Is supply *really* the reason for the housing affordability crisis?

Sascha: [00:00:03] Welcome to the podcast that says Why does business news need to be all business? I'm Sasha Kelly, and today we're talking about Australia's favourite obsession property.

Audio Clip: [00:00:14] But a lot of the talk in property has been about prices going to live in crisis. 

Audio Clip: [00:00:18] And a possible economic recession doesn't seem to have scared. 

Audio Clip: [00:00:21] Off homebuyers and homeowners this morning. House prices across Australia's capital cities are recovering quicker than expected. 

Sascha: [00:00:30] In a changing economic climate. Amidst all of this conversation of interest rate rises and cost of living pressures. One thing just seems to be always the same, and that is the price of property ticks ever upwards. But why? Only a few months ago, reports said that prices were falling amidst rising interest rates. But now I'm reading a lot of headlines with phrases like prices surging and record highs. It's Monday, the 19th of June. And today I'm asking, is it ever going to be a path to affordability in the Australian property market? And what's the best way there? To talk about this today, I'm joined by my colleague and the co-founder of Equity Mates. It's Alec Renehan. Alec, welcome to The Dive.

Alec: [00:01:16] Hi Sascha, good to be here. Housing is always a hot topic. 

Sascha: [00:01:18] I just feel like people fall into two camps, which is either like you and I, we don't have a house or people who are feverishly paying away their mortgages. And every time there's an interest rate rise, they're like groaning and hanging on for that first Tuesday. So we have seen a few headlines about affordability challenges, what has happened recently? [00:01:39][20.9]

Alec: [00:01:40] Yeah. So by 2022, we actually did see house prices fall and in the end the numbers weren't huge, according to Domain, the property website. The value of Australia's housing market fell by about 5% in the capital cities in 2022. Sydney was the biggest faller. It dropped about 11% in 2022 and we know why interest rates rose and all of a sudden people could borrow less. 2023 interest rates have kept rising. So you would think the story would continue. 

Sascha: [00:02:16] Yeah, we had 12 rises in a row, so you'd assume with past performance, I mean, you shouldn't assume we're past performance, but yeah, I thought the prices would keep going downwards. 

Alec: [00:02:26] Yeah, I mean, the logic is the more that you have to pay an interest, the less you can borrow. But that's not what's playing out in Australia. Instead, we've just seen three consecutive months of house price rises over the past three months. Nationally, Australia's housing market is up 2.3%, I said that in 2022 Sydney was the biggest faller, down 11% in the last three months. It's up four and a half percent. And Sasha, if we look at just the last month of data, just May we saw a 1.2% price rises nationally. That was the strongest month of house price growth since November 2021 and November 2021 was peak COVID bubble mania, cheap money and all of that. In May, every capital city was up. Sydney was up the most 1.8%, Brisbane 1.4%, Perth 1.3%. Perth has actually returned to its record highs. Every other city and region is not quite there yet. But Perth, if you over there, if you own a house, you're laughing. If you're trying to get on the property ladder, not so much. 

Sascha: [00:03:40] What about the regions, Alec? Because everyone always says, Oh, it's so much more affordable if you get out of the capital cities.

Alec: [00:03:46] Yeah, the covered phenomena was the regions grew incredibly strongly, a combination of people wanting to get out of the city, being able to work from home. Regions just saw incredible growth. They're not growing as fast as the cities at the moment. In the last three months, nationally, the cities grew at 2.8% and the regions at 0.8%. And when we ask why? Because interest rates are going up and so you would assume people can borrow less and therefore spend less on their housing. A lot of people are pointing to housing supply and Corelogic's numbers show that supply is tight. In the past 12 months, sales volume nationally is down 22%, but importantly new listings. So new houses being listed to be sold is down 24% from the same time last year and down 16% compared to the five year average for this time of year. 

Sascha: [00:04:45] So like supply is down, which does go some way to answer why house prices still rising, even their interest rates are also rising. And in response to the house price rises and the supply crisis. As the Australian Government has proposed the Housing Australia Future Fund. But they need the Greens support and they're struggling to get it yet. 

Alec: [00:05:10] Now that's right, we should say the question of whether this is a supply problem is a controversial question and we will get to that. So if you're sitting there tearing your hair out, put a pin in that. Let's talk about what the government are proposing and why we're talking about this today, because housing supply is in the news. The Australian government, as you said, have proposed the Housing Australia Future Fund as a way to solve the housing affordability crisis. 

Audio Clip: [00:05:37] My question is to the Minister for Housing and Homelessness. What has been the public feedback on the Albanese government's landmark $10 billion Housing Australia Future Fund? 

Alec: [00:05:48] So how is it going to work? The Government have proposed putting aside $10 billion into this fund and know that doesn't mean they would then spend that $10 billion on housing. That would be a simple solution. Instead, what they're going to do is invest the $10 billion and any returns that they make on the 10 billion would be used to fund social and affordable housing projects. 

Audio Clip: [00:06:13] Indeed, our plan to establish a $10 billion Housing Australia Future Fund, we have legislation in the Parliament to actually establish it. The single biggest investment in social and affordable housing by federal government in more than a decade. 

Alec: [00:06:30] Now, importantly, the original proposal had this spending capped at $500 million. So you invest $10 billion, you make a 5% return, you get $500 million. That money goes to housing. If you make more than $500 million, the excess gets reinvested in the fund. If you make less than 500 million, that's where the trouble begins. But we'll get to that now. When the government first proposed this project, they said it would build 30,000 new social and affordable houses in the first five years to get it through Australia's upper house, the Senate. Labour needed the Greens to support it. The Greens don't like this idea of the $500 million price cap, and instead they believe there should be a price floor. Regardless of your investment returns on any given year, the Government should guarantee a certain amount of money to build houses. 

Sascha: [00:07:25] So instead of capping it 500 million, they will guarantee that they will spend 500 million, for example. 

Alec: [00:07:32] Yeah. Now the Greens actually want that price floor to be $5 billion a year. Okay. 

Sascha: [00:07:37] A little bit of a different zero in a different spot there, but okay.

Alec: [00:07:42] Yeah. Yeah. Now they argue that instead of investing in houses, this proposal is essentially just gambling on the stock market. And as we always say, Sasha, investing in the stock market is not the same as gambling. But that is beside the point. 

Sascha: [00:07:56] Listen, to get started investing, if you want to take up that argument.

Alec: [00:07:59] Let's send it or send the first episode to Adam Bandt. But the Greens rightly point out that in the way that the government first proposed it, there would be years where, no, no money gets invested in housing. Last year, Australia's Future Fund, which is separate to the Housing Future Fund, returned -1.2%. It was a tough year for stock markets around the world. If the Housing Future Fund did that, returned -1.2%, then $0 would be invested in housing. The Greens also point out that over the next decade the Government's going to spend or give 74 billion in negative gearing and capital gains tax concessions. And they're also going to pass these stage three tax cuts which are valued at, I think 300 and something billion. So a 10 billion fund for housing supply pales in comparison to those numbers. But that is a political choice, and we're not going to delve into that. 

Sascha: [00:08:56] Yeah, we're business focussed, Alec. We are not a political focus, although I really want to say a few things, but let's keep focus.

Alec: [00:09:04] Yes. So as I said, the Greens want to say a minimum of $5 billion a year guaranteed for investing in housing supply, not invested in the stock market. As part of their negotiations, they've halved that demand to two and a half billion. And the Government, the Labour Government, have countered with, rather than capping the spending at 500 million. They've now countered with a guarantee of 500 million a year. So a price floor. So where we're at is the government are willing to spend $500 million a year on social and affordable housing. The Greens want $2.5 billion a year, but it seems all of our political debate is stuck on housing supply and how much money we're going to use to build more houses. And we're not really talking about any other aspects of housing, maybe the tax treatment of housing or maybe the demand side of the. Supply demand equation when it comes to housing. 

Sascha: [00:10:02] And while those discussions don't happen, like the price of houses just keeps taking upwards in the interim and becoming more unaffordable. And there's a bigger question. There are those that actually challenge that idea that we pinned early on and that more housing supply is what we need. So let's get into that after the break. Welcome back today on the dive where unpacking housing affordability. I mean, we are unpacking it. Will we solve it? We don't know. But we're going to get a little bit closer to it by the end of the episode. The Australian Government are really focussed on the supply side of the housing market as the key to this solution. Build more houses and houses will become more affordable, which makes sense as an economic idea, but not according to our resident economist here at Equity Mates, Thomas Keeley. Here he is on his podcast. Comedian Vs Economist. 

Adam: [00:11:01] Thomas the AFR has launched Housing supply Week. Okay. So there are some weeks that I get up for this. This is one of my favourite ones. Yeah. What's going on with the AVA and housing supply? 

Thomas: [00:11:19] Yeah, I think this is just another shameless push for corporate interests out of the AFR. it's weak. They're going to run a whole bunch of stories about why we need more supply. Yeah, I kind of want to just talk about why I supply it. Doesn't work. Like, we can't. We can't build to build our way out of the housing crisis. But like, you keep seeing this as being pushed as the solution. So late last year, the Albanese government appointed Mirvac CEO Susan Lloyd Hurwitz to lead the National Housing Supply and Affordability Council. Yeah. Lloyd Hurwitz was the former CEO of Mirvac, one of the biggest building builders in the country. So can you guess what her solution to the housing crisis was? Apartments? Build more homes. So there's this kind of, like, idea that we need to build our way out of the crisis. Even the government's panels in mashing those two things together. Saying affordability and supply. So the AFL kick that kick this push for this idea of this week with a piece by Tony Richards, who is a former RBA economist, where he's blaming NIMBYs. So not in my backyard as and councils for not, not bringing enough supply to market. And that's why we've got a housing crisis. Hmm. Yeah. So there's a couple of myths that's worth looking at. The big myth is that we don't build a lot of homes. The truth in Australia is that we build a lot of homes. So you can look at how many homes we produce as a share of the housing stock. Each year. We produce just under 2% each year. We had just under 2% of the housing stock. The only nations in the OECD that produce more houses than us are Korea, Iceland and Turkey. We build almost twice. We build twice as many as the EU and a little bit less than twice as many as America. So we build a lot of homes. So this isn't the problem. Like the idea. We need to build more homes. Like we built a lot of homes. Like what are we going to be the number one house building nation on earth? Is that like is will we have a solution? Like, if that solution is not a little bit ridiculous, surely we're happy with a, you know, podium finish that sounds pretty reasonable. 

Adam: [00:13:26] I think Iceland, though, are very keen on those little tiny homes that they build. So that's pretty jacking their numbers up. They've they've probably got you're thinking of igloos because you can't say that anymore is not politically correct to say igloos anymore. They're tiny homes. 

Thomas: [00:13:43] No igloos. All right. It's Inuit people. That is I think an igloo is still an igloo, isn't it?

Adam: [00:13:49] An English tree. Feel free to correct this. Well, I think fitting in from Iceland or any of the Nordic Nordic countries. Yeah. We'd love to hear about your tiny home. 

Thomas: [00:14:01] Anyway, so. So the idea that we don't build enough homes is like it's that struggles to stack up. The second is the hero law is that we need more apartments. The thing about high rise and medium density is per dwelling. They're much more expensive to build than detached housing. Because we're like, we're very efficient at producing detached housing. Now it's like the big metric homes and whatever can throw out the house very cheaply. They're super well rehearsed that there's a kid, they just bang it up and it's pretty straightforward. Medium density and high rise density is much more bespoke. Plus you're stacking massive slabs of concrete on top of each other, which requires much more engineering, requires much more support, and ends up being much more expensive. The only places where high rise works is places where the land value is so expensive that what you lose in construction costs you make up for by splitting the land value across multiple properties. So that so that's why you get them in the city, you know, like right in the in the middle of the city because the land values so high and the further out you go. Yeah. That's why you don't see them. Yeah, yeah, yeah, yeah. 

Adam: [00:15:08] I never thought about that. Yeah. Yeah. 

Thomas: [00:15:09] So developers only. Yeah, that's like the reason we see them only come up in the inner cities is that's the best developer driven. That's the market driven because that's the only place where it's economical to do so. So then we don't see mountainous outer suburbs because it's not economical to do it that way. The price you get for the apartment you build, it doesn't justify the cost you put into it. So it's the causality. It runs backwards. It's. It's that expensive. Housing creates a market for apartments, so apartments can't bring down the price of housing without removing the incentive for apartments. Right. Does that make sense? Yeah. So I think so. Therefore, apartments can't be a solution for affordability, because if they did bring down prices, they would remove the incentive for apartments and there would be no more apartments and prices would go up. Right. So they can't really be part of the solution. Yeah. Okay. Right. So apartments can't fix the crisis. So. And if we build a lot. Mhm. So we're the highest builder. Why is there still a shortage. What is the problem? Well, the problem is population growth. So CBRE is the the commercial building real estate research firm. I don't know the acronym CBRE. They published the chart saying that Entourage, I think it is commercial building, real estate. Entourage. Okay. There you go. Anyway, so they published a new single during the week which showed that in looking at population growth from between this decade, between 2021 and 2030, Australia is far and away has the fastest population growth in the OECD. So our population set to grow 13.8%, that's there's the US and then there's daylight back to New Zealand, the 10.8%, Canada at 9.4, India at 7.9 and then down the list you go UK 2.8. So we have a fairly made up mostly of Australians working to get away from the housing crisis. Bugger. I've got to do Zealand or Canada. So 13.8% is, is massive. We're number, number one in the world for population growth. Hmm. We're going to add, they say between 2023 and 2033, 4.4, 3 million people to the Australian population. Hmm. To put that 4.43 million in perspective, that's equivalent to adding another Brisbane, Adelaide, Hobart and Darwin to the current Australian population. Yeah. Wow. So four major cities in ten years. Why? Why, why? Why are we going to do that? Yeah, that's a very good question. I mean, what problem are we trying to fix by doing that? I mean, like I'm all for I'm very welcoming. I like people coming here like diversity. I like multiculturalism. But is there a particular like, it seems like we're really aggressively kind of trying to ramp up immigration now. Yeah. And the question is why? What what problem is that trying to solve? It's not really trying to solve a problem. Yeah, like it's trying to create it. It's about making money. So, like, if I had a piece, like an opinion piece talking about the immigration, the ramp up in immigration, they're saying business is looking at slips at the prospect of migration reform with few doubting that a bigger Australia is better. It is boosting retail sales, increasing landlords ability to collect rent, helping miners and contractors find staff, bolstering the big four banks, customer numbers, lifting pathology providers, testing volumes and filling up the chorizo IT department. Right. Hmm. I think this is the thing. Like you have a big population, supports particular interests. It supports customer facing businesses. It supports landlords who own property and the ownership of land in particular, and idea of land and dwelling follows the same distribution that all wealth starts. It's very tilted to the very wealthy. So there's a big push. So what you have in Australia is, is a sort of a political consensus around big Australia. It's called Big Australia. On the conservative right, it supports business interests. They're pro big immigration. On the left we like diversity, so we're pro-immigration. Sort of the way that consensus lands out is we're pro-immigration and we're pro very big immigration. And so we have the biggest immigration program in the world. One of the consequences is even though we're building more homes and almost any other country on earth, we still have a housing shortage because we just have such low wages growing the population so quickly. And it's not just about housing, too, because it's like you think about adding, you know, what Adelaide's got like seven hospitals and high schools, three universities we could add. We've got to add Adelaide and Brisbane in ten years. So that means 14 hospitals in ten years, 160 high schools, six universities, that's Adelaide Oval where the crisis is sort of just not happening. So that means that the wine region and everything that we'll have to put on. Don't even get me started on the number of churches we're going to have to build through the roof. Yeah. So it's like it stretches, stretches the infrastructure and people are always already saying the infrastructure is stretched. So yeah. So what is the solution if it's not supply? If we can't build our way out of it, we, we stop immigration, we kind of cut that down. Or is there an. Others recycle. I don't think you definitely don't want to stop immigration like you want the immigration or something. You want to keep that. But I think it is about bringing it in line with. But the BCA, the Business Council of Australia had an interesting idea the other day where they saying that the immigration intake should be tied to housing supply. So like you should almost demonstrate that there's an increase in the housing stock before you fill it with people rather than at the moment we bring in the people and then hope the housing stock adjusts and it's not. And we're creating homelessness. That's what we're creating with this story. So I think that it makes sense. You don't know you don't open a hotel and then yeah and then just like over-subscribed every room and then work out how to add more rooms. You, you just Yeah. You bring as many as you can accommodate. Yeah. That makes a lot of sense. Yeah. Yeah, yeah, that's right. And like we talked like with the latest budget, they're talking about an annual immigration intake up around 260,000. That's a lot higher than it has been through all the 2002 thousand and tens. You could just go back to where it was in 2013, ten years ago, which is somewhere around 130 hundred and 40,000. It would probably take a lot of the heat out of the story just going back by a more normal, normal immigration numbers. 

Adam: [00:21:43] Yeah, but you need to adjust for inflation. Thomas, You probably don't understand. It's a difficult concept, but. 

Sascha: [00:21:50] We're going to leave it there. But if you'd like to hear more about what Thomas thinks on that topic, then search Comedian Vs Economist wherever you get your podcasts. And that particular episode was called Nvidia and AI beginning of a boom or a baby of a Bubble from the 31st of May. Sir Alec, turning to Mike, back to you. Any final thoughts before we wrap up for today? 

Alec: [00:22:15] Well, I mean, Thomas is a hard act to follow, but I think that what he said there about how much we're building is the important thing to stress. Even if you throw more money at the building industry, there are just capacity questions. How many builders are there? How much can we build, how much land is available, the demand side. It's a fraught political conversation, obviously, because we want to support a big Australia, a multicultural Australia. We want to be welcoming. But the amount of immigration seems to be a key driver of some of these challenges. One thing that Thomas didn't touch on there, and we've done a few interviews on Equity Mates Investing podcast about housing. We spoke to Matt Barry this week and Chris Joy earlier in the year. And one thing that no one really speaks about and I even asked Matt and you dismissed it was the tax treatment of housing. And if supply and demand remained the same and on the same trajectories, would changing the tax treatment of housing, you know, questions around negative gearing, capping the amount of houses you could negative gear, would that affect prices on the margin? That's still a question I have, and maybe we'll try and find someone who can help us answer it. 

Sascha: [00:23:30] That's a really intriguing and a great way to finish it today, because I want to sit on that thought for a little bit. Look, we've talked about housing supply, but one thing we can build more of, Alec, is more podcasts. We're going to be back with more episodes. We'll be back in your feed on Wednesday. Please actually get in touch and let us know what you want us to dig into all the contact details in the show notes below. But Alec, let's leave it there for today and I'll pick it up with you on Wednesday. 

Alec: [00:23:56] Sounds good.