We need housing abundance

Higher density infill is the answer

It is not unusual to be living in a city where restrictions on increasing housing density have lead to rising rents and house prices, and where people have to live away from jobs, amenities, and friends and family in ever more distant suburbia or be forced to live with people they would rather not. Let's start by looking at the state capitals in Australia where I live and then we will move on to a short discussion of what I think a reborn left would be saying about housing.

Melbourne, Sydney or any of the other Australian cities are overwhelming low density single dwellings once you leave the inner district. This has been enforced through various local and state government restrictions. First off you cannot demolish a pre-1945 house because it is "heritage". This is a big problem because these cities have mostly been quite sizable for well over a century so you have to travel quite some distance to get away from these houses. So, in this inner and middle ring higher density development is confined mainly to old factory and warehouse sites. Then where houses are not considered heritage you still face local government "planning" that caters to the usual aversion of incumbent residents to multi-story apartments and more people. This is the renowned NIMBY problem.

The housing shortage in Australia has become even more acute in recent years with a jump in demand. During Covid people were less inclined to share, families broke up in record numbers and, with people working at home, bedrooms were converted into offices. This was followed by the post-Covid immigration resurgence.

The resulting acceleration of rents and house prices has created sufficient political pressure to compel federal and state governments to start taking increased supply seriously by removing obstacles to higher density infill and setting more ambitious construction targets. This will make some difference but given the backlog of undersupply and continuing population growth, we will only get on top of the problem once we start demolishing Victorian cottages, Edwardian houses and California bungalows and replacing them with apartments. At the moment the very idea is abhorrent to all "fine thinking" people. This will only be changed if they can be convinced that there really is a supply problem and infill will be done really well both in appearance and livability. They would also be more receptive if the windfall gains from up-zoning were taxed and put to local use.

In the short to medium term, removing obstacles to housing approvals is not the only problem. We also have limited construction capacity for housing and related infrastructure which is made worse by an excess of other major projects competing for the same resources.

The extent of undersupply can be shown up in a number of ways. The growth of dwelling completions has been well under population growth over the last 25 years (see graph). Surveys have revealed that a large proportion of people living in houses in the outer suburbs would prefer to live in an apartment much closer in. (See page 10 of this reference). And in recent decades average household size has stayed much the same although demographic changes would suggest that it should be somewhat lower. For example, there are fewer children, and more empty nesters and single people. This means people are sharing when they would rather not. Adult children staying with their parents is a classic example. And telling the same story is the fact that dwelling per thousand people has not increased in recent decades and the figure is one of the lowest among developed countries.

Some are skeptical about focusing on supply as the problem. Indeed, if you do you might be accused of supporting "greedy developers". We are told the problem lies elsewhere.

First we have the tax arrangements that allow investors to deduct interest payment losses when rent income is insufficient and treat kindly the capital gains when they sell the property. This certainly pushes up house prices but according to Grattan Institute estimatesonly by around 2 percent. The home ownership rate is also a few percent lower because of the competition. Foreign investors who own about 2 percent of the housing stock may have a similar demand effect.

This tax regime could also encourage some investors to leave properties vacant because capital gains make the investment profitable even without any rental income. People often cite the Census night vacancy figure of around 10 percent of dwellings. This is very unwise given that there are many reasons why no one is home on a particular evening. The number of dwellings consuming no water for extended periods is a better figure. A Melbourne study shows that 1.5 percent of all dwellings were unoccupied in 2023 according to this measure, and around 5 percent if we include those that were scarcely used.

By all means do some tax reform here. But the best solution is to reduce or eliminate the primary cause of capital gains, the lack of abundant housing.

Another concern sometimes voiced is gentrification. This refers to higher income households moving into cheap, possibly rundown, working class neighborhoods. The more the new crowd takes over, the more attractive it becomes for them, and they flood in and out-compete the original residents for housing. In Australia's inner suburbs, this happened decades ago. So, now it is mainly a matter of keeping them out of new territory, and that is best achieved by ensuring adequate new supply in the areas that are already gentrified, indeed by eventually making them more affordable for everyone.

Land-banking is another concern. It is argued that there is sufficient supply of land but developers and investors are sitting on it in order to keep up prices. However, land ownership and development are fairly competitive sectors and if we up-zoned for lots of infill it is difficult to imagine how this could be a problem.

A few years back it was claimed by misusing statistic that housing construction was catering mainly to the top end of town. This is visibly nonsense when you consider that most new housing is in the more affordable city outskirts.

Combined with this is the claim that "filtering" does not occur. In other words, the resulting cascade of house moves when one household occupies a new dwelling does not reach the bottom of the market. The information to test this is not available for Australia, however, US studies suggest that filtering is real. Of course, for those at the bottom end of the market there would be a lag and it is not the same as building affordable dwellings in the first place.

If we actually had a political left, its housing policy would focus not only on housing abundance but also on making renting more attractive relative to the mortgage treadmill.

Supporters of capitalism are very keen for workers to be "homeowners" and achieve the “<country> dream”. It ties them down physically and financially, and gives them an investment in the system. It would also leave a revolutionary regime stuck with a lot of people attached to a bit of private property.

I don't know about other countries, but in Australia the tax and welfare systems both favor home ownership over renting. This has to be challenged. Also, the tenancy laws have to do a better job of protecting tenants from landlords.

In Australia around 85 percent of the rental stock is owned by "mum and pop" landlords with three or less properties. This is because state land taxes are progressive and on the basis of total properties owned rather than each separately. This deters large institutional investors who would make much better landlords. Unlike small landlords they would not kick out a tenant to sell to a homeowner nor to install a family member. They would also be more reliable with repairs because they have a brand to protect and tenants can organize against them.

Large landlords would be more relaxed about long-term leases and allowing significant interior changes much in the way shops and other businesses do. With their large number of properties they can risk the occasional bad tenant.

There also needs to be a boost to public housing to accommodate those who tend to be rejected by the private rental market and are at risk of being homeless. Some have grander visions of a greatly expanded public housing sector and possibly think there is something "socialist" it. However, providing public housing to everyone on welfare would require a level of spending that is simply not going to happen. On the other hand, increasing the federal rental assistance to anyone in that category is a realistic proposition.