Supply and Demand for Housing

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Houses are too expensive. Right?  They are if you are trying to buy one, but not necessarily if you are an owner.  As an owner you just want to see them go up in value.  So what, if anything, can governments do?

Let’s start by thinking about supply and demand.

On the supply side, we have the number of houses and the land available to build new houses.  Government has control over the land available and councils have control over the types and density of housing.  Developers want government and councils to allow them to build more houses.  On the other hand existing residents want less density and undeveloped areas to stay undeveloped.

More courage is required from legislators to approve development than to sit on the fence.  In any case, do we not elect governments to do what the majority want?  Isn’t that what democracy is all about? Are there more people who want to buy a house, or are there more people who want to retain, and increase the value of their own house.  Democracy can become an exercise in who is the most selfish.

On the demand side, we have two groups.  There are those who are trying to buy a family home, and those who want an investment property.  The mix of those two groups is going to be determined by the economics of the situation.  If there is money to be made from investment properties, investors will dive into the market.  If there is no money to be made they will bail out.

The government can influence the developer market.  Negative gearing is the most obvious, but there are also fees and chargers for developers to fund infrastructure.  There is land tax.  Rates and taxes could be modified to reduce investment return by having higher levels for investors.

Another demand based factor is obviously price.  The more expensive the property, the less demand.  Imagine you have a property on the fringes of Sydney with national park at your back door.  The government decides to carve off some of that national park for development.  Instead of pristine bush you now have a new suburb over the back fence.  What happens to your property value?  It moves in a direction that is not up.  Are you a happy little Vegemite who can see that it is all for the common good?  Probably not.  Will you vote at the next election for the party that took the decision?  It will take an opposition headed by Satan to drive you back to the incumbent party.

Equally, the higher interest rates, the less demand.  Government can influence interest rate but the ramifications go well beyond housing.  Interest rate is a hammer to drive in a pin.  Someone can end up with badly bruised fingers. In any case, rates are not forever.  People dive in when the rates are low, and often find out they are totally over committed when rates rise.  Not the way to endear you to the electorate.

So what can governments do?  The answer is not much if they want to stay in power.  A long term approach is needed that will gradually whittle away the investment returns and make more land available is about all we can hope for.  Drastic action will guarantee electoral annihilation.

Over time we need to move Australia away from the concept that a house is an investment.  Buying a house should be seen as a basic right albeit for a significant proportion of their income over the years.  I have no idea how you do this but it starts with a conversation between government and the population.  It will take decades but at least we will be moving in the right direction.  The biggest problem I see is that nobody wants to start talking about the reality of supply and demand for housing.