Let me start with my thesis.
Much of the contemporary debate about housing affordability is a distraction; promoted by vested interests and reinforced by political incentives. The proposed solutions are usually policies that favour property owners, not renters and buyers.
The first way we know something is off is the language. Affordability is a beautifully vague word. It’s a word that works nicely as a covert signal—that is, a word that means something different to your target audience compared to others.
Aspiring homeowners can be led to believe that the word implies cheaper prices to buy homes. Maybe also cheaper rents. They feel their concerns are acknowledged. It appears like something is being done for them.
For homelessness and public housing advocates, the word affordability can imply a boost to public housing investment to provide non-market housing options to the neediest. The word makes it appear that something is being done for them too.
But the beauty of a covert signal is that the true meaning is known only to the target audience. In this case, large property owners and developers. They know that affordability means that absolutely nothing will be done that puts the value of their property assets at risk. To them, the word is an invitation to participate in the next great property scam.
They know that to appear to be doing something about affordability, their political mates will simply ask them what policies they want. Whatever tax break, rezoning, or subsidy they come up with will then become the nation’s new “affordable housing” policy.
It is no leap to say that these outcomes are in fact the real objective of pretending to care about cheap housing by distracting us with the word affordability.
In his 1946 essay on Politics and the English Language, George Orwell wrote:
When there is a gap between one's real and one's declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish spurting out ink.
Affordability is a long word that hides the real aim of boosting the asset portfolios of major property owners behind the declared aim of making housing cheaper for residents.
So why must politicians play this Orwellian game of pretend at all? There are three political economy issues at play.
First, is the electoral logic.
John Howard is claimed to have said that he had never met anyone who complained about their house going up in value.
Sixty-five per cent of Australian households own their own home, with eighteen per cent being landlords, and both sets of property owners generally skewing toward the highest-income households, as well as older households. Contrast this with the roughly 100,000 households (or 1%) who are new buyers each year, and the few per cent more that would like to be, the electoral calculus on heavily on the side of satisfying the majority who benefit from higher prices, not lower ones.
Think about it. Australia’s housing stock is worth about $10 trillion. Not billion. Trillion. That’s $1 million per household on average. It’s the largest asset class in the economy by far.
A policy that reduced home prices by 30% would wipe out $3 trillion of value from household balance sheets, hitting the highest income and most politically influential households the hardest.
That leads me to the second related political economy issue. What I call the personal finances logic.
Politicians themselves own a lot of housing. Analysis of the financial disclosures of federal politicians in 2017 found that the 226 federal politicians in the house and senate directly owned 525 residential properties between them—that’s 2.3 properties on average. If these were valued today at the $1 million per dwelling average, that’s over half a billion between them.
There are another 600 or so politicians in our state houses of parliament, again filled predominantly with homeowners and landlords. And Australia’s roughly 500 councils have over 4,500 elected councillors, who are also heavily represented by property interests.
Altogether, that’s roughly 5,600 politicians in Australia across all levels. If they owned the 2.3 properties on average that we know federal politicians do, worth $1 million each, that’s $13 billion in property assets. A 30% price decline would wipe off over $4 billion in asset value from their own balance sheets.
What are the chances of over 5,000 people conspiring to wipe billions from their own balance sheets, and of course those of their family and friends, for no direct benefit? It’s implausible.
Finally, there is a macroeconomic logic.
For three decades Australia and its peer nations have used the housing market as a macroeconomic stabilisation tool. When economic trouble appears on the horizon, we lower interest rates to boost house prices. And by repeatedly doing so, the interest rate ratchet has led to massive asset-repricing of property in Australia, and globally, since the 1990s.
We call this property price regulation monetary policy. Another phrase that might make George Orwell proud.
Let me read from the Reserve Bank of Australia’s (RBA’s) published explanation of the mechanism by which they think monetary policy affects the economy.
• Lower interest rates support asset prices (such as housing and equities) by encouraging demand for assets. One reason for this is because the present discounted value of future income is higher when interest rates are lower.
• Higher asset prices also increase the equity (collateral) of an asset that is available for banks to lend against. This can make it easier for households and businesses to borrow.
• An increase in asset prices increases people's wealth. This can lead to higher consumption and housing investment as households generally spend some share of any increase in their wealth.
This is no secret. It’s in the economic textbooks and it is published on central bank websites all around the world. This is why housing prices around the world boomed on the back of the low-interest response to the pandemic in 2020. They boomed because we designed our macroeconomic stabilisation policy as a “high house price insurance system”.
So big and important is the housing market to the overall state of the economy, quite few informed friends of mine say that “Australia is a housing market with an economy attached”.
Indeed, the RBA’s Luci Ellis said at the recent Housing Supply Inquiry, another great piece of political theatre, that
there are no examples internationally of large falls in nominal housing prices that have occurred other than through a significant reduction in capacity to pay, such as a recession and high unemployment.
There are no examples, anywhere in the world, where cheaper prices have been engineered politically. Price declines only happen as an undesirable side-effect of declining macroeconomic conditions.
The three main political economy issues—the electoral logic, the personal financial logic, and the macroeconomic logic—together reveal the motivation for keeping prices high and hence only pretending to care.
Given these realities, what real choices does even the most community-minded politician have? The political sweet spot is to ensure economic returns to property owners stay high—through price growth and market rental returns—while pretending to want the exact opposite.
Anyone who does differently will simply be replaced. We saw how big a deal relatively minor changes to negative gearing and capital gains tax were in the 2017 federal election.
If what I say is true, then the tax breaks, rezoning, or subsidies now being sold to us as affordability solutions must be anything but. Instead of benefiting home buyers and renters, they must benefit home sellers and landlords—the other side of the housing market equation.
With some simple logic, we should be able to see them for what they are and hence cut through some of the intentionally vague language of the current Orwellian housing debates.
Housing economics tangent
But before I dig into these fake solutions, I need to take a quick aside into economics and asset pricing and talk more about what cheap housing, not affordable housing, would mean.
The high price of housing assets can be a bit of a distraction when thinking about making housing cheaper for residents. After all, dwellings are assets and priced based on yields—that is the rental incomes and expected capital gains.
We don’t talk about the price of BHP shares when we talk about iron-ore “affordability”. The housing product is occupation, not ownership.
It is not widely acknowledged, but in the 2018-2021 period, and especially in 2020-21, first home buying boomed in Australia, to be about 180,000 per year instead of under 100,000 in the five years prior. Why was that?
Because the price of renting the money needed to buy a home fell compared to the price of renting a home.
For the same price as renting a home for, say, $20,000 per year, you could have “rented” about $400,000 at 5% interest, back in 2017. By 2020, you could rent $670,000 at 3% interest for that same $20,000 per year price. That’s a 67% higher asset price at the same annual price of occupancy.
What happened in the past decade, and much more in the past two years, was an asset re-pricing process whereby the free gains from shifting from renting housing to renting money were exploited. That process led to rising housing assets prices to close the differential, just as intended by low-interest rate monetary policy.
The HomeBuilder grant also added to that temporary boost in first home buying. As did the fall out of the 2017 banking royal commission, which led to banks repricing lending so that owner-occupier mortgage interest rates were much lower than investor rates. When interest rates fell, homebuyers got a bigger advantage than investors.
It’s funny because in May 2020, during the most panicked period of COVID, I predicted that home prices were more likely to rise 20% than fall 20% over the next 18 months. Most major banks and economic commentators were warning of large price falls on the back of low immigration and high unemployment. But the interest rate effect, coupled with some cyclical factors (which I won’t talk about today), swamped any other effect when it came to property asset pricing.
So, we need to be careful using housing asset prices as a measure of the price of housing occupation. It’s another confusing part of the current debate.
When you hear commentary about Australia’s high house price to income ratios, for example, what you are actually hearing is that Australian residential property assets have low housing yields. This is not a direct indication of whether housing is expensive or cheap to actually occupy.
This leaves us with a question of where does the price of occupation, the rental price, come from?
The answer to that question is very much ignored in housing policy debates. The short answer is that rents reflect household income levels. The data we have since the mid-1990s shows that private renters in Australia have consistently spent 20% of their income on rent—in the 19%-21% range.
Why would rent be so consistently reflective of incomes?
Because if rents were priced at, say, 10% of local incomes, people would move to better locations and bigger homes, spending more on housing until they found that there was no longer a net benefit to them from giving up other goods and services for more or better housing. The reason that households who pay the market price spend 20% of their income on rental housing, not 5%, or 10%, is because of our human preferences. If everyone somehow changed their mind about how much of their income they are willing to spend on housing instead of other goods and services, market rents would be lower… or maybe higher.
We can see exactly this income effect play out since 2020. As people moved from inner-city locations towards the regions, those higher incomes shifted with them, leading to big rental adjustments in regional towns, and rental price falls in inner-city locations in Sydney and Melbourne. I expect this to be a short-term adjustment, not a long-run trend.
To me, the real social issue in housing is that renters get stuck in bidding wars where incomes are the firepower. So more unequal incomes across the economy generally make renting more difficult in areas that become popular with higher-income households. Long term renters in Australia’s regional towns are having a terrible time right now because of this.
This is why traditionally homeownership has been a desirable policy goal. It allows households to avoid ongoing price competition. It helps distribute ownership of property assets and reduces housing costs later in life. Renting is a bad place to be in the property market for the long term.
Another issue that arises due to high property asset prices is that they advantage existing owners who have access to equity—think the “bank of Mum and Dad”—and makes it harder for those saving towards a deposit. Remember though, this is the intended monetary policy outcome of increasing equity for asset owners to borrow against.
This deposit hurdle is why the age of first time homebuying increased from 27 years old in 1980 to nearly 40 today, and the share of homeowning households aged under 34 fell from 60% to 45% over the same period.
Contrast this with the rise in homeownership from 1950 to 1966, from 52% to 71%. We got that outcome in a political environment where cheap housing really was desired and with heavy-handed public involvement in the market. There were rent controls, mass-scale public land development and housing construction (and the sale of that housing to residents at a discount), public loans for new construction and restrictions on private bank housing finance. Just like we solved unequal access to health care with public hospitals and health insurance, we previously solved housing the same way. But none of these policies that worked previously are within the scope of today’s housing debates.
For now, let me summarise this rambling housing economics lesson that we need for context before we move back to the politics and the fake solutions we get from the game of pretend.
1. The asset price of housing doesn’t reflect the price of occupying housing—it mostly reflects prevailing interest rates.
2. Rents reflect local incomes.
3. Higher asset prices and more unequal incomes lead to more households stuck renting and saving for a deposit, leading to lower and later homebuying.
4. Previous housing successes involved major public intervention.
Political sweet spot
The political sweet spot today requires ignoring housing economics because the real intention of pretending to care about cheap housing is to provide a cover story for political favours. Rezoning, tax breaks for build-to-rent corporate landlords, and subsidies are the main game. Let’s look at them in turn and see if these solutions can be undone by simple logic and in the process, I hope I can arm you with arguments that cut through the word games that dominate the debate.
First is the upzoning solution.
The tale we hear is that of the poor, down-trodden property developer, just trying to build cheap homes for people, but being extorted by the government at every turn through zoning laws and other fees and charges.
It seems weird to say it like that, but the language we use is important if we want to change things.
There are two simple logical reasons why this story makes no sense.
First, large property owners are mostly sophisticated and politically connected. I studied six major land rezonings across Queensland from 2007 to 2012. I looked at the landowners inside the areas upzoned, and those nearby and adjacent, who could have been, but were not, to see what determined where the rezoning boundary was drawn. I created a network of connections for each landowner using corporate records, lobbyist and political donation records, and biographies of former politicians, mapping over 250,000 relationships onto the 12,000 landowners, individuals and companies in the database. I found that the network connections predicted which landowners got their land rezoned for housing. The story that major property owners are terrible at getting rules made in their favour flies in the face of this evidence.
I was also able to observe the change in land value due to these zoning decisions. Those upzoned areas increased in value over $710 million due to those zoning decisions when I compare their value growth to neighbouring non-upzoned properties. I’ve previously estimated that about $19 billion per year is given away to landowners across the country through rezoning.
Indeed, Canberra charges a fee of 75% of the value gain from upzoning, something that Victoria has recently copied with their 50% windfall rezoning tax. But the same developers lobbying for rezoning to make housing cheaper suddenly get upset when the giveaways they get in the process are halved. Maybe it wasn’t about making housing cheaper after all.
This leads to the second failure logic in the rezoning for affordability story.
If mass upzoning decreases dwelling prices, why would an industry that makes money selling new homes lobby for it? It is completely contrary to their financial interests
A couple of years ago I did a study based on the data from the annual reports of Australia’s top twelve publicly listed property developers. They had billions worth of zoned and undeveloped land in the landbanks, and they made hundreds of millions each year in revenues from selling that land for housing.
If what they say is true, then I’d expect the following types of comments to be made in board meetings of major developers.
“Whoops, our lobbying worked and now we have to write off billions from our balance sheets because the value of our 50,000 zoned but undeveloped housing sites has collapsed”
It’s a fantasy.
Either these guys are financially irresponsible, or the way they claim the property market works—that rezoning will result in the market being flooded with cheap housing—is wrong. After all, I don’t see Stockland shareholders kicking out the executives for lobbying for more competition and cheaper prices through rezoning.
Developers like rezoning for more density on sites they own because it increases the value of their site whether they build or not. But it doesn’t make them panic and sell faster to reduce prices. The optimal rate of new sales is the same regardless of the density—if it was optimal to sell faster to increase the value of the revenue flow, it would be optimal regardless of how many dwellings you could build in the future on that site or others. So big projects simply take longer—they add sales to the end of the sequence. This built-in speed limit on sales is known as the market absorption rate.
In the current federal Inquiry into Housing Affordability and Supply, some major housing developers were asked if they thought it was possible for mass rezoning to reduce dwelling asset prices by a hypothetical 20%. Back to where they were 10 months ago.
None did. None said under oath that it would make a difference. Let me quote them.
Falinksi: Is it not your view that, if we increase the amount of supply, prices will go down?
Mr Helmers: I don't think that's the case…
Mr Long: My view is consistent with Richard's: rezonings won't necessarily lead to lower housing prices…
Falinksi: …[d]o you think if state local governments rezoned more land to allow greater supply, that you could see dwelling prices drop by 20 per cent?
Mr Warner: No. Straight out, I concur with some of the comments before. It's not going to create that much of a difference.
I’m not saying housing developers are doing something wrong by responding to market incentives when accumulating property and drip-feeding to meet the market and maximise their returns.
But as we have known for centuries that property is just another word for monopoly. The private monopoly property market won’t behave competitively. You can’t make them. When we do see panic in the market and sellers being competitive, we call it a market crash and bail everyone out with low interest rates.
This is why traditionally the market outcome for housing was seen as the problem, not the solution. It’s why non-market systems to provide access to housing are the only way any nation has massively reduced the inequalities inherent in private property, and especially housing.
Build to rent
The next story we’ve been sold in the game of political pretend is that tax breaks are needed for corporate build to rent (BTR) housing projects. Somehow, if we replace landlords who own just a few properties and have them managed professionally by real estate agents, with large institutional owners who own many properties, and have them managed professionally by real estate agents, then… I don’t know. Something happens. We never seem to ask what exactly. Like the word affordability, build-to-rent is another “long word and exhausted idiom” hiding real policy aims.
If the experience so far is anything to go by, this solution will turn out to be a multi-billion-dollar giveaway to existing large property owners with no benefits to housing occupants. There are two existing projects that show what outcomes to expect.
On the Gold Coast is Australia’s first and largest BTR at the former 2018 Commonwealth Games Athlete’s Village. Despite record tight rental markets, this development of 1,251 dwellings was on a staged release strategy over 3 years. The manager of the project in 2021 told me they “didn’t want to flood the rental market”. Instead, they left hundreds of brand-new homes vacant for years to keep their rents up.
Strangely, this project is government-owned. Just not an Australian government. The Abu Dhabi sovereign wealth fund owns it. Maybe sometimes governments do like owning and building housing?
In Sydney at Mirvac’s Liv BTR project at Olympic Park, the rents are typically 10% to 30% above the local market rate. The rental prices there last year were $535 a week for a one-bed apartment, $615 for a two-bed, and over $1,000 for a three-bed apartment. To maximise their economic return, they focussed on the premium market with packaged gyms, facilities, appliances and services, to sell a more hotel-like experience.
This is what tax breaks on GST and land tax to encourage BTR landlords are going to deliver.
I also wonder sometimes where all these sites for BTR projects seem to magically appear from. If you believe the previous rezoning story, there aren’t any spare developable sites. The market for buying new homes can’t be satisfied. But now there are many spare sites all over the country to allocate to BTR projects instead.
Perhaps that was a lie and there are plenty of development sites around, but the owners of them are looking for ways to improve the return on them with changes to the rules in their favour.
The final pretend solution are subsidies. Sometimes they are grants to buyers, either in the form of cash subsidies like the first home buyers grant (FHBG), or tax breaks like stamp duty discounts. These typically end up raising housing asset prices since buyers take into account the total purchase cost—property plus taxes and other costs. It’s a bit like if there was a tax on buying Apple shares. The price would be lower to account for the cost of tax. When the tax is removed, the share price rises by that amount so that for a buyer the total purchase cost remains unchanged.
These policies mostly favour existing owners and home sellers, with new home buyers getting only a small share of the subsidy for themselves.
Sometimes we subsidise renters. These typically end up being subsidies to landlords. For example, the National Rental Affordability Scheme (NRAS) paid billions more to landlords than landlords gave as rental discounts to tenants.
While subsidies can work to make housing cheaper for occupants, they usually also give away most of the value to housing sellers and landlords.
So we have three main solutions—rezoning, tax breaks for BTR, and subsidies—that really aren’t doing much for current housing renters and aspiring homeowners, but have major advantages for landlords and developers.
With its vague language, our current housing affordability debate often ends up confusing policies that benefit landlords and property owners with policies that benefit renters and buyers who are on the other side of the market. Even though the economic interests of the two groups are fundamentally in opposition, we can still call a policy that benefits landlords an affordable housing policy even if it doesn’t benefit their tenants.
The equity synthesis
There is one final policy I want to talk about that I think gets to the heart of this economic conflict between current property owners on one side of the market, and buyers and renters on the other side.
That is shared equity. Many states have these programs, and the Grattan Institute recently released a report proposing a national scheme. The idea is that to reduce overall costs to homebuyers, the government would stump up 30% of the purchase price for a 30% equity stake. The homebuyer would only need a loan or cash to cover 70% of the asset price and would get to occupy the home (not 70% of it) and could buy back the government’s 30% stake at any time.
This scheme reduces the deposit hurdle, loan size and ongoing costs for homebuyers, allowing them to become homeowners sooner. And it does so without affecting the asset price, hence its political popularity.
The payoff to the government arises because house prices typically rise over time, at least with the rate of income growth in the economy. Whenever the government’s share is bought back by the homeowner, they will make a return on their investment. For example, a $150,000 30% stake in a $500,000 home might get repaid in 10 years when the home is worth $750,000 and the equity stake is worth $225,000. That’s a 50% return over 10 years on the funding provided.
It really seems like magic—make housing cheaper for homebuyers without the political suicide of reducing market prices.
But has anyone noticed anything weird about how the government makes money under this policy?
Let me restate what’s happening. The government is buying 30% of someone’s home, letting the owner of the other 70% reside in their share for free. The government only gets its money back when the property is sold, and this makes the government money.
If this is true, then the following should also be true.
The government buys 100% of someone’s home and lets the owner of the other 0% reside in their share for free. The government only gets its money back when the property is sold, and this makes the government money.
Yes, this truly does mean that a government agency could undertake the kind of BTR projects that the private financial sector loves on their balance sheet, let residents own those dwellings for their lifetime, for free (while covering outgoings like council rates, insurances ad maintenance) and that would make the government money because the capital gains would exceed the funding costs.
The pretend solutions are all about making more money for private landlords and investors, without any obligation to actually reduce the price of occupying housing.
But if the government can simply be a landlord, investor or developer, it could use those financial returns to provide occupants cheaper housing—either through a discounted rent or purchase price— while still covering their financial costs.
I’m very wary when the answer to a problem appears to be “the government should do it”. To me, that’s only the start of an answer—how should an institution be designed, what are the incentives, what are measurable outcomes? That’s what matters.
I’ve explained one way how to implement a cheap housing program that leverages government participation in housing markets in a proposal I call HouseMate. It copies the Singapore model of a public homeownership supplier. Unlike Australia over the past four decades, where homeownership has both declined and concentrated amongst the older households, Singapore has boosted homeownership from 60% to 88% since the early 1980s by providing a cheap publicly supplied homeownership option to every citizen.
It's one way, but there are probably many ways.
I spoke to a local council representative from a regional town recently about the problems they are having with locals being priced out of rental housing. They have some land they would like to use for housing and asked my advice. I said just build homes on that land and then let people live there for a low rental price.
“It can’t be that easy” they said.
“Why not?” I said.
We’ve been led to believe that housing is a difficult problem when it’s not. We only made it difficult because we eliminated from the debate the only effective policies because they involved active public involvement in land and housing markets.
The government housing interventions Australia had in the 1950s and 60s worked to get the outcome of cheap housing. But Australia then was a different place, with homeownership at only 50% after the war, and there was immense political pressure from returned soldiers and their families to make cheap housing options available.
Instead of three political economy issues that generate today’s game of pretend, there was just one—the personal finances logic. But the electoral logic was on the side of cheap housing, and the macroeconomy was managed via public spending in a similar manner to the wartime period, so there was no macroeconomic conflict either.
When we really dig down, we can see the housing solutions that worked in the past and that today work elsewhere.
The solutions are not difficult. The politics is. Until we stop pretending, nothing will change.