Housing supply needs to be more flexible: RBA governor

Speaking to the House of Representatives standing committee on economics for its hearing on monetary policy on Friday (11 February), the governor of the Reserve Bank of Australia (RBA), Philip Lowe, was asked for his thoughts on how housing affordability could be improved in Australia.

The committee is chaired by Liberal MP Jason Falinski, who is also leading the government’s inquiry into housing affordability and supply.

During the hearing, Mr Falinski noted that “one of the biggest expenses or drains on household income is housing costs and affordability of housing”.  

Given the RBA’s duty to contribute to “contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people”, Mr Falinski asked the RBA governor: “What, in the view of the RBA, is the one thing that any level of government could do to improve the affordability of housing in Australia given that it is now one of the most unaffordable markets in the world?”

In his response, governor Lowe said that while he did not believe there was a “silver bullet”, he suggested that “flexible” supply-side measures, including zoning, urban planning and transportation links, would be key.

Mr Lowe explained: “Like most things, prices are determined by the combination of demand and supply. 

“In previous hearings, we’ve talked about the importance of addressing the supply side and that includes the supply of well-located land. Because when we talk about high housing prices, really what we’re talking about is the high cost of land in each dwelling. 

“So we can increase, effectively, the supply of well-located land through transportation policy, good planning policy, good zoning policy. So in a broad sweep of time, it’s the supply side that really is the thing that needs to become more flexible.”

The central bank governor told the committee that fixing the supply of “well-located” housing was needed given the increasing demand for larger floor space brought about by the pandemic.

“[What we’ve seen] over the past couple of years is a very strong increase in demand for floor space; people wanting the bigger homes or homes in different locations because they’re working from home and kids are being schooled home, etc. 

“So there’s been an increase in demand for floor space because of COVID – but the supply of floor space, in the short-term, is fixed (and regional communities are seeing this very clearly). So, what happens? Prices go up a lot. The supply side just isn’t that flexible in the short run … so you get those price swings. 

“In the longer-term, making the supply side more flexible [through] zoning, planning, and I think, as discussed previously, transport; they’re the things that we can do. 

“We can’t do very much about the demand side; people understandably want housing and want to live in the fantastic cities that Australia has and they want a block of land, many people do. So if that’s the demand side, the supply side has to be more flexible,” Mr Lowe concluded.