More housing supply not driving down prices, says AHURI

Housing Supply Responsiveness in Australia, a recently released AHURI report, argued that while the issue of housing supply has traditionally been viewed in terms of supply failing to keep pace with growing demand, the concept is actually more nuanced, and “cannot be captured by a simple comparison between the levels of demand and supply”.

“Our descriptive statistics show that the growth in the national housing stock has kept pace with national population growth over a nearly decade-long time frame. However, [we’ve also discovered] that most of this growth in housing supply may not be constructed in areas where it is most needed,” it said.

The report found that much of the growth in Australia’s housing stock between 2005-6 and 2013-14 has not been in areas where it is required.

“New housing supply has been concentrated in mid-to-high price segments. Housing in low-priced segments is presumably more affordable, but less than five per cent of building approvals were in the bottom 20 per cent of the house and unit real price distribution in 2013–14,” the report said.

“New housing in high-priced segments should, in theory, push down the prices of existing housing as purchasers of new housing vacate their established properties, making it more accessible to low-income households. However, this process does not seem to be working very well,” it said, explaining that this could be due to “structural impediments” that weaken the trickle-down impact of new housing supply.

AHURI’s comments come after NAB’s global head of research Peter Jolly argued that the new First Home Super Saver Scheme introduced in the federal government’s budget won’t actually fix the housing affordability problem.

“This actually adds to demand,” he said at a recent breakfast event in Sydney. “It doesn’t actually solve the other big issues in any way.”

He pointed out, “there is something else going on other than those things that are cited as being issues for housing.”

The issue is one of supply and demand.

“One of the key drivers of demand has been this,” Mr Jolly said. “Australia’s population is growing at an extraordinarily quick pace of 1.5 per cent per year or 350,000 people a year.

“As NAB’s chairman Ken Henry likes to say, it is ‘a Canberra per year’ that we need to house and educate and give medical services to.

“When we look around the country, the places where dwelling prices have been rising quickly are where population growth has been growing most quickly as well.”

The RBA has taken action with monetary policy, and APRA has introduced macroprudential measures, but none of these issues solve the supply-demand issues, Mr Jolly said.

“If you look at what is happening in Australian housing, the fundamental issue is we are not building enough dwellings relative to the population,” he commented. “The RBA and ASIC and macroprudential policy – they don’t change the real outcomes. It’s policies at the top that changes real outcomes.”

When assessing the policy development implications of its findings, AHURI emphasised that the price responsiveness of housing supply has important implications for productivity in both metropolitan and regional economies.

“The high housing costs – that are a consequence when housing supply is price-inelastic – are a drag on local, metropolitan and regional economic growth. They depress the real incomes of households in communities affected, and local firms’ business/sales are adversely impacted, exacerbating downside impacts on the local economy,” it said.

It therefore concluded that there is a need for further policy reforms that promote the price responsiveness of housing supply in the country.

“Targeted government intervention might be needed in order to ensure an adequate supply of affordable housing.”

[Related: Analysis: The missing piece in Australian housing]