In March of last year, Australia’s international border was closed.
The decision was not made without good reason, but it had massive economic ramifications.
Employers could no longer access the constant flow of skilled and unskilled workers they relied on, universities could not attract international students, and the outlook for the housing sector was bleak.
For years, the conventional wisdom among many economists (inside and outside of government) was that population growth was at least a significant force behind rising house prices.
But when the migration tap was turned off, when house prices first fell in some areas, they are now roaring.
Closing international borders was the kind of experiment economists had never done without a spreadsheet, never expecting it to actually happen.
The results surprised some and many wonder if the right lessons are being learned.
What is really driving real estate prices up?
There are undoubtedly a whole host of things that influence real estate prices, and rents too.
The question for economists and policymakers has always been who has the greatest influence and who can be adjusted if prices are to be brought under control.
Brendan Coates of the Grattan Institute suggests that a key influence has won the day.
“I said at the start of COVID, we’re about to find out what matters most to house prices: interest rates, or underlying demand or supply,” he said. he declares.
“And I think we’ve been proven that interest rates matter more.”
Interest rates were already low before the onset of the pandemic. They are now even lower, with the RBA holding the spot rate at 0.1%.
He doesn’t plan to hike rates until 2024, although some in financial markets aren’t convinced he’ll wait that long.
Mr. Coates argues that if cheap finance pushes buyers into the market, raising rates will not solve housing affordability.
“And that’s a very smart move, because there’s no point in having cheaper housing if you have hundreds of thousands of Australians out of work and nobody’s wages go up, which would be the consequence. . “
Which leaves policymakers with a difficult question: if the biggest lever of housing affordability cannot be pulled, what is left?
The supply side of the housing equation
When asked what the biggest housing affordability problem is, Liberal MP Jason Falinski suggested that it was actually pretty obvious.
“The lack of supply is simple,” he said.
Mr Falinski is currently chairing a parliamentary inquiry into housing affordability, but said he had a clear idea of what needs to be fixed.
“It’s not that we don’t have enough land in Australia,” he said.
“It’s not that we don’t make enough money, because we have some of the highest average weekly earnings in the world.
The town planning regulations Mr. Falinski refers to are almost entirely managed by state and local governments.
Outside of supply facilitation work, such as running the National Housing Finance and Investment Company, the federal government has little role to play.
But what if it’s not the supply?
City planner Nicole Gurran of the University of Sydney said that while the investigation was on the supply side, it was going in the wrong direction.
“I often think, ‘I wish it was that simple,'” she said.
“Because if it were that simple, having a liberal planning regime and just wanting the private sector to build more properties, even if prices moderate or fall – if it were that simple, we would have solved by now the problem. “
Dr Gurran points to closed international borders and the resulting forecast of excess housing supply as evidence that supply is not the problem.
She said a key problem with simply relaxing town planning laws is that the vast majority of home construction in Australia is undertaken by the private sector, which is most motivated to build more homes when the prices rise. are high.
“The problem is not so much that we have a regulatory constraint on new supply, it is that the supply of new housing in Australia is mainly supplied by the private markets… and they will only increase the new supply. ‘in response to the increased profits, “she said. .
She argues that if housing is to be made more affordable, the relationship between the supply of new housing and the steadily rising housing prices must be broken.
“We need to move away from the drivers of the private sector housing market and focus on an area of the housing system that meets housing needs, namely social and affordable housing. “
Why is tax not on the table?
Two federal elections have been held with housing affordability as the central issue.
Twice Labor has advocated for removing the negative gear for existing homes and changing capital gains tax rules, in an effort to help first-time homebuyers.
And twice he failed – which led him to give up politics now.
Economist Saul Eslake thinks this is a problem, because both are part of any solution.
“I wish we could have an honest conversation on demand,” he said.
“It is very disappointing that the Labor Party has gone down the drain on a policy they took to two elections, one of which they almost won.”
Mr Eslake highlights the sweeping changes in New Zealand on both negative debt and capital gains tax.
“What is remarkable about this is that the skies have not collapsed in New Zealand, as property interests and the Coalition commonly predict, whenever this topic is brought up in a conversation. on this side of the Tasman, ”he said. .
What if politics were the problem?
The mandate of the new Housing Affordability Survey includes “the impact of current taxes, fees and regulatory parameters” at all levels of government.
Mr Falinksi said he was happy to have the conversation, but it was time for the discussion to move on.
“What people are saying on the demand side is that there is a group of Australians who should not be allowed to own their own homes,” he said.
“How they’re going to do it is by reducing tax incentives, reducing government programs that help first-time buyers to enter the market, raising taxes, raising interest rates – that’s definitely a problem. reply.
Mr. Eslake, however, questions whether politics is really leading the conversation about housing affordability.
“There are 11 million Australians who own at least one property, and among these there are at least two million who own more than one property,” he said.
“And the last thing these 11 million Australians want a government to do is anything that is slowing the rate of growth in house prices.”
According to some accounts, there have been at least five surveys conducted by the federal government into the affordability of housing in Australia in the past two decades.
Mr. Eslake – and many others – don’t hold their breath for a quick and easy fix to come of it.