Housing supply is not the problem

Prime Minister Anthony Albanese says that the cause of the nationwide housing affordability crisis is a lack of supply. In a speech to Parliament in early June, he outlined how his government is tackling the issue by encouraging property developers to build more homes. He wants state governments and local councils to free up public land for private development. And he has introduced federal government cash handouts and tax incentives for developers.

But is a lack of supply really to blame for the housing crisis? The numbers suggest otherwise.

On Census night in August 2021, there were 10.85 million dwellings in Australia and 25.69 million people. On average, around two and a half people live in each dwelling, according to the Australian Bureau of Statistics, so there were more than enough homes available. In fact, there was an extra 400,000.

There aren’t 400,000 extra homes available to purchase, however, because many people own more than one. But let’s come back to this.

What about the massive wave of immigrants Peter Dutton says is responsible for putting a home out of reach for so many? There is indeed significant population growth, which you could reasonably expect to choke up the housing supply.

But interestingly, this is not the case. In a piece for ABC News, financial journalist Alan Kohler crunched the numbers to show that projected new housing construction will outstrip the rise in migration over the coming years.

For instance, construction began on over 180,000 new homes last year and plans for 190,000 more were approved. This should more than cover the 284,000 new homes needed this year and next to accommodate the growing population, according to Treasury population growth forecasts.

There has been much coverage in the media about building projects stalling because of rising construction costs and bankruptcies, further squeezing supply. JP Morgan estimates 50-60,000 newly approved or commenced projects have stalled. But even taking this into consideration, there is enough of a buffer in the projected builds to absorb this loss.

So, why is there a housing crisis if we already have a surplus of dwellings relative to the population and are building enough to provide a home for everyone now entering the country? And why are the politicians and media talking about supply all the time?

The issue is that wealthy individuals own not one but two, three, four or more properties. They might have a holiday home on the coast or in the mountains, an Airbnb in the city, and a few more properties on the rental market.

The Australian Tax Office says that 3.25 million dwellings are investment properties. That’s a third of all residential property in Australia.

This is what skews the market and drives up prices. Even if there is technically a dwelling available for every household, a section of the population is looking for multiple properties to purchase. The more people bid for an item, the higher its price will likely rise.

The share of the population with at least one property investment grew significantly in the 1990s and early 2000s as successive governments introduced policies that encouraged people to view housing as a lucrative investment rather than just a place to live. Several million people now own more than one property, but within that crop of investors, just 7 percent own a quarter of all investment properties.

Negative gearing allows investors to reduce taxable income by writing off losses incurred on investment properties. And capital gains (the profits realised when investment properties are sold) are taxed substantially lower than personal incomes if the property is held for more than a year.

The ultra-low interest rates of the past decade further fuelled property speculation—for those who could afford a hefty deposit.

Consequently, one-third of all dwellings are now income-generating investments rather than simply “homes”. Rising property prices have encouraged even more to join in the speculation. It’s been a virtuous circle for investors but a downward spiral of unaffordability for people without the resources to get their first home. Those unable to buy a home are then stuck in the private rental market where landlords are jacking up rents partly in response to the higher price of houses but many times simply because they can.

Investment properties are purchased not only for the rental income they generate but also for capital gains. This is one reason why homes can sit empty—another way in which supply is artificially reduced, causing rents to rise.

So how can any of this be fixed? Quite easily. The incentives for property investors could be abolished, and the government could offer substantially more support to those currently locked out of home ownership. Rents could be capped and federal rent assistance could be raised to ease immediate pressures and provide some space for people to save a deposit. A percentage of units in new developments could be guaranteed for lower-income households at below-market rates. Residential property ownership could be capped at one or two homes per household to stop the hoarding. Governments could acquire and use much of the newly available stock to expand public housing.

Measures such as these would dramatically transform the situation and substantially improve the lives of millions of people.