Five great myths about the housing market

1.    Affordability issues will be solved by constructing new supply

The NSW Government keeps repeating that new supply is their preferred housing affordability strategy. Well it is not working. We have produced a lot more supply in Sydney in the last few years but prices keep going up. We hope they have a Plan B. Looking around the world, rapid increases in housing supply is associated with price increases (USA, Spain, Ireland) not decreases. Ireland, for example, which has about the same population as Sydney,  tripled its housing production from around 30,000 homes per annum in the mid-1990s to a peak of 89,000 dwellings in 2006, but house prices increased too - by 350 per cent across the country, and over 400 per cent in Dublin. 

One of the key economic drivers for this apparently perverse behaviour is that in the housing market as prices rise, more people are encouraged to enter the market: occupiers, because they want to buy before prices go any higher; and investors, because they are chasing capital gains. This surge in demand keeps putting pressure on prices. In most other markets as prices go up demand decreases. But in housing markets it is usually an external shock – such as rising unemployment and/or mortgage interest rates – which trips demand. In Ireland’s case, the 2007/08 global credit crisis sent house prices into freefall - halving in Dublin - decimating the construction industry, and reverberating across the economy.

What is the take-home message? The private sector can deliver increased housing supply in a rising market, but focused interventions are needed to address existing affordability problems affecting low and moderate income earners.

2.    The main constraint to new supply is the planning system

Property lobbyists keep complaining that the planning system is the reason that we don’t have enough houses in Sydney and that planning is “strangling development”. Last financial year about 44,000 dwellings were approved in Sydney. In fact, the dwelling approval rate is running way ahead of dwelling completions – the NSW Department of Planning estimates the gap at about 15,000 dwellings. The main constraint on supply doesn’t appear to be the planning system. After the reforms of the last ten years the planning system has been able to respond to the current housing boom with a lot more flexibility. No doubt there’s room to keep improving planning processes but bigger opportunities for more supply lie elsewhere.

3.    Property would be much cheaper if we didn’t allow overseas investment in the housing market

This is a popular view but since international investment is directed at new property, we need to allow for the impact of international investment on new supply. International investors are generating new supply, so the amount of upward pressure they place on prices will be limited. Where international investment could be particularly helpful is to keep dwelling completions up when the market isn’t experiencing a boom.  This is the real supply challenge for Sydney – how can we maintain supply in Sydney in the downturns?

4.    Housing in Sydney is a State and Local Government  issue

Federal politicians from both sides of politics are experts in passing off the blame about house prices to State and Local Governments. But one of the biggest reasons why we have such a surge of investors in the current market is Federal Government tax settings. The combination of negative gearing and the capital gain discount have pushed the top of housing booms higher, putting more pressure on prices. These settings have been questioned by a range of commentators, ranging from industry economists such as Saul Eslake, and David Murray as part of his Inquiry into the Financial System and most recently the Reserve Bank. 

As many commentators have said, these settings are encouraging a ‘boom and bust’ cycle. And while the boom pushes home ownership further out of reach of younger generations, busts jeopardise the whole economy. We can do better. Housing is actually a whole of government issue and national leadership, in particular, is long overdue.

5.    Local Government is the main problem

Many commentators have been very critical of Local Government. Whilst Local Government in some parts of Sydney does represent resident homeowners who fear neighbourhood change, structural reforms to the planning system over the last ten years means there are fewer opportunities to obstruct new housing development (myth 2). Again, whilst it is important to keep improving governance, many Local Governments are very positive about growth and work hard to encourage new developments in their areas. For too long we’ve accepted self-serving myths about the housing market, while a real housing policy to address Australia’s affordability problems has been missing in action.

The Festival of Urbanism (1-10 September) is staged by the University of Sydney to expose the myths about cities and create conversations about how we can make better cities.  It is sponsored by the Henry Halloran Trust.

Peter Phibbs and Nicole Gurran are professors in Urban and Regional Planning and Policy at the University of Sydney. First published in the Sydney Morning Herald.