This article was first published in The Australian on 13 August 2003.
By Christopher Joye
Posted Friday, 15 August 2003
On June 6 this year, Malcolm Turnbull and I presented a 380 page report to Prime Minister John Howard that advocated several approaches to radically reducing the costs of home ownership in Australia. The insights offered in this submission, which was co-authored with colleagues from Cambridge, Harvard and New York University, are responsible for precipitating the Productivity Commission's housing inquiry and shaping its terms of reference.
For better or worse, the media attention to date has focussed on our desire to relax the "all-or-nothing" constraint on home ownership and furnish families with the option of using both debt and equity finance when purchasing their properties. Along these lines, aspirants would not be compelled to acquire 100 percent of the equity in their home nor single-handedly bear the burden of the vast financial responsibilities inherent in owner-occupation. Yet a considerable proportion of our analysis was also dedicated to investigating problems on the "supply side" of the housing market equation. So what were the key findings?
First, a great deal of confusion tends to reign in the emotive affordability debate. Most commentators make the mistake of attempting to judge the costs of home ownership in relation to the income levels of prospective acquirors. While poverty undoubtedly leads to significant suffering, this does not justify tying housing policies to the distribution of income.
If government wants to assist the economically disenfranchised, it should do so via targeted anti-poverty proposals. If it is especially eager to ensure that poor people are able to afford appropriate shelter, then housing vouchers that are linked to income may make sense. Good public policy does not, however, confuse issues that cause high house prices with those that contribute to poverty.
Second, there is an affordability problem in Australia, but it has nothing to do with income levels, interest rates or a dearth of exploitable land. Rather, it is the result of oppressive local and State government regulations (often imposed with the enthusiastic support of proximate communities) that severely constrict the stock of low-cost properties and, when combined with ever-growing demand, artificially inflate the price of housing.
Viewed differently, these constraints on dwelling dispersion and the release of greenfield and brownfield sites act as a burdensome tax on new building, which leads to a mismatch between the accommodation needs of Australian households and the supply of available properties. This in turn produces a divergence between the price of homes and their underlying costs of construction. As a consequence, we recommend expanding the affordability debate to encompass local and state government reform, rather than confining ourselves to that perennial panacea, public housing.
Specifically, we believe that several innovative steps can be taken to improve the availability of housing without resorting to subsidies, and which would contribute to a striking reduction in the costs of home ownership right across the country. The overall objective here is to accelerate the approval and land release process so as to promote private-sector investment in the production of affordable housing.
In particular, we propose a system in which local councils are set targets for the number of new building approvals they issue during any given period. The size of these quotas would be determined according to a variety of factors, including environmental considerations, the density of existing dwellings, developer demand and cross-municipality prices.
Hence, regions characterised by a combination of high prices and low dispersion would be set comparatively high targets, all else being equal. The scheme could be enforced by tying the council's funding to their ability to boost supply in line with the mandated goals.
This brings me to a more general point, which is that many local and state governments have failed to come to the affordable housing party. To a certain extent, this is an upshot of their profound aversion to instituting changes that are perceived to be disruptive to existing residents (popularly encapsulated in the "NIMBY" movement).
While we believe that our strategy goes a long way to addressing these concerns, it may not garner adequate political support. In the event that it does fail, councils still have an arsenal of alternatives on hand. As a minimum, they should strive to adopt clearer and more objective review standards, and expeditiously render land use decisions in an attempt to enhance the ownership opportunities available to current and prospective home buyers.
The states, on the other hand, need to make a much greater commitment to providing the vital physical infrastructure (or at least its funding) that is required before zoned land can be made useful for housing purposes.
In the UK and the US there has been emerging recognition of the merits of this method. For example, the Mayor of New York City, Michael Bloomberg, notes: "Our affordable housing strategy [rests on] changes that will cut building and land acquisition costs in order to facilitate private housing construction." His counterpart in London, Ken Livingstone, recently tendered a vision for his city along similar lines.
Christopher Joye is a director of the Menzies Research Centre and based at Cambridge University in England.
