The answer to housing affordability is staring us in the face

Media headlines continue in full war cry regarding falls in Australian house prices over the past year, particularly in Sydney and Melbourne. And yet, just over 12 months ago, the lack of housing affordability, and ‘millennials locked out of home ownership forever,’ led the stories.

To give some perspective.

House prices in Sydney, which have fallen farthest and are now 13% off their peak, are back at 2016 levels, and still almost 50% higher than five years ago.

In 2016, a first home buyer on a median income could only afford around 10% of houses in Sydney.[1] And wages have risen by only the smallest margin since then.

Rental affordability has also deteriorated, despite recent falls in house prices; as at June 2018, over 30% of household income was required to rent a home in NSW[2], putting the average NSW renter in housing stress.[3]

Why should we care about housing affordability?

Access to secure, affordable shelter is a basic human right. But in order to see more concerted (and sustainable) action taken to address the problem, perhaps we need to better communicate the wide-reaching social and economic benefits of housing affordability.

These include greater financial and physical security, greater self-confidence and improved family functioning. It can mean the ability to afford adequate food or heating, which in turn can lead to absenteeism or presenteeism at work and at school.

From an economic perspective, the benefits are even more profound.

These include:

  • Better access to jobs for workers and access to skills for employees
  • Reduced reliance on government assistance as a result of the high costs associated with homelessness, such as poor mental and physical health and increased crime.

Higher levels of home-ownership also mean greater security in retirement and allow creation of intergenerational wealth.

Why is the solution so difficult?

Policymakers play an important role in sustaining this affordability problem, with planning restrictions possibly adding as much as 40% to the price of Sydney houses.[4]

So why don’t we lift those restrictions? In a word: NIMBYism.

NIMBYs (the “Not in my back yard” anti-density movement) are good at quickly and loudly mobilising against efforts for even the slightest increase in density, failing to see the costs of their actions.

In the face of NIMBYism, governments look for other solutions. For example, cutting immigration is frequently discussed as an option. However, this would exacerbate NSW’s ageing population, adding fiscal pressures[5], and leading to lower productivity (via reduced access to skills and ideas) and growth.

Providing social housing can help address problems for the most vulnerable in society. However, subsidised housing as a primary option for a significant proportion of the population is an unsustainable Band-Aid, not a cure.

So what is the answer?

Medium-density development offers a genuine and sustainable solution

…the affordability of housing is overwhelmingly a function of just one thing, the extent to which governments place artificial restrictions on the supply of residential land.

Dr. Donald Brash, Former Governor, Reserve Bank of New Zealand

 

Australians live in the world’s least dense cities (Chart 1). We can well afford to lift density by a substantial amount before coming close to many higher density cities that are considered exemplars, such as Paris.

Chart 1: Population density


Source: Demographia (2018) http://www.demographia.com/db-worldua.pdf

Other benefits

Increasing density could help improve affordability and deliver a range of other benefits, including:

  • Lower infrastructure costs – density means sharing the costs of infrastructure. Greenfield infrastructure costs may be five times higher, per dwelling, than infill costs[6]
  • Increased productivity – a significant increase in labour productivity is linked to higher density[7]
  • Reduced environmental impact – units and townhouses consume less electricity, and lead to reduced car use and more trees
  • Broader social benefits – medium-density developments improve walkability and their shared public spaces support community ties.

What does good look like?

Mentions of increased density often elicit strong a strong response; we immediately think of the worst cities in the world – which we quite reasonably don’t want on our doorstep – instead of Berlin or Paris.

However, a viable solution could come from an increase in medium-density development such as low rise units and townhouses, supported by economic and social infrastructure.

An increase in medium-density zoning is the answer

Medium-density mixed use development, combined with open spaces, promotes walkable streets, access to amenities, opportunities for local employment, and more cost-effective transport infrastructure.[8] Critically, it is also the most effective means of addressing housing affordability.

The missing middle needs to be accepted as the best solution to our housing affordability challenge, especially in Sydney and Melbourne.

YIMBYs raise your voices!

[1]La Cava et al (2017) Chart 6
[2]Estimate based on CoreLogic data.
[3]Housing stress is where a household spends more than 30% of their income on rent/mortgage.
[4]Kendall and Tulip (2018)
[5]Lowe (2018)
[6]InfraPlan (2013)
[7]British Property Federation (2018)
[8]The Committee for Sydney

For more commentary from Deloitte on the Royal Commission click here.


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