Unmasking the Quick-Fix Myths of the Major Parties

Australia’s housing crisis has become a fierce political battle that could have major implications for the next federal election.

As I see it, the fierce battle over housing is set to intensify and define the next federal election as Labor, the Coalition and the Greens target a growing cohort of voters who believe they’ve been locked out of home ownership for life.

Opposition Leader Peter Dutton kicked off his “election campaign” in his budget reply with a populist promise to fix the housing crisis by cutting back on migrant numbers to 140,000 a year and cap foreign student visas.

That’s not a housing policy; it’s just a cut in immigration.

The problem is there are no quick fixes to the housing crisis, yet both the Coalition and Labor continue to chase short-term solutions that don’t address the real issues.

Anything easy and popular won’t work to solve housing affordability

Mr. Dutton’s strategy of blaming immigration for housing woes offers appealing sound bites for the media about “restoring the dream of home ownership.”

However, this approach ignores the deeper structural problems in housing supply.

Dutton proposes to slash permanent migration from 185,000 to 140,000 over the next two years, marking the lowest level in two decades.

After this period, the numbers would rise gradually to 150,000 and then 160,000.

He argues that reducing demand will help meet the Albanese government’s housing target of 1.2 million homes by 2029, freeing up 100,000 homes over the next five years.

Many industry experts worry that this policy of significantly decreasing immigration would worsen the existing shortfall of 600,000 builders and tradies, potentially backfiring entirely.

Of course we also have a skills shortage in many other areas, so decreasing immigration learning make this worse.

As I see it, decreasing immigration won’t stop the strong demand from homebuyers but it may lessen demand on our rental markets as immigrants tend to rent for the first few years of their status Australia.

As for housing demand from buyers, there number of substantial demographic changes, as I explain a little later on it will keep house prices high.

Interestingly, Australia’s housing supply is low by international standards.

According to the OECD, Australia’s level of housing supply was 420 per 1,000 people in 2022.

That lags behind comparable countries such as Canada, the US and the UK (England) — which are all below the OECD average too. ,.

Additionally, Dutton plans to stop foreign investors and temporary residents from purchasing established properties for two years.

This is a populist answer to a problem that’s been exaggerated.

The spike in new arrivals is partly due to the rebound in foreign student numbers after the pandemic paused all migration.

Before the pandemic, net overseas immigration was about 240,000 per year.

This number plummeted during the pandemic, even going negative as Australia experienced net emigration.

By 2022, the numbers had normalised and then surged to 550,000 in catch-up mode.

Although this figure seems high, it’s likely correcting now.

Over the pandemic period and subsequent recovery, Australia’s population has reached roughly the same level it would have without the interruption.

Moreover, Dutton’s restrictions might have limited impact because more than half of permanent migration applicants are already in Australia on temporary visas, meaning they are already part of the housing demand.

Also, the number of foreigners buying property here is minimal due to existing regulations.

What about capping international student numbers?

Capping student visas as proposed by Peter Dutton would have significant consequences for Australia’s tertiary education sector, which is one of our biggest export industries.

As government funds have been withdrawn, our universities have turned to fee paying foreign students to remain economically viable and employ the same number of academics.

If the number of foreign students is reduced, either government funding would have to be increased (and I can’t see that happening), local students would have to pay more or the size of our universities would have to shrink, meaning there would be less education, fewer degrees and less research.

What about Labor’s policies.

Labor’s approach focuses on capping overseas student numbers to reduce migration.

Universities exceeding these caps must demonstrate they can provide housing for the students.

However, this strategy merely shifts the supply shortage problem elsewhere, turning universities into builders facing the same local council approval challenges.

This policy also undermines Australia’s fourth-largest export sector, higher education, worth $49 billion annually, potentially destabilising an industry vital to the economy.

In my mind, both the Coalition’s and Labor’s attempts to tinker with housing demand via migration cuts are misguided.

Labor’s recent budget, with its inflationary cost-of-living measures and spending on competing against cheap Chinese solar panels, is another example of populist, short-sighted solutions.

The political debate risks avoiding the tough decisions necessary to address the housing crisis, instead relying on crowd-pleasing but ineffective answers.

The housing market has been destabilized by long standing and persistent supply-side bottlenecks.

The Reserve Bank’s assistant governor (economics), Sarah Hunter, recently described this situation as a “perfect storm of constraints” in housing supply.

Aside from record levels of immigration, the other key driver of demand has been a reduction in average household size due to demographics (and aging population and smaller families), the trend towards more space for working from home, and fewer share houses.

“The average number of people living in each household has trended lower, from around 2.8 in the mid-1980s to around 2.5 of late,” Ms Hunter observed.

“This may sound like a small change but if, for some reason, average household size rose back to 2.8, we would need 1.2 million fewer dwellings to house our current population – no small difference.”

However, the RBA’s chief economist said the demographic and work-from-home drivers of reduced household sizes appear unlikely to reverse.

The fact that more of us are working from home nowadays means we’re going to require larger dwellings, often within an extra home office or zoom room.

Hunter further explained:

” Housing supply does eventually respond to this growing demand. The speed and magnitude of that response can vary, however, and is determined by rental and housing prices, underlying construction costs and the time to design, approve and build.

In the meantime, prices and rents do the adjusting. The extent of this adjustment differs through each cycle and depends on the relative movements in demand and supply.

The pandemic period – and its aftermath – stands out as a particularly sharp cycle. Growth in demand for new dwellings slowed rapidly in 2020 before rebounding strongly (Graph 3). Supply, as measured by dwelling completions, has been much less volatile and has trended down in recent years. Overall then, growth in demand is currently running well ahead of supply.”

Further, during the pandemic, government incentives for home building and renovation led to a spike in building costs due to shortages of materials and labour.

State government infrastructure projects further strained resources, pushing costs up 40%.

The Reserve Bank’s interest rate hikes to combat inflation have also led to construction companies going bust and made buying an existing house cheaper than building new ones, despite inflated house prices.

The existing housing supply has effectively shrunk as people demand more space for working from home, reducing household sizes.

These issues are compounded by long standing local council restrictions against medium-density housing development.

My concern is that political debate in an election year will sidestep these complex issues in favour of populist answers that could ultimately exacerbate the housing crisis.

Ms Hunter put it well when she explained that the future of Australia’s housing market is a critical issue.

“The housing sector sits at the heart of the economy,” Ms Hunter said.

“Everyone needs a place to live and finding suitable housing is fundamental to people’s quality of life.”

About Michael Yardney
Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He’s once again been voted Australia’s leading property investment adviser and one of Australia’s 50 most influential Thought Leaders. His opinions are regularly featured in the media.