The Victorian Government is conducting an Inquiry into the Rental and Housing Affordability Crisis, which has triggered intense debate over what policies would reduce the costs, increase security, and limit the rise of housing stress and homelessness.
Some commentators are demanding that the state government get out of the way, and allow the private sector to build more homes. This seems on the face of it a logical solution – in a standard market if there is high demand, then reducing constraints around supply seems obvious. This has led some to focus on changing local council laws to prevent NIMBYs from blocking the construction of higher density homes, reducing heritage protections and cutting red tape.
However, while these policies may have a supportive role, the root of our housing problems do not lay in too little market freedom, but too little state activity.
This is because left to itself, the construction industry isn’t in the business of providing the cheapest possible homes to those most in need. Landowners and developers are in the business of maximising private returns on investment, and with land prices this . Sometimes these incentives coincide, but certainly not always. As the eminent economist John Kenneth Galbraith put it, “One of the curious facts of life is that the market system does not, in any industrial country, provide good inexpensive housing for the poor”. This can be observed in the current market, where residential construction approvals are 31% lower than the decade average, despite record low vacancy rates, and surging rents, and rebounding house prices.
Part of this story is about just how cyclical housing construction is. Construction investment is one of the most cyclical components of the economy, and tends to be procyclical – once the sector gets hot, more money piles in and increases the heat. The current interest rate environment and high costs of materials is anathema to investment. And since land rarely decreases in value and is lightly taxed, it makes sense for a landowner to simply sit on their growing asset and wait for a better opportunity.
Another part of the story is that housing is complex. The housing needs of people seeking crisis accommodation are very different from people looking to upsize to a family home. Housing policy includes everything from mortgage regulation through to overshadowing rules, social housing financing to urban planning. It is better to think of housing as a system rather than a market.
The biggest policy lever that governments have in ensuring affordable, secure housing is simply to build homes – between 1945 and 1970, around 15% of all homes were built by governments. By the 1980s one in four renters lived in public housing, meaning that they spent no more than 25% of their income on rent, and many homeowners had bought subsidised homes. But after decades of neglect social housing construction is down to around 1% of total construction, and the share of renters in social housing is less than one in 10. In Victoria, closing the social housing shortfall will require building around 60,000 homes between now and 2034.
Housing policy expert Chris Martin and his colleagues, suggested in a recent paper that we take a mission-oriented, nation-building approach to housing and homelessness. This will require concerted intergovernmental target setting and financing arrangements, a reinvigoration of public service housing expertise and a system-wide approach across many policy domains. Underlining this should be a right to housing enshrined in a bill of rights. This is something the Victorian Government should be leading on, shepherding other governments toward a new national compact.
A well-resourced social housing system will place a floor under the housing market, and help stop people from slipping into housing stress and homelessness. But of course, social housing alone doesn’t resolve all of the housing crisis issues. The housing crisis has been decades in the making and is a national problem. it isn’t something that the Victorian government can achieve in isolation.
So what policies could the Andrews Government enact by itself?
1. Improve rental security.
Rental tenure in Australia is poor. Nearly all rental contracts are 12 months or less, meaning that renters are less able to treat it as a home, and rental prices return to new market rates far more quickly. High turnover tends to increase rental prices, as well as decreasing housing security for long-term renters. The Andrews government should build on their 2019 reforms and amend the Residential Tenancies Act to end no-cause evictions which are still legal at the end of a first fixed term contract.
2. Reduce the churn of rental dwellings.
Part of the cause of rental insecurity also related to the the market being dominated by “hobby landlords”. Australia is unusual in that having a around half the rental stock owned by people who are not professional landlords, but do it in their spare time. There is no required training, or even registration of landlords, despite them providing a critical service, as important as power, water or healthcare. What this means is that it’s pretty much potluck whether you get a decent landlord or not.
The Victorian government should be lobbying the federal government to reform landlord tax concessions, which encourage people to buy investment properties regardless of their aptitude or commitment to providing a good service. For example, the 50% capital gains tax discount can be realised after owning a house for just twelve months, encouraging people to buy and quickly flip rental houses. If the CGT discount were kicked in after 5 years it would require investors to be far more circumspect in becoming a landlord. Negative gearing also provides unusually generous tax concessions, nearly all of which flow to the most well off, while not incentivising better housing. They could be redirected toward social objectives if we chose, for example by limiting negative gearing only to new-build homes.
3. Moderate rental increases.
The Victorian government should move to mitigate excessive and unpredictable rental increases. While rent freezes appear to have the potential to produce negative effects in the rental market, more modern approaches to stabilising rents are well established and functional in a range of countries. Ireland faced some of the sharpest and most sustained rises in rent prices, and brought them down by designating local governments areas with high rent increases (above 7% for four of the last six quarters) as Rent Pressure Zones. In these zones, rents are limited to CPI, or 2%, whichever is lower. However, the introduction of the Irish model required other regulatory change. For example, regulation of the short term rental sector is required to prevent too many landlords removing their properties from the long term sector and listing them on Airbnb instead.
4. Encourage build-to-rent construction.
Linked to reducing the hobby landlord sector, we also need to increase options in the rental market, particularly for long term rentals. Australians are spending more time in the private rental market, but our rental stock does not reflect this reality. Our research has indicated that more than 2/3rds of renters would be happy to remain in a rental home if they could treat it as their home, so it makes sense to incentivise more institutional investors who seek a return on their investment over 30 years rather than being incentivised to buy and sell rentals on a whim. The Victorian government is encouraging this sector by offering a 50% land tax concession for build-to-rent properties, and such incentives should be developed further.
5. Ensure better use of our existing housing stock.
On that note, it is important that the Victorian Government move to limit negative effects of the short term rental sector. Our research indicates that in parts of Victoria, over 20% of homes are listed on Airbnb. This sector does provide benefits, but needs regulating to ensure that there is a better balance with the long-term rental needs of communities.
6. Expand inclusionary zoning.
Where land is rezoned from agricultural or commercial to residential, or where government releases state-owned land near new infrastructure, land values increase significantly. For example, land values in areas around the suburban rail loop have increased dramatically thanks to the investment of all Victorians. This is wealth created by the act of government rezoning, so it makes sense to try to capture some of this value uplift for the benefit of all Victorians. Inclusionary zoning does this by requiring that a proportion of the new dwellings build are social or affordable houses. In the ACT, there is a requirement that between 15-25% of homes built on new land releases are affordable homes. The Victorian Government’s Inclusionary Housing Pilot Scheme should lead to a inclusionary housing policies which ensure the pipeline of social and affordable rentals is mainstreamed into such types of construction.
The crisis in the housing system has reached a new level recently, but has been decades in the making. Solving the many intersecting problems with the system will require concerted effort at the federal and state level, and the Victorian government, on the back of the Big Build and many innovative pilot schemes, is well places to lead the charge toward a new approach toward a new housing policy regime. After decades of rolling back state involvement in the housing sector, the outcomes are clear to see. Public attitudes have shifted, and now the appetite for greater state leadership is greater than ever. Lets hope the Premier seizes this opportunity.
– Matthew Lloyd-Cape