Affordable housing? Build (in the right place) and they will come

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People have been complaining about the unaffordability of houses for as long as I’ve been a journalist. In all that time, governments have professed great concern, while doing nothing of consequence. But I suspect their insouciance can’t last much longer.

Over the years, the prices of houses and apartments have risen much faster that household incomes have risen, gradually lowering the proportion of Australians able to afford a home of their own.

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So the problem keeps getting worse and, with interest rates having risen so far so fast, as well as renters now feeling so much pain, it wouldn’t surprise me if, in coming federal and state elections, many younger voters – and some of their parents – were really steamed up about the issue.

If so, both Labor and the Liberals will be vulnerable to minor parties offering solutions – sensible or otherwise. But what could the major parties do to reduce the problem?

Well, nothing that some people wouldn’t vigorously object to. That’s why the political duopoly has done so little for so long.

The unending rise in house prices has been caused by various factors – some under the control of the federal government, some controlled by the states.

Over the decades, supply has eventually caught up with demand, so that doesn’t explain why prices have been rising for ages.

If prices keep rising, this suggests that demand is outstripping supply. In general, the feds have more direct influence over the demand for housing, whereas the states have more direct influence over the supply of them.

It’s wrong to assume that all the problems are coming from either the demand side or the supply side. But, of late, economists have been focusing on the supply side, which points the finger at state governments.

At first blush, if house prices are high and rising, this suggests not enough houses are being built. That’s probably true at present, with immigrants coming faster than we’re building new dwellings for them to live in.

But, over the decades, supply has eventually caught up with demand, so that doesn’t explain why prices have been rising for ages.

And, if it was just a matter of building enough houses to accommodate the growing population, cities would just keep spreading out for ever. That would be expensive – with all the extra transport and infrastructure you’d have to build – and not everyone wants to live that far out from the CBD.

So, the real supply issue is not that we should be building enough houses, it’s building enough housing where people want to live. And the truth is that many people want to live closer in.

As the NSW Productivity Commission explains in a new report, state planning systems make it “difficult to build enough new homes where people want to live – close to jobs, transport, schools and other amenities”.

“Instead, the system encourages urban sprawl, forcing people into longer and longer commutes. These policies increase inequality, especially for low and middle-income workers.”

Capital cities have grown by spreading further out. Credit: Brook Mitchell

Guess what happens if governments don’t allow enough homes to be built where people want to live? The prices of homes in, or nearer to, the most desirable areas get bid up relative to prices out in the boondocks, forcing up the median price.

As Australia’s population has grown so rapidly over the decades, the populations of Sydney, Melbourne and the other state capitals have increased greatly, but done so mainly by spreading out.

This has made housing more expensive, as people have had to pay more to live in the closer-in, more desirable parts of the city. Inevitably, it’s the better-off who get the best spots and the less well-paid who have to live further out, where the amenity is less.

Everyone’s paying more for their housing, but the well-off pay a smaller proportion of their income than those in the middle and at the bottom. This pushes families to compromise on where they live – further from family, friends and jobs.

The NSW Productivity Commission report says poor housing affordability brings four disadvantages to individual families and the community. It leaves families with less to spend on other things. It reduces the productivity of the nation’s labour because so many people who want to work can’t afford to live near their best employment prospects.

It adds to environmental damage because more workers live further from city centres and endure long, polluting commutes to their jobs.

And it reduces people’s quality of life because so much of our cities’ populations end up too far from the beach, sports arenas, big entertainment venues and other amenities.

So, what can state governments do to reduce these costs and make our lives better?

We should build more new homes in areas closer to the city’s centre. “These areas offer both the richest collection of job opportunities, and a supply of already-built infrastructure and other amenities whose capacity can be leveraged and expanded,” the report says.

What we need to do is build up, not out, and achieve more “infill” of unused or underutilised land close in.

Specifically, the report says, we need three changes. First, raise average apartment heights in suburbs close to the CBD (and to job opportunities).

Second, allow more development around transport hubs, such as train stations, and take advantage of our existing infrastructure capacity.

NSW Producticity Commissioner Peter Achterstraat says young people deserve the chance to own their own home.Credit: Kate Geraghty

And third, encourage more townhouses and other medium-density development, and allow more dual-occupancy uses such as granny flats, where higher density is not an option.

The report argues that, even if the new supply of homes targets the high end of town, building more housing closer to the CBD, “downward filtering” means affordability improves everywhere.

The new, more expensive homes near the centre will be occupied by high-income families. But they will leave behind high-quality homes that middle-income families can move to, leaving their homes to be occupied by lower-income families.

NSW Productivity Commissioner Peter Achterstraat says that “if you believe, as I do, that today’s kids deserve the same shot at the Australian dream that my generation had, we need to change our planning system and build near existing infrastructure to make room for them”.

Ross Gittins is the economics editor.

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