By Hal Pawson. The story was originally published on John Menadue’s Pearls and Irritations site. Read the original article here. Photo by Victor on Unsplash

While most Australians remain well-housed, few public policy experts would argue that our housing system is today in good shape. Homelessness continues to increase and both rental and mortgage affordability stress are widespread.

But although compounded by post-pandemic market disruption, such problems have been mounting over decades. Perhaps the single most powerful indicator of dysfunction is the long-term decline of home ownership, with young adult owner-occupancy rates down nearly 20 percentage points since the 1980s.

As many economists would nowadays argue, such problems primarily reflect structural housing market flaws, not cyclical fluctuations. They represent a policy challenge that calls for fundamental reforms to policy settings that shape the way that market works.

As argued in a recent paper, growing concerns around declining housing affordability in the post-GFC era have brought to the fore three distinct sets of ideas on the actions needed to address this problem.

The Rational Economic Reform Discourse

The Rational Economic Reform Discourse on housing dates back to the 1980s. It attributes housing affordability problems to policy settings giving preferential treatment to one housing tenure (home ownership) over another (renting). This incentivises housing choices that benefit from such preferential treatment. These policy settings are not only inequitable, their benefits are also capitalized into property values, pushing these further out of reach for low to middle-income non-owners, and detracting from investment in other more productive economic activities.

The Rational Economic Reform Discourse instead advocates ‘tenure neutrality’ in housing policy; that is, tax treatment equality across the different forms of housing. This could involve phasing down related ‘tax expenditures’ for redirection to boosted financial support for lower-income renters, and/or expanded social housing investment. Judy Yates was a leading academic researcher in this body of thought, and the Henry Tax Review is a notable policy document in the Rational Economic Reform tradition.

The Supply Discourse

The basic claim of the Supply Discourse is house prices and rents are high because housing supply is too low. While supply may be inhibited by many factors, contemporary Supply Discourse highlights one: land-use planning. As bluntly stated by one of its leading Australian proponents, Peter Tulip: ‘The main cause of high [housing] prices is land-use restrictions—often called planning or zoning’.

Advocacy for the Supply Discourse unites free market economists and construction industry voices, among others. It is also attractive to many politicians, partly because the ‘cutting red tape’ and ‘prices too high because of inadequate supply’ mantras both resonate well with the media and the public.

The Supply Discourse has a popular political following in the YIMBY (Yes In My Backyard) movement. YIMBY adherents are adamantly opposed to so-called NIMBYs (Not In My Backyard) who, it is said, stymie development proposals and throttle housing supply.

Demands for ‘planning deregulation’ are underpinned by the assertion that this would liberate developers to expand output, thus deflating property prices. This discourse also dismisses the advocacy for planning rules requiring that new developments routinely include a specified percentage of homes at sub-market rents.

However, while widely cited, modelling estimates purporting to quantify the ‘cost of zoning’ in Australia have been challenged as failing to recognise the special qualities of land as a commodity.

The Land and Finance Discourse

The Land and Finance Discourse shares some common concerns with Rational Economic Reform discourse, but places greater emphasis on the ‘unreproducible’ quality of land, on developer behaviour, and on the way that housing has become increasingly financialized – that is, treated more as a financial asset than as a place to live.

Underpinning this discourse is the political economy perspective identifying land ownership as a source of economic rent, and highlighting that this constitutes essentially ‘unearned income’.

All landholders have an eye to the potential future values of each lot they own – values that depend on nothing they have done, but on the level of economic activity on and around their land, and investments in transport and other infrastructure. In contrast to the Supply Discourse assumption that landowners are straining against planning restrictions, this analysis sees owners weighing whether it is more profitable to develop now or later at potentially greater profit.

Thus, much more than in the Rational Economic Reform Discourse, this narrative emphasizes the central importance of broad-based land value taxation (LVT). The direct relevance of LVT to addressing housing affordability is its utility in discouraging speculative acquisition and holding of land. LVT instead spurs property owners to develop land to its best use, and thereby bring more housing supply to the market.

Land and Finance reform advocates also favour stepped-up government involvement in land ownership and development. This could include agricultural land acquisition at existing-use values for subsequent sale at development values following infrastructure installation and rezoning. In other words, a resumption of practices common in Australia in the immediate post-war period, and continued in some form to this day in countries such as The Netherlands and Germany.

Finally, recognizing that the financialization of land and housing has led to an explosion of private debt, the Land and Finance discourse includes calls for stronger central bank intervention to reverse the historic increase in the share of bank debt being issued for real estate, a factor contributing to property price inflation.

How can housing system reform be advanced?

In more broadly applicable proposals on how to free up overdue structural reforms, former Grattan institute CEO, John Daley, proposes institutional measures to confront key barriers. These include ‘strengthening … independent policy institutions that build the public evidence base for reforms’, restricting the influence of interest groups and lobbyists, curbing the power of Ministerial political advisers, and rebuilding the policymaking capacity of government itself.

All three housing reform prescriptions reviewed here have elements of validity although the ‘silver bullet’ qualities sometimes claimed for the Supply prescription are highly questionable. At the same time, the Rational Economic Reform prospectus implies a case for scaling back owner-occupier tax benefits imaginable only via some kind of ‘roll over relief’ mechanism that remains unspecified. Crucially, only the land and finance discourse fully recognizes the special qualities of housing and land, as well as resulting developer behaviour.

A continuation of current trends will inflict growing hardship on disadvantaged groups and a continuing rise in intergenerational inequality. Moreover, an ongoing decline in homeownership will increasingly feed through into elevated levels of pensioner poverty as fewer in this age cohort benefit from outright homeownership. Since an under-performing housing system is also a drag on economic productivity and growth, it is also surely a problem that should be owned by both sides of politics.

This article draws on a recently published chapter in: Jacobs, K. et al. (eds) Research Handbook on Housing, the Home and Society.

Thanks to Dr Chris Martin for his useful contributions to the story.