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Myth busting on housing economics

Myth busting on housing economics

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Building 1.2 million homes over five years is possible but current misinformation can distract from essential policy outcomes. It’s important to be aware of four common myths about the Australian housing supply.

Todd McInnis

HIA Senior Economist

The government’s goal of building 1.2 million homes over five years may significantly improve the acute housing shortage that’s plaguing the Australian economy. It’s an ambitious but achievable goal. To achieve this, the government will need to increase the volume of new homes commencing construction from the 183,000 that started in 2022 to at least 240,000 per year.

HIA’s forecasts show that in 2024 – the first year of this five-year window – there will be just 179,000 new homes commencing construction with both detached and multi-unit starts well below their recent volumes. That isn’t to say the target can’t be achieved. At the peak of industry activity between 2015 and 2018, the industry routinely commenced more than 220,000 a year and peaked in 2016 at 234,000. With this volume of new homes commencing construction over the course of a decade, the cost of housing and rental price growth will stabilise. But there’s clearly a lot of work to do.

To achieve the target, it will require a reduction in tax constraints, easing in finance regulations and reform of planning regulations and for all tiers of government to work to these outcomes. Unfortunately, there’s misinformation that needs to be corrected that can distract from these policy outcomes. Here are some of the most common misconceptions about housing supply.

Drivers of housing demand are independent of migration or population growth.

MYTH 1: Housing demand only grows when population grows

When people talk about the sufficiency of Australia’s current and expected future housing stock, they generally refer to growth in the population – that is, the number of dwellings we need to accommodate the expected increase in population. Growth in the population will obviously have a positive effect on the number of dwelling commencements. But it’s not the only factor.

Many underlying drivers of housing demand are independent of migration or population growth. Housing demand will continue to grow even if the population does not. For example:

  • There will always be a stock of dwellings needing to be replaced, either as they get old and no longer habitable or simply as their owners 
    move out. 
  • As households become wealthier, they will be more likely to purchase an investment house, a holiday home, or make extensions to their existing home. This will add to the overall demand for building activity, regardless of growth in the population. 
    This analysis provides two key insights: 
  • Even without any population growth from either natural increases or migration, Australia will need to commence between 100,000 and 120,000 new homes per year. This is over half the current rate of 180,000 commencements in 2022. This phenomenon can be observed over recent decades in Japan, which has experienced decades without population growth. Despite this, it continues to build new homes. Similarly, this occurred in Australian cities during the 1980s 
    and ’90s.
  • The most robust models had a lag on population of between five to eight years. Hence, population growth today can be expected to add to the stock of dwellings needing to be completed in around five to eight years’ time, highlighting the importance of long-term, consistent planning. 
Foreign investors can’t purchase existing properties in Australia.

MYTH 2: Foreign investors are buying all the houses

Net overseas migration in the 12 months to March 2023 was 454,000, nearly double what it was tracking before the pandemic. Migration is certainly trending upward but if growth is consistently above trend, it’s easy to see how these perceptions come about. Since migration is a key part of population growth, saying that migrants steal houses is just saying that population growth steals houses. Clearly, no-one says that.

Importantly, foreign investors can’t purchase existing properties in Australia. Foreign investors can, however, buy vacant land and build new homes. So far from ‘stealing’ dwellings by adding to the demand for new properties, foreign investment spurs additional investment in new dwellings.

A study by the RBA found the value of foreign investment is only around five to 10 per cent of the total value of dwelling turnover1. And, of course, new housing funded by foreign developers could just as easily be purchased by Australians. The same RBA study estimated that 65 per cent of dwellings funded by foreign investment are sold to Australian buyers.

According to a recent update from the Foreign Investment Review Board, the value of approved foreign investment in 2021-22 was less than a quarter of what it was in 2017-18. The Financial Review also recently reported that overseas buyers accounted for just 0.75 per cent of residential dwellings in Australia2. This coincides with the decline in new apartment construction over the same period.

MYTH 3: There’s nothing government can do

Although the sector has fallen back recently, 60,000 starts per quarter, or 240,000 per year, is well within its capacity to deliver. In the four years before the pandemic, 56,000 building starts per quarter was the norm. It’s possible that figure can be achieved again.

To achieve this, all parties need to come to the table. That includes governments of all levels, as well as relevant industry players. However, the industry will naturally take its lead from the government so to get the ball rolling, governments need to ensure the right policy settings are in place.

HIA has previously reported what we consider to be the four key things the government could do to play its part in achieving 240,000 homes a year. They include:

  • Do no harm. When governments tax something, they get less of it. There’s a long list of taxes, fees and charges imposed on new home building from stamp duty to a ‘temporary levy’ imposed to recover the cost of the HIH collapse in 2001. Just as governments tax tobacco to impede its consumption, by taxing new homes, they achieve the outcome of building fewer homes. 
  • Attract more investment to the sector. To build more homes, more investment is required from all buyer types: owner-occupiers, investors, foreign investors and government. However, fees and taxes on foreign investors have begun spiralling out of control. This needs to stop if we want to build 240,000 homes a year.
  • Address labour shortages. Shortages of skilled labour have persisted in hampering the industry for much of the past 20 years. HIA member surveys over multiple years have persistently found access to skilled labour as one of the most challenging pressure points builders face. 
  • Facilitate a coordinated government response. Coordinated action across all tiers of government can ease Australia’s shortage of homes. This would be assisted if each state had a department of housing with a consistent mandate to increase the supply of housing. Apart from ensuring a concerted effort is made to improve housing supply, it will also provide an advocate within government to prevent additional costs being imposed on new homes.
Holiday homes accounted for 23 per cent of vacant dwellings.

MYTH 4: 10 per cent of homes are vacant

After the 2021 Census, there were attention-grabbing headlines saying 10 per cent of homes were vacant on Census night. The articles implied that there are one million abandoned homes around Australia that are being withheld from the property market. However, this claim is untrue.

The proportion of unoccupied homes has been around 10 per cent since as far back as the 1981 Census. In fact, an article in The New York Times noted that the vacancy rate from the 2020 US Census was around 10 per cent as well3. So it’s hardly newsworthy to say 10 per cent of homes were unoccupied. Additionally, the proportion of unoccupied homes has been steady so it can’t be due to ‘abandoned’ dwellings being withheld from the market. If it were, something would have been done about it 30 years ago.

Most of the so-called ‘vacant’ homes were, in fact, vacant for a good reason. An analysis in 2017 estimated that residents being absent accounted for 44 per cent of reported vacant homes in the 2016 Census, and holiday homes accounted for a further 23 per cent of vacant dwellings4. Rental properties accounted for a further 11 per cent of unoccupied dwellings, while homes undergoing repairs and homes for sale both contributed five per cent each.

A better measure was recently released by the ABS in an experimental dataset that draws on the Multi Agency Data Integration Project (MADIP), an initiative commenced in 2015 with the aim of making better use of the wealth of information collected through Australia’s various government departments5

The dataset uses data from the Australian Bureau of Statistics address register, the Multi-Agency Data Integration Project as well as data on electricity connections from electricity distributors and networks to estimate the proportion of dwellings that were:

  • in use as a primary residence
  • in use but not as a primary residence
  • inactive with no sign of recent use. 

So, the last category is the most significant, while the majority of the 10 per cent of ‘vacant’ homes more accurately fall into the second category.

Based on this measure, between 107,000 and 136,000 dwellings, or 1.3 per cent of the total, were ‘inactive’ at the time of the Census. This is less than what we estimate to be the number of dwellings required simply to house the expected growth in the population each year.

References : 

  1. Foreign Investment in Residential Real Estate
  2. Overseas investors are buying less property than you think (afr.com)
  3. Vacancy rate by state
  4. SOLVED: Why no one was home on census night
  5. Administrative data snapshot of population and housing

Source: HIA Economics

First published on 27 November 2023

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