Sydney, he said handouts to first-time buyers tends to stimulate bidding wars, wherein everyone’s buying capacity increases while the number of houses for sale stays unchanged. “The benefit essentially goes to whoever’s selling the property,” he says. “The first-time buyer is not really any better off and everybody else in the market is screwed.” Maltman shares a similar view. He explains how stimulating demand can be ineffective because houses are termed inelastic goods. This means developers cannot easily build more houses when demand grows, meaning that, if buyers are given more money, pressure will build on prices. “Those policies (FHOG and stamp duty exemptions) are things that sound good to people because they’re considered helpful for first homebuyers get into the market,” he says. “To some extent it does, but it doesn’t actually get to the fundamental root of the issue.” Their arguments mirror similar commentary from other private research organisations, such as the Grattan Institute. In its 2019 submission to a Federal parliamentary review of the First Home Loan Guarantee scheme, it criticised direct payments to buyers as trying “to fix the housing affordability problem by adding to demand for housing”. Grattan researchers echoed that sentiment again in 2021, when, in a submission to the Federal Parliament’s tax and revenue standing committee, they said the Federal Government should “improve housing affordability by reducing demand”, suggesting State Governments instead tackle the problem by addressing planning restrictions. “Australia’s land-use planning rules are highly prescriptive and complex,” they wrote. “Current rules and community opposition make it very difficult to create extra residences in the inner city and middle-ring suburbs of our capital cities. And so new housing construction in Australian cities is relatively unresponsive to demand, and the density of Australian cities has barely changed in the past 35 years.” Tulip backed up this view, saying research generally indicated restrictive planning laws were the main reason why housing has become increasingly expensive. “It’s very profitable to provide extra housing in big capital cities, (but) planning systems make it illegal,” he says. “To give an example: the average apartment in Sydney sells for about $1 million, but can be supplied for about $600,000. The reason that seemingly lucrative opportunity is not being grabbed is because it’s illegal, and there is a very wide range of evidence to show that planning restrictions have huge effects on the cost of housing, both in Australia and overseas.” At a State level, governments have shown a willingness in recent years to roll back regulation in hopes of increasing supply. In New South Wales, where house prices are highest, newly elected premier Chris Minns has become a vocal proponent of increasing housing density through deregulation, committing to allow fast-tracked approvals for developments worth more than $75m on the condition they comprise 15 per cent affordable housing. His support for greater housing density has won plaudits most notably from billionaire and Meriton founder Harry Triguboff, as well as industry bodies like the Property Council, UDIA and the Housing Institute of Australia. Elsewhere, Victoria has also sought to wind back overly prescriptive planning laws, with the State’s red tape commissioner, Anna Cronin, having opined that complicated planning systems and lengthy approvals processes “leaves all participants in the system frustrated about the outcomes and is clearly not working as well as it should”. “Building approvals that have not prevented a series of systemic problems are clearly in need of review,” she said. For its part, WA has since 2018 mandated density targets for inner-suburban Perth, and has for more than a decade now required all developments worth more than $10m to be jointly assessed by local governments and the Department of Planning. That regime will be further streamlined, with the State Government in February committing to lowering the threshold to $2m. That’s in addition to developers also being allowed to circumvent councillors entirely to seek approval directly from WA’s planning commission if they can prove a project will be of significance to the State. Lisle praised these moves, calling them “good steps in the right direction”, but argues most of the changes, which effectively allow developers to build structures that deviate from existing town planning schemes, should go beyond allowing developments that fall outside of a local government’s planning scheme and encompass broader land use policy. “The land planning is where the bigger issues are,” he says. Broad reform of land use policy hasn’t been pursued in Australia but has some parallel in New Zealand. There, Auckland Council’s Unitary Plan, enacted in 2016, effectively extinguished restrictive zoning throughout 75 per cent of the city to allow proponents to proceed carte blanche with medium- and high-density developments. Research appears to support the idea that rezoning has had some effect on supply, with academics at University of Auckland’s business school published in May concluding the changes did lead to a boost in construction. Meanwhile, data from NZ-based property analytics firm QV shows that, between January 2016 and 2023, Auckland’s house prices rose by about 16 per cent, nearly half the rate at which property prices increased across New Zealand, suggesting that, in relative terms, housing has become more affordable in Auckland since land use has been relaxed. While evidence would suggest these reforms have boosted housing supply, discontent for the changes has been real. The Coalition for More Homes, a pro-development community group in Auckland, regularly tracks how the city’s councillors vote on residential development, categorising seven of 18 as ‘NIMBYs’. Many of those hail from wards covering the city’s isthmus and inner suburbs where housing is considered most desirable. For his part, Lisle concedes that gathering community support for a significant overhaul of land use would be politically difficult. If the State Government is to increase supply substantially, he argues, then it — and developers — would need to communicate the benefits of greater housing density to those wariest of it. “I’ve seen so many examples of stuff down at Scarborough or City Beach (where) these people throwing rocks are then the same people down there using the facilities,” he says. “A lot of people are scared of, and can’t see through, change to see what the possibility could be. I think our job is: How do we preserve what’s good while making it better?”