Supply, supply, supply: The dubious mantra that's making housing worse

Listen to most politicians and they will insist the housing market can be fixed simply by adding more stock.

“The answer is supply,” they keep repeating.

For added emphasis, they will sometimes say “The answer is supply, supply, supply.” As if by repeating the mantra it gains credibility.

Industry and business groups are similarly disingenuous. Some have very large memberships that are deeply invested in accelerated demand. They benefit from sales and market pressure. More TVs, more apartments, more widgets. Their self-interest is palpable.

The argument that it is all about supply is a dishonest distortion of the law of supply AND demand. By ignoring the very real impact of heightened housing demand via the same government’s own accelerated immigration policies, the claim that this imbalance can be addressed simply by adding more supply is just wrong.

Let’s not dwell on the accelerated demand issue. Let’s just instead focus on the supply argument.

First, this assumes that supply is both elastic and responsive to demand pressures. In housing, neither is true.

The recent Federal Budget has tried to divert private capital’s investment appetite from the established housing market to new housing only. Nice idea, but while the capital demand switch might be capable of being quickly flicked across, the supply side will take years to respond.

Developers cannot open up land for housing at short notice. The acquisition, design, approvals and compliance process can take several years.

The same applies for new medium or high-density housing projects. In many cases, the total time from identifying a site to a person moving into a completed project, can be close to 10 years. It is almost always more than five years.

So what will happen if a wave of investment capital is suddenly directed to the new housing market, in pursuit of the beneficial tax treatment it now offers?

More money directed at a market that cannot respond quickly by supplying more stock must surely mean more price pressure in this market, which risks making the family-friendly and first home buyer project home market even less affordable?

Likewise, the apartment market. Prices will surely rise for new stock as it trickles in, and along with that rents will rise too?

None of this is shaping as doing anything for more affordable housing.

Why is supply so delayed?

Why is supply so sticky and slow to respond? The answer is down to many things, nearly all self-inflicted over many years.

Planning regulations and controls have exploded over time.

The number of planners for every home built has increased almost seven-fold over 30 years. Whereas in the 1990s there between 40 and 60 house completions per planner, we are now at less than 10.

Planning law has similarly exploded. Queensland’s Local Government (Planning and Environment) Act 1990, for example, was 120 pages. The current version is 430 pages plus 526 pages of planning regulations, plus 54 pages of Rules under the Act, 86 pages of Minister’s Guidelines and Rules and more than 200 pages in State Development Assessment provisions.

Building the dwelling is now also more regulated: the National Construction Code currently totals between 2,000 and 3,000 pages. The predecessor Building Code of Australia in the 1990s was around 300 to 600 pages.

Almost every facet of housing delivery has become more difficult, more costly, and takes longer, for little apparent benefit. Are the homes we now deliver so much better than what we managed 20 or 30 years ago?

Taxes and charges hammering build costs

There is also the cost issue as it applies to new housing supply. Property Council research has shown that one third of the cost of a new house or apartment can be attributed to taxes, charges and regulatory costs.

Almost none of these applied to established housing. The stamp duty buying a new home worth $1 million across Australia is roughly between $35,000 to $55,000. That sounds outrageous, which it is. But nowhere near as outrageous as $330,000 in taxes levied on a new dwelling of the same price. The new house is taxed nearly 10 times that of the established one.

So to argue that it’s as simple as adding supply, the cost of which is massively inflated due to a pernicious tax and regulatory environment, without addressing the tax structure, is plainly misleading.

There was a similar argument doing the rounds in Vancouver, Canada, for many years.

Vancouver was one of the world’s most unaffordable housing markets. The city added more housing between 1960 and 2020 in percentage terms than any other north American city. Yet it remained the most expensive of them all by a large margin. Why? They had mandated high density as the preferred housing model – which was also the most expensive to construct. Sound familiar?

How can you address affordability if each new unit of supply is already unaffordable - because it’s a form of housing that takes longer and costs more? No matter how much supply you add, if each unit of new supply is overpriced, overtaxed, and overregulated, and of a built form that costs more to build anyway, you are solving nothing.

You are probably just making it worse.