Housing Crisis: Supply Alone May Not Solve Australia's Affordability Issues

A recent study suggests that increasing housing supply alone may not significantly resolve Australia’s housing affordability crisis.

Christian Nygaard, a professor of housing economics at the UNSW’s City Futures Research Centre, stated that even a substantial increase in home construction over the next two decades would have limited impact on affordability.

Government Targets and Projections

The Albanese government has an 'aspirational' target to deliver 1.2 million homes over the five years to mid-2029.

However, the National Housing Supply and Affordability Council's estimate projects 938,000 new homes for the second half of the 2020s, falling short of the government's goal.

Model Findings on Affordability

Nygaard's model indicates that even if the 1.2 million home target were met and repeated for 15 additional years, the national house-price-to-income ratio might only decrease from 8.0 to 6.7.

In Sydney, where the ratio is approximately 12, it could potentially lower to 10.

Economists' models generally suggest that increasing supply 1% faster than household growth reduces house prices by about 2-3% over several years.

However, Nygaard highlights additional factors that limit this impact:

• Growing incomes boost housing demand.
• Tax settings make home buying financially attractive.
• Changing borrowing costs have exacerbated these factors.

These combined elements reduce the overall effectiveness of increased housing production on affordability.

Policy Implications and Concerns

While Nygaard supports boosting housing supply due to population growth, rising incomes, and changing demographics, his modeling raises two primary concerns regarding the current housing debate:

1. Clarity on Affordability Outcomes

The focus on building numbers lacks clear connection to achieving broader affordability outcomes. Nygaard emphasizes that policy needs to consider the distribution of housing produced, rather than solely focusing on overall numbers, to address housing affordability as a political, societal, and wellbeing challenge.

2. Avoidance of Deeper Issues

Overemphasizing supply may allow policymakers to avoid discussing more complex issues, such as tax settings that make housing investment lucrative, or economic and urban policies that influence where people choose to live.

Nygaard suggests considering changes to capital gains tax discounts for investors and potentially owner-occupied primary home capital gains taxation, despite the political challenges. He argues that avoiding these deeper issues could lead to misdiagnosing the problem and pursuing less effective policy solutions.