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What a mess Barr’s made of housing supply

House price growth averaged 8.3 per cent over the period 2020-23, compared to the previous period’s average growth of 5.4 per cent. Photo: Paul Costigan

“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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Jon Stanhope

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3 Responses to What a mess Barr’s made of housing supply

Peter Bradbury says: 8 February 2024 at 4:02 pm

For the record, I also support increasing density where appropriate, including dual occupancy on separate titles. I agree, the current ACT Government plan is merely a PR announcement, it is too restrictive in what is allowable and for concessions.

Requiring these simple subdivisions to be unit-titled makes no sense except for the Government as they will be subject to the unit-title surcharges on Rates (and Land Tax) which raises significantly more tax revenue. Anybody following this course of development should probably convert the unit subdivision into a block subdivision at the earliest opportunity.

The stamp duty exemption is capped at a value of $800,000, so if the article is right about the minimum value being $900,000, there maybe a completely useless concession.

It is not only that the supply of dwelling sites is insufficient to meet population growth (Table 1), but that they are disproportionately for apartments and townhouses which house less people each on average.

Ian Hubbard says: 9 February 2024 at 3:37 pm

Thanks for your insightful analysis of the housing crisis in Canberra. This crisis is of the ACT Government’s own making. Undersupply is the main problem with an ever-widening gap between supply and demand. This lack of supply puts a floor under the price of existing houses and ensures that prices grow rapidly when housing finance is cheaper (interest rates). The current construction slowdown reflects the high cost and unaffordability of housing. Homeowners cannot afford the massive mortgage burden and the construction industry can’t build efficiently with the high cost of land and limited supply of sites.

The Chief Minister continues to claim that supply of land has been adequate but feels the need to an additional $50 million of taxpayer’s money be given to the monopoly land provider, Suburban Land Agency in the next budget to release more land. The CM says he’s going to err on the side of land oversupply. Your analysis shows the increasing undersupply compared with population growth for the last decade.

The other two important factors that need to be considered are the cost of land and the type of house being produced. The ACT has the second most expensive residential land in Australia (per square metre) and is producing the highest proportion of units to detached houses in Australia. Demonstrated by the current 5 year program of 16935 dwelling sites aiming to produce 13620 multiunit sites and 3315 sites for single dwellings. Too few and the wrong type. The CM certainly wouldn’t get a purchasing job at a large store because he’d buy in the wrong product at too high a price and wonder why they didn’t sell. The demand for houses over a million dollars is being met, but not the market for affordable housing.

There is currently a focus on price gouging. The price of land in Canberra is an example. The solution is not to release more land for unit developments. The recent land ballots highlight an undersupply of affordable detached three bedroom house blocks. This is the housing type that Canberrans want. Hopefully the $50 million will go to releasing 500 sqm blocks at $250,000. This is done in other jurisdictions. A house and land package at around $550,000. I suggest starting with an additional 1000 blocks annually pitched at this price will go a long way to addressing Canberra’s housing crisis. ACT Treasury has the talent to do a market analysis to find the price point for housing that’s affordable for the average household. Hint: It’s not close to $1 million.
Unfortunately, the current Government are good at telling you what you’ll get and not listening to what you need.

Tony Cook says: 14 February 2024 at 5:23 pm

Like i have said many times, Barr does not know the difference between increase and decrease. He urgently needs to go back to kindergarten. Most kindergarten kids could teach him the difference between up and down.


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