The newly formed National Housing Supply and Affordability Council (NHSAC) has released its first report titled State of the Housing System 2024.  Like it’s predecessor’s reports, it aims to provide detailed insights into key housing supply issues and policy options.  With housing affordability centre stage, its release is welcome, along with the debate it will generate. But the 2024 report appears to have a few notable shortcomings.

The full report can be found here.

Supply and Demand Estimates – Faulty?

One of the objectives of the NHSAC report is to provide guidance to industry on the outlook for housing demand and supply. The 2024 report provides estimates which over the six-year forecast period 2023/24- 2028/29 have dwelling demand (1,079,320 dwellings) and net supply (1,040,126 dwellings) leaving a small deficit (39,176 dwellings), which is covered by the Government’s target for their policy initiatives to add 40,000 dwellings. However, there are two flaws in these estimates:

• On the supply side, projected gross completions of 1,080,733 generates net new supply of 1,040,126 dwellings. The implied assumption is that demolitions are 3.8% of gross completions. This estimate (page 93) references ABS Census 2021: “demolition rates are projected to stay at the level reported in the 2021 Census”. However this is misleading as the Census does not report estimates of demolitions. The ABS provides numbers on demolitions, with its Building Approval statistics, with demolition numbers over the period September quarter 2016 to March quarter 2024, averaging 11.5% of gross dwelling approvals. In understating demolitions compared with the 11.5% average, this overstates the net addition between 2023/24- 2028/29 by about 84,000 dwellings.
• On the demand side, provision is only made for growth in households or occupied dwelling stock. Unoccupied stock (i.e. vacant rental stock, houses for sale/under repair, holiday/second homes, Airbnb) accounts for a pretty constant 6.6% of the total dwelling stock, so it would be assumed to grow at the same rate as occupied stock over a six-year period. This omission understates demand during the period 2023/24- 2028/29 by 75,000 dwellings.

If the other assumptions are taken as correct, the net impact of these two factors is a deficit of around 160,000 dwellings over the six-year period, not a balance as stated in the 2024 report.

The 2024 report does not provide an estimate of the starting point shortfall, but acknowledges a significant shortfall exists, as evidenced by the upward pressure on rents and prices. Whatever that number is, based on these numbers, the shortfall is projected to increase substantially over the next six years.

Even with the under-estimate, the 2024 report projects real rents to rise by another 10% during the next six years, which would be a concern, but a larger shortfall would imply even worse outcomes and a significant policy challenge.

Despite projecting worsening affordability, the 2024 report appears to assume a decline in average household size. If affordability is to deteriorate, one behavioural response is to lift household size.

The Commonwealth Government has set itself an ambitious housing target of 1.2 million dwellings during the next five years (not six). However, there is significant gap between the target and total dwelling supply projected by NHSAC. The NHSAC forecasts – net completions of 869,000 plus the 40,000 social and affordable dwellings during the next five years – represent a shortfall of 291,000 on the Commonwealth’s housing target. Allowing for higher demolitions, including to build the 40,000, the shortfall will be more like 365,000.

Let’s just say, the odds on the Commonwealth’s housing target being met are about zero.

Issues and Policies – Missing the Big Picture

The 2024 report has chapters which forensically address the affordability of housing, social housing and first nations housing. These are important but the report is light on in terms of policies to address the observed problems.

In terms of policies to improve housing system outcomes, NHSAC has identified 10 areas of focus for its research/advice to the Commonwealth Government. These cover social housing, indigenous housing, regional housing, homelessness, the rental market, housing targets, data and (a very light touch on) taxation.

In terms of addressing supply outcomes, NHSAC has identified increasing the capacity of the construction sector (to build new dwellings). It has also talked in terms of improving the efficiency of the land use and planning systems. However, while referencing efficiency measures e.g. faster system approvals for build-to-rent (BTR), there is limited reference to the supply constraints imposed by zoning controls and urban growth boundaries.

Also reflecting the 2024 report’s focus, in discussing trends impacting on housing costs, the key points noted upfront are the contributions of rising construction costs i.e. labour, materials, finance and low productivity in explaining the rising costs of housing. The rise in the cost of land which has been the major source of growth in the cost of housing and threatens to continue to drive up the cost of housing, is mentioned later (Figure 3.19) but is not a key point apparently.

While the key points make no reference to land costs, there is some reference to the impacts of planning in the body of Section 2.1.1: “Policy factors that influence supply”.  In this section, reference is made to two research articles which support deregulation of zoning controls. However, to balance the discussion (and potentially cloud the issue), two separate articles are referenced, which are said to contradict these studies i.e. support the ‘supply does not matter’ school of thought.

Given the international consensus amongst urban economists – supported by urban economic theory and abundant empirical evidence – that supply constraints generated by zoning and urban growth boundaries are a major factor in the rising cost of housing, this is a serious shortcoming, which reflects the lack of international perspective in this area of the policy discussion.

It is also a notable omission given the policy lead on this being taken in New Zealand, where the previous Labor Government (with support from the then opposition Nationals) introduced measures in 2020 to override Council restrictions on increased density and allow increased supply. The recently elected National Government is attempting to take that a few steps further and is talking more aggressively in terms of lifting zoning restrictions, including pushing out urban growth boundaries. It is also proposing to offer Councils an incentive in terms of receiving 50% of GST revenues payable on new builds (GST rate is 15% so that is 7.5% on the taxable price).

Just as was the case in the 1980s when the Kiwis (courtesy of Roger Douglas) far outdid Australia on tax reform, the Kiwis are again leading the way. Now, the reformist intent in New Zealand might be thwarted by the NIMBY forces which are a powerful force using the planning system to frustrate supply. However, if it goes ahead, we will be able to observe how real reform on the supply side can positively impact on affordability.

– Dr Nigel Stapledon

We ask the question many First Home Buyers might wish to ask the NHSAC.

On the supply side, the 2024 report notes (page 34) “rationing of development rights (constrained supply) gives rise to a (scarcity) premium that is necessary to mitigate the negative impacts of urbanisation”.

In the case of Melbourne where outer fringe land lots cost about $350,000, we are conservatively talking in terms of a scarcity premium created by the planning process of more than half that price or about $200,000. That is a very significant “premium” first home buyers are being asked to pay.

The question first home buyers might ask is how this $200,000 premium they are being asked to pay stacks up against the “negative impacts of urbanisation”.  How “necessary”?