Category: Building & Construction

England expects 40% of new housing developments will be affordable, why can’t Australia?

From The Conversation.

Australia has record levels of supply of new properties but despite various government interventions, housing still remains unaffordable for many.

Our study found the government could use more direct methods to deliver homes for people on low and moderate incomes, while leveraging the market. These methods, widespread across the United Kingdom and in major cities of the United States, are known as “inclusionary planning”.

This includes requiring developers to make a financial contribution towards affordable housing, or to dedicate completed dwellings, as part of the development approval process.

We studied the outcomes of inclusionary planning programs in parts of the United States and the United Kingdom, and more recent approaches in South Australia and New South Wales.

What techniques can ensure affordable housing in the mix

“Inclusionary zoning”, a common type of inclusionary planning, was first developed in the United States to counteract land use rules which excluded the lower end of the property market. For example, where rules would only permit large homes on single allotments.

Some states in the US have also adopted “anti-snob” laws. Under these laws, developers whose schemes include affordable housing can bypass local zoning controls, if an area has insufficient affordable housing for those on low and moderate incomes.

More recently, inclusionary planning programs are being used in many US cities in a bid to ensure that transport and infrastructure investment does not price out or displace lower income renters.

There are now more than 500 inclusionary planning schemes operating in municipalities across the US. Some require developers to include affordable housing as part of development in a particular zone (usually a fixed percentage of units or floor space).

For example inclusionary planning programs in the city of San Francisco, California (population of around 830,000) generate around 150–250 affordable units per year (around 12% of the city’s total supply).

Other schemes allow variations to planning rules in return for affordable housing. These variations might permit additional density in certain areas or waive certain requirements that would normally apply or expedite the development assessment process.

Other schemes require financial contributions from developers to offset the impact of a project on affordable housing demand or supply.

These programs provide a way for governments to ensure affordable housing for lower income residents even in rapidly gentrifying neighbourhoods.

How this plays out in England and Scotland

In England and Scotland, the supply of affordable housing is negotiated through the planning process. The general expectation is that 20 to 40% of new housing developments will be affordable. But proportions of affordable housing are allowed to vary on a case by case basis in light of the housing market and the costs of undertaking the development.

The main methods for this in England are section 106 agreements. These agreements, which come under the Town and Country Planning Act 1990, specify the amount and type of affordable housing to be provided as part of a development.

Section 106 agreements have steadily gained traction since the 1990s. Between 2005–16, 83,790 affordable dwellings were secured through these agreements in England. This included 9,640 new dwellings in 2015–16.

Section 106 agreements have resulted in different types of affordable housing, including social housing, discounted home ownership, share equity schemes and affordable rental housing (offered at 20% less rent than for comparable properties in the same local housing market).

Our study found that when inclusionary planning model requirements are predictable and applied in a consistent way, developers accept them because they can factor costs into the price paid for land.

We also found most models work in conjunction with other government funding or subsidies, extending the value of this funding by reducing the cost of land for social or affordable housing.

What usually happens in Australia

Only the South Australia and New South Wales governments have similar types of planning schemes in Australia, although there are signs that other states may follow.

The SA government’s inclusionary planning target, announced in 2005, aims for 15% of significant new housing developments to be affordable.

By 2016 more than 2,000 affordable homes had been built and a further 3,476 homes committed. This amounts to about 17% of new housing supply in South Australia.

In NSW, inclusionary planning schemes only deliver affordable rental housing.

In the mid 1990s an inclusionary zoning scheme pilot was introduced to Pyrmont and Ultimo. This scheme was then extended to Green Square.

These schemes require that developers dedicate 0.8 to 3% of the floor area of developments for affordable housing, or that a monetary contribution be made in lieu of direct affordable housing provision.

However, to date, the NSW state government and many in the development sector have favoured voluntary mechanisms (such as density bonuses for providing affordable housing) over mandatory ones to supply affordable rental housing.

For our study, we estimated the volume of affordable housing delivered through voluntary planning agreements and state policy giving a density bonus for affordable housing inclusion by examining individual development approval records.

We found that voluntary measures have so far delivered about 1,300 dwellings or between 0.5 to 1% of Sydney’s housing supply between 2009 and 2017.

How viable is inclusionary planning?

We found that voluntary planning incentives can encourage affordable housing, but as part of incremental residential development, within the existing planning framework.

However, affordable housing should be mandated when land is rezoned for residential development, when planning rules are varied for particular projects, or following major infrastructure investment.

Inclusionary planning can’t replace government funding in providing housing for those on the lowest incomes. However, inclusionary planning schemes can reduce land costs and ensure that affordable homes are well located near jobs and services.

Authors: Nicole Gurran, Professor of Urban and Regional Planning, University of Sydney; Catherine Gilbert, Research Assistant and PhD Candidate, Urban Housing Lab, University of Sydney

HIA Says Just Build More … And More..

The HIA has released a new report peddling the same old message. Just build more.  This despite the fact that vacancy rates are rising, we have 150,000 new units coming on stream in the next year or so, and the root cause of the affordability problem is NOT population growth, but poor credit policy.  You can read more about the truth about housing affordability here.

“Australia needs to build in more than 230,000 homes every year if we are to address our current housing affordability challenge,” stated Tim Reardon, HIA’s Principal Economist.

HIA has released a Report, “Housing Australia’s Future”, which presents a number of scenarios based on future population growth and wages growth to estimate the number of new homes required avoid exacerbating the housing affordability challenge.

“Over the past 15 years Australia’s housing market has been dominated by a persistent undersupply of housing – the underlying cause of the rapid acceleration in prices and ultimately Australia’s housingaffordability crisis.

“The excessive cost of supplying new housing lies at the core of the affordability challenge. This has been recognised by a number of key organisations including the RBA and the Productivity Commission; and federal and state Treasury’s have identified the supply of housing as the key problem.

“In 2016 Australia built a record number of 230,000 new homes and we will need to maintain this rate of annual supply for the next thirty years, if we are to meet future housing needs.

“The enormous pent up demand for housing in metropolitan areas is now being met and for the first time in 15 years the supply of new housing is in balance with the demand for new housing.

“Housing affordability will not be solved by amending negative gearing, capital gains tax or imposing punitive charges on foreign investors.

“Such measures increase taxation on housing and further raise the cost of new supply, which is already excessive and inefficient.

“Meaningful action needs to include all three tiers of government, working with industry, to ensure the delivery of affordable residential housing,” concluded Mr Reardon.

Unit Approvals Fall In February

The latest ABS data on residential building approvals were released today.

The number of dwellings approved in Australia fell for the fifth straight month in February 2018 in trend terms with a 0.1 per cent decline.

Approvals for private sector houses have remained stable at around 10,000 for a number of months. But unit approvals have fallen for five months.

Overall, building activity continues to slow from its record high in 2016. And the sizeable fall in the number of apartments and high density dwellings being approved comes at a time when a near record volume are currently under construction. If you assume 18-24 months between approval and completion, then we still have 150,000 or more units, mainly in the eastern urban centres to come on stream. More downward pressure on home prices.

This helps to explain the rise in 100% loans on offer via some developers plus additional incentives to try to shift already built, or under construction property.

Here is the data displayed in original terms. Whilst house approvals remains relatively stable, unit approvals are more volatile. This is explained by the changing demand profile as overseas investors and local investment property purchasers retreat. As we discussed recently, this is thanks to tighter lending standards making mortgages more difficult to come by, lower capital growth making investment property less attractive, and stronger controls on overseas investors, both in terms of moving capital to purchase, and local regulations and tighter supervision.

We can then look across the individual states, as there are significant variations. Among the states and territories, the biggest trend decrease in dwelling approvals in February was the Australian Capital Territory down 18.7 per cent,

followed by the Northern Territory (down 7.2 per cent),

Western Australia (down 4.4 per cent),

Tasmania (down 3.4 per cent)

and South Australia (down 1.2 per cent).

There were small increases in trend terms in New South Wales (1.0 per cent),

Queensland (0.9 per cent)

and Victoria (0.1 per cent).

Approvals for private sector houses rose 0.2 per cent in trend terms in February. Private sector house approvals rose in Victoria (1.1 per cent) and New South Wales (0.8 per cent), but fell in Queensland (1.1 per cent), South Australia (1.1 per cent) and Western Australia (0.5 per cent).

The value of total building approved fell 1.1 per cent in February, in trend terms, and has fallen for five months. The value of residential building fell 0.1 per cent while non-residential building fell 2.9 per cent.

The Property Imperative Weekly – 31 March 2018

Welcome to the Property Imperative Weekly to 31st March 2018.

Watch the video or read the transcript.

In this week’s review of property and finance news we start with the latest CoreLogic data on home price movements.

Looking at their weekly index, after last week’s brief lift, values fell 0.17% in the past week and as a result Sydney home values have now declined by a cumulative 4.2% over the past 29-weeks, with values also down 4.1% over the past 34 weeks. Sydney’s quarterly growth rate remains firmly negative, down 1.8% according to CoreLogic and annual growth is also down 2.2%.

More granular analysis shows the most significant falls in higher value property, and also in high-rise apartments. Our own analysis, and feedback from our followers is that asking prices are falling quite consistently now, and the same trend is to be see in Brisbane and Melbourne, our largest markets. This despite continued strong migration. We see two trends emerging, more people getting desperate to sell, so putting their property on the market, and having to accept a deeper discount to close a sale.

As we showed this week in our separate videos on the latest results from our surveys, down traders in particular are seeking to release capital now, and there are more than 1 million who want to transact. On the other hand investors are fleeing, though some are now also being forced to sell thanks to the switch from interest only to more expensive principal and interest loans.

This is all consistent with the latest auction results, which Corelogic also reported. They said that volumes last week broke a new record with 3,990 homes taken to auction across the combined capital cities in the lead up to Easter, which exceeded the previous high of 3,908 over the week ending 30th November 2014. The preliminary clearance rate was reported at 65.5%, but the final auction clearance rate fell to 62.7 per cent last week, down from 66.0 per cent across 3,136 auctions the previous week. Over the same week last year, 3,171 auctions were held, returning a significantly stronger clearance rate (74.5 per cent).

CoreLogic said that Melbourne’s clearance rate last week was 65.8 per cent across 2,071 auctions, making it the busiest week on record for the city. In comparison, there were 1,653 auctions held across the city over the previous week, returning a clearance rate of 68.7 per cent. This time last year, 1,607 homes were taken to auction, and a clearance rate of 78.9 per cent was recorded. Sydney was host to 1,383 auctions last week, the most auctions held across the city since the week leading up to Easter 2017 (1,436), while over the previous week, 1,093 auctions were held. The clearance rate for Sydney fell to 61.1 per cent, down from 64.8 per cent over the previous week, while this time last year, Sydney’s clearance rate was a stronger 75.8 per cent.

Across the smaller auction markets, auction volumes increased week-on-week, however looking at clearance rates, Adelaide (64.6 per cent) and Canberra (69.1 per cent) were the only cities to see a slight rise in the clearance rate over the week.

The Gold Coast region was the busiest non-capital city region last week with 87 homes taken to auction, while Geelong recorded the highest clearance rate at 79.7 per cent across 75 auctions.

Given the upcoming Easter long weekend, auction volumes are much lower this week with only 540 capital city auctions scheduled; significantly lower than last week when 3,990 auctions were held across the combined capital cities.

The next question to consider is the growth in credit. As we discussed in a separate blog, credit for housing, especially owner occupied mortgages is still running hot.  The smoothed 12 months trends from the RBA, out last Thursday, shows annualised owner occupied growth registering 8.1%, up from last month, investor lending falling again down to 2.8% annualised, and business credit at just 3.6%

Looking at the relative value of lending, in seasonally adjusted terms, owner occupied credit rose 0.71% to $1.15 trillion, up $8.08 billion, while investment lending rose 0.12% to $588.3 billion, up just 0.69 billion. Business lending rose 0.17% to $905 billion, up 1.55 billion and personal credit fell 0.15%, down 0.22 billion to $152.2 billion.

Note that the proportion of investment loans fell again down to 33.9%, and the proportion of business lending to all lending remained at 32.4%, and continues to fall from last year. In other words, it is owner occupied housing which is driving credit growth higher – if this reverses, there is a real risk total credit grow will run into reverse. Again, we see the regulators wishing to continue to drive credit higher, to support growth and GDP, yet also piling on more risks, when households are already terribly exposed. They keep hoping business investment and growth will kick in, but their forward projections look “courageous”. Remember it was housing consumption and Government spending on infrastructure which supported the last GDP numbers, not business investment.

Now, let’s compare the total housing lending from the RBA of $1.74 trillion, which includes the non-banks (though delayed, and partial data), with the APRA $1.61 trillion. The gap, $130 billion shows the non-bank sector is growing, as historically, the gap has been closer to $110 billion. This confirms the non-bank sector is active, filling the gap left by banks tightening. Non-banks have weaker controls on their lending, despite the new APRA supervision responsibilities. This is an emerging area of additional risk, as some non-banks are ready and willing to write interest only and non-conforming loans, supported by both new patterns of securitisation (up 13% in recent times) and substantial investment funds from a range of local and international investors and hedge funds.

Once again, we see the regulators late to the party.  This continues the US 2005-6 playbook where non-conforming loans also rose prior to the crash. We are no different.

The ABS released more census data this week, and focussed on the relative advantage and disadvantage across the country. Ku-ring-gai on Sydney’s upper north shore is Australia’s most advantaged Local Government Area (LGA). Another Sydney LGA, Mosman, which includes the affluent suburbs of Balmoral, Beauty Point and Clifton Gardens, has also been ranked among the most advantaged. In fact, SEIFA data shows the 10 most advantaged LGAs in Australia are all located around the Northern and Eastern areas of Sydney Harbour and in coastal Perth.

The most disadvantaged LGA is Cherbourg, approximately 250 kilometres north-west of Brisbane (QLD), followed by West Daly (NT). The 10 most disadvantaged LGAs in Australia can be found in Queensland and the Northern Territory.

The latest data has found that more than 30 per cent of people born in China, South Africa and Malaysia live in advantaged areas and less than 10 per cent reside in disadvantaged areas. Meanwhile, 40 per cent of Vietnamese-born live in disadvantaged areas and only a small proportion (11 per cent) live in advantaged areas.

People of Aboriginal and/or Torres Strait Islander origin are more likely to live in the most disadvantaged areas with 48 per cent living in the bottom fifth most disadvantaged LGAs, compared to 18 per cent of non-Indigenous people. Overall, only 5.4 per cent of Aboriginal and/or Torres Strait Islander people live in areas of high relative advantage compared with 22 per cent of non-Indigenous people.

What the ABS did not show is that there is a strong correlation of those defined as advantaged to valuable real estate – home price rises have both catalysed the economic disparities across the country, and of course show the venerability that more wealthy areas have should home prices fall further. The paper value of property is largely illusory, and of course only crystallises when sold.

The HIA reported that new home sales declined for the second consecutive month during February 2018 overall, but the markets were patchy, based on results contained in the latest edition of their New Home Sales report – a monthly survey of the largest volume home builders in the five largest states.

Despite the fact that the overall volume of sales declined during February, reductions only occurred in two of the five states covered by the HIA New Home Sales Report – the magnitude of these reductions outweighed the increases which took place elsewhere. The largest fall was in Queensland (-16.3 per cent) with a 9.9 per cent contraction recorded in WA. The largest increase in sales was in NSW (+11.7 per cent), followed by SA (+10.3 per cent) and Victoria (+4.8 per cent).

Finally, we walked through our survey results in a series of separate videos, but in summary, the latest release of the Digital Finance Analytics Household Survey to end March 2018, helps to explain why we think home prices are set to fall further by drawing on our 52,000 sample, from across Australia.

This chart, which looks across our property segments, shows that both portfolio property investors (who hold multiple properties) and solo investors (who hold one, or perhaps two) intentions to transact are tanking, down 8% since December 2017. This is because credit is less available, capital growth has stalled, and in fact only the tax breaks remain as an incentive! This decline started in 2015, but is accelerating.  Remember that around one thirrd of mortgages are for investment purposes, so as this demand dissipates, the floor on prices starts to shatter.

Whilst there are offsetting rises from down traders (who are seeking to release capital before prices fall further) and first time buyers (who are being “bribed” by first owner grants) there is a significant net fall in demand. This pattern is seen across the country, but is most prevalent in our two biggest markets of Sydney and Melbourne.

Refinancing is up a little, thanks to the attractive discounts being offered by many lenders, and the prime driver is to reduce monthly repayments, as currently household finances are under pressure. We release the latest mortgage stress analysis in a few days.

And if you want to think about the consequences of all this, then watch our commentary on the Four Scenarios which portrays how the property and finance sector may play out, and compare the comments from APRA with those in Ireland in 2007 in our latest video blog – they are eerily similar, and we all know what happened there!

The outlook for finance and property in Australia in decidedly uncertain.

What governments can learn from Perth’s property market

From The Conversation

Governments can encourage more affordable housing by targeting first home buyer subsidies to specific locations and housing types, a new report finds. It also suggests incentivising developers and builders to create smaller houses with more cost-efficient designs.

The report is based on the housing market in Perth, Western Australia, and shows that historically building single houses as opposed to units or town houses is a more effective way of delivering affordable housing on the city fringes.

The report examined housing affordability through individual transaction records over a six year sample period. It compared prices between established and new housing, showing that new land and building developments play important roles in supplying affordable housing options.

New dwellings comprise 13% of single house transactions and 33% for dwellings such as apartment or townhouses. Although new dwellings like apartments provided some affordable housing options, in general they are selling at a premium over existing houses.

Australia’s largest cities, like Perth, are stretched to the limit of land supply and infrastructure for affordable housing. The most infrastructure exists in city centres where houses are expensive.

Over the past two decades Perth has grown rapidly. Between 2001 and 2016 the population increased by 46.7%, the largest proportional increase of any Australian capital city. The make-up of the housing market is similar to other capitals: 68% of the housing stock is single houses, 20% other dwellings and 11% vacant.

Levels of home ownership are generally consistent with the national pattern: 62% of housing is owned outright or mortgaged, and 24% rented.

House prices have grown rapidly. From 1999 to 2016 house prices grew at an average annual rate of 8.4%; other dwellings grew 9%. Both sectors report the highest annual increases for all Australian capital cities over this period.

How can governments help?

The challenge in Australia’s housing market is supplying an adequate range of affordable new dwelling types within a range of suitable locations – both inner city and outer suburban choices.

Clusters of cheaper housing on the urban fringe and more expensive inner-city development suggest new building activity is confined to specific locations. These are defined by the price the constructor or buyer is willing to pay.

Housing policy in Australia has relied on market outcomes to determine aesthetic and economic characteristics of housing in our cities. Government intervention has mainly been through zoning, predominantly at local levels. More recently there’s also been stimulus at state and federal levels for first home buyers through various deposit subsidy schemes.

Subsidy schemes have been important in helping first home buyers bridge the deposit gap. Incentives have included cash payments and stamp duty relief.

In some states additional payments have been made for new building and for purchases in specific locations. But the Perth study indicates that some of these subsidies are becoming ineffective.

Standard “one type fits all” subsidies are limiting first home buyers’ choices of location and housing type.

The solution to this problem is to make subsidy schemes more flexible to nudge first home buyers towards affordable locations. This would even out the supply of affordable houses from areas where housing is densely clustered in certain locations.

Policy would also need to take into account the needs of different demographics in certain locations. Housing requirements of young singles are obviously different than for young families.

Effective policy would also need to take into account the types of housing finance available for first home buyers. One example is the WA government’s Keystart loans which help eligible people to buy their own homes through low deposit loans and shared equity schemes.

These types of schemes include shared ownership with the government owned housing authorities and include existing and newly built homes in a variety of locations.

But it’s not all up to state governments. The problems of lack of land supply and infrastructure are the same in all Australian capital cities. The federal government could play a more prominent role through infrastructure grant funding in changing the location choice of buyers and variation of affordable housing types at a national level.

Author:  Greg Costello, Associate Professor, Curtin University

Second Monthly Fall for New House Sales – HIA

The HIA says sales of new detached houses declined for the second consecutive month during February 2018 overall, but the markets were patchy, based on results contained in the latest edition of their New Home Sales report – a monthly survey of the largest volume home builders in the five largest states.

Despite the fact that the overall volume of sales declined during February, reductions only occurred in two of the five states covered by the HIA New Home Sales Report – the magnitude of these reductions outweighed the increases which took place elsewhere. The largest fall was in Queensland (-16.3 per cent) with a 9.9 per cent contraction recorded in WA. The largest increase in sales was in NSW (+11.7 per cent), followed by SA (+10.3 per cent) and Victoria (+4.8 per cent).

“The decline in new house sales during the first two months of 2018 is consistent with our expectation that residential building activity will move lower over the next 12 months.

“Tighter restrictions around investor lending and heavier obstacles to foreign investor participation are contributing to the weaker conditions in new dwelling construction.

“New house sales in NSW saw decent growth during February. There were several favourable changes made by the NSW government relating to First Home Buyers last year and these have been beneficial to the state’s housing industry.

“Our forecast is that new home sales will trend downwards during 2018 in line with new home building activity. We expect things to bottom out in late 2019 before modest growth resumes,” concluded HIA Senior Economist Shane Garrett.

Dwelling approvals up 0.1 per cent in January

The number of dwellings approved rose 0.1 per cent in January 2018, in trend terms, after falling for the previous three months, according to data released by the Australian Bureau of Statistics (ABS) today.

“Dwelling approvals rose in January, driven by a large increase in private dwellings excluding houses,” said Justin Lokhorst, Director of Construction Statistics at the ABS. “Approvals for private sector houses have remained stable.”

Dwelling approvals increased in Victoria (2.6 per cent), Tasmania (2.0 per cent), Queensland (1.1 per cent) and Western Australia (0.5 per cent), but decreased in the Australian Capital Territory (32.6 per cent), the Northern Territory (9.3 per cent), South Australia (3.2 per cent) and New South Wales (2.3 per cent) in trend terms.

In trend terms, approvals for private sector houses fell 0.1 per cent in January. Private sector house approvals fell in Queensland (1.6 per cent) and South Australia (1.4 per cent), but rose in New South Wales (0.7 per cent), Victoria (0.3 per cent) and Western Australia (0.3 per cent).

The value of total building approved fell 1.4 per cent in January, in trend terms, and has now fallen for four months. The value of residential building rose 0.5 per cent while non-residential building fell 4.7 per cent.

Government Policy Contributes to Affordability Problems – HIA

“The current housing affordability crisis is the product of two decades of policy neglect,” HIA Managing Director Shane Goodwin said today.

“It is the core issue that HIA has championed fixing, and is responsible for the affordability challenge facing Australian cities.

“For too long governments have chosen quick fix options to the very long term problem of housing affordability. Australia needs brave and bold policies that go to the heart of the affordability problem,” Mr Goodwin said.

“We need to resume the discussion around tax especially where it cascades applies to land and housing and put an end to upfront taxes that are keeping so many first home buyers out of the market.

“We need to get serious about planning reform, these things are the keys to solving housing affordability which have largely been overlooked by State and Federal Governments.

“We need all tiers of government back at the table, driving these discussions and implementing change.

“HIA has said for a long time now that the problem of housing affordability in simple terms, comes down to supply and demand – more land needs to be freed up, and the punitive taxes like stamp duty that come with buying a home need to be done away with.

“State governments should take on policies like fixing planning rules to allow more homes to be built in inner and middle-ring suburbs of our largest cities, and continue to support the supply of new land around
our cities to achieve the right balance of housing supply.

“It is pleasing that today’s Grattan industry report mirrors HIA call for reform, but HIA cautions against any changes to migration.

“The problem of housing affordability is one of supply and demand – houses will not get built if the population doesn’t grow, and the main driver of population growth in Australia is migration.

“Migration issues aside, HIA is urging State and Federal Governments to get moving on reform, rather than sticking to the current politically safe and largely ineffective measures of dealing with housing affordability,” Mr Goodwin concluded.

A good point, but we also observe that availability of low cost credit, and weak lending standards has also driven affordability lower. This must also be addressed, or else more supply just means bigger debts, and more trouble for households. Time for some joined up thinking!

Migration and Housing Affordability

From The Conversation.

So much of Australia’s history and success is built on immigration. Migrants have benefited incumbent Australians by raising incomes, increasing innovation, contributing to government budgets, smoothing over population ageing and diversifying our social fabric. But it is also true that immigration is affecting house prices and rents.

Australian governments are squandering the gains from migration with poor housing and infrastructure policies. Our new report, Housing affordability: re-imagining the Australian dream, shows what’s at stake. Unless the states reform their planning systems to allow more housing to be built, the Commonwealth should consider tapping the brakes on Australia’s migrant intake.

Immigration has increased housing demand

Australia’s migration policy is its de-facto population policy. The population is growing by about 350,000 a year. More than half of this is due to immigration.

Since 2005, net overseas migration – which includes the increase in temporary migrants – has averaged 200,000 people per year, up from 100,000 in the previous decade. It is predicted to be around 240,000 per year over the next few years.

Immigrants are more likely to move to Australia’s big cities than existing residents, which increases demand for scarce urban housing. In 2011, 86% of immigrants lived in major cities, compared to 65% of the Australian-born population.

Chart 1. Migration has jumped, and so have capital city populations

Grattan Institute, Author provided

Not surprisingly, several studies have found that migration increases house prices, especially when there are constraints on building enough new homes.

The pick-up in immigration coincides with Australia’s most recent housing price boom. Sydney and Melbourne are taking more migrants than ever. Australian house prices have increased 50% in the past five years, and by 70% in Sydney.

Chart 2: Net overseas migration into NSW and Victoria is at record levels

Grattan Institute (Data source: ABS 3101.0 – Australian Demographic Statistics), Author provided

Of course immigration isn’t the only factor driving up house prices and rents. Housing also costs more because incomes rose, interest rates fell and banks made it easier to get a loan. But adding 2 million migrants in the past decade has clearly increased how many new homes are needed.

We haven’t built enough homes

Housing demand from immigration shouldn’t lead to higher prices if enough dwellings are built quickly and at low cost. In post-war Australia, record rates of home building matched rapid population growth. House prices barely moved.

But over the last decade, home building did not keep pace with increases in demand, and prices rose. Through the 1990s, Australian cities built about 800 new homes for every extra 1,000 people. They built half as many over the past eight years.

We estimate somewhere between 450 and 550 new homes are needed for each 1,000 new residents, after accounting for demolitions. And because more families are breaking up and the population is ageing, more homes are needed to accommodate households with fewer members.

The imbalance between demand and supply has consequences. Younger and poorer households are paying more for housing, and owning a home depends more on who your parents are, a big change from the early 1980s.

Chart 3: Housing construction lagged population in the last decade, but has picked up

Grattan Institute, Author provided

Only in the past couple of years has construction started to match population growth, especially in Sydney. It’s no coincidence that Sydney house prices have finally moderated in the past six months.

But the backlog of a decade of undersupply remains. Development at today’s record rates is the bare minimum needed to meet record population growth built into Sydney’s and Melbourne’s housing supply targets over the next 40 years.

Chart 4: Strong housing construction will need to be maintained to meet city plan housing targets

Grattan Institute

So what should governments do?

Building more housing will improve affordability the most – but slowly. Even at current record construction rates, new housing increases the stock of dwellings by only 2% each year. But building an extra 50,000 homes a year nationwide for a decade would lead to national house prices between 5% and 20% lower than otherwise. Do it for longer and prices will fall even further.

State governments need to fix planning rules to allow more housing to be built in inner and middle-ring suburbs. More small-scale urban infill projects should be allowed without council planning approval. And state governments should allow denser development “as of right” along key transport corridors. The Commonwealth can help with financial incentives for these reforms.

But the politics of planning in our major cities is fraught. Most people in established middle suburbs already own their houses. Prospective residents who don’t already live there can’t vote in council elections, and their interests are largely unrepresented.

If we want to maintain current migration levels, along with their economic, social and budgetary benefits, we need to do better at planning to allow more housing to be built.

What does this mean for the migrant intake?

The Australian government should develop a population policy, as the Productivity Commission recommended. It should articulate the appropriate level of migration given its economic, budgetary and social benefits and costs. This should include how it affects the Australian community living with the reality of land use planning policy – and contrasting this with the effect of optimal planning policy.

If planning and infrastructure policies don’t improve, the government should consider cutting the migration intake. This would reduce demand for housing, but would also reduce the incomes of existing residents.

The best policy is probably to continue with Australia’s demand-driven, relatively high-skill migration and to build enough homes for the growing population. But Australia is in a world of third-best policy: rapid migration and restricted housing supply are imposing big costs on people who don’t already own their homes. If the states are not going to reform planning rules to increase the number of homes built, then the Australian government should consider whether reducing migration is the lesser evil.

Any reduction should be modest and targeted at the parts of the migration program that provide the smallest benefit to Australian residents and migrants themselves. Balancing these interests is difficult, because each part of the program has different economic, social and budgetary costs and benefits.

Cutting back family reunion visas would have substantial social costs. Limiting skilled migration would hurt the economy and many businesses. Restricting growth in international students would reduce universities’ incomes.

There are also broader costs to cutting the migrant intake. It would hit the Commonwealth budget in the short term. Most migrants are of working age and pay full rates of personal income tax. And many temporary migrants, such as 457 visa holders, can’t draw on a range of government services and benefits, including welfare and Medicare. More importantly, cutting back on younger, skilled migrants is likely to hurt the budget and the economy in the long term.

But there is no point denying that housing affordability is worse because of a combination of rapid immigration and poor planning policy. Rather than tackling these issues, much of the debate has focused on policies that are unlikely to make a real difference. Unless governments own up to the real problems, and start explaining the policy changes that will make a real difference, Australia’s housing affordability woes are likely to get worse.

Authors; John Daley, Chief Executive Officer, Grattan Institute; Brendan Coates, Fellow, Grattan Institute; Trent Wiltshire, Associate, Grattan Institute

The Better Affordability Silver Lining To The Home Price Clouds

The HIA Housing Affordability Index saw a small improvement of 0.2 per cent during the December 2017 quarter indicating that affordability challenges have eased thanks to softer home prices in Sydney where they are now slightly lower than they were a year ago. This makes home purchase a little more accessible, particularly for First Home Buyers. [DFA Editors note: though offset by tighter lending criteria now].

The HIA Affordability Index is produced quarterly and measures the mortgage repayment burden as a proportion of typical earnings in each market. A higher index result signifies a more favourable affordability
outcome.

Shane Garrett, HIA Senior Economist said

Softer home prices in Sydney contributed to improved housing affordability during the final quarter of 2017.

Affordability conditions in Sydney are still more challenging than any other city. After Sydney, Melbourne has the second highest mortgage repayment burden.

It is often overlooked that affordability conditions are favourable in the markets outside of Sydney and Melbourne. Housing prices are more affordable in the other six capital cities today than has typically been the case over the past 20 years – primarily due to very low interest rates. Housing affordability is still a very acute problem.

To win the affordability battle, governments need to make tough decisions on reducing the tax burden on new home building, speeding up the planning process and releasing new residential land in a more timely fashion.