Stop, hammer time: Can you build your way out of a housing shortage? 🔨

Sascha: [00:00:02] From Equity Mates media. This is The Dive. I'm your host, Sascha Kelly. Build, baby, build. It's the cry being repeated around the world because globally there's an undersupply of houses in America. The estimated housing shortfall is 3.8 million houses in Britain. The government aims to build 300,000 new homes each year. In the last fiscal year they built just two thirds of that in Australia. The new Government has just announced a plan to build 1 million new homes and in Canada by the year 2030 they need another 3.5 million houses to avoid a supply crisis. It's Wednesday, the 26th of October. And today I want to know how it is that so many countries are facing an undersupply of housing? And is it as simple as just building our way out of the problem? To talk about this today, I'm joined by my colleague and the co-founder of Equity Mates. It's Alec Renehan. And welcome to The Dive. 

Alec: [00:01:00] Hi, Sascha. As two millennials that don't own houses. Who better to talk about this topic.

Sascha: [00:01:05] Before we get to the news of the day? I think we need to frame this issue in how it affects people like you and I. When there's not enough supply to satisfy demand, prices rise and prices have certainly risen. 

Alec: [00:01:19] Yes, prices have risen. Don't we know it? According to The Economist, adjusted for inflation between 2000 and the middle of 2021, house prices in America rose 64%, prices in Britain rose 110%, so a bit more than doubled. Prices in New Zealand rose 256%. 

Sascha: [00:01:43] Ouch.

Alec: [00:01:44] But you know what, Sascha? They are all rookie numbers. We went out and found Australia's numbers. According to coal logic, prices in Australia over the past 25 years, adjusted for inflation, rose 412%. Take New Zealand. 

Sascha: [00:02:03] Yeah, that's certainly bragging rights, but not for the right reasons. And so the reason we're talking about this story today is because housing was the central point in the Australian Government's budget that was handed down last night. 

Audio Clip: [00:02:16] Treasurer Jim Chalmers will unveil a new plan to build 1 million houses as part of his budget. The collaboration between the federal and state governments, as well as the private sector, aims to increase housing supply, focussing on affordable new homes. 

Sascha: [00:02:30] The new Australian Government, the Labour Government has said it's going to build 1 million homes by the end of the decade. What's the plan, Alec? 

Alec: [00:02:39] Yeah, well, housing affordability is such a hot button issue, it's so important and the Australian Government is going to build their way out of it. They're going to increase supply to match up with demand. They've set up a $10 billion fund to build social and affordable housing and they plan to use $350 million to build 10,000 new homes each year and then kicking in from 2024. The government has set a goal of building 1 million new homes over five years. They're expected to be built under a new national housing accord. That's what they're calling it, which is basically an agreement between the federal government, state governments, institutional investors and the construction sector. The government expects there will be around 180,000 housing completions a year in 2022, 2023, 2024 before the goal and the new housing accord kicks in. But really, 1 million over five years would just increase it from 180000 to 200000. 

Sascha: [00:03:41] Yeah, and that's the thing, Alec, is that 1 million. It's a nice round number. It sounds great and it sounds pretty ambitious. But data shows that in the last five years, up to March 20, 22, 985,085 homes were built. So this is really that much of a stretch, isn't it? 

Alec: [00:04:02] Yeah, it makes it sound a little bit less ambitious. If you were going to say we're going to build 15,000 more homes than we did in the last five years. And that's really one of the key criticisms. It's a really nice sounding number, but it's not a massive uptick from what's already been built. 

Audio Clip: [00:04:19] Housing in Australia is cooked. It is seriously messed up. We have lost sight of the basic fact that housing needs to be treated as a human right. 

Alec: [00:04:29] The Australian Greens have been particularly critical of it. They've called the plan insufficient and they've said that there will be a shortage of public housing. Well, the shortage of public housing will grow to 590,000 homes over the next five years. And one Greens MP called the policy quote, a complete joke and said these homes will have been built anyway. 

Audio Clip: [00:04:50] That is the crazy situation that we have at the moment. And we have that situation because we no longer treat affordable housing as a human right. We treat it as an investment. Away. The government rewards their big donors, but young people get locked out of the housing market. 

Sascha: [00:05:06] But the ambition is there and it's pretty clear it's build, build, build. And the Australian Government isn't alone with these plans to increase housing supply worldwide. We've seen similar announcements and policies to the shortfalls that you outlined earlier in the episode. 

Alec: [00:05:23] Yeah, in the US, Joe Biden has announced a housing supply action plan that includes tax credits and investments to encourage the building of millions of homes, including financing for the construction of 500,000 units of affordable housing in Britain. A key part of Boris Johnson's 2019 Conservative manifesto set a target of 300,000 new homes per year by the mid 2020s, and their aim was to build at least a million more homes over the next parliament.

Sascha: [00:05:53] We'll have to see if that's still in place now that Boris is there any more.

Alec: [00:05:58] And in Canada, the Trudeau government has announced the largest and most ambitious federal housing programme in Canada's history. 2020 one's National Housing Strategy will invest more than $70 billion to build more housing.

Speaker 4: [00:06:12] We know that housing is a real challenge, not just here in Kitchener, but right across the country. And that's where we need to work together to solve it. We need to work together with different orders of government.

Sascha: [00:06:22] So Australia is joining many of its peers in designing economic plans to build and build a lot. But this isn't a policy that you can just throw money at and the problem is solved. There are so many challenges when it comes to actually building and constructing houses that people can live in. And that is where we, along with the US, Britain and Canada, might do well to look at a close neighbour of ours. Let's take a quick break and then come back with a look at how New Zealand are approaching this challenge. Welcome back to The Dive. I'm your host, Sascha Kelly. Why don't you follow us on Instagram? Our handle is at the dive dot business news. Today we're talking about housing. Well, really, the lack of housing globally, there's a severe shortage. And the solution from governments all around the world is to throw money at the problem like Barb and just stop building tax incentives, project financing, all in order to be a light bulb and build a lot. But it's not as simple as that. Is it, Alec? 

Alec: [00:07:29] It's not Sacha. It took me a moment to figure out what Bob you were talking about, but I got there.

Sascha: [00:07:35] Just throwing a little like childhood reference in there for all the millennials.

Alec: [00:07:39] I mean, look at Bob's in a good industry at the moment because the world needs to build and the world is throwing money at the problem. But this generation of governments isn't the first generation of governments to try and throw money at the problem. The challenge is housing supply, and the challenge to build more houses is more complex than that. In 2008, Australia's Senate released a report on housing affordability in Australia. In it, they identified three challenges when it comes to housing supply. The first, the need for supporting infrastructure. The second, planning processes and zoning laws. And then thirdly, an adequate construction workforce. Now, let's put the third point of the construction workforce aside for 1/2 and focus on the first two, because that's really the challenge. Universally, you need infrastructure like roads, public transport, schools, shops, hospitals near where you build houses. So governments can either build new infrastructure and then developers can build houses around it, or governments can change zoning laws so more housing can be built around already existing infrastructure. And this is the challenge that has caused housing undersupply around the world. It takes a long time to build new infrastructure, and local residents strongly challenge any changes to zoning laws. No one wants more apartments built close to them. That's that whole not in my backyard, NIMBYism. And so countries around the world have continued to under build. Research published by the Reserve Bank of Australia in 2018 found that restrictive zoning contributed about 40% to the price of houses in Australia's two major cities of Sydney and Melbourne. 

Sascha: [00:09:20] And that is why throwing money at the problem isn't enough. Governments can offer more and more financial incentives to builders, but there are limits on where they can build and where people will buy. 

Alec: [00:09:31] Yeah, that's right. To give you a sense of how zoning laws constrain new builds. Consider these stats reported by the Atlantic. In nearly every major U.S. city. Apartments are banned in at least 70% of residential areas.

Sascha: [00:09:45] That's huge.

Alec: [00:09:46] Yeah. San Jose prohibits apartments in 94% of its residential areas. Wow. So, Sacha, imagine you came up with your mate Bob and you start a construction company in San Jose. The Biden administration wants you to build. They're offering you tax breaks and project financing to build affordable housing. But every time you try and build denser housing in San Jose, maybe you have a plan to knock down a couple of single family residents and build an apartment block or subdivide them and build more smaller houses. You don't get planning approval because it's not zoned for denser housing, so you can't do it that way.

Sascha: [00:10:25] Yeah. You'd be fighting over 6% of the land. Really? Yeah. 

Alec: [00:10:28] So you and Bob turn to plan B, you go. We can't build denser housing in San Jose. Let's go to the edge of San Jose and build on greenfield land on land that hasn't been built on. But there's no transport infrastructure. Maybe there's a road, but you don't have public transport there. The hospital might be a long way away. The school is too small to accommodate an influx of new residents. So if you were to build out there, you wouldn't get a great price when you went to sell. And then the business case might not stack up. And that is the practical challenge developers face. And that is the challenge why housing supply is harder than just a financial one. 

Sascha: [00:11:04] Yeah. And it also explains why I'm not in business with Bob as well, because that doesn't sound like the kind of thing I want to be doing. But this leads us to New Zealand. Jacinda Ardern's government took some radical steps last year to break this deadlock and unlock a lot more housing supply. 

Alec: [00:11:21] Yeah, New Zealand has had one of the toughest housing markets in the world, according to The Economist. Earlier this year, an average home in Auckland, New Zealand's largest city, is 35 times the median income and Jacinda Ardern's government faced many of the same challenges. The other countries we've spoken about today faced.

Audio Clip: [00:11:40] But the idea that one thing is going to make a difference for everyone is just not the case. We've done things around foreign buyers. We've increased by over 4000. The new builds in our public housing. We've rolled out housing first for the home. Listeners across the country in 2017.

Alec: [00:11:56] To address that, she introduced a scheme called KiwiBuild that was intended to build 100,000 affordable homes by May. Last year, it had only built 1000. There are structural problems when it comes to increasing housing supply. So in December of last year, Ardern's government took a radical step. They have overridden local government zoning rules for single family homes. Now, any area zoned for single family homes will be allowed to have up to three three storey houses without requiring local councils zoning approval.

Sascha: [00:12:28] But is this going to be enough to make up for New Zealand's housing shortfall?

Alec: [00:12:32] Probably not. Modelling by Pricewaterhouse Cooper predicted it would lead to between 48,000 and 105,000 new houses in the next 5 to 8 years. But importantly, it's starting to break the back of that NIMBY attitude that you can build, just not in my backyard attitude. And that is the attitude that's really encouraging these restrictive zoning laws. And it's now, I guess, forcing more housing in your backyard if you want to live in the middle of a densely populated city. That's the price of admission, I guess. And the important thing is it might not be enough to solve New Zealand's problem, but it is a step in the right direction and reforms like this in other jurisdictions before have had positive results.

Sascha: [00:13:14] This is why the city of Houston, Texas in the United States is a great case study. In 1998, the local government changed zoning rules and reduced the minimum size requirement for a family home. Fast forward 20 years and Houston builds housing at 14 times the rate of cities like San Jose, which we heard about earlier. And in 2019, Houston built roughly the same number of apartments as Los Angeles.

Alec: [00:13:39] Yeah, it's pretty incredible when you think about that. 14 times the rate of a city. And that's really the key takeaway here. Housing supply isn't a problem that we can just throw money at, as we've both said a few times in this episode. It requires reform at a local government level or a real commitment to build new infrastructure. Not everyone likes the idea of changing zoning laws for most people. Housing is their biggest asset, their most important investment and a key part of their retirement. And changing zoning laws could affect the value of their property and their investment. And then, I guess, the quality of their retirement. But I guess that's the conversation that we need to have, because it's the only way the Australian Government is going to deliver on their ambition of building 1 million more homes by 2030 or any of these other governments around the world are going to be able to deliver on their ambitions to make up for their housing shortfalls. 

Sascha: [00:14:33] Yeah, well, Alec, if there's ever been an argument to diversify your investments away from property, that's made me feel a lot better about putting my money into shares. And that's the Equity Mates way. 

Alec: [00:14:46] Yeah, well, Sascha, you know, we're all about diversification here, so I guess let's make that argument. But it doesn't have to be an either or thing. It doesn't have to be a. If we loosen zoning laws and we allow denser housing or more housing, that's going to hurt our investments. We spoke about Houston earlier. I just had a look at Zillow. Home prices in Houston have gone up 15% over the past year. 

Sascha: [00:15:07] Well, we know that housing is a hot button topic. So if you have any thoughts on this episode at all, then you can contact us by email. The dive at Equity Mates dot com. We might leave it there for today. If you want to help the dive grow, then send this episode to a friend. I'm sure there's someone out there who you've been talking about the property market with. Well, then why not forward them this link? Take a screenshot, send it in a text shared on your Instagram. Remember, you can always tag us at the Dive Dot Business News and you can subscribe to this episode wherever you're listening right now, so you never miss an episode. Thanks so much for joining me today, Alec.

Alec: [00:15:45] Thanks. 

Sascha: [00:15:46] Until next time.