Is building more homes the answer to Australia’s housing crisis?
No, it’s not. Not even close.
In fact, delivering an unrealistically massive overbuild of homes over the next two decades would barely put a dent in housing affordability, according to Christian Nygaard, a professor of housing economics at the UNSW’s City Futures Research Centre.
The Albanese government’s housing accord has the “aspirational” target of delivering 1.2m homes over the five years to mid-2029. Despite best efforts at federal and state level, nobody thinks we will get there.
The National Housing Supply and Affordability Council’s last estimate was for 938,000 new homes to be built in the second half of the 2020s – or 262,000 short of Labor’s goal.
But let’s imagine we do meet that target. And then repeat that unlikely feat for the following 15 years.
Surely, by the 2050s, this would deliver the seismic shift in affordability that so many Australians, particularly younger Australians, are demanding?
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According to Nygaard’s model, this herculean construction effort may only reduce the national house-price-to-income ratio from 8.0 to 6.7.
In Sydney, where the ratio sits at more like 12, you might lower it to 10, he says.
Why such a weak payoff?
Economist models find that lifting supply 1% faster than the pace of household growth reduces house prices by roughly 2% to 3% over a number of years.
While the five-year, 1.2m target modestly exceeds projected household growth, there are other factors at play.
We also become richer over time, so that boosts housing demand. Then, our tax settings make buying homes financially attractive. Then you add in changing borrowing costs over much of the past 20 years, which exacerbates the second factor.
“So the sum of all of those three additional parts means that the overall efficacy of producing more housing, in terms of affordability, becomes more limited than that 2-3% price impact in isolation suggests,” Nygaard says.
To be clear, Nygaard supports boosting supply.
“We have growing incomes. We have growing populations and changing demographics. Of course we need more housing. There are no two ways about that.”
But his modelling raises two major concerns with the current housing debate.
The first is that there’s a lack of clarity about how the objective of “build more homes” fixes affordability.
“What I’m trying to show in my paper is that just focusing on building numbers doesn’t necessarily achieve the affordability outcomes in the practical ways many people would usually think about them,” Nygaard says.
“At the margin it will have an impact. But it won’t address housing affordability as a political issue. It won’t address housing affordability as a societal challenge. It won’t address housing affordability as a wellbeing outcome.”
To achieve these wider objectives, policy makers need to be more focused on “the distribution of the housing that is produced, rather than the overall numbers”.
In other words, rather than just “build, build, build”, we need to think more deeply about who buys these extra homes, and why.
Which leads to the second complaint Nygaard has with the “supply is the answer” position.
By overemphasising the supply side, it allows politicians to dodge a much more difficult conversation about the tax settings that have made it so lucrative to invest and own housing, or the economic and urban policies that also influence where people want to live.
Nygaard thinks potential changes to capital gains tax discounts for investors would have a “symbolic impact” and also some practical impact, but he argues we may need to think more radically.
“The vast majority of the capital gains sits in the owner-occupied sector. And touching that is politically very, very difficult.
“But if you say, ‘it’s so difficult that we can’t touch owner-occupied primary home capital gains taxation,’ and so instead focus on something else, then you’re partially misdiagnosing why we are in the situation we’re in.
“And you’re possibly ending up with prescribing, and believing in, the wrong policy solution: that the answer is just to build more housing.”
• Patrick Commins is Guardian Australia’s economics editor
