Falling prices won’t fix housing affordability. Governments still need to act

House prices are finally falling. The national average is down 2% in the July quarter, Sydney is down 4.7% and Melbourne 3.2%.

These are the fastest falls since the global financial crisis, and experts predict prices could fall further, by as much as 10-20%. So those whingeing millennials should be grateful, right? Well, not exactly…

House prices ≠ housing affordability

Falling house prices probably won’t improve affordability for most households. Credit will become harder to secure as banks consider buyers’ ability to cope with higher repayments. Meanwhile, rent and other prices are going up, making saving for a deposit harder.

Furthermore, CoreLogic analysis found a 15% price drop would wipe $14,000 off an average deposit. But in that scenario, interest rates would probably reach 2.25%, pushing up repayments by $285 a month and costing thousands more overall.

House prices would need to fall about 25% before they would start to compensate for the added costs, and few predict such a deep drop. We probably won’t even wind back prices to pre-pandemic levels.

The Reserve Bank won’t save us

We should not rely on the Reserve Bank to fix housing affordability. The bank is required by legislation to pursue currency stability, full employment and “economic prosperity and welfare” — not housing affordability.

To lower unemployment when it’s unacceptably high, the RBA will often lower interest rates to encourage investment. But this cheaper debt won’t just go into enterprises and public works; it will also go into housing. Indeed, Australian banks give out way more money in home loans than business loans.

The RBA is snookered. If it pulls its biggest lever to fulfil its mandate of creating jobs, it will also pour fuel on our unaffordable housing market. Conversely, if it keeps interest rates high to dampen excessive property speculation, it undermines employment.

That’s why former RBA deputy governor Guy Debelle argued last year that housing affordability shouldn’t be the bank’s problem to solve. Governments have better tools, such as taxes, to direct investment away from speculation and towards productive enterprise.

Governments must step up…

As the OECD recently reminded them, affordability will continue to deteriorate unless state and federal governments act.

The Albanese government establishing a National Housing Supply and Affordability Council last week presents an opportunity for such action. It will bring together experts to advise federal and state governments, set targets and track progress. It has received little media attention but could prove important.

Albanese has been disappointingly unprincipled on housing policy, particularly in dumping Labor’s proposed tax reforms. But while disincentivising excessive demand from investors seems unlikely for now, an area of possible action is emerging: increasing supply.

Dwelling approvals have fallen by 29% since March 2021. Part of this downturn is due to rising costs and the withdrawal of the COVID stimulus. But absurd regulatory barriers are clearly contributing to the shortfall long-term too — this poor Melburnian isn’t even allowed to put solar panels on his heritage-listed roof!

… and build up

Would increasing supply bring down prices? I’ve previously argued that given the sheer number of investors enticed into the market by tax breaks, increasing density would have less of an effect on house prices than on their location.

But new research shows that if you truly soak the market with new builds so as to outpace even rapacious investor appetite, you can make a modest dent in prices. Consider Auckland, New Zealand’s biggest city, with crazily unaffordable housing and where investors don’t pay any capital gains tax.

Its prime minister, Jacinda Ardern, unwisely baulked at tax reform, so Auckland “up-zoned” about three-quarters of its core suburbs, allowing more housing to be built with greater density. It worked; the rate of construction effectively doubled and average house prices dropped (though properties with large land sizes increased in value).

Australian economists estimate that if our cities replicated a similar policy, we could lower house prices by approximately 12.5%, as well as better matching people’s location preferences.

Let me suggest some ambitious targets for Albanese’s housing council: first, governments should build 50,000 social and affordable houses each year. Homelessness Australia suggests this would eliminate rental stress as we know it within 10 years and halve the number of people turning to homeless services. Albanese’s social housing program includes just 30,000 homes over five years — a good start, but meeting just 3% of demand.

Second, governments should commit to increasing private building approvals through up-zoning, aiming to return to early pandemic highs of 13,000-14,000 a month.

Get to it, politicians. If you succeed, we’ll permit you a photo op in hi-vis at a construction site.

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