Housing is, no surprise, an issue in the NSW election, with Baird promising to facilitate a small number of extra homes (20,000 over 4 years) and Labor talking about deferring stamp duty for first time buyers.
Here is the thing. DFA modelling for NSW indicates we need an additional 150,000 homes in and around Sydney, each year, for the next three years, just to bring things back to equilibrium. Many of these should be starter homes in the inner suburban area, not on the urban fringe. We also need properties designed for older less mobile households. Our modelling takes account of net migration, demographic shifts, and household preferences. In particular we know there is demand for units and small houses in the inner suburban area, from both first time buyers and investors.
We do not believe that further “assistance” to first time buyers, whether via stamp duty, or access to super, per Hockey’s comments recently have any economic merit (more likely they should be seen as dog whistle politics).
Anything which eases the purchase price will simply lift the price, as for example in the now defunct first time buyer incentives.
The right question is how will policy be changed to release more land for development, and how will planning regulations be tweaked to allow the development of starter homes. How many will be built? If the answer is not in the 100,000’s we do not have the right answer. Such an inflection in supply would have a dampening effect on house price growth.
The root cause of the current issues in property in NSW goes back to pure Economics. Simply put, supply and demand are out of kilter.
On the supply side, not enough property is being constructed to meet increasing demand from local and overseas purchasers. Either space is a problem, land releases have not kept pace, or builders cannot get funding.
Demand is being stoked by demographic shifts, like more single households, older independents and young families. Also, investment purchasers see property as a good hedge against wider uncertainty, so are very active. Many can enjoy tax breaks. Plus Chinese investors have become a major force.
Thanks to the banks, purchasers can borrow more, and this lifts prices. First, low interest rates are making larger mortgages more affordable. Second, they have been able to increase the supply of home lending credit, thanks to lower capital rules, especially for those using the most sophisticated capital management. Next, they see risks in property lending much lower than commercial lending, so are happy to skew their portfolio. Finally, they have changed their lending criteria (although some regulators are pushing back), making larger loans possible, for some.
As a result, rising property prices are artificially lifting bank and household balance sheets. History shows that prices won’t necessarily defy gravity for ever. If they do correct there could be significant consequences for households, banks and the community.
We need proper supply-side strategies.
