Economic causes of housing crisis can be addressed, but gently

Carl Harris and Paul Liggins tell why people live in tents in Hobart and how to fix the issue

HOBART’S house prices are on the up, catching ground lost over the past decade.

According to the latest Corelogic data, Hobart’s median home price is $424,000, just behind Darwin ($429,000), Adelaide ($435,000) and Perth ($465,000).

In 2008 Perth’s median house price almost overtook Sydney — it is now barely half.

So why the big swings in property prices and people living in tents?

The property market has many features of competitive markets that economists like. For example there are plenty of buyers and sellers and a wide range of product options. But many factors influence and distort the housing market away from an economist’s competitive ideal.

The most obvious is the supply of housing is fixed in the short term. If more people want chocolate milk, prices will rise in the short term but more chocolate milk will be produced, and prices will fall to a new equilibrium.

In the housing market, it’s not possible to quickly supply a house. More importantly, everyone needs a home. Unlike abstinence from chocolate milk, you cannot decide not to purchase some form of shelter.

Other distortions affect the supply of land and homes. Houses cannot be traded across regions. In contrast a chocolate milk shortage in Hobart can be solved by shipping chocolate milk from Melbourne, not so in housing.

Governments intervene in the market, often owning land that could potentially be used for housing, either in infill (for example Macquarie Point) or greenfields sites. To maximise the sale price and hence their revenue, they may have an incentive to restrict supply.

State and local government rules such as minimum lot sizes, height limits, design standards and planning approval processes also restrict the supply of housing or increase its costs. There are good reasons for many of these rules, but recent research by the Reserve Bank suggests rules and approval processes raised the price of a detached house by 42 per cent in Sydney and 41 per cent in Melbourne (no analysis was done for Hobart). Research suggests the economic and social cost of these rules are likely to significantly exceed the benefits, and in many cases their impact was primarily to advantage homeowners to the disadvantage of others.

The supply of homes to renters and low-income groups is also affected by the commercial property market. More tourists, shortages in hotels and rising preference for non-hotel options mean Hobart’s private dwellings are increasingly offered on Airbnb and not to renters. Up to 1000 entire dwellings are available on Airbnb in Hobart.

On the demand side, higher population, fewer people in each household, low interest rates, slowly increasing wages and a generally strong economy have pushed up prices. More overseas students — enrolments rose 90 per cent

(an extra 4200) from 2014 to 2017 — also need housing.

As on the supply side, governments have a big impact. Decisions to build roads or provide public transport affect demand, particularly at a local level. Taxes such as stamp duty, or concessions such as capital gains tax reductions impact demand. First homeowners grants raise demand and prices.

Finally, houses are longterm assets and a big commitment for most people. Confidence is important, both for supply (e.g. builders being confident they can sell a house for more than it cost to build) and demand (buyers being confident their future income will cover the mortgage, and that house prices won’t drop).

All of the above mean that mismatches between demand and supply can easily occur. University of Tasmania data estimates a shortage of 1400 dwellings per annum in the greater Hobart region. Dwelling construction approvals have picked up in the past two years, and more hotels are being built, but these will take time to come into the market.

Some short-term and indirect solutions — such as banning new Airbnb rentals in some areas — have been proposed. We recommend caution against such approaches. Aside from the costs of implementation, including ensuring people comply with bans, short-term interventions are often ineffective or have unintended consequences. An Airbnb ban might shift the problem to adjoining suburbs and/or restrict growth in tourism, limiting job opportunities and growth. Changing the rules will also reduce confidence in the market.

To ensure a robust and affordable housing market, solutions need to be comprehensive, sustainable and long-term. Federal, state and local governments each play a role. More land releases, fewer zoning rules, improving transport infrastructure, more rapid approval processes, and working with the private sector to provide low-cost housing will help to address the challenges the housing sector faces.