Dr Matthew Thomas, Social Policy Section and Peter Hicks, Economics Section

Australia’s significant housing problem

Housing supply in Australia has not kept up with underlying demand—that is, the need for new housing stock as a result of population growth and trends in household formation. This has resulted in an estimated shortfall of almost
180 000 dwellings as at June 2009 and contributed to significant levels of housing stress, especially among low income households. In 2007–08 over 300 000 lower income home buyers and 445 000 lower income households renting privately were in housing stress.

Many households have been effectively excluded from all but the lower end of the private housing rental market and are spending ever-increasing proportions of their limited income on housing. While they may receive some support through government provided rent assistance (RA), this assistance has not kept pace with rental prices in many parts of Australia.

For those low income households most in need, the federal, state and territory governments provide public housing. However, a reduction in the size of the public housing stock has reduced the ability of governments to provide affordable housing to these households. Waiting lists for public housing are high and increasing, and the housing affordability problem has contributed to sustained high levels of homelessness in Australia. Current National Housing Supply Council (NHSC) projections indicate that the gap between supply and demand will continue to increase, thus exacerbating the housing affordability problem.

The supply problem

The accumulated housing supply shortfall is due to a number of factors, some of which are of a long-term nature. These include:

• restrictions on the supply of available land for housing
• state and territory as well as local planning and approvals processes
• lack of coordination between infrastructure planning and housing supply, and
• skills shortages in the housing construction industry.

More recently, the global financial crisis (GFC) has resulted in changed lending practices and reduced the availability of credit for multi-unit development. This is particularly significant given that over two-thirds of dwelling supply in the capital cities between 2009–10 and 2018–19 is expected to be through infill development and nearly all infill activity is likely to be multi-unit development.

Recent reforms

The Rudd-Gillard Government implemented several measures calculated to tackle the on-going housing supply crisis in Australia. These reforms go beyond traditional forms of government housing assistance such as home purchase assistance, the provision of public housing and RA. They also seek to enhance the effectiveness of the mainstream housing market for both renters and buyers.

Among other things, the Government:

• introduced a National Rental Affordability Scheme
• established an Office for Housing and the NHSC
• provided for up to 19 300 new social housing dwellings and repairs and refurbishments of over 60 000 existing social housing dwellings through the Social Housing Initiative
• introduced the A Place to Call Home initiative which aims to provide 730 new dwellings for the homeless
• supported the Residential Mortgage-Backed Securities Market during the GFC
• provided a temporary increase in the First Home Owner’s Grant to stimulate housing construction, and
• established a Council of Australian Governments (COAG) process to clear infrastructure planning and provisions obstructions.

The current situation and future prospects

The progress and success of the above reforms have been assessed by the NHSC which is independent of government, and by the COAG Reform Council which is independent of individual governments. The NHSC currently expects Australia’s housing shortfall to increase considerably. Assuming medium growth in both supply and demand, the accumulated deficit could reach 308 000 dwellings by 2014 and 640 000 dwellings by 2029.

The housing supply problem has had a major adverse impact on the affordability of housing for low income households. In 2008–09:

• almost half of the low-income households renting privately were in rental stress
• only three per cent of dwellings were affordable to low-income households (negligible for low-income Indigenous households), and
• of all low-income households with a mortgage, almost half were in mortgage stress.

Australia’s housing supply and affordability problems have long-term causes and are unlikely to be resolved quickly. It may be years before many of the above-mentioned measures yield significant results, and this will only be the case if current levels of investment—both government and private—are increased. In addition, the housing problem is complex and multifaceted. Not only does it involve monetary policy, but also planning and taxation issues as well as questions about the appropriate size, density and distribution of housing.

Where to next?

Improving the housing outcomes of Australia’s low income households in the short to medium term, may require the introduction of further reforms to improve the fairness of housing policy.

The Henry Review of Australia’s tax and transfer system noted the stimulatory effect on housing demand of the current highly favourable treatment of owner-occupied housing. It recommended a number of changes aimed at making housing more affordable and better matching supply and demand. These include:

• removing stamp duties
• streamlining land taxation so as to remove disincentives to property investment
• moving to a more neutral tax treatment of negative gearing and capital gains on investment in residential property
• reviewing infrastructure charges to remove impediments to housing development activity, and
• refining RA and increasing its maximum rate to ensure that renters are able to afford an adequate standard of dwelling.

While the institution of any or all of these proposed reforms may assist in increasing Australia’s supply of housing, and thus benefit low income households individually and collectively, they present other economic and administrative challenges for all governments.

Library publications and key documents

National Housing Supply Council, 2nd State of Supply Report 2010, Commonwealth of Australia, Canberra, 2010, http://www.fahcsia.gov.au/sa/housing/pubs/housing/national_housing_supply/Pages/default.aspx

Australia’s Future Tax System Review, Australia’s future tax system: report to the Treasurer: part two – detailed analysis, Commonwealth of Australia, Canberra, 2010, http://taxreview.treasury.gov.au/Content/Content.aspx?doc=html/home.htm