Land Supply and Demand: Wrong to declare land supply meets demand.

Jon Stanhope

Jon Stanhope is a former Australian politician who was Labor Chief Minister of the ACT from 2001 to 2011. Professorial Fellow at IGPA, University Canberra

Khalid Ahmed

Adjunct Professor at IGPA, University Canberra

The Canberra Times of 21 November 2016 included three articles on housing affordability, in particular on (a) a veteran of the housing industry finding it difficult to downsize to a detached house; (b) a single income couple in rental stress, and unable to enter homeownership; and (c) the change in the mix of land supply for units and detached houses. Housing affordability is an important issue and the Canberra Times should be commended for highlighting the problems for two representative households, and a substantial shift in policy on land supply.

Each of the articles, however, include comments based on some questionable analysis which invites challenge.

 

 

The trouble is, the measure is far too simple. The measure used is the ratio of median dwelling price to average weekly income, and comparison is made with Sydney and Melbourne. This comparison is irrelevant; Canberra has unique policy levers and referring to affordability being worse in other cities hardly helps in understanding the cause of the problem here and policy responses to alleviate housing stress and removing barriers to entry or re-entry into the market for people in Canberra.

The measure is based on the average of prices for units, townhouses and stand-alone houses. However, it’s the detached housing market where the prices have been rising sharply. Between 2012 and 2016, the median price of detached houses in Canberra rose by 29% from $483,000 to $623,000, more than double the increase under the “simple measure”.

The use of average weekly income is simplistic. It is well known that the average income in Canberra is skewed by a relatively smaller proportion of households on high double incomes. Households on average income are a minority. Randomly picked, we are more likely to find households with incomes which are much lower than the average income. The next most likely household in a random pick would be one with income which is much higher than the average income. In other words, Canberra has a double-peak income distribution. Devising a measure based on average is quite meaningless because not many households are represented by that measure.

This is a characteristic of Canberra that, if not in its statistical detail but certainly in its implications, is well understood by community sector organizations at the forefront of advocacy and service delivery.

Notwithstanding the rather comforting comparison of affordability based on the flawed measure, the reality is that someone buying a median priced house is paying $140,000 more today than four years ago. Incomes have not grown at that pace, and many households have been priced out of the market.

In a separate article on high rents (“Canberra’s rent trap”, page 1), Associate Professor Ben Phillips is quoted as saying that investors were driving up the prices for everyone. He said further, “The housing industry would probably say that it's all about supply, there's not enough supply coming onto the market. Well, Canberra's probably had more supply than it needed population-wise so I don't think that's the reason for Canberra”.

Blaming investors for high rents is strange, and betrays a lack of understanding of the fact that supply of rental accommodation is driven by investors. For more competition in the rental market, more rental dwellings, and therefore more investment is required. Decisions on investment are dependent on a range of factors including returns in the alternative investment markets and taxation policy settings. In Canberra, increasing rates and land tax would reduce returns for investors. In a market where households are unable to move to ownership - a supply constrained market - they will be able to on pass the tax increases to renters rather than absorbing those and accepting lower returns.

We find the claim that Canberra has had more supply population-wise than it needed, and the summary dismissal of industry’s concerns on lack of supply, quite extraordinary. No one dismisses, say, a steel manufacturer’s complaint about difficulties in obtaining iron ore – a basic ingredient to production.

The dismissal is based on faulty analysis. Population increase is but one of the drivers of demand for new dwellings. Household formation constitutes a significant, possibly half of the total demand and ignoring it in estimating demand is a mistake. New households form when, for example, a young person leaves home to live independently, or two young people leave their respective homes to start a family, or when a partnership breaks. In each of these, there is additional demand for a dwelling. It is quite straightforward to conclude that household formation rate has been suppressed – again, due to constraint on supply and lack of affordable housing options – vouched by many parents whose children are staying longer at homes.

Besides ignoring household formation, a common mistake in using simple population increase is assuming that new household being formed are of the same size as the average household today. In the examples above, each of the new households is smaller than the average household in Canberra.

Household formation may have been recognized by the Land Development Agency (LDA) in estimating demand. The question however is, whether the estimates were reasonable. The deputy chief executive of the LDA claimed that underlying demand was for 15,000 dwellings over the past five years, whereas 17,800 had been released (“Apartments and townhouses hold sway over freestanding houses in Canberra”, page 1). If the demand estimates were correct, one would not have seen the massive increase in land and dwelling prices of the past few years.

Claims that the housing market in Canberra is affordable, and that supply has exceeded government’s demand estimates, miss the point. Canberra is of course affordable – for those on average or higher incomes. On that measure, Sydney, Melbourne and any other place for that matter would be affordable. The discussion of affordability should be about those income groups for whom it is no longer affordable, or those that have been priced out of the market.

We suggest a simple measure to test whether there is adequate supply – growth in price – which is based on basic economic principles. On this measure, there has been an adequate supply of units, but severe constraint on the supply of land and detached housing.

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