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Building more homes could cut prices by 20%: Grattan Institute

Constructing an extra 50,000 homes a year over a decade could result in house prices and rents being up to 20 per cent lower, the Grattan Institute has estimated.

The think tank has pushed for the government to boost housing supply in its submission to the ongoing parliamentary inquiry into housing affordability.

Across cities and most regions, the Grattan Institute noted median prices have moved from about four times median incomes in the 1980s and early 1990s, to more than about eight times today (and about 10 times in Sydney).

According to the submission, housing costs would have risen less in previous years if more housing had been built, as tax and welfare settings and rapid migration fed demand.

But Australia reportedly has around 400 dwellings per 1,000 people, with the think tank arguing against those who have said there is no undersupply.

Naysayers have reportedly ignored how rising prices have pushed people into larger households than they otherwise would have chosen – pushing them towards a house on the fringe of a city rather than a town house or apartment in the middle or outer suburbs.

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“Australia has among the least housing stock per adult in the developed world and is one of only a handful of developed countries in which housing stock per capita has been stagnant over the past 20 years,” the Grattan Institute stated.

“The mismatch between supply and demand has created a ‘zoning premium’ for well-located housing that benefits existing property owners, but imposes additional costs on new purchasers and renters.”

The worry is that once the international borders reopen, future rates of construction will need to surpass recent elevated levels, in order to keep up with inbound migration.

Going forward, the Grattan Institute believes that if Australia builds an extra 50,000 homes a year over a decade, house prices and rents could end up being between 10 to 20 per cent lower they would have otherwise been.

The additional 50,000 dwellings would be an increase of around 25 per cent on current levels of national construction, or roughly 0.5 per cent of the national housing stock.

Even at the current higher levels, new housing construction has increased the stock of dwellings by about 2 per cent each year.

“Increasing housing supply will only restore housing affordability slowly. But without a concerted effort to boost housing supply in Australia, housing affordability will likely get worse,” the submission said.

“This is primarily a problem for state governments: they set the overall framework for land and housing supply, they govern the local councils that assess most development applications and they set building regulations that affect building costs.

“But the federal government can encourage the states to reform land-use planning and zoning laws in ways that will boost supply.”

However, the argument runs counter to what the Reserve Bank has said, that increasing housing supply will only help combat rising prices to a certain limit.

Planning rules restricting development: Grattan

The think tank has blamed “highly prescriptive and complex” land-use planning rules for a shortage in housing, stating the standards make it difficult to create extra residences in the inner-city and middle-ring suburbs in capital cities.

Further, it claimed planning rules have constrained development of medium and high-density housing, going against what prospective buyers want.

“And so new housing construction in Australian cities is relatively unresponsive to demand and the density of Australian cities has barely changed in the past 35 years,” the Grattan Institute stated.

“Reserve Bank researchers estimated that restrictive land-use planning rules added up to 40 per cent to the price of houses in Sydney and Melbourne, up sharply from 15 years ago.

“More recent research suggests that planning rules have added substantially to the cost of apartments, where building height limits in and around the urban cores of our major cities prevent more construction.”

First home buyer grants offer ‘false hope’

Further, the institute has pushed for the federal government to make tax reforms, suggesting it abolishes negative gearing, slash the capital gains tax from 50 to 25 per cent and include owner-occupier housing in the age pension assets test.

The changes would be the “most direct way” the federal government could improve affordability, the submission stated.

However, the Grattan Institute has warned against subsidising first home buyers and downsizers, commenting past policies have typically caused spikes of activity as they bring forward purchases and drive up prices during the period of demand, but then have a lull afterwards.

“If governments really want to make a difference, they need to stop offering false hope through policies, such as first-home owners’ grants, that are well-known to be ineffective,” the institute stated.

“Governments have no chance of bringing the community with them when they keep telling voters that the easy policies will do the job.”

Meanwhile, most seniors are emotionally attached to their home and neighbourhood and don’t want to downsize, leaving any subsidies to go towards those who were going to downsize regardless, the paper said.

The think tank has estimated that reducing the capital gains tax discount and abolishing negative gearing would cut property prices by around 2 per cent lower than they would have been otherwise.

Further, including more of the value of the family home in the pension assets test would reduce housing demand, the institute posited. Currently, only the first $216,500 is counted in the pension assets test, which determines how much of the age pension would be allocated to a retiree.

“Many age pension payments are made to households that have substantial property assets. Half of the government’s spending on the Age Pension goes to people with more than $500,000 in assets,” the submission said.

“This reform would also encourage a few more senior Australians to downsize to more appropriate housing, although the effect would be limited given that research shows downsizing is primarily motivated by lifestyle preferences and relationship changes.”

The House of Representatives’ standing committee on tax and revenue began its inquiry into housing affordability and supply in Australia in August, hosting its first hearings in early September, where it heard from Treasury, the Reserve Bank and the Department of Social Services.

[Related: Lender economists ‘surprised’ by lending changes rumours]

Building more homes could cut prices by 20%: Grattan Institute
Building more homes could cut prices by 20%: Grattan Institute
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