Economists rate government’s housing accord

The federal Treasurer Jim Chalmers’ budget outlined a National Housing Accord that aims to address the supply and affordability of housing crisis in Australia.

The accord was signed between governments, investors and the construction sector and set a goal of building 1 million new homes over five years from 2024.

Under the accord, the government will provide $350 million over five years, with ongoing availability payments over the longer term, to deliver an additional 10,000 affordable dwellings, with the bulk of the investment coming from the private sector.

Mr Chalmers described the accord as “ambitious”, given the current economic conditions, with inflation tipped to reach 7 ¾ by the end of the year, rising interest rates and global uncertainty, which weighed on the budget’s bottom line.

However, one of the main critiques of a target for 1 million new homes in a five-year period is that the target is “not ambitious” given recent completions.

According to the latest ABS data, 974,732 homes were constructed in the five years to June 2022, and an average of 1,010,723 have been completed on a five-year basis since 2017.

Thus, it could be argued that the housing accord is “below target” given Australia’s increasing population and housing crisis.

But CoreLogic’s head of research, Australia, Eliza Owen, said it’s important to note that the past five years have been conducive to high levels of construction.

Ms Owen said notwithstanding immense bottlenecks for the construction industry in the past two years, there’s no guarantee activity levels will remain at the same level for the next five years.

“One million new homes is an ambitious target when considering economic context,” she said.

“The completion of 1 million homes between 2017–2022 has been achieved amid falling and record-low interest rates, strong price incentives for developers, the HomeBuilder grant, and an investment-led, off-the-plan apartment building boom in the mid-to-late 2010s.”

However, as interest rates rise, home prices fall and supply-side constraints persist, the delivery of a million homes is not guaranteed and may be “more ambitious” than what was achieved in the past five years.

ABS data has revealed that building completion has already started winding back since the recent building boom and new dwelling approvals have been trending lower since interest rates increased.

Ms Owen said the data (below) suggests there will be a gradual depletion of the residential construction pipeline and further falls in completions down the line.

“Perhaps one of the more worrying unknowns in the accord is just how much of these million homes will be dedicated to affordable housing,” she said.

The government has indicated 10,000 homes will be allocated for affordable housing supported by the federal government over five years, with 10,000 coming from state and territory governments, as well as the 30,000 new social and affordable homes, which were announced in the lead-up to the May federal election.

While the budget references incentives for the private sector to deliver affordable housing, Ms Owen argues there will be “some finer detail” required about how this can be incentivised and enforced.

The Housing Accord is laying the foundations for institutional ownership.

“The accord encourages ‘institutional investment’ in housing, including from superannuation funds, [but] traditionally, institutionally-funded housing has not been a large part of Australian housing stock,” Ms Owen said.

“Australian tax settings in particular are far more conducive to individual, ‘mum and dad’ investors participating in the housing market than large managed funds.”

She explained this was partly due to investors seeking solid rental returns and returns remained “relatively low”, making long-term rental investments less viable.

However, the accord attempts to combat this by incentivising institutions to invest in social and affordable housing by “covering the gap between market rents and subsidised rents”.

“Institutional ownership of land and property could be an awkward fit for Australia, a country which has historically placed emphasis on outright home ownership for wealth creation and a comfortable retirement,” Ms Owen said.

“While there is not a lot of detail just yet about how institutional investors will fit into the Australian housing market, it seems the Albanese Government is laying the foundations for a new kind of property ownership in Australia.”

Promoting investment is a necessary move

Chief of research and economics at Domain, Dr Nicola Powell, said it was a “lofty ambitious” and important transition for the government to promote investment, alongside incentives such as the government guarantees.

“It was a great move to see the government prioritising supply rather than thinking how can we boost demand through helping say first homebuyers get onto the property ladder quicker,” Ms Powell said.

“What it showcases is that the government acknowledges the fact that supply is a crucial part of the affordability equation.”

She added the fact that supply will be targeted to areas that particularly need more affordable housing was a key ingredient.

“We know that population dynamics did take a shift during the pandemic, we saw regional areas being boosted in terms of their population,” Ms Powell said.

“The supply of housing and particularly affordable housing in Australia, [hasn’t] kept up with the level of demand in the market and there’s been an under supply of housing for some time.”

Indeed, it’s not just about boosting supply for home buyers to purchase a home, but also opening housing for the rental market, she explained.

“Not everyone can afford to or wants to purchase a home,” Ms Powell said.

“Social housing supply helps to ease various aspects of the housing market and the rental market is in a crisis across Australia.

“We haven’t built enough social housing. We haven’t built enough housing in general. And what that means is our most vulnerable Australians should be in social housing or in the private rental market.”

While increasing supply may indicate house prices could fall further, Ms Powell said we need to “push to boundaries” in terms of what we call affordable housing and ensure tenants who want to be first home buyers have access and people living rough have homes.

[Related: Budget 2022/23: What you need to know]