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Standing Committee on Tax and Revenue
Housing affordability and supply in Australia

TULIP, Dr Peter, Chief Economist, Centre for Independent Studies [by video link]


CHAIR: I now call the witness from the Centre for Independent Studies, Dr Peter Tulip. This hearing is a legal proceeding of the parliament. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. The evidence given today will be recorded by Hansard and attracts parliamentary privilege. It is important to note that, although your evidence is protected by parliamentary privilege, this protection cannot be enforced outside of Australia. I now invite you to make an opening statement before we proceed to discussion.

Dr Tulip : Thank you, Mr Falinski. I want to make two points in my introductory comments. First, planning restrictions are a big reason that housing is so expensive. Secondly, the Commonwealth government can reduce that problem by providing financial incentives to state and local governments. On the first point, there's a huge amount of research both in Australia and overseas that shows that planning restrictions substantially boost housing prices. There’s a strong expert consensus, which is reflected in official reports. Examples from just the past few months include surveys of the Australian economy by the OECD and the IMF, and the NSW Productivity Commission's white paper. The CIS submission lists lots more reports with similar conclusions.

I acknowledge that several submissions to the inquiry disagree with the expert consensus. In my view those disagreements reflect simple misunderstandings that aren't taken seriously by people who look closely at the issue, and I hope we can discuss some of those misunderstandings in questions.

To be clear—because it's often misunderstood—nobody is arguing that supply restrictions are the only cause of high house prices. Of course, low interest rates and immigration matter. Yet, a lot of submissions to the inquiry, including several on the program for today, characterise our position in extreme terms, so they have a strawman to knock down. I trust the inquiry's going to see through that.

Land use regulation is the responsibility of state and local governments, so it's outside the direct control of the federal government. Nevertheless, the Commonwealth government can encourage better regulation by creating better incentives for good policy. For example, just as an illustration, the Commonwealth could make grants proportional to dwelling completions. There are several reasons why the Commonwealth should do something like this. First, there's a coordination problem. States and local governments incur the costs of extra development—for example, congestion, schools, funding hospitals—but the benefits, in terms of housing affordability and economic growth, are distributed nationally. Secondly, but very closely related, the need for extra housing is driven in large part by high immigration. This is a Commonwealth government decision that substantially boosts Commonwealth government revenues, so the Commonwealth should share the burden of housing that extra population. The third reason is that the Commonwealth already spends billions of dollars every year on programs ostensibly aimed at housing affordability. A lot of those programs are of questionable value, and that money would be better spent directed at planning reform or made conditional on increased supply.

This is a policy that's been recommended in many submissions to the inquiry, including those from the Centre for Independent Studies, the Grattan Institute, UDIA, Urban Taskforce, Master Builders, the Property Council, the NSW Productivity Commission—and probably others that I haven't read. It's a policy that's also recommended in both the OECD and IMF reports. So I hope the committee gives it serious consideration. I'm now happy to answer any questions you might have.

CHAIR: Thank you, Dr Tulip. I've been asking people initially whether they think there is an affordability problem in the Australian housing market. I take it that your view is yes.

Dr Tulip : To be clear, housing is too expensive in Australia. We have big market failures that need to be fixed for equity and efficiency reasons. People can disagree on whether you call it an affordability problem. Let's be clear on the important issue, which is that housing is too expensive.

CHAIR: The ABC mischaracterised the evidence given by Dr Luci Ellis on Monday that the cause of this is low interest rates and low inflation. Do you think that that is an explanation for the predominant causes of the house inflation or asset inflation that we've seen in the Australian market?

Dr Tulip : No, I don't think many people outside the RBA believe that. That's been the 'house' view for decades there, but there's no real evidence to support the idea that it's inflation. Luci emphasises nominal interest rates, which move very closely with real interest rates—and, yes, there is a very broad consensus that real interest rates have had a very substantial effect on the house price boom that we've recently seen. That’s a partial answer to your question. Do you want me to keep going?

CHAIR: Please do so.

Dr Tulip : When people are talking about causes of high house prices, there are two very different questions that people are asking. One question is: historically, why did house prices increase? There, interest rates are the big short-term factor, and immigration is the big long-term factor. A separate way of interpreting this question, of what the causes of house prices are, is: What's the market failure? Why doesn't housing operate well? Why doesn't it operate like other markets? There, the answer is zoning. It's planning regulations or land use regulations, or whatever you want to call it. Our planning regulations stop supply from responding to that extra demand.

CHAIR: Historically, have development or building lead times always been roughly this long in the Australian market, or have they been increasing over recent times?

Dr Tulip : My information on that mainly comes from talking to builders and developers, and they say that times have increased dramatically over the past decade or two.

CHAIR: I take it you don't have any data on whether or not there's a correlation between increases in approval times and price increases?

Dr Tulip : Other people have looked at that, but I don't. I'm not familiar with that data, no, sorry.

CHAIR: Would you mind taking on notice who those people may be and we may call them before the committee. My other question is that Dr Ellis also said that she couldn't think of a single case study globally where an increase in the supply of housing led to a decrease in price. That doesn't seem to make intuitive sense in terms of how we understand microeconomics and macroeconomics. I can think of one example in New Zealand where that wasn't the case. Are you aware of any examples where a liberalisation of the supply chain in housing has led to long-term decreases in price?

Dr Tulip : Japan is the famous example or, to be more precise, Tokyo. Over the past few decades, they've built a lot of housing and, as a result, housing prices in Tokyo have fallen in real terms.

CHAIR: Can you tell us what they did over there? What are the high points of what they did in the Tokyo market to allow supply to be more responsive to demand?

Dr Tulip : I'm not an expert in the details. I think we cite a few papers discussing the Tokyo land reforms in the paper. If we don't cite them there, it's easy for me to get them. The central issue is that we need planners to stop saying no and start saying yes. The actual institutional reforms that get you there are a lot harder. Rather than trying to remember, I'll take that on notice.

CHAIR: The other thing was that the deputy chair mentioned that the different ways that you can finance housing overseas might have an impact on pricing too. Would that be something that you think has an impact?

Dr Tulip : I'm not aware of that. Whether interest rates are variable or fixed, they're low in a lot of countries, and I think all of those countries, whether they have fixed rates or variable rates, have all seen house price increases.

CHAIR: If we continue to make housing an investment and then we change the policy focus of that and make it less attractive, does your modelling show what would happen to the supply chain and whether that helps housing become more or less affordable?

Dr Tulip : The big policy lever that people are talking about in that area is tax changes. If you were to make investment less profitable by removing the capital gains discount and removing negative gearing, then, yes, you would get much less investment. But the effect on prices is going to be tiny. There have been a bunch of different papers that have looked at the effect of tax concessions on housing prices and they find that, were you to remove that—similar to the Labor Party policy in the last election, for example—it would change house prices by maybe one to four per cent. That's just a few months national change.

CHAIR: Some of the community housing providers, social housing providers and the lead groups like National Shelter made an argument that there's not enough government spending on low-income and affordable housing. In your view, is more institutional investment needed in these areas? Or is this an issue best fixed by government spending? One of the providers argued that we may need to spend up to a trillion dollars between now and 2036 in terms of creating low-cost housing.

Dr Tulip : I think the social housing industry's definition of the problem is too narrow. They think that housing is unaffordable for low-income earners. It's much worse than that: it's unaffordable for everyone. We have a problem throughout the whole housing market: at each end and in all different places.

In terms of the solution, to a large extent I agree with the social housing lobby that, yes, we need more supply. But it's not just the narrow, expensive supply that they want to provide. We need to provide it throughout the housing market, wherever people want to buy, and the way to do that is to get planners out of the way, to stop saying no to proposals for new developments. So it's not actually necessary for the Commonwealth government to spend the billions of dollars that you're talking about. There doesn't need to be any cost to the budget. We just need to get the planners out of the way.

CHAIR: This is my final question to you. One of the things that are beginning to occur to me during this whole process is that it's not a simple question of demand not meeting supply, and therefore increasing supply, but going to your point—oils ain't oils, supply ain't supply. Building apartment blocks in remote parts of the city or on the edge of the city is not the same as allowing apartment blocks to be built in the middle of the city. We can see from some of your research, some of the research from the Reserve Bank, some of the research from NHFIC—the list goes on and on—that certainly in Sydney and in Melbourne, but not so much in Brisbane, there's been a refusal by local governments to allow apartment buildings in their areas which has resulted in apartment blocks being built in the ring section or the middle section, which is creating pressure on the outer suburbs. It just seems to me that this central planning model that we have for housing in Australia has failed us in terms of the quality of housing we get, where that housing is located and its price. SQM and CoreLogic indicated this morning that their research is indicating that as well. Is that something that you've seen in your research?

Dr Tulip : I would phrase the problem slightly differently. You say the problem is excessive centralisation; I think the problem is excessive regulation, and, in fact, the solution may involve more centralisation. It involves taking the decision-making out of the hands of local governments and giving it to state governments and the Commonwealth government. But we need the Commonwealth to take a more active role in this. When planning decisions are left to a very local neighbourhood level, the local neighbours tend to say no. They're scared of change. They don't get a lot of the benefits. There needs to be a broader public interest brought to bear on these decisions, and that actually involves going in the opposite direction from what you're saying. It involves increased centralisation and, in particular, an increased role for the Commonwealth.

CHAIR: Thank you, Dr Tulip. Julie?

Ms OWENS: Dr Tulip, I've got a couple of questions. Can I start with that issue of centralised planning. If you get it wrong and you allow developers to do whatever they want in a large suburb, then the price of land tends to go up, because the development profit goes into the price of land. I can see ways of restricting it around railway stations so that the price of land did go up so that people couldn't build houses—so you can use it for good or for bad. How would you see it working so that you got the buildings where you want them, but you didn't start to, I guess, not just destroy the character of the suburbs but build inappropriate development in places where you'd cause unintended consequences in travel and the lack of facilities et cetera.

Dr Tulip : You raised many different issues there. I think residents are overly critical and mistrustful of new developments. One of the studies we did looked at large apartment buildings being constructed in various suburbs of Sydney and Melbourne—Chatswood and Green Square in Sydney, Box Hill in Melbourne.

We've found that the local residents initially oppose these as damaging the character of the neighbourhood and harming neighbourhood amenity, but a lot of other people—in particular, the residents who move in—actually like high-density development. They like a walkable neighbourhood. They like a lively neighbourhood. So you have competing preferences here. One way you can balance those is by looking at what happens to neighbourhood prices when the tall apartment buildings go in. What we find is that, despite resident opposition, nearby house prices often go up. Some go down; some go up. On balance, there's actually not much change in neighbourhood amenity as judged by willingness to pay, so I think that neighbourhood objections to the tall apartment buildings are exaggerated.

Ms OWENS: You've suggested that the federal government could lead a national conversation on social values and priorities in relation to housing. We have had witnesses who recommend a national housing strategy. How would you see that desire for a national conversation unfolding? How would it happen?

Dr Tulip : I think this inquiry is a big development along that path. It's great that we're talking about these issues and I hope that you guys will write a report that's widely read and discussed. In particular, I'm hoping that your report and the discussions around the inquiry will put a spotlight on the planning system and the need for reform and how we need extra supply to make housing affordable.

Ms OWENS: You said earlier that housing is too expensive. Obviously, it isn't for the people who are buying it. There's a group of people, including investors, but also new home owners, who are quite comfortable with the rising price of houses. In some ways, for some sections, the market is actually working. When you say it's too expensive, what do you mean?

Dr Tulip : I mean that people are paying more than they need to. The average apartment in Sydney, for example, costs about $900,000. That can be supplied for about $550,000. There's a huge gap between what people are paying—the value that buyers place on houses—and what it actually costs society to supply that housing, and that wedge is because of the planning system. Developers don't meet that demand because it's not legal to. The planning system says they can't build the housing that home buyers want to pay for.

Ms OWENS: But people are prepared to pay that at the moment, and real estate agents are saying that they could sell it 10 times over. If it's the case that they could sell it 10 times over for that price, it would still take quite a bit in a competitive market to pull the price down, regardless of what the costs were.

Dr Tulip : It will take a lot of extra supply to bring prices down towards costs, yes. But that's the objective we should be aiming at—that prices should equal the cost of supply. For the economists out there, it's the marginal social cost.

Ms OWENS: Thank you. That's it, Chair.

Mr THISTLETHWAITE: Thanks for your evidence, Mr Tulip. When you say that planning regulations are a handbrake on supply and that that's affecting price, what do you mean by that? Do you want to elaborate on that? Is it the time taken to get approval? Is it the cost of getting an approval? What do you think we should be looking at to reduce it?

Dr Tulip : The planning system is too complicated and it is too bureaucratic, but that's not the big problem. The problem isn't the grey area of not knowing which housing is going to be approved and which won't be. The problem is the black-and-white area. Planners just say no to most development. Most of our major cities are reserved for single-family, detached, low-density housing. It's not legally possible to put apartments and townhouses on the majority of our urban land. Then, when apartments are allowed, height limits seriously restrict the number of dwellings that can go in the new apartment buildings. If we allowed taller apartment buildings and more apartment buildings, we would have more supply and housing prices would fall.

Mr THISTLETHWAITE: At the moment in Sydney, we've got an oversupply of housing in the unit space. There are several developments in my electorate that are quite big that have 50 per cent occupancy rates. So the supply is there, but the prices aren't coming down. What's the issue then?

Dr Tulip : It's hard to know. You're right, that is a puzzle. It's partly because there are so many unusual things driving the housing market at the moment because of the pandemic. I think there is a temporary fall in demand for apartments, particularly around the inner city. That will be reversed once the pandemic goes away. The attractions of living in an apartment in the centre are that you're close to nightlife, you're close to work and you're in a lively environment. The COVID pandemic has stopped all of those, so there's no real reason why people should be filling those apartments. But I think that's temporary and will change.

Mr THISTLETHWAITE: You've mentioned infill development and you've focused on that, but what about greenfield development? Do you think that we need to make it easier for greenfield developments to occur? Should governments be making sure that they're investing in constructing the infrastructure to support that development as well?

Dr Tulip : Definitely. Greenfield is a huge problem. These things vary from city to city. Sydney and Melbourne are already so big that a lot of the greenfield development is a two- or three-hour commute to the centre of the city. Understandably, the demand for that is relatively limited. The excess demand for housing in Australia is clearest in our inner suburbs, where we need tall apartment buildings. Yes, extra greenfield development would help, but the priority is in apartments.

Mr THISTLET HWAITE: That apartment development usually brings additional traffic in particular. So there's traffic congestion. A lot of the time, the public transport isn't up to speed to cater for the increase in the population. They all bring reductions in quality of life for existing residents, and, in a democracy, don't those residents have the right to oppose that reduction in quality of life and ask their elected representatives to encourage governments to do more development in greenfield areas rather than infill development, which is going to result in that reduction in quality of life?

Dr Tulip : These are real, important obstacles to boosting supply; you're exactly right. Our submission suggests that the Commonwealth can play a role in this with extra funding. More financial assistance to local governments and state governments may help allay some of those infrastructure problems. Yes, residents are right to complain that their local streets are too crowded and that traffic congestion is a problem. It's a problem that they have to the bear the cost of extra development when the whole nation benefits from the improvement in housing affordability that would come from increased density at the location, so the whole nation should help contribute towards that.

Mr THISTLETHWAITE: Thank you. That's it from me, Chair.

CHAIR: Thank you, Dr Tulip. We very much appreciate your evidence today. I have one question on land banking. We have received some submissions which say that developers are—I'm not sure that people are suggesting 'deliberately', but you could interpret their submissions as saying 'deliberately'—land banking in order to maximise the price at which they sell the properties. Have you seen much evidence of that? Are there alternative explanations to what people are doing?

Dr Tulip : The Productivity Commission looked very closely at land release in two reports they did earlier—I think there was a 2011 report on benchmarking of zoning and an earlier report on first home buyers—and they did not find evidence that land banking was very important. There have been other reports that have looked closely at land banking, and they've not found evidence that it's very important. I noticed that the submissions from Prosper and Cameron Murray to your inquiry worry about this, and it really worries me that they make these assertions without any reference to official studies that have looked closely at the issue. So it's partly a question of who you trust. Do you trust Cameron Murray or do you trust the Productivity Commission? Without them trying to reconcile their results, it's very difficult to place a lot of weight on these ideas. That's one point I want to make.

The second point I'd make, as we were just discussing with Matt Thistlethwaite, is that I think the big problem in major cities for housing is apartments in inner suburbs, and that's clearly not a problem of land banking or land release. The solution for extra high-density dwelling is a completely separate question to that for land release, though extra land release would be good.

CHAIR: Thank you, Dr Tulip. We very much appreciate your time before us today. If you've been asked to provide any additional information, please forward it to the secretariat by 1 December. You will be sent a transcript of your evidence and will have an opportunity to request corrections to transcription errors. Thank you very much. Members, the committee is now suspended until 11.00, when we will welcome Dr Cameron Murray.

Proceedings suspended from 1 0:52 to 11:00