our_policy_agenda

Urban Taskforce | Policy Agenda

Fact sheet: More affordable housing

26 February 2011

 

Owning your own home is the great Australian dream. Home ownership delivers a wide range of economic and social benefits both to home owners and the communities in which they live.


However, Australia has been experiencing declining levels of home ownership for some time.


Renters have been suffering too. They are the first to feel the pain, as rents rise rapidly when there is a housing shortfall.

 

Housing affordability crisis
The National Housing Supply Council figures suggest our housing undersupply has reached 200,000 homes. The shortage is getting worse every year.


The COAG Reform has recently highlighted the connection between the constraints on housing supply and home affordability in its recent report National Affordable Housing Agreement: Baseline performance report for 2008-09. The Reform Council said
there is strong evidence of a disconnect between supply and demand in the housing market, resulting in a shortage of supply that has led to an increase in housing costs.


According to the report, 28 per cent of homes sold Australia-wide are affordable to moderate-income households. Melbourne, with its robust housing supply, has the highest proportion of homes affordable to moderate-income households at 39 per cent - while in Sydney only 26 per cent of homes sold were affordable to moderate-income households.


Reduced affordability has contributed to falling levels of home ownership. In the twelve years to 2006/2007 the proportion of the community who were owner-occupiers fell from 71 per cent to 68 per cent. This significant decline has hit key sections of our community particularly hard.


For example, home ownership in the 25 to 34 year old age group plummeted from 52 per cent to just 43 per cent. In the 35 to 44 year old band, home ownership dropped from 72 per cent of households to 65 per cent. In the 45 to 54 year old age group the level of home ownership fell from 82 per cent to 76 per cent.


Of 28 developed countries ranked by the OECD, Australia was ranked 22nd, with a relatively low number of dwellings per head of population. Perhaps, thereof, unsurprisingly, while homeownership rates have increased in many OECD economies over recent decades, they havent in Australia. In over the ten years to 2005, Australia suffered a 2 per cent fall in the level of home ownership. Of the twelve countries assessed, only Australia and Luxemburg were in this position. Our level of home ownership would have fallen further, if not for our aging population. The OECD says theres a likely link between this fall and changes government policies. Countries whose housing markets were more able to respond to price increases with additional supply did see significant increases in home ownership.


The COAG Reform Council has observed that: "Home ownership is associated with many benefits for households ... . These can include financial benefits such as lower real housing costs over a lifetime and wealth accumulation through a growth asset. Owning a home can also bring social and cultural benefits such as a sense of family and belonging, security, control and privacy, and is linked to improvements in health and educational attainment."


In this context urban planning policy-makers have considered special measures to boost housing affordability. Regretfully, there seems to be an insufficient recognition that the lack of affordability is caused by a systemic mismatch between the demand for, and supply of, housing.


The answer to our problem is obvious: build more homes.


The problem of housing affordability is a function of strong demand and limited supply. The affordability problem can be addressed, in the inner suburbs of major cities, by making more residential sites available for the construction of medium and high density housing. We also need to ensure that new suburbs are built on the edge of existing urban areas, so that the needs of those who want the choice of a house with a backyard are met.


The overwhelming body of evidence on this matter indicates that to make more sites available and hence to improve affordability, we must address those matters that restrict site availability.


That is, we need to ensure that current and proposed planning policy is not overly restrictive and will in fact encourage development. The introduction of local plans that unfairly limit development potential of land, coupled with excessive development fees and charges including housing affordability contributions, will guarantee the continuation of limited housing supply and hence reduced affordability.


Unfortunately, planning policy has been very effective at limiting urban expansion at the edge of existing urban areas, but has been hopelessly ineffective at encouraging infill development. Restrictive and difficult local government planning policy has been the culprit.
It is this set of circumstances that are largely responsible for escalating house prices and diminishing access to home ownership. If we are serious about tackling the housing affordability crisis, we must challenge conventional town planning approaches. There should be a reduced focus on limitation and control over development and a greater focus on increasing the supply of development sites.


A good starting point for this would be to approach any comprehensive local planning process with a view of ensuring that land in suitable locations is assigned the appropriate zone, base density and height controls that will encourage the efficient development of land.
You know you have a real problem when the Reserve Bank is increasing interest rates partly because restrictive land use laws are choking off housing supply.


If we are serious about addressing housing affordability then we need significant supply-side reform. We certainly dont need additional red-tape or further taxes on development. Declining housing affordability is a function of high demand in an artificially constrained market.

 

Therefore, in order to address both underlying demand and prevent rapid home price escalation, the critical role of supply to housing affordability must be acknowledged.

 

The benefits of an efficient housing market
The OECD has observed that there is a strong need for a housing market that functions smoothly. Its an important element of wealth as well as the single biggest expenditure for a majority of households. As witnessed by the recent financial and economic crisis, housing market outcomes can also have repercussions for the macro economy.


An efficient housing market supporting geographical mobility is also necessary to ensure efficient labour market. Housing also deserves attention for social reasons, because - among other things - adequate housing may enhance childrens opportunities for educational achievement and their future employment.


A wide range of public policies affect the housing market. Such policies are justified on the basis of repairing market failures, pursuing broader economic efficiency goals and a desire to influence the housing opportunities available to citizens.


These interventions include fiscal measures (such as subsidies and taxes), direct provision of social housing (i.e. housing let/sold at below-market rents and/or allocated by non-market mechanisms) and regulations aimed at influencing rental markets, as well as the quantity, quality and allocation of dwellings. They also involve public resources being directed to redistribute income by supporting housing consumption (e.g. housing allowances).


Badly-designed policies can have substantial negative effects on the economy, for instance by increasing the level and volatility of real house prices and preventing people from moving easily to follow employment opportunities.


Housing markets, and policies affecting them, have spillovers on the macro-economy. Badly-designed policies can have substantial negative effects on the economy, for instance by increasing the level and volatility of real house prices and preventing people from moving easily to follow employment opportunities.

 

Responsiveness of housing supply
Housing supply responsiveness to price changes varies widely across OECD countries, with potential consequences for the nature and speed of the stock-flow adjustment mechanism that characterises housing markets. The long-run response of new housing supply is estimated to be strong in the United States and Nordic countries, while supply is more rigid in some continental European countries and the United Kingdom.


In Australia, for every 1 per cent jump in home prices, we see just a half a per cent increase in supply. We rank poorly, when compared to other countries with a similar population density. In the United States, the same 1 per cent increase in home prices, delivers a 2 per cent increase in supply. Sweden, Denmark, Canada, Japan and Finland also all enjoy new home supply that is at least as twice as responsive to changes in home prices, than Australia.


The OECD report observes that our house prices have sustained the highest category of price increases - 90 per cent or more - over 1980 to 2008. A distinction avoided by two-thirds of developed countries in the study. Yet in the last 15 years residential investment has hovered around just over 5 per cent of gross domestic product, despite rising prices.


The OECDs has found that low supply responsiveness of new housing has tended to exacerbate the price effect of changes in housing demand (e.g. caused by financial and labour market or demographic shocks). Thus, in rigid supply environments, increases in housing demand are much more likely to be capitalised into house prices than to boost increases in the quantity of housing. Supply responsiveness depends not only on geographical and urban characteristics but also on public policies, such as housing market regulations. In particular, cumbersome land use and planning regulations are associated with a less responsive housing supply across countries.


Land-use and planning policies that are intended to reduce negative externalities (i.e. costs that borne by the whole community such as additional traffic, change view lines, etc), but they may also restrict supply responsiveness. OECDs estimates of new housing supply responsiveness tend to be lower in countries where it takes longer to acquire a building permit, suggesting that an efficient design and enforcement of land-use regulation can make housing supply more responsive to prices.


Differences in supply responsiveness at the aggregate and regional levels are important since they determine the extent to which increases in demand for housing result in higher prices or in more housing investment. In the short to medium term, an increase in housing demand (e.g. caused by mortgage market deregulation, higher levels of activity and employment or migration inflows) would translate into smaller increases in real house prices if housing supply is more responsive. However, in more flexible-supply countries, housing investment adjusts more rapidly to large changes in demand. The OECD believes that in the longer term a more flexible supply of housing is generally desirable as it allows a better match of housing construction to changes in housing demand patterns across the territory.
The OECDs cross-country panel estimation confirms that positive housing demand shocks caused by financial and labour market or demographic shocks translate into larger increases in real house prices in countries with more rigid housing supply.


Many government planners will informally express the view that they are helping to prevent boom and bust by placing a hand-break and supply. Yet the OECDs findings illustrate how this approach is misguided and that it is likely to accentuate the boom and bust cycle. This view is consistent with recent empirical evidence from the United States shows that the relaxation of interstate banking regulations resulted in larger increases in house prices in counties with less elastic housing supply.


The OECD has said that regulations on land-use were not the sole cause of a lack of responsiveness in housing supply. The OECD observed provision of infrastructure and other public services complementary to housing, such as road intersections or water drainage, is also likely to be a factor.


An unresponsive supply of housing affects the average availability of housing and regional housing market imbalances, which can reduce residential mobility. There is evidence that large price differentials between areas, for instance caused by region-specific shocks in combination with rigid supply, can lead to lower geographical mobility since households in lower-priced areas have a larger credit hurdle to clear if they wish to move to the higher priced region.


OECD empirical findings show that in countries with a more responsive supply of new housing, residential mobility tends to be much higher. For example, increasing the responsiveness of supply from the lowest level among the countries studied to the average level would raise the average household's mobility rate by around 5 percentage points. OECD empirical estimates also show that mobility is lower in US cities with more stringent land-use regulations, which are usually associated with an unresponsive housing supply.

 

Strong demand, limited supply
The problem of housing affordability is a function of strong demand and limited supply.
The affordability problem can be addressed by:
¢ in the inner suburbs - making more residential sites available for the construction of medium and high density housing;
¢ in the outer suburbs - - allowing greenfield development on more land, and actually rezoning land that has previously been identified for greenfield development;
¢ reducing development levies and boosting public urban infrastructure investment; and
¢ reforming the planning system to speed-up the monolithically slow approval process and reduce the chances of getting refusals based on arbitrary, subjective or political reasons.


The overwhelming body of evidence on this matter indicates that to make more sites available and hence to improve affordability, we must address those matters that restrict site availability.


That is, we need to ensure that current and proposed planning policy is not overly restrictive and will in fact encourage development. The introduction of local plans that unfairly limit development potential of land, coupled with excessive development fees and charges including, ironically, housing affordability contributions, will guarantee the continuation of limited housing supply and hence reduced affordability.


Unfortunately, planning policy has been very effective at limiting urban expansion at the edge of existing urban areas, but has been hopelessly ineffective at encouraging infill development. Restrictive and difficult local government planning policy has been the culprit.
It is this set of circumstances that are largely responsible for escalating house prices and diminishing access to home ownership. If we are serious about tackling the housing affordability crisis, we must challenge conventional town planning approaches. There should be a reduced focus on limitation and control over development and a greater focus on increasing the supply of development sites.


A good starting point for this would be to approach zoning processes with a view of ensuring that land in suitable locations is assigned the appropriate zone, base density and height controls that will faciliate the efficient development of land.

 

The supply-side solution
If we are serious about addressing housing affordability then we need significant supply-side reform. We certainly dont need additional red-tape or further taxes on development.
Declining housing affordability is a function of high demand in an artificially constrained market. Therefore, in order to address both underlying demand and place downward pressure on new house prices, the critical role of supply to housing affordability must be acknowledged.


The first thing the councils should do is allow more affordable housing to be built on a commercial basis. For example, the City of Sydneys draft affordable housing strategy expressly excludes studio apartments from its definition of affordable housing. The City of Sydney also restricts the ability of developers to build apartments with three or more bedrooms denying families the opportunity of more affordable living close to the central business district.


There are many home buyers eager to establish themselves in secure homes close to work and services. There are developers willing to build these homes for them at an affordable price.

 

Imposing rent control
It would be a mistake to believe that the planning system can encourage affordable housing by introducing new regulatory requirements. In fact, the presence of regulatory requirements does not solve housing affordability problems - it creates them.


Planning policies requiring the construction of "affordable housing" units to be sold or rented at a below-market rates or requiring a contribution to a dedicated fund in return for development bonuses will not solve the affordability problem.


The hypocrisy of affordability policies such as these is this: developers (and ultimately home buyers) are forced to pay to have density restrictions relaxed, however developers would seek to develop more market-rate units if those rights could be had without cost.


The OECD has developed indicators on regulation of both private and social rental markets capturing the degree of control of rents and tenant-landlord relations. These indicators show that regulations tend to be relatively strict in some Nordic and continental European countries. The OECD currently rates Australias rental market as a relatively flexible one, with les controls on rents than countries such as Sweden, the Netherlands, Denmark, Germany and Austria.


A review of the research lead the OECD to conclude that rent controls tend to generate, on average, small benefits for tenants living in regulated dwellings and that such regulations tend to be poorly targeted.


In the 30 developed countries analysed by the OECD, it was concluded that there is no clear evidence that comparative average rent levels (taking into account differences in quality of dwellings) are lower in countries with stricter rent controls.


Instead, rent regulations may redistribute from new tenants (or tenants with shorter expected duration) to incumbents (or longer-stay tenants), reflecting the tendency for landlords to initially set higher rents in order to compensate for the erosion of real rents suffered during occupancy. Hence, rent regulations may cause a divide between established households benefiting from rent-controlled, higher secured tenancies and new households who have to access housing primarily through the unregulated market.


A number of studies illustrate the adverse effects of poorly designed rent regulations on various aspects of housing markets. Stringent rent regulations potentially discourage new construction and maintenance by capping the price of rentals, thus lowering the net return on such investments. In line with this, an illustrative correlation shows that across countries, stricter rent control tends to be associated with lower quantity and quality of rental housing, as measured by the share of tenants lacking space and those reporting sub-standard housing, in terms of a leaking roof. Below-market rents may also encourage individuals to spend effort and resources on obtaining cheap housing and this can lead to a misallocation of housing.


Overall, the OECD has concluded that rent regulations appear to achieve little benefits in terms of average rents, while they may possibly, unintentionally, redistribute among different categories of tenants.


OECD cross-country evidence shows that stricter rent regulation and tenant protection are associated with an increased incidence of renting (and therefore reduced how ownership). For example, increasing tenure protection from the lowest level observed among the countries in the OECDs sample (the United States) to the average level would raise the probability to be a tenant by 5 percentage points.


According to the OECD, strict rental regulations are associated with lower quantity and quality of housing across countries, with uncertain benefits for tenants: there is no clear evidence that average rents are lower in countries with stricter controls than elsewhere.
The ease of moving residence geographically (e.g. across regions) has implications for the functioning of the labour market as it affects the job-matching process and the efficient allocation of human resources across the national territory.


Tenants in highly means-tested social housing systems - tend to be less mobile than private renters. Consistent with existing studies, OECD empirical evidence finds that tenants in social housing are less mobile than private tenants - on average 6 per cent less likely to move - possibly reflecting the reluctance to give up their below-market rents and their generally more secure tenancies.


Stricter rent controls and tenant-landlord regulations significantly reduce residential mobility by discouraging the supply of rental housing and by locking-in tenants. Econometric estimates suggest that reducing rent control from the strictest to the average level in the OECD would imply roughly the same magnitude of increase in householdsŸ mobility rate as an increase in the responsiveness of housing supply.


Ill-designed housing allowances can also distort housing consumption choices. For instance, when allowances are based on a percentage of the actual rent, tenants may overspend on housing leading to efficiency losses. Over-consumption of rental housing is best prevented when the income transfer is independent of a certain dwelling and its actual rent level (i.e. the allowance is portable). In such a situation the recipient can choose freely between dwellings and search for housing that best meets his or her needs.


Strict regulations in rental markets can reduce residential mobility by discouraging the supply of rental housing and decreasing tenants incentives to move. Indeed, the OECD says that if rents in rent-regulated dwellings are set, or vary, differently from those in non-regulated dwellings, rent regulation may limit residential mobility as sitting tenants in rent-controlled dwellings will be reluctant to move and give up their below market rents.


Strict tenant-landlord regulation, resulting in high tenure security, can have adverse mobility outcomes as it lowers the expected returns from residential rental supply, potentially reducing investment and/or encouraging hoarding or alternative uses of the existing stock by households. Difference in tenant security across regulated and unregulated segments of the market can also reduce mobility by curbing residential turnover as tenants may have to give up secure tenancies for less secure ones. Combined, the negative effects of rental regulation on supply and tenants incentives may lead to lower turnover in the rental sector and, thus, lower residential mobility.


One advantage of portable housing allowances over direct provision of social housing is that they do not seem to hinder residential and labour mobility. Earlier studies found that housing subsidies locked-in tenants in the case that these subsidies are not portable . An additional advantage is that in a majority of countries households can receive rent subsidies for any rental dwelling, i.e. both social and private rental, and this can facilitate residential mobility. At the same time, ill-designed phasing out schemes of means-tested housing benefits can reduce job-seeking incentives for the unemployed or reduce incentives for job progression of employed tenants, as benefit withdrawal increases the effective marginal income tax rate.


At the end of the say, the solution to housing affordability is simple. Increased demand must be met by increased supply if prices are to remain stable, and must be met by an even greater increase in supply if prices are to be reduced.

 

Embracing new compact, pedestrian-friendly, mixed-use neighbourhoods
Supply constraints in the form of land use and zoning restrictions that restrict the construction of medium and high density housing reduces the supply of private rental housing - particularly in the low- to medium- cost segment of the market.


The Urban Taskforce argues that within the inner and middle ring suburbs of major cities planning schemes need to more readily permit the development of new compact, pedestrian-friendly, mixed-use neighbourhoods.


Not only would such an initiative increase the potential to provide more housing, it would also bring together new apartments, workplaces, shopping, and recreation areas within walking distance of public transport infrastructure and in the vicinity of major transport corridors.


We commissioned a research paper, Liveable Centres, that considers the benefits of mixed-use urban neighbourhoods. The highly respected urban design and planning firm, Roberts Day, provides a compelling argument on the benefits of mixed use centres and particularly highlight the ability for local planning to facilitate and/or frustrate the provision on these highly desirable urban environments.


The Liveable Centres report highlights how recent zoning plans prevent new homes being built in the areas that need it most. The report concluded that:
¢ There is an endemic bias against residential development in the heart of centres.
¢ The community was being denied the benefit of many genuine mixed-use centres.
¢ Mixing uses around public transport is the most effective way to reduce unnecessary traffic congestion.
¢ Reducing car dependence also boosts household disposable income. The average yearly cost of car ownership is the equivalent of servicing a $90,000 mortgage debt.
¢ Physical form is a places most intrinsic and enduring characteristic. Regulation should be concerned with physical form of buildings, rather than the use of a building.
¢ The focus should be given to the adaptability of buildings rather than their immediate use.

 

Planning authorities need to properly consider the creation of liveable and functional living centres.

All types and sizes of dwellings should be permitted


Some councils attempt to regulate apartment mix within residential apartment development.
The proportion of dwellings with one, two and three bedrooms within a development must be determined by home buyers, not council regulation.


Seeking to control apartment mix will ensure that development does not proceed. This approach does not recognise the necessity for a development to meet market demand. It does not recognise that if there is a genuine demand for a particular size of dwelling then the development community will deliver the product.


Local councils should cease unsophisticated attempts to influence the market and focus on ways that it may increase supply of dwellings. All types of dwellings, from the single room studio, to one, two and three bedroom dwellings need to be considered as a means of improving housing supply and the developer must be able to provide the appropriate product at a time and location where there is demand from home buyers.


We live in a market driven economy and unless there is a genuine demand for a product it will not be produced. The residential development industry is no different.

 

Construction costs
In 2008 an Australian Building Codes Board study revealed that council planning regulations increase the cost of building homes by up to 14 per cent, adding tens of thousands of dollars to the price of new houses and apartments.


The board, a federal-state government agency, examined the additional requirements imposed by local councils, such as increased ceiling heights, room sizes and noise controls.
The consultants found the local government regulations led to construction cost rises from 1.5 to 14 per cent. Most local council requirements examined increased costs by between 4 and 6 per cent compared with the cost of complying with the national code.

 

Phony trade-off between inner and outer suburban development
Policy-makers often wrongly portray urban growth management as requiring a trade-off between new development in the existing urban footprint and outward suburban expansion.
This trade-off is phony. It ignores the right of home buyers to be in charge of their own destiny and decide for themselves what kind of lifestyle they want.


Some people seek out pedestrian friendly apartment living close to public transport in the inner suburbs of our major cities. There is a serious undersupply of this kind of compact home.

 

But many home buyers will still insist on a house with its own backyard in a suburban community.


Its the job of governments to allow more of both kinds of housing, not to try and re-direct people away from the housing type of their choice.


More infrastructure investment to allow urban expansion
The Federal Government needs to commit to an annual rolling program of funding cities infrastructure, including expanded public transport, motorways and key arterial roads crucial to growth. State and local governments need to increase their investment too.


It's crucial that infrastructure servicing new suburbs at the edge of cities be supported, as well as the infrastructure vital to creating compact, pedestrian friendly residential communities in the inner and middle ring suburbs of cities.

More information

For more information (and source details) please read our fact sheet:


Fact Sheet: More affordable housing



2011 [  January February  |  March  |  April  |  May June  |  July  |  August  |  September  |  October November  |  December ]
2010 [  January  |  February  |  March  |  April  |  May  |  June  |  July  |  August  |  September  |  October  |  November  |  December ]
2009 [  January  |  February  |  March  |  April  |  May  |  June  |  July  |  August  |  September  |  October  |  November  |  December ]
2008 [  January  |  February  |  March  |  April  |  May  |  June  |  July  |  August  |  September  |  October  |  November  |  December ]
2007 [ All ]