Housing
The hard numbers: supply lags demand
As immigration resumes, our housing crisis is accentuated, and it’s bound to get worse. As houses are completed, construction will slow down because higher interest rates will be taking their delayed effect. A recovery in supply is not expected before 2025.
That’s a summary of the analysis in the National Housing Finance and Investment Corporation’s State of the Nation’s Housing Report 2022–23. When it compares projections of housing supply and population growth, it forecasts that there will be an additional accumulated shortage of 106 000 houses by 2027.
To get a grasp of the magnitude of that shortage, imagine a natural disaster wiping out every house in Hobart, rendering its population of 230 000 homeless.
The corporation estimates that at present, using conservative estimates, around 380 000 households are in housing need, comprising 330 000 in rental stress, and 50 000 who are homeless. Because there about 2.6 people per household, that’s almost twice the population of Canberra in housing stress.
Will they build more of these when they finish?
In that context the government’s bills to provide 20 000 homes for “social housing” and 10 000 “affordable homes for frontline workers”, spread over 5 years, can be considered as somewhere between pathetic and tokenistic.
It’s hard to understand the government’s stubbornness in resisting pressure in the Senate to increase this allocation to some meaningful level. Spending on public housing is capital rather than recurrent: it would not add to the government’s net debt. So long as there is capacity in the construction sector – and the NHFIC report forecasts that there will be capacity – any socially useful capital expenditure that employs otherwise underutilized resources is an indisputable economic benefit.
Does this mean that the Albanese government is just as obsessed by the cosmetics of the budgetary cash outcomes as the Coalition was? If so, we face a period of lost opportunity to borrow wisely to re-build our depleted public assets.
As for the Coalition’s opposition to spending any Commonwealth money on public housing, it’s yet another example of the way they have long ceased to grasp the basics of economic management.
Build-to-rent – a novelty in Australia but a common model in other countries
In many European cities it is possible for renters to enjoy the same long-term security as is enjoyed by those who own their houses. They can put down roots in the local community, and their children can enjoy the benefits of staying in the same school over an extended period. They don’t have the continued anxiety that the property owner will suddenly evict them to put their apartment on the market, forcing them to bear disruptions to their lives and to incur search and moving costs in finding a new apartment.
Australia’s property market is different, because of the dominance of the so-called individual “investor” (in reality a land speculator), encouraged and subsidized by a tax system designed and defended by successive Coalition governments.
Ernst and Young has prepared a report A new form of housing supply for Australia: build to rent housing for the Property Council. As the name suggests, build to rent involves a corporate investor constructing housing for long-term rental and retaining ownership. Superannuation funds, seeking secure investments to balance their portfolios, have expressed enthusiasm about the model, and no doubt many small investors, who don’t want to take on the burden of property ownership, would buy shares in public companies investing in build-to-rent.
So far the build-to-rent market in Australia is small, comprising only around 23 000 apartments. That’s about 0.2 percent of our housing stock, compared with 5.4 percent in the UK and 12.0 percent in the US. Here it’s considered to be an innovation, but it’s commonplace in other countries. (Germans talk about apartment tenancies sometimes being passed from generation to generation.)
The report presents scenarios that could add up to 150 000 new apartments to our housing stock, providing solid returns to investors and to governments as tax revenue. But in order for these benefits to be realized, certain tax provisions that favour build-to-sell over build-to-rent, have to be modified. The report reads a little like an ambit claim, but it presents a compelling argument that the sector does suffer some comparative disadvantage.
ABC journalists Dinah Lewis Boucher and Velvet Winter go into the economics of build-to-rent, reporting on the opinions of academic experts who are somewhat sceptical about the Property Council’s arguments about disadvantage: It's touted as one solution to Australia's housing crisis, but what is build-to-rent? And can it live up to the hype?. They note that although the market is small, it is growing quickly from a small base.
They also note that those build-to-rent properties tend to be in the high end of the market, whereas the present urgency is about people unable to afford even the most basic rental properties. Yet surely anything that adds to the housing stock will have some effect on the market overall. And if commercial build-to-rent is to be targeted at those with low income, then there could be a case for forms of subsidies.
One telling aspect of the Property Council Report is that investors so far tend to be foreign. They list 21 existing build-to-rent projects, accounting for those 23 000 apartments, by ownership, and it is notable that only 5 are local. Perhaps our institutional investors, having been conditioned for more a hundred years to high investment returns, fail to understand that housing can give solid, if unexciting, returns.
Of course even if the commercial sector finds build-to-rent to be novel, governments shouldn’t. It’s been the de-facto model of state housing authorities for decades. If it’s a good investment for corporations, it’s surely a good investment for governments with their lower cost of capital.
The demise of a redoubt of suburban socialism – the group house
Many people have memories of living in group houses in their undergraduate days. Setting aside the conflicts about cleaning the bathroom and kitchen, sharing space in the refrigerator, contributing to rent, and controlling the noise of music, most people found it to be an economically and socially rewarding lifestyle, and many continued to live in group houses even after they joined the workforce. For many living an urban lifestyle the house was nothing more than a dormitory to be occupied at night.
Covid-19 changed all that. The house became more like a crowded prison than a night shelter. It may have been OK for students doing assignments, but not for professionals working from home. So people moved out to find their own accommodation.
Peter Martin, writing in The Conversation, has drawn on data collated by Reserve Bank staff, to analyze the effect of this phenomenon: What made rents soar? It might have been COVID, and pairing off. Statistically it is manifest as a fall in average household size, from around 2.60 to 2.55 persons per household. That may not look like a large fall, but it means 140 000 more houses and apartments have been needed.