7.1
This chapter considers additional topics that submitters and witnesses raised during the inquiry as being potentially relevant to housing affordability and supply in Australia, beyond those issues covered in preceding chapters.
7.2
This chapter first discusses macroprudential and monetary policy, and the necessity of enabling infrastructure for land to be suitable for development. It further considers evidence regarding self-managed superannuation funds, the issue of land banking, and finally the importance of data to support evidence-based housing policy.
Macroprudential policy
7.3
Ms Renée Roberts, Executive Director, Policy and Advice, Australian Prudential Regulation Authority (APRA), appeared before the Committee and explained its role:
Firstly … APRA supervises institutions across banking, insurance and superannuation. In regulating banks, APRA's role is to set prudential requirements that are designed to protect the interests of depositors and to promote financial system stability in Australia. We do this in close collaboration with other members of the Council of Financial Regulators. Secondly…in residential mortgage lending APRA seeks to ensure that banks are making sound credit decisions that are appropriate, individually and in aggregate, in the context of broader housing market and economic trends. APRA's prudential requirements, which are focused on lending practices, can influence the terms, amount and price at which banks extend housing finance. They do not target house prices or matters of affordability. Lastly, APRA's recent actions to address emerging risks to financial stability related to residential mortgage lending: last month we set an expectation that banks would assess new borrowers' repayment capacity at lending rates that are at least three percentage points higher than those currently prevailing. APRA's objective is to ensure the financial system remains safe, with banks lending to borrowers who can afford the level of debt they are taking on, both today and into the future. We expect the overall impact on aggregate housing credit growth flowing from this change to be fairly modest since many borrowers do not borrow at their maximum capacity.
7.4
As stated by Ms Roberts, it is not within APRA’s mandate to directly regulate house prices in Australia. While it may make regulatory decisions that have an effect on house prices, housing affordability is not within its remit.
7.5
In its submission to the inquiry, APRA foreshadowed an information paper, designed to set out its framework for macroprudential policy, and provide greater detail on APRA’s objectives for macroprudential policy, toolkit of options and approach to implementation.
7.6
Released on 11 November 2021, the paper sets out that the objective of macroprudential policy is to ‘mitigate risks to financial stability at a system-wide level’ and goes on to state that macroprudential measures are:
… typically temporary and counter-cyclical in nature; they seek to build additional resilience or reduce excessive risk-taking during an upswing in the financial cycle, and can provide flexibility for the financial sector in supporting the economy during a downturn.
7.7
APRA’s ‘macroprudential toolkit’ includes levers and controls that involve capital, credit, liquidity or market, and structure, that is, exposure or concentration limits, all of which are ‘deployed through the banking sector, given the critical role leverage plays in the financial cycle.’
7.8
Despite APRA’s measures not being ‘directly targeted’ to housing affordability or supply, there seemed to be agreement amongst some submitters that these measures do in fact directly impact supply and house prices. Moreover, in some instances, it was suggested that APRA should be doing more to counteract rising house prices because of the very real effect its measures can have in this regard.
7.9
The PCA noted in its submission the very real effect of APRA’s decisions on housing supply, stating the ‘need for extreme care in targeting macro prudential action at agreed risk areas on the edge of the market, avoiding a broader confidence impact the nation’s construction pipeline.’ It stated that ‘all market observers are mindful that the last time Australia stamped on the macro-prudential brakes, in the shadow of the Hayne Royal Commission, our national housing supply pipeline was hit hard.’
7.10
Mr Louis Christopher, Managing Director of SQM Research, explained to the Committee some of the effects of, and complexities around macroprudential controls:
It's pretty clear that regulators have been increasingly leaning on macroprudential tools since about 2014, and I think they have had some success with that. I note that the last round of lending restrictions, which peaked in 2017, did create a downturn in the Sydney and Melbourne housing markets, and shortly thereafter we saw a surge in first home buyer activity during that time, so they have their merits. I get a little bit concerned, though, where I read comments to suggest that it will be used as a policy tool to potentially stimulate the housing market when it's in a downturn or try to take the heat out of the market when the market is running hard. It's very difficult to time these types of measures. One needs to be careful here that we do not create other economic waves just as a result of trying to control the housing market.
7.11
In his submission, economist and Principal of Corinna Economic Advisory Mr Saul Eslake suggested that actions taken by APRA in the mid 2010’s (along with other factors) saw a drop in house prices in Australia’s eastern seaboard capital cities:
… after a series of steps by the financial system regulator APRA to curb some of the more egregiously risky forms of lending to investors that had mushroomed in the first half of the past decade, stricter enforcement of rules pertaining to foreign investment in established properties, and perhaps also in response to expectations that the tax preferences enjoyed by residential property investors would be scaled back in the event of a Labor victory at the federal election due in 2019, residential property prices began falling in Sydney, Melbourne and to a lesser extent Brisbane.
7.12
Mr Coates, Economic Policy Program Director at the Grattan Institute, told the Committee:
So macroprudential rules clearly affect prices. That's undoubtedly true, because you're affecting people's capacity to borrow. After the loosening of macroprudential controls in 2019, just around the time of the election—essentially, with the election itself we didn't see much of an increase in prices, but the moment those macroprudential controls were relaxed and implemented by the banks, the next weekend, prices took off, and they took off all the way to COVID. Then obviously we had COVID, and we had a fall and then a boom again. The question is: what's the purpose of those controls? The purpose of those controls is notionally to manage risks in the financial sector, to make sure that people are not taking on so much debt that they default down the track.
7.13
Mr Coates went on to suggest that macroprudential controls be incorporated more holistically into monetary policy making:
I would probably lean towards a world where you don't try to use them to affect house prices per se, but you would probably need to integrate them into macro policymaking in a more structural fashion. One idea is to do what the Bank of England does. You have a monetary policy committee and a financial stability committee that have overlapping membership. That allows those controls to be managed in a way that's more consistent with the macro cycle.
7.14
Narrow Road Capital was particularly critical of what it sees as APRA’s lack of macroprudential responses to rising house prices, and suggested two macroprudential reforms:
The ability to leverage up a minimal deposit and/or the ability to more relative to your income creates an arms race amongst buyers. The one who borrows the most can bid the most. However, the ‘winning’ bidder may ultimately end up losing the most in an economic downturn that is accompanied by a house price correction. The RBA [Reserve Bank of Australia] has worsened this with its monetary policy decisions…and APRA has failed to respond whilst house prices have run higher. Two simple measures can address the building systemic risk in residential property lending;
Ban lending where the debt to income ratio exceeds six times
Ban lending where the LVR [loan-to-value ratio] exceeds 90 [per cent].
7.15
Another submitter who wished to remain anonymous submitted that ‘[c]ombined with monetary policy Australia’s macro-prudential policy is the other main cause of housing unaffordability. House price cycles in Australia correlate directly with the volume of credit, with prices rising when credit expands and steadying or falling when it contracts.’ They further suggested the following four macroprudential measures be taken:
Mortgage repayments should be limited to no more than 30 per cent of incomes with no exceptions
Where the investor already owns a property (some investors rent), a minimum of 30 per cent deposit to be required
Residential Mortgage Backed Securities to be banned in their entirety, to encourage banks to take responsibility for their own lending practices
Investor lending restricted to no more than 10 per cent or so of total mortgage volume.
Monetary policy
7.16
The Reserve Bank of Australia (RBA), Australia’s central bank, twice appeared before the Committee during this inquiry. The RBA is tasked with producing the monetary policy for Australia, that is, setting the official interest rate (the ‘cash rate’), which in turn involves ‘a duty to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.’
7.17
In her evidence before the Committee, Dr Luci Ellis, Assistant Governor, Economic, RBA described the complexity of the housing market and the factors that influence it:
One of the things that makes the housing market both so interesting and so complex is that it connects up to the finance system…there are a whole bunch of things around lending, lending standards and credit worthiness. There are a bunch of things around land supply, urban structure and architecture—and, of course, migration policy is relevant. There are so many touchpoints to the housing market. If you look at one little bit in isolation, you'll miss the whole picture.
7.18
Dr Ellis said on the question of ‘affordability’:
I think there are a number of areas in housing policy that are a matter for government, not for a central bank. That said, what we're seeing here is fundamentally a distributional issue. If housing prices are rising, it's because someone can afford to pay those prices. But the issue is that not everybody can. It has never been the case that first home buyers have bought at the median house price. One of the things we say in our submission is to remind everybody that saying, 'Can you afford the median house?' is not the right question. The question is: 'Are there properties that are suitable for your needs that you can attain?' One of the other things we point out is that, typically when people say something is unaffordable, what they really mean is, 'In order to access this particular home, you need to devote more than 30 per cent of your income to that,' whether that's rent or whether that's servicing your mortgage. People will look at that rule of thumb and say, 'That's unaffordable.'
7.19
Dr Ellis explained (in the context of house prices in the 1980s and 1990s):
You've got to remember that, prior to the eighties, there were restrictions on mortgage interest rates and, therefore, restrictions on the supply of mortgage credit. As the financial sector was liberalised, credit availability went up, effective interest rates went down, and that enabled an expansion in the demand for housing, and, because most of the stock of housing is already there, that results in a bidding-up of housing prices.
7.20
However, the RBA sets the official interest rate, and current interest rates are at record lows in Australia. Many submitters suggested that this is directly linked to an increase in house prices by way of increased debt serviceability. As Ms Cyrstal Ossolinski, Director, Macroeconomic Conditions Branch at the Australian Government Department of the Treasury (the Department of the Treasury) told the Committee:
I think the key factor here really comes down, again, to that question of interest rates and the effect that interest rates have on the housing market. It is a primary channel of monetary policy globally, and, as interest rates fall, the affordability eases up for households. Over the past year, we've seen debt servicing increase a little bit, but it certainly has not increased in line with prices. This reflects that interest rates have fallen dramatically.
7.21
Mr Jonathan Rochford, Managing Director of Narrow Road Capital told the Committee that central banks around the world are facing a wake-up call, that is:
… whilst low interest rates are stimulatory in the short term, in the long term they reduce the prosperity of the economy, they create financial instability risks and they are negative for productivity. So, in the long term, low interest rates are a bad thing … essentially, what low interest rates have done is that they have stimulated asset prices but they've done very little to stimulate the real economy. They have switched people's thinking from productive investment to speculative investment.
7.22
In its submission, Narrow Road Capital contended that:
The global evidence on the effectiveness of ultra-low interest rates has become clearer now that more than a decade has passed since implementation … Ultra-low interest rates have inflated asset prices, including Australian housing. Lower interest rates reduce the monthly repayment required to repay a loan. Many buyers have used lower interest rates to increase the amount they borrow rather than borrowing the same amount and repaying it faster.
7.23
Narrow Road Capital described measures used by governments to hold down interest rates as ‘financial repression’. It suggested to the Committee that the Australian Government should amend the RBA’s current inflation target of two to three percent, to keep inflation below three percent or to an inflation band of between minus three to three percent. Further, Narrow Road Capital proposed that the RBA should be required to ensure that the cash rate allows all citizens to receive a positive after-tax real rate of return to prevent ‘financial repression.’
7.24
Mr Keith Almeida, a Fellow of the Actuaries Institute of Australia, submitted that the most obvious factor that has had a negative impact on housing affordability is interest rates – ‘[t]he fact that property is highly levered, means that it is not a coincidence that property prices worldwide are steeply rising as central banks have reduced rates to zero.’
7.25
Mr Almeida and Digital Finance Analytics both raised New Zealand as an example where the Reserve Bank there ‘now has a direct mandate to consider home prices when setting monetary policy’. Mr Almeida stated that this would be the ‘neatest, and most effective method for addressing housing affordability in Australia and is backed by robust mathematical modelling.’
7.26
Digital Finance Analytics argued that any discussion of improving housing affordability in Australia must look to the ability of the Australian Government and financial regulators to pull the levers of interest rates, monetary policy and credit availability when needed.
7.27
The anonymous submitter mentioned earlier in this chapter suggested:
One of the principle causes of the rise in house prices is monetary policy. The RBA’s own research shows a large response in the housing market to interest rates. In 1998 the Australian Bureau of Statistics reformed the CPI [Consumer Price Index]. Part of this included changing the old housing method, based on total mortgage costs of all properties, to a method that is effectively a new house construction index. This was at the explicit request of the Reserve Bank of Australia, who made the argument that land is an asset and not consumption. At a stroke this removed many household’s largest item of spending from the index. Prior to 1998 income and house prices used to track each other. Since then they have diverged. Although another important factor (the capital gains tax discount) was introduced that year, the loss of the interest rate buffer is likely the primary cause of house price rises since 1998. It is notable that the housing ‘booms’ beginning in 2013 and again in 2019 and accelerating in 2020 were both associated with significant interest rate cuts. Had land not been removed from the CPI, interest rates would have risen and checked the booms.
7.28
That anonymous submitter went on to suggest that the RBA, in effect, wants house prices to rise, stating:
A very large number of parts of speeches and policy statements refer to real estate, usually in the sense that rising prices are a positive. Reference is often made to the ‘wealth effect’, where people will speed more if house prices rise. The wealth effect does not hold over the long term.
7.29
They suggested the following actions be taken in respect of monetary policy:
the Consumer Price Index be reconstituted to include land prices to the extent of their actual proportion of consumer spending and price movements.
inflation targeting and average inflation targeting are either abandoned or the inflation target be reduced to 0-1 per cent. Rates should be returned to equal with inflation to prevent economic malinvestment.
the RBA board is reconstituted to reduce the number of academic economists, bankers and business people, with seats being reserved for the trade unions, small business and so on.
Enabling infrastructure
7.30
Over the course of the inquiry multiple parties including state and territory government, local government, and the private sector, raised the importance of basic infrastructure for new housing supply to be built. Various terminology was used to refer to foundational infrastructure that supports development, including ‘catalyst’, ‘trunk’, or ‘enabling’ infrastructure.
7.31
For brevity the term ‘enabling infrastructure’ will be used hereafter and the Queensland Department of State Development, Infrastructure, Local Government and Planning’s (DSDILGP) definition of catalyst infrastructure will be used, that is, physical or hard infrastructure which unlocks development, including the construction of roads; sewerage, wastewater, stormwater, and water distribution systems; and transport infrastructure.
7.32
As defined by the Australian Government’s National Housing Supply Council 2nd State of Supply Report, greenfield developments are those that occur on ‘former agricultural or undeveloped natural land on the periphery of towns and cities… [where the land is] rezoned for urban development’, whereas infill developments occur ‘within existing urban areas’ (that is, on developed or serviced land). The installation of enabling infrastructure is necessary for greenfield sites, and upgrades of existing enabling infrastructure may be required for infill developments.
7.33
Mr Simon Basheer, the National President of the Urban Development Institute of Australia (UDIA), told the Committee that ‘inefficient methods of funding and of delivering the enabling infrastructure’ are impeding the supply of new land viable for development. Professor Nicole Gurran and Emeritus Professor Peter Phibbs echoed this view, stating:
… the costs and complexity of new and augmented infrastructure can be a constraint to new housing supply, and… further work is needed to untangle and address these constraints in Australian cities and regions.
7.34
As an example of how delays in the installation of enabling infrastructure can impact greenfield sites, a recent UDIA report found that ‘enabling infrastructure (sewer, water, power, roads) is a major constraint on the development of new homes in the South West and Greater Macarthur…’, noting that ’60 per cent of lots expected between FY22 and FY29 [financial year 2022 and financial year 2029] are constrained by sewer infrastructure’.
7.35
As another example, the rezoning of new suburbs Marsden Park North and West Schofields in North-West Sydney, permitting 8,000 new homes, has been paused because an upgrade to Richmond Road had not yet been funded. The UDIA estimates that this and other delayed infrastructure have prevented the supply of approximately 70,000 homes in the western suburbs of Sydney. The required infrastructure costs an estimated $423 million, or $6,000 per lot.
7.36
Transport infrastructure was mentioned by some witnesses as a particularly critical form of enabling infrastructure for the viability of greenfield sites. Dr Ellis of the RBA observed that ‘increasing transport infrastructure is the way to increase the supply of well-located land’, and cited the Geelong-Melbourne transport corridor in Victoria as an example.
7.37
However, Mr Maxwell Shifman, Vice President of UDIA, told the Committee that due to the significant upfront costs involved, transport infrastructure typically requires the existence of a minimum population density to support it – which creates a problem. He explained:
You’ve got a chicken-and-egg problem, which is exacerbated by the fact that behavioural change is really hard. If someone moves into an area and they have fantastic public transport from day one then they’re likely to use it, but, if someone has lived in an area for 10 years and the only way they’ve been able to get around the place is by having a car … it’s really hard to convince them, when you bring in the bus line 10 years later … It’s important to have the infrastructure running early…
7.38
Enabling infrastructure is also often important for increasing housing supply via infill developments. The DSDILGP submitted that:
In many locations that may be suitable for urban consolidation (increasing density) there is often a deficit of infrastructure or infrastructure is sized such that it will not support increased population.
7.39
Professor Steven Rowley noted that ‘…the capacity of infrastructure and services is an important consideration for councils in planning for future growth.’ In support of this, Professor Rowley also referenced research by the Australian Housing and Urban Research Institute (AHURI) which found that infrastructure capacity – particularly transport infrastructure – has been identified as a common factor that helps ‘to explain high and diverse housing supply’ in certain local government areas.
7.40
Thus, as outlined above evidence received by the Committee identified that a lack of enabling infrastructure, and/or delays in its installation or augmentation, can slow the creation of new housing supply in both greenfield and infill developments.
Responsibility for enabling infrastructure
7.41
The division of responsibility between levels of government and the private sector for enabling infrastructure is complex and not a focus of this inquiry. At a high level, funding and responsibility for various aspects of enabling infrastructure belongs to or is shared between local governments, state and territory governments, the development sector through developer contributions (see Chapter 6), and the Australian Government.
7.42
The majority of enabling infrastructure for new housing supply is shared between state and territory government, local government, and developers. As Mr Basheer from UDIA explained:
It's a combination of the developers requiring infrastructure to service their needs, but there are what’s called large-scale general scheme costs, which are regionally based, that are required to open up from a transport point of view, major sewer upgrades, major water upgrades and things like that. It’s a state, local and developer partnership for enabling infrastructure to be developed and delivered.
7.43
At the federal level, the National Housing Finance and Investment Corporation (NHFIC) is a key entity that contributes to increasing housing supply through enabling infrastructure. Established in 2018, NHFIC administers multiple programs to ‘help improve housing outcomes across the housing continuum’ (that is, across market housing and sub-market housing).
7.44
Among its responsibilities NHFIC manages the $1 billion National Housing Infrastructure Facility (NHIF) which helps fund enabling infrastructure for new housing supply by offering concessional loans, grants and equity funding. The NHIF aims to increase new housing supply by exclusively supporting infrastructure projects that ‘without NHFIC financing…would be unlikely to proceed or would proceed only at a much later date or with less new affordable housing.’ The NHIF can be used for eligible enabling infrastructure projects including but not limited to new or upgraded stormwater, sewerage, water, gas and electricity infrastructure, and telecommunications and transport infrastructure. Community infrastructure projects or housing itself are not eligible for funding through the NHIF.
7.45
Entities that are eligible to apply for the NHIF include: state and territory governments or government-owned development corporations or utility providers, local governments or their investment corporations or utility providers, registered community housing providers or special purpose vehicles that have at least one of these eligible entities as a member. As of October 2021, over $300 million has been allocated under the NHIF, in support of the delivery of more than 5,700 new social, affordable and market dwellings.
7.46
An independent statutory review of the National Housing Finance and Investment Corporation Act 2018 (the NHFIC Review) was tabled in Parliament on 28 October 2021. The NHFIC review found that the NHIF had been relatively underutilised and made four recommendations regarding the NHIF. On 16 December 2021, the Department of the Treasury published a Government Response to the NHFIC Review which supported these four recommendations.
Calls for more enabling infrastructure
7.47
A common theme throughout the inquiry was calls for greater Australian Government financial support for enabling infrastructure to increase housing supply. Some submitters advocated for increased funding for enabling infrastructure broadly, others for funding directed at state and territory government, local government, or for new housing supply in regional or rural Australia.
7.48
In advocating for greater Australian Government support for enabling infrastructure, some submitters referenced the budgetary limitations facing local government. For instance, Regional Development Australia Southern Inland stated that ‘councils are not properly renumerated for either the strategic planning work or the infrastructure development itself to provide a future-focussed investment pipeline.’ The Australian Local Government Association elaborated that:
While many local governments work closely with their local communities to provide affordable housing, councils are often unfairly criticised for lack of land availability even when they are constrained by financial resources and legislative requirements.
7.49
NHFIC’s report titled Developer contributions: How should we pay for new local infrastructure? also acknowledged that funding constraints impact local government’s ability to provide enabling infrastructure, stating:
Local councils find it difficult to produce the necessary infrastructure to meet the demand and expectations of its constituents while also balancing their budgets.
7.50
Submitters to the inquiry also called for an increase in enabling infrastructure funding in regional and remote areas. For example, Urban Taskforce submitted that ’many regional communities have suffered from not having the funds available to commit to the construction of critical infrastructure (water, sewerage, roads).’ Tatiara District Council and Regional Development Australia Barwon South West agreed that the high costs of providing enabling infrastructure in these areas, combined with lower property values, can make development ‘cost prohibitive/unviable’ and create ‘market failure’.
7.51
In addition, the Local Government Association of South Australia told the Committee that the COVID-19 pandemic, combined with subsequent government investment in infrastructure including the HomeBuilder program, has encouraged ‘intrastate migration’ and thus:
… placed further pressure on regional real estate markets and contributed to many trades and material shortages, adversely affecting the supply of resources available for regional residential construction.
7.52
Evidence provided to the inquiry referenced existing programs run by the Australian Government such as the NHIF or by state and territory governments such as the Queensland Government Building Acceleration Fund, which can assist local government with low-cost loans for infrastructure investments. However, NHFIC noted that:
…local governments in Australia tend to have an aversion to using debt. Local councils generally lack large-scale financial capabilities and may fail to understand the value of well-positioned debt. Some stakeholders indicated that key performance indicators placed on local councils would mean debt is perceived negatively.
7.53
At the state and territory government level, the New South Wales (NSW) Government called for greater funding for enabling infrastructure from the Australian Government, noting that ‘housing growth is still constrained due to shortfalls in funding for enabling and supporting infrastructure’.
7.54
The Committee heard additional detailed requests for increased Australian Government financial support for enabling infrastructure to unlock new housing supply. For instance, UDIA recommended the Australian Government provide funding to close ‘gaps in the delivery of enabling infrastructure’ for projects that, once enabling infrastructure is in place, will be ‘shovel-ready’. UDIA specifically proposed the Australian Government deploy:
… capital available to NHFIC under its revised mandate, with an allocation of $1 billion to be matched by the states and territories. This will foster greater progress against dedicated housing supply targets.
7.55
Focusing on regional areas, Urban Taskforce proposed the Australian Government ‘create a $3Bn fund… to build regional infrastructure which directly supports regional housing supply where a shortage can be demonstrated.’
7.56
At the same time, some submitters drew the Committee’s attention to shortages in construction trades and materials which are increasing the cost and availability of skilled labour for residential development. The Insurance Council of Australia called for greater investment in technical and further education (TAFE) and vocational studies to address this, and stated:
Large infrastructure and commercial projects are drawing up the available skilled labour leading to a lack of supply in residential construction which has seen the … affordability of skilled labour increase.
Self-managed superannuation funds
7.57
Some evidence to the inquiry has suggested that property investment through self-managed superannuation funds (SMSFs) may be having an adverse impact on housing affordability. SMSFs are superannuation (hereafter, super) funds with fewer than five members, all of whom are trustees or directors of a corporate trustee. These funds can borrow or gear their super into property, through an arrangement called ‘limited recourse borrowing’, strictly regulated by the Australian Taxation Office.
7.58
As of June 2021, the value of residential real property investments through SMSFs was over $43 billion. Regional Development Australia Southern Inland told the Committee that property investment through SMSFs has ‘become the highest returning investment, given the low cash rate returns and unstable stock market.’
7.59
The Sustainable Australia Party, among others, proposed that the Australian Government should ‘phase out provisions allowing Self-Managed Superannuation Funds to borrow for investment in real estate’. An anonymous submitter claimed that this has an ‘unnecessary distorting effect’:
In this case houses that could have been owned by a young worker are instead being used to help fund the retirement of somebody who has almost certainly paid off their house or is close to doing so and who experienced a higher rate of lifetime wage growth.
7.60
Mr John Goodman, a private member of the public, similarly highlighted this issue:
The mass hoarding and snowballing effect of investment properties, through personal investment of that of a SMSF, distort the price that home owners (those who will reside within their property) are forced to pay.
7.61
Another anonymous submitter told the Committee that allowing property investment through SMSFs was ‘introduced in 2007’ and:
… had the effect of increasing the amount leverage[d] in the financial system as well as increasing [the] level of competition that first homebuyers have faced in trying to get into the market (given the houses being purchased by SMSFs are at the lower end of the market).
7.62
The RBA has also previously opposed gearing property investment through SMSFs, telling the Committee that it had submitted to the Department of the Treasury’s Financial System Inquiry in 2014 (the Murray Inquiry) that it ‘opposed leveraging into self-managed super’. In its submission at the time, the RBA stated that ‘at least some of the increase in property investment by SMSFs is a new source of demand that could potentially exacerbate property price cycles.’
7.63
Clamping down on direct borrowing by super funds was a key recommendation of the Murray Inquiry, with the objectives to:
Prevent the unnecessary build-up of risk in the superannuation system and the financial system more broadly.
Fulfil the objective for superannuation to be a savings vehicle for retirement income, rather than a broader wealth management vehicle.
7.64
The Government did not agree with the recommendation in its response to the inquiry, stating that:
While the Government notes that there are anecdotal concerns about limited recourse borrowing arrangements, at this time the Government does not consider the data sufficient to justify significant policy intervention.
7.65
In contradiction to this, the Grattan Institute submitted that the political difficulty of changing government policy to limit SMSF borrowing is ‘easy’, but the positive impact on affordability would be almost neutral.
7.66
In addition, Mr Malcolm McNeil, a private member of the public, stated that there should be greater incentives for super funds to invest in affordable housing, proposing that an incentive ‘would be if the profit was replaced by a reduction in tax’, also enticing smaller funds and SMSFs to invest.
Land banking
7.67
The City Futures Research Centre of the University of New South Wales (UNSW) described land banking as:
… a specific and long-established developer practice, in the expectation of building out gradually so as not to depress local prices and to benefit from any increase in dwelling prices during the land release period.’
7.68
Many local councils and council organisations claimed in evidence that land banking is occurring and is a significant problem, which limits the ability of councils to influence housing prices through their zoning decisions. Other submitters agreed that it is occurring, and in some cases were critical of it, including the NSW Government and the City Futures Research Centre of UNSW.
7.69
The University of South Australia argued that allowing more building will be ineffective if developers choose not to build. They used an example from the United Kingdom (UK) suggesting that planning reform does not necessarily improve affordability. It described the studies examining the failure of reforms in the early 2000s to improve affordability as follows:
These projects found that the competition between developers to acquire land suitable for development in the UK was so intense that developers were compelled to bid too aggressively to acquire the land. Having won the land, but at a very high cost, they were then locked into a strategy of building out slowly to allow rising prices to recoup the optimistic land acquisition costs.
These studies also found that local housing markets cannot ‘absorb’ too much new-build housing supply per period. This seems principally because consumers of newly developing housing are often a niche demand group, and because developers can only be confident of their sales rates when the level of new-build supply is not too high with respect to supply generated from the established stock.
7.70
Discussing a subsequent review by the UK Government, the University of South Australia stated that an important finding was that:
… greater diversity of housing supply, and a larger number of smaller developments, would have a larger impact on housing affordability than the release of very large sites, leading to development of homogenous dwelling types and sizes.
7.71
Other witnesses were more ambivalent about land banking and its impact. For example, Mr Coates from the Grattan Institute said that in his view it is ‘not an issue’ for ‘apartments or medium density urban infill’, although it may be more of a problem for ‘the greenfield market…particularly in regional areas.’
7.72
Professor Steven Rowley suggested that ‘land banking might be relevant to the big players but not to others …. We can't have a broad-brush conversation about the development industry because it is so diverse.’
7.73
Dr Cameron Murray, an independent researcher, explained that ‘all the major listed developers’ engage in this practice. However when asked what portion of current housing prices is attributable to land banking, he responded with ‘zero’, adding that ‘land banking is just a feature of how property markets work.’
7.74
Dr Peter Tulip, Chief Economist for the Centre for Independent Studies criticised Dr Murray’s work on land banking and argued that various reports on the issue have ‘not found evidence that it’s very important.’
7.75
Developer groups that gave evidence to the Committee strongly rejected claims of land banking, with Mr Basheer from UDIA describing these as ‘an absolutely fundamental myth’ and ‘nonsense.’
7.76
In contrast to many claims of land banking, which imply non-competitive behaviour, the developers and builders appearing before the Committee argued that the Australian market was highly competitive. They argued that any developer withholding supply in order to raise the price would be undercut by their competitors.
7.77
Ms Kristin Brookfield, Chief Executive, Industry Policy, Housing Industry Association, commented:
I think land banking as a concept is extremely complex, and people refer to it in a very glib way. You have got to start with land and look at the actual process again. The process of zoning land and subdividing land, before you get shovel-ready land to put that house on, is nothing short of 10 years in Australia, and it's been that way for a very long time. I can't see any reason right now why that would change. If you call 10 years of being stuck in the process 'land banking', you are being disingenuous. If you have shovel-ready land, and then you are having a conversation about, 'Do I let out 20 blocks or do I let out 200 blocks,' that's a conversation we can have…
7.78
Some developers who appeared before the Committee were likewise emphatic that they are supplying housing as fast as they can, and are unable to keep up with demand. They agreed that large inventory was common and that it took many years to bring property to market. However, they attributed these observations to delay in infrastructure and in planning approvals. It was not due to withholding property from the market to force up the price. Mr Toby Long, General Manager NSW from Mirvac stated, ‘we don’t have land banks.’
7.79
Mr Richard Rhydderch, General Manager NSW, Stockland explained:
The key part for us is you need to trade and trade quickly, otherwise your rate of return—we're an internal rate of return business and the longer periods of time that we actually take to deliver products means our internal rate of return is less, and our shareholders don't reward us for that, because we're a publicly listed company. Our whole thing is about speed trying to get it to market.
Data and analysis to support evidence-based housing policy
7.80
Two common themes throughout this inquiry have been the lack of data regarding certain aspects of housing, and the need for government housing policy to be evidence-based.
7.81
Master Builders Australia (MBA) described gaps within housing data and outlined how these gaps impact public policy, advising the Committee:
…there are serious issues with the collection and publication of data relating to the residential land market. While adequate figures are available for some jurisdictions, the lack of a nationally consistent set of figures relating to the volume of land at different stages of the pipeline and information relating to transaction volumes and sales price in the market means that any future improvement (or deterioration) will be difficult to detect.
7.82
More broadly, MBA submitted that these data gaps ‘prevent us from fully understanding the sources of affordability problems and make it much more difficult to know how well we are addressing the issues contributing to unfavourable housing affordability.’
7.83
Mr Hugh Hartigan, Senior Adviser from NHFIC, observed that ‘the whole [housing] data landscape is very fragmented’ and noted that NHFIC in conjunction with the City Futures Research Centre of UNSW is leading a housing data project known as the Australian Housing Data Analytics Platform. As NHFIC and the City Futures Research Centre explained:
Australian housing datasets are disparate, making it a challenge for housing researchers and policy makers to search, process and implement data into evidenced based housing research and analytical models. The Australian Housing Data Analytics Platform (AHDAP) seeks to address this challenge by bringing together nationally significant and harmonised housing-related datasets with a view to improving overall housing outcomes. The platform will significantly improve Australia’s current housing evidence base, providing research and policy makers with a prioritised set of nationally harmonised housing data...
7.84
The Committee further heard that data presented an issue for some states and territories, with the NSW Government commenting that ‘inconsistent data for evidence-based decision-making’ was a contributing factor to housing pressures in the state.
7.85
While advocating for a National Housing Strategy, Mr David Williams, Chief Executive Officer of the Planning Institute of Australia (PIA) suggested that it ‘needs a strong evidence base underpinning it’.
7.86
The Real Estate Institute of Australia told the Committee that a National Housing Strategy should include ‘the establishment of a government-led mechanism for reliable data on housing demand and supply.’
7.87
Some submitters suggested that nationally consistent data holdings could enable the performance of different policies to be assessed and best practice models identified. For instance, MBA proposed that national data on developer contributions could inform policy analysis.
7.88
However, Mr Darren Crombie, President of the PIA expressed caution about how data is used and compared, stating:
… there needs to be a very well-informed understanding of what that data is telling you. You wouldn’t want for that to then end up as a league table where states which are doing the right thing but might be doing it more slowly because they are front-end loading the planning systems are criticised for it.
Committee comment
7.89
Macroprudential and monetary policy have large effects on housing prices, which in turn have substantial effects on the ultimate objectives of those policies: financial stability for macroprudential policy and stable inflation and full employment for monetary policy.
7.90
However, it would be wrong to regard housing prices, or housing affordability more broadly, as an objective of these policies in their own right. To do so would involve distracting policy from the ultimate objectives noted above.
7.91
The Committee heard several appeals to tighten prudential policy in order to restrain housing prices. If these are intended to promote financial stability, the Committee is confident that APRA will consider them as part of its standard operations. However, if these appeals are intended to promote housing affordability, the Committee regards them as counter-productive. You don’t make it easier to access housing by denying credit.
7.92
The Committee also heard appeals to restrict lending to investors, so as to reduce prices for owner-occupiers. However, discouraging investors would mean fewer properties available for rent and hence higher rental prices. That is undesirable on both an equity and efficiency grounds. Many submissions argued that affordability for renters was an even greater problem than affordability for owner-occupiers.
7.93
In February 2021, the New Zealand Government formally added a clause to the mandate of the Reserve Bank of New Zealand, instructing it to consider housing prices in making monetary policy decisions. Such a measure would be inappropriate in Australia. If it is intended to ensure that the RBA pays attention to housing prices it is redundant. The briefest perusal of RBA publications shows that it already pays enormous attention. If it is intended to place greater weight on housing prices at the expense of conventional objectives, it would lead to inferior macroeconomic outcomes. The Committee notes there is a very large body of economic research on the question of whether monetary policy should directly target asset prices, the consensus of which is that it should not.
7.94
The Committee would further note that Australia’s problems with housing affordability are long-run trends. A cyclical instrument like monetary policy is singularly unsuited to deal with those.
7.95
The Committee is cognisant of the need for greater infrastructure funding, especially as developments occur and cities get denser. In particular, infrastructure bottlenecks are often a significant constraint on housing construction. The expenditure of relatively modest amounts on roads, sewers or schools can unlock much greater sums of property development. Moreover, improved transportation effectively increases the supply of well-located land.
7.96
Primary responsibility for the administration of such services lies with state and local governments. Decisions are best made by key stakeholders and local communities. State and local governments are best placed to decide which projects are most worthwhile and how they should be financed.
7.97
The Committee considers that a greater Commonwealth funding of enabling infrastructure should be directed to those state and local governments building the most housing, as recommended in Chapter 3.
7.98
Evidence the Committee has received indicates that land banking is not a significant factor in supply constriction. There are several reasons for this:
evidence in support of land banking was not strong
this claim was strongly disputed by builders and developers
past inquiries, such as by the Productivity Commission, have not found it to be important; and
it seems only relevant to greenfield land development, but not the more important issues of infill and higher density developments.
7.99
Furthermore, the Committee does not believe that land banking is a major determinant of housing prices (though it was not clear whether this was being suggested). To explain increases in housing prices over a significant period of time would imply land bankers holding large and increasing inventories, which we do not see.
7.100
Even if land banking was important, it is not clear what implications would follow from this. Those submissions that emphasised its importance did not argue for policy changes to remove it. Nor is it clear how its importance would affect other policy recommendations the Committee is making. As noted earlier, the relevant of land banking to planning reform is not clear.
7.101
The Committee commends recent efforts by the ABS, NHFIC and others to develop detailed nationally consistent databases. The Committee encourages further efforts along these lines, in consultation with industry, researchers and other affected parties.
7.102
The Committee recommends that the Australian Government continue to support the Australian Prudential Regulation Authority’s (APRA) Prudential Standard APS 2020 to manage authorised deposit-taking institutions’ (ADIs) lending on housing loans.
7.103
The Committee supports APRA’s Prudential Standard APS 2020 to manage ADI lending on housing loans. This support transpires to the powers introduced in 2018, to allow APRA to make rules relating to the lending activities of non-ADI lenders if APRA considers that lending by non-ADI lenders is materially contributing to financial system stability risks.
7.104
The Committee recommends no changes be made to the Reserve Bank of Australia’s current charter and monetary mandate, ensuring that house prices are not a specific objective of monetary policy.
7.105
The Committee recognises that internationally, policy makers have been considering whether house prices should be taken into account, in addition to inflation and the unemployment rate, when setting monetary policy.
7.106
The Committee rejects the recent changes to the Reserve Bank of New Zealand’s mandate by the New Zealand Labour Government to consider house price sustainability when setting interest rates.
7.107
The Committee reaffirms that housing prices should not be an objective of monetary policy. The Committee considers these changes to be retrograde to the economy with questionable benefit to home buyers.
7.108
The Committee recommends that the Australian Government, led by the National Housing Finance and Investment Corporation, implement mechanisms and work with the states and territories to receive their current and up-to-date forecast data on population, housing approval and completions.
7.109
The Committee recommends that the Australian Government continue to support the National Housing Finance and Investment Corporation’s concessional loans to infrastructure projects and community housing providers that will unlock new housing supply, particularly affordable housing, with a stronger focus on funding being contingent on supply outcomes.
Mr Jason Falinski MP
Chair
9 March 2022