The value of my house in Manly in Sydney has gone down about $250,000 since the peak of the market. That’s about 8 per cent. Hooray. This is good news, although from the business pages of the local media you would think it was bad news.
Essentially, Australia’s Reserve Bank did what such banks were meant to do: it took away the punchbowl when the party started raging a bit much. It suppressed previously promiscuous lending into the housing market by our now disgraced banks by requiring increased deposits from borrowers, and by requiring banks themselves to increase the ratio of capital on their balance sheets to the amount they loan. The federal government itself has helped by tightening up laws restricting foreign investment in residential development, largely from China from which capital had been fleeing to places like Sydney in order to buy homes not to live in or rent out but as safety deposit boxes.
This deflating of house prices is obviously finance-driven as had been the previous inflation. And of course, because prices have cooled, because access to credit has reduced, developers are slowing down production of homes into the market. It’s called business, which housing is. Why would we expect developers to build more homes when the price is coming down?
An obvious answer
I think that question is an obvious one, although I am always struck by the strange looks I get from government advisers or property council types when I point out the empirically verifiable – and theoretically robust – proposition that market housing supply rises when house prices go up and declines when prices go down. This means there is no basis to the idea that private sector developers have an interest in prices coming down, or the related idea that they will build more than their market appraisal tells them they can. I repeat, in the housing market we actually have – and-there is not much difference between the developer model in the UK and Australia – there is no factual basis to the idea that building more homes reduces house prices, as if there were developers would stop building at that rate.
And again, this is not because they are evil or selfish. It is because they are a business and not a charity and they have a business model, which has served them well in what can be risky land markets. They will not build a brick if they cannot guarantee in their market a 20 per cent return on capital employed for the next house they wish to sell.
Interestingly, whenever I point this out I get attacked, not by developers but by those in politics who have never worked in the business or by those lobbyists whose job it is to promote the business interests of the sector. Actually, I gave a talk along these lines once to an event by business group London First a few years back. The chair of one of the big national UK housing developers came up to me after my talk to say he completely agreed. He said that he had been trying to explain to politicians for years that his business model did not allow him to over-produce homes on the naïve lines he was hearing from politicos, who seemed to think that developing homes was a manufacturing business where you could deliver more while margins reduced but overall income increased. "That’s not our business," he agreed. Nor is it.
This means that whatever we think housing need actually is, it cannot be fully met in the market. Some other models of home delivery need to be incentivised to enter the market other than the one main model we have in both the UK and Australia at the moment: the homes for outright sale model. Even what little social housing we now produce in either country is really parasitical on the developer model, which we then tax or levy through inclusionary zoning.
We need government to incentivise those other models. Indirectly, it can do that by reducing the tax attractions of multiple home ownership to individuals, which is actively killing the yield and thus the potential for build to rent models. In Australia all costs of mortgaging and letting a second home can be offset for tax – an enormous unearned increment to the wealth of existing homeowners, enabling them to outbid first time buyers who are thus priced out.
Directly, governments need to understand the role that the public sector can play through its land, its policies and its cash, in building homes. I’ve said before that such a path does not have to be ‘back to the future’ of lifetime social renting. The Singapore model shows how housing as shelter to all - the public duty of government - has been combined with homeownership for all, and thus access to some form of housing wealth, although in a market where the socialisation of housing has severely limited land speculation and thus prices. The housing markets in the UK and Australia need more such alternative business models if we are to serve both housing need and equity.
Tim Williams is cities lead at Arup and is its Australasian lead on urban renewal. He is also an adjunct professor at Western Sydney University.