The Supply Argument, the Stevens Report and the Sydney Housing Market

Author: Dr Nigel Stapledon, Chief Advisor. There is an argument out there, which defies the laws of gravity but keeps getting printed in our media, that somehow supply does not matter when it comes to housing.

The report by ex-RBA Governor Glenn Stevens to the State Government earlier this year, provides a very succinct argument on why supply does matter.

Stevens’ report looked at both demand and supply factors, but with reference to Sydney the focus was on supply as the primary fault line. Particularly, not just on a simplistic numbers paradigm (did numbers built equate with growth in households this year or last year?) but on factors which make the market less competitive than would be desirable. It is that lack of competitiveness which means that it struggles to respond adequately to shifts in demand.

The Stevens report acknowledges that some things on the supply side are not amenable to change, namely Sydney’s natural geographic constraints.

Download ex-RBA Governor Glenn Stevens report here.

Other things are amenable to change but slowly. Chief among them is a 20-30 year backlog in investment in transport infrastructure, which is “a critical weakness” in terms of both supply and in explaining the anti-growth views of Sydneysiders.  The current State Government has made a good start in fixing the backlog but it will require sustained commitment (and courage) by State Governments for a good period of time.

The primary focus of the Stevens report is on the things “that ought to be more amenable to change more quickly.” He goes on to discuss how regulation, zoning and approval processes make the supply side far less flexible than it could be. Stevens observes that the length of time required for rezoning and development approval is “much too long”, tying up capital which ultimately feeds into the cost of land. Related to that, the complexity of the planning process means that it requires large developers with large resources to navigate that complexity, while small developers would struggle – hardly conducive to a competitive market.

Stevens understands that, if changes are going to be made to the planning process to facilitate growth, the really hard challenge is to sell to the majority of voters the reality that Sydney’s population is going to grow, and that we need to accommodate (not perpetually resist) that growth: “It appears that the history of reform in this area is not a happy one.  Perhaps the main thing that has changed is the greater sense of urgency, after years of rising prices. While it is a political judgement for the government on how aggressive they wish to be in seeking reform, inaction is costly and becoming more so (after more years of rising prices), while it is far from clear that the politics of reform will get easier.”

If I can add to Stevens’ point on reform, it is that above all other areas of policy bar perhaps electricity generation, this is a policy area where bi-partisan support is almost certainly required for meaningful, sustained reform to actually happen.

For all players in the complex housing system that Australia (and Sydney) has managed to conjure up, the Stevens report should be mandatory reading. It is difficult to find, so here is the link.

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MacroPlan regularly conduct research assignments on housing demand and supply and employ this understanding when delivering market assessments, economic impact reports and business case recommendations.  Contact Dr Nigel Stapledon (one of Australia's leading macro-economist and housing experts) to discuss your next research requirement, 02 9221 5211 or