“The real and very serious housing problem in Canberra is undeniably one of the ACT government’s making. The problem is undersupply and an ever-widening gap between supply and demand,” writes JON STANHOPE & KHALID AHMED.
The ACT government’s new zoning policy, permitting a second dwelling on an existing block, is a mere distraction – a red herring – and highly unlikely to resolve the mess the government has knowingly made of housing supply in Canberra.
The genesis of the problem is inadequate land supply, combined with the sale of more than a thousand units of public housing and the failure to replace them, and a major and growing shortage of community and affordable housing.
For the record, we support allowing unit-titled dual occupancy where appropriate. However, we have serious concerns the government is effectively mandating dual occupancy through taxation policy settings, for all blocks above a certain size.
The price of a 120sqm secondary dwelling, according to government figures on land valuation, construction costs and tax will be between $900,000 and $1.124 million – that is, if the owner decides to subdivide and then design, finance and construct an additional dwelling in their backyard.
This is hardly an “affordable option” for families priced out of the housing market. There’s also no reasonable estimate available on how much additional supply is expected to be generated through this policy.
The real and very serious housing problem in Canberra is undeniably one of the ACT government’s making and, as we have noted many times over recent years, the problem is undersupply and an ever-widening gap between supply and demand. Table 1 details actual dwelling supply and population growth over successive four-year periods since 2007-08.
While population increase is a significant driver of housing demand, it is not alone, with household formation being the other key driver. Household formation occurs, for example, when children leave home to live independently or form a family, or when a household splits into two through separation/divorce.
According to the ABS, in the ACT, divorces alone have averaged 1392 a year since 2018. A significant proportion of divorces involve couples of mature ages with relatively high financial capacity and hence the capacity to purchase a second home.
Consequently, if there is an undersupply of housing it is more likely to impact younger residents, notably those leaving the family as they embark on life’s journey. A consequence of this is the phenomenon experienced by many of us, of children living longer at home. Household formation is, by the way, estimated to constitute around 40 per cent of the demand for new dwellings.
A decrease in supply relative to demand has a consequential effect on prices – that is the iron law of economics – and, consequently, house price growth averaged 8.3 per cent over the period 2020-23, compared to the previous period where the annual average growth was 5.4 per cent.
Price growth is outstripping income growth
The interest rate increases by the RBA since May 2022 have had some dampening effect on price growth. Nevertheless, price growth outstripping income growth is expected to continue in the ACT given the lag effects of supply on prices in the market.
Obviously, if the inputs required for an economic activity, or to deliver a product, are constrained, the activity and the output will also be constrained. Cutting land supply has unarguably severely impacted economic activity in the ACT.
Chart 1 details real average annual growth over the long-term and the period 2013 to 2022 for both the ACT and Australia as a whole. The ABS data accounts for price effects and, as such, provides a measure of the real growth in economic activity. We have defined “long-term” as the 20-year period from 1992 to 2012.
Over the past decade, growth in dwelling investment in the ACT has collapsed to less than a quarter of the long-term average. The ACT being a growing city, dwelling investment growth has, historically, been higher than the national average. In a complete reversal of that trend, the dwelling sector in the ACT has significantly underperformed over the last decade (2013 to 2022).
So, can this be blamed on the COVID-19 pandemic? No. The illustrated chart also includes data for the pre-pandemic years from 2013 to 2019, and clearly illustrates that the ACT’s dwelling sector was dramatically underperforming before the pandemic.
Dwelling investment constitutes a significant proportion of private investment in the ACT economy. Its share of total private investment has dropped from 41.2 per cent in 2012 to 36.4 per cent in 2022. This does not mean that business investment comprising investment in non-dwelling construction, machinery and equipment and intellectual property has grown any faster. In fact, growth in total private investment has similarly been subdued.
We estimate that the ACT’s economy would be around $1.5 billion larger if the government had simply maintained growth in housing at the long-term average rate.
This is potentially the “first round” effect of inadequate input, namely land, on economic activity. There are flow-on effects where households who do enter the housing market, but at higher prices and, therefore, with a larger mortgage, have a reduced capacity for discretionary spending, for example, in cafes and restaurants or other leisure activities.
Too many people chasing too few houses
When there is inadequate supply of new stock available to buyers, they will inevitably seek to acquire an existing dwelling. The ABS national accounts data shows that in the ACT ownership transfers grew at 6.4 per cent annually on average over the period 2013 to 2022, a jump from the long-term average of 1.4 per cent. The ACT’s growth over this period was also higher than the national average of 4.7 per cent .
Turnover of existing stock is not a bad thing in itself. However, in circumstances where too many people chase too few houses, the auctions become inefficient, resulting in extraordinary price growth, as has been the case in the ACT.
An unreported consequence of this is that in recent years conveyancing duty revenues have doubled, despite Treasurer Andrew Barr promising, a decade ago, when releasing the taxation reform plan that conveyancing duty revenue would be halved within 10 years, ie two years ago.
Land supply to meet the housing needs of a growing population and household formation has been a challenge for all governments in Australia due to the fragmentation of planning systems as well as the availability of suitable land under their control.
However, the ACT is completely different from the rest of Australia. Apart from not having a pesky upper house or annoying local government to contend with, it has inherited a leasehold system that has bestowed on it complete monopoly control of land supply, and a land bank of thousands of hectares built up over the years through the resumption of land at a cost of tens of millions of dollars.
Typically, mainstream media unfortunately focuses on the most recent economic data and the changes in the last quarter, with accompanying one-eyed commentary from the government.
Trends over the last decade, however, paint a concerning picture of the ACT’s economy because of decisions the ACT government has taken to cut supply of an essential input, namely land, and its failure to meet even the inadequate targets it has set.
Jon Stanhope is a former chief minister of the ACT and Dr Khalid Ahmed a former senior ACT Treasury official.
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