Barely a day passes without the media reporting on Australia’s growing housing affordability crisis. With some regions reporting mortgage stress of more than 40%, commentators are getting sore arms trying to point the blame.

The Age reported yesterday that recent interest rate rises were behind the affordability crisis, with 21% of respondents to an Age/AC Neilsen poll citing rates as a cause; another 27% noted that Australia’s desire for bigger houses was to blame.

In a bid to get in on the act, Kevin Rudd “has taken direction on the issue from the housing industry, proposing various initiatives such as tax breaks for investors who build affordable housing, a tax-free savings account for first home buyers and increasing the first home owners’ grant for low-income earners.”

Sadly, Rudd is taking advice from the wrong people.

The reason for the “affordability crisis” in Australia is simple: there are more people moving to Australia than there are dwellings being constructed. The Department of Immigration noted that in 2005-2006, more than 131,000 people arrived in Australia (of which around 75% are deemed to be “highly skilled”). At the same time, the ABS reports that around 4,500 new dwellings are constructed each month – or about 55,000 per year. That means there are far more people moving to Australian than there are houses being built.

Housing is a basic need, not a luxury item. People are going to spend as much as they can afford on housing. Contrary to the popular belief, higher interest rates may actually be keeping house prices down at the moment. If interest rates were to fall, burgeoning demand would simply mean that purchasers would bid up the price of dwellings (house buyers would be able to spend more because if rates were lower, banks would lend purchasers more money for the same security).

There are two simple solutions to the affordability problem. The first is to reduce immigration. While this may strike a chord with many former One Nation voters, it would also deprive Australia’s economy of valuable skilled workers. Fortunately, the other solution is also pretty straightforward: build more dwellings.

Rudd’s proposals – such as tax breaks and increasing the home owner’s grant will simply cause distortions in the housing market by benefiting a select group of investors and probably further inflame prices (as the first home owners’ grant did when it was introduced).

What is stopping more dwellings being built? As noted by Crikey back in February, it is not taxes (new property sales often receive stamp duty concessions). Rather, local councils simply do not allow developers to construct dwellings at the same levels of density as was allowed in previous decades. Drive through Melbourne or Sydney and you will see scores of flats – virtually all were constructed circa 1960.

These days, only a handful of councils (such as the Melbourne City Council in Southbank or the Docklands Authority) allow any sort of housing density. The result is Economics 101 — reduced supply, coupled with increased demand from immigration, is forcing up the price of housing for ordinary Australians.

Releasing the clamps on development in fashionable suburbs will ease the crisis. Unfortunately, such a simple solution would probably never be favoured by politicians.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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