I recently read an article by Australian think tank the Grattan Institute. The name of the article was Options for housing affordability: the good, the bad and the cosmetic. Here I summarise some key points that they bring up and give my opinion on their thoughts.
What does the Grattan say?
- Own up to the size of the problem
In my mind this means defining the housing affordability problem.
Is affordability getting worse because median house prices are rising rapidly?Implicit in this definition is that ownership is the problem rather than rents. Or, is it getting worse because first-home owner rates are falling? Implicit in this definition is that first-home owners are not willingly delaying home ownership. I could go on…
There’s many ways you could define the problem and it can all get a bit complicated or convoluted. So let’s keep it simple. Housing means having a roof over your head. Affordability means being able to pay for it. Moving on.
- Acknowledge that the problem is a result of many interacting factors
In short this means it is going to take some time to sort out. Do not expect to make large changes to a complex system without expecting some form of destablisation. For example, come down hard on investors and expect prices to fall. The mechanism does not matter here but think about developers who have spent money building homes and now there are suddenly fewer people wanting them or allowed to want them.
- There is no shortage of ideas. Some of them are bad, many are in the too hard basket and there is not much else.
Below is a graphic put together by the Grattan Institute that summarises their analysis on the ‘ideas’. The article goes through them if you care to read more. The short summary is some are bad because they increase demand and therefore prices (rob Peter to pay Paul), some are bad because the cost of administration (government failure), others are bad because the government is set up to be a prudent banker (US sub-prime), and some are bad because of the flow on impact to the other parts of the economy (remember it’s a system and it’s part of a bigger system!).
- Federal government should focus on reducing demand, the States on increasing supply
For the Feds they suggest fine tuning tax policies to reduce demand from people who already own a home. What I would say is that these people are typically those with a greater stock of capital available to invest in new supply. Reducing their demand would also reduce housing supply unless you can fund supply in some other way.
For the State politicians they suggest focusing on infrastructure and planning on middle to outer ring suburbs. Not much to argue with here from an economic perspective. It’s a bit 101. However, from a practical perspective this will not be quick and also costs.
There is a lot of commentary out there on housing affordability. Some with an agenda others a thought experiment. The Grattan authors have done a decent job at looking at the problem. One hole in their work is they have narrowly defined the problem as ‘I can’t afford to own a home’. No surprise then that improving the lot of renters has not been considered. If the rental experience was not one most Australians wished to avoid, then the current dynamic of housing supply, where supply is funded by older more established Australians, would not be so bad.
Housing affordability is a complex problem and it may well take some tough political debate with the public and a mix of ‘solutions’ that include thinking about renters. From an economic perspective policy makers need to remember that housing demand (both ownership and rental) are both derived demands.