HOUSING AFFORDABILITY: WHAT IS TO BE DONE? – JOE GERSH

In 2023, housing affordability surfaced as the issue of the moment – baby boomers knew nothing like it. The question seemed to have become whether Australians were locked in an unbreakable cycle with no workable answers. Linda Scott, a Labor councillor on the Sydney City Council, oversees an area with the some of the highest property prices in Australia. Joe Gersh AM is Executive Chairman of Gersh Investment Partners Limited, a specialist real estate investment firm based in Melbourne. They are both close to housing problems and finding solutions. On Tuesday 14 November 2023, Joe Gersh and Linda Scott addressed The Sydney Institute to provide perspectives on Australia’s housing dilemma.

HOUSING AFFORDABILITY: WHAT IS TO BE DONE? 

JOE GERSH

I’d like to thank The Sydney Institute – my friends Gerard and Anne Henderson, who I’ve been proud to support as a Board member for over 20 years – for the opportunity to try to say something useful about housing affordability.

It was Mark Twain who famously said, “Everybody talks about the weather, but nobody does anything about it”. And so – until recently – the same might have been said of housing affordability. Everyone talked about housing affordability, but nobody had done anything particularly useful about it.

Of course, all that has changed. To the point at which it can be said the issue of housing affordability may well determine the outcome of the next Federal election. So, not surprisingly, federal and state governments have weighed in with major plans. The Federal Government’s National Housing Accord targets 1.2millions new homes by 2029. The Victorian government has announced a target of 80,000 dwellings per year. The NSW government has just announced a similar objective – 75,000 new dwellings per annum.

To achieve the Federal government’s 1.2m new home target implies 240,000 new homes in each of the five years of the target. But housing starts for the June quarter this year were 40,720; a decade low number. Housing starts are expected to fall from 172,000 in FY 2023 to 154,000 in FY 24. This will give you an idea of the magnitude of the challenge.

Housing demand has been accelerated by a number of factors including, of course, a planned 1.5million immigration surge over the next 5 years. In the year to 30 September 2023, our population grew by 2.5 per cent – 654,000 people, of whom it is estimated 80 per cent were immigrants.

So, to answer the question posed by The Sydney Institute: What is to be done? What will work? In the short time that’s available, I would like to make five main points.

First, our governments are on the right track approaching the affordability issue from the perspective of supply, rather than with demand initiatives. Second, although part of the solution, government is, in fact, a larger part of the problem. Third, the argument over “up or out” is a false binary. Fourth, as Australians accept a paradigm shift to renting as a permanent rather than temporary housing solution, the need is to develop creative new ways to add supply as well as to establish a tax and regulatory regime that supports it. And fifth, we should embrace immigration and not try to shrink the solution to fit the problem.

To deal with each.

 

Supply vs Demand

Until relatively recently, demand type responses were the usual response. For example, first home buyer grants, stamp duty concessions and other purchaser incentives. Time and again economists warned that, in a supply constrained environment, demand side incentives would simply drive up prices – I know this from first-hand experience. Faced with, say, a $5000 government incentive in a buoyant (meaning supply constrained) market, a rational land developer will increase lot prices by the same $5000. I’ve seen it happen, and why wouldn’t it.

Not all demand side responses are as blunt. Schemes in which the government tops up the purchaser’s deposit and shares in the equity of the home can be effective. But these schemes are expensive and complex, and therefore limited.

So, the federal government and state governments in particular have, belatedly, pivoted to a series of measures to address supply; too many to detail here. Principal amongst these is higher density, particularly around transport nodes, and streamlining planning process for particular types of development. Some of the initiatives make sense; some do not. I’ll elaborate a little later.

So much for government as part of the solution.

 

Government as part of the problem.

It is estimated that 40 per cent of the cost of a completed house is attributable, one way or another, to government. Every tax, every fee, every surcharge, every bureaucratic delay, be it state, federal or local, every external referral, every control, such as environmental, heritage or otherwise, every appeal process, every new and creative tax – windfall, vacant property, foreign purchaser surcharge or whatever – adds to the cost of housing and is ultimately borne by the consumer. This is not to argue for or against any particular tax or control. It is simply to state a fact.

But is the cure worse than the disease?

Streamlining the planning process is a polite way to say stripping planning powers away from local government and transferring it to state government authorities. This is proposed in both Victoria and NSW. No doubt, my co-panellist this evening will have (has had) something to say about this (despite Sydney Council having been exempted).

The experience of most developers has been that there is a 6 to 8 month delay whilst an approval – that will ultimately be granted on appeal – is refused by a local government because of elected councillors’ fear of backlash from what are now known as NIMBYs. Councillors use this process to look like they are heeding their constituents while blaming the appeal tribunal for the inevitable outcome. In the meantime, 6, 12, 18 months or longer has been lost – delaying and adding to the cost of much needed housing stock.  

But the solution proposed may create its own problems.

The first is one of design – state governments are offering developers a more streamlined planning process (or even planning concessions) in exchange for including social and affordable housing within their development. If you accept my earlier proposition, you will agree that the cost of this trade off will be borne in the end by the developer, which means, by the other buyers in that development. Is this likely to make housing more or less affordable for most people?

The second problem is one of implementation. Will the state government authority be any better resourced and more nimble than the current local authorities in practice, given (amongst other things) the dearth of qualified and experienced professionals to deal with the applications. Might there be a better way, dare I say it, such as limiting appeal rights? And, of course, planning system delays are only a component of the 40 per cent of cost attributable to government.

What of the other fees, taxes and charges. That is a huge subject. Let me speak tonight briefly about the largest of these: stamp duty.

Stamp duty is a fundamentally flawed tax. It adds-hugely-to the cost of housing. It is a tax on labour mobility. It is a tax on upsizing. And a tax on downsizing. It had one virtue – that it is simply raised – and even this has been muddied by imposing it on commercial agreements and partnerships between land owners and developers, which don’t even involve transferring the land. And it has been distorted by imposing it on foreign purchasers and then exempting – in some instances but not all (and in a discretionary fashion) – overseas capital providers.

And yet state governments have become addicted to this tax, and tentative about exploring more broadly based options. And, of course, increasing the GST and eliminating unproductive state taxes is off the agenda. At least, for now.

Greenfield vs infill. Up or out?

The key insight from the state government plans announced recently in Victoria and NSW is that those governments plan to increase affordability by increasing supply, thus encouraging competition. Economics 101. Yet the Victorian government has, for example, deliberately slowed down and under resourced its planning system for growth areas (currently 50 per cent of new home purchases) in pursuit of its ambition to change the ratio to 70-30 in favour of urban densification. This must drive up the scarcity value and hence the price of growth area land lots. There can be no other outcome.

Why has it done so?

In many of his speeches before stepping down as Victorian Premier, Dan Andrews argued it was because “we can’t keep building roads, hospitals and schools”. You might ask what else state governments are supposed to do except build roads, hospitals and schools. The idea that the state’s finances have been so mismanaged as to limit its capacity to perform core responsibilities (for which contributions have in many cases already been collected and not spent) is an indictment.

And the arguments about infrastructure, although true at the margin, are somewhat bogus. A given number of additional students in an area – infill or growth – will require the same number of school rooms. A given catchment of patients will require the same number of beds. Urban roads themselves have a limited capacity. Traffic is already a problem. To meet the requirements of a rapidly growing population, we need to build both up and out, and we need to do so a rate which we have hitherto not been able to achieve.

There’s nothing wrong with setting objectives – even 70-30, if that’s thought desirable – but are those objectives to be achieved by encouragement or coercion?

Housing needs to be built of a type and in a place that people want. It is unreasonable to expect an immigrant family with two, three or more children and aspirations to a backyard and proximity to their work their community to move to a two-bedroom flat in the inner city, because that’s where the state government wants them to live.

We need to be practical and not ideological about this.

There is a policy to encourage medium density residential development near transport nodes, for example railway stations. This is a sensible and practical solution in urban areas. It does not translate to the growth areas, 20, 30 or 40 km from the CBD. In one instance I’ve been involved in – professionally – it was proposed to backzone land already designated for small lot residential and medium density housing so as to require six storey apartments. Small problem: there isn’t a viable six storey apartment building within a 20km radius of this land. And the railway station in question, of course, hasn’t yet been built!

Lateral thinkers have long recognised that a key solution to land supply and housing affordability lies with transport infrastructure, particularly fast rail. It is the key to regional growth. And yet, Australia’s financial architecture has not allowed it to be built. In the meantime, the demand for housing lots and townhouses remains unsatisfied and prices are bound to increase. In other words, a policy which will lead to the precise opposite of what it was intended to achieve.

I have spoken thus far about housing affordability from the perspective of home ownership. This is just part of the story.

What about Australians as renters?

Traditionally, in Australia, renting was considered a temporary phenomenon; the aspiration was home ownership. This has been turned on its head by the steep change in housing costs, but also by lifestyle choices. This has led to the creation of a new asset class: build to rent. And a growing variant on the theme, land leasing, whereby the land is leased long term but the house itself is purchased. There are many factors which make these sectors investible, or otherwise. Some are outside the scope of this presentation. But the one thing that is certain to stall the progress of these innovative ways of addressing housing affordability in the future (and others such as co-living) is that it introduces government intervention risk.

Cue the Greens.

Let’s accept that the Greens generally have a tenuous grasp of economics, but back on planet earth, or at least so much of it as is inhabited by free markets underpinned by private property, the only way to reduce rents (or at least limit rental increases) is to increase the available supply of rental accommodation. And the base requirement condition for an investor is a predictable, market-determined rental stream. Nothing else will make rental accommodation as an asset class investible or financeable, let alone attractive.

What do the Greens propose? Rental freezes; rental caps. Or in its latest iteration, the Greens candidate for the Brisbane City Council has proposed a 750 per cent – let me repeat that – a 750 per cent rate increase to any investor who increases their tenants rent. In other words: sovereign risk.

I haven’t in this paper spoken about social housing, public housing, community housing – by which I mean rental accommodation provided by the government or subsidised by government and provided by not for profits. This is not to dismiss this sector; just to acknowledge that, with the best of intentions, there is a finite limit as to what the government can afford to provide and that well into the future 90 per cent or more of housing accommodation will be provided by the private sector.

Immigration and the shrunken imagination.

Much has been said about immigration in the context of the housing debate.

Let me make clear that I am not advocating against immigration; on the contrary. It is immigration which has fuelled our economic growth, enhanced our security and facilitated our rich multicultural society. But if we don’t treat all of the steps which are being proposed with urgency, creativity and translation into direct and immediate action, then we may have to consider slowing down our rate of immigration, as suggested by my good friend Peter Costello in today’s Financial Review. But that would be against our longer term interests and an admission of failure on the part of our leaders.

We cannot afford a failure of imagination to let us down. Australia has overcome greater challenges in the past. And with determination, co-operation and innovation we will overcome this one.If I’ve learnt anything over the past few weeks, it’s that it is a lot easier to attend a Sydney Institute lecture than to write one. So, I’d like to acknowledge all of the speakers who I’ve heard over the past 20 years for the effort they’ve made, and to the Institute for publishing them.

I hope mine has also been a useful contribution.