To tackle housing affordability Scott Morrison must get more homes built | Stephen Koukoulas

Scott Morrison is aiming to make housing affordability a key policy aspect of the federal budget in May. If the treasurer can set in place policies that go towards achieving this, it will be good news for the economy and for issues of fairness and equity.

Housing affordability is relatively easy to calculate because it is the interplay of house prices, household income and the level of mortgage interest rates. Nothing else drives affordability, although having a deposit helps too.

There are three factors that can improve affordability: falling house prices, rising wages and lower interest rates.

These factors can combine to make homes easier to buy, such as when a large fall in interest rates compensates for a moderate increase in house prices. But there is also conflict. For example, a solid rise in wages, which would in isolation improve affordability, is almost certainly going to be linked to a tight labour market, rising inflation pressures and rising interest rates. As such, any plan to materially improve affordability through the wages side of the equation would likely run into the problem of higher borrowing costs.

Let’s look at a scenario of a moderate fall in house prices – say 5% a year over a couple of years. At face value, this would appear to be a controlled, soft landing for housing. In Perth, there has been just such a fall over the past two years but affordability has not improved significantly as it has been accompanied by a doubling of unemployment, a surge in part-time employment and record low wages growth. Affordability has been hampered by the weakness in household income growth as the economy has faltered, in part, because of the housing market weakness.

With full employment and moderate wages growth a policy aim, and interest rates often at the whim of global markets and international economic conditions, perhaps the most meaningful way to tackle affordability is through house prices.

Given the bipartisan policy approach to immigration, which contributes the lion’s share of the 350,000 to 400,000 increase in Australia’s population each year, prices are best contained via a sufficient increase in supply.

By 2022 Australia’s population will be about 2 million more than it is today. Whether these new Australians rent or buy a dwelling is secondary to the fact that the number of dwellings in Australia needs to increase by about 800,000 just to meet that demographic demand. The current level of building approvals is just enough to meet that level of growth having been stronger than that during 2016 (noting that there are around 40,000 dwellings demolished and replaced with new ones each year).

Suffice to say that any shortfall in building will skew house prices higher.

Morrison’s upcoming budget cannot have much, if any, influence over wages growth or the level of interest rates in the short or long run. What federal government policies can influence is demand and supply of dwellings. On the supply side, the government can provide financial incentives for state and local governments to release land that is well-serviced by quality infrastructure – such as roads, public transport, schools, hospitals, leisure areas and places to work.

At the margin, negative gearing and capital gains tax changes are important issues to be sure, but they matter little if there is an ongoing supply and demand imbalance in housing. Those tax changes are more about equity, fairness and removing a distortion to the property market, and as a result are worth pursuing. In the short run, they would no doubt take some of the heat out of the housing market. Over the longer run, the impact of changes to negative gearing and capital gains tax would be slight as the focus switched to supply.

As the Treasury will no doubt be briefing Morrison, there are policy changes that can help influence housing affordability. They centre on issues to do with supply, which is where the attention should be in the budget.

Stephen Koukoulas is a research fellow at Per Capita, a progressive thinktank