Elizabeth Baldwin, Grattan Institute and Brendan Coates, Grattan Institute

With 120,000 people homeless each night and one in five low-income private renters spending more than half their income on rent, it is clear Australia urgently needs a housing policy change. A new book by economist Cameron Murray, The Great Housing Hijack, claims to provide a guide for just that.

Murray is spot on about one thing: the housing policy debate has been hijacked. As he notes, the breathless reporting of every fluctuation in the market is unenlightening. People with a stake in property markets flood the debate with spurious claims.

Unfortunately, Murray’s book only adds to the cacophony. His analysis is inconsistent with the evidence, and his proposed solution yet another distraction.

But we can’t give up in despair. It is important to sift critically through the research and advocate for what works.

Review: The Great Housing Hijack – Cameron K. Murray (Allen & Unwin)

The most controversial argument in The Great Housing Hijack is that planning and zoning rules do not change how much new housing is built, just the location:

The planning system and its zoning rules do not regulate how fast new homes are built. There are no speed limits. What town plans do is regulate where different types of immobile buildings can go.

Murray says developers will only ever build a limited number of homes at a time, regardless of planning permissiveness. He argues they will refrain from flooding the housing market. Instead, he says, they will often prefer to just hold on to land, keeping the option of developing it in future.

This claim is based on shaky research. Murray’s model assumes individual land owners have pricing power: if they build too many homes at once, they will undercut their own prices. His analysis uses data on just eight developers, who built 9% of new homes over the period studied.

In fact, the construction sector is not highly concentrated and the urban infill market has many players, so each individual developer has little market power.

Murray’s model also assumes it makes sense for developers to hang on to empty land for a long time – in the hope, for example, that its value will increase if upzoned in the future. But that just suggests another benefit of zoning reform – taking away the prize for waiting – although Murray is right that taxing the windfall gains from upzoning is a good idea.

Ultimately, the weight of evidence suggests planning and zoning do matter for housing supply. They influence how quickly the supply of new homes can respond to changes in incomes and preferences. Rents are lower when housing supply is more responsive.

The location – not just the quantity – of housing is also important. When planning and zoning rules force us into urban sprawl, our cities are less vibrant and productive.

Supply is crucial

Murray argues that even if more housing were built, the average household would not end up spending any less on housing:

aliens could suddenly and immediately construct a million extra homes in Australia, or about 10 per cent more [than] at present, and within a few years rental prices would still be on average 20 per cent of household income.

This implies that if Australians could suddenly access cheaper housing, they would spend all the income freed up on even better housing. But the evidence suggests demand for housing is fairly inelastic, meaning the effect of price reductions is unlikely to be completely offset by an insatiable desire for more housing.

Moreover, Murray’s focus on average rent-to-income ratios ignores the ways boosting supply makes Australians – especially lower-income renters – better off.

If housing becomes cheaper, many people will stay where they are and spend the extra money on other goods. That is pretty important, when too many households are choosing between rent and food.

Others will use the opportunity to move to better, safer homes. 15% of private renters live in homes with major structural problems. The rate is even higher for single parents and people with disabilities.

If I was living in a mouldy room in a decrepit share house, then after a supply boost was able to move to a smart one-bedroom apartment for the same price, I would be better off, even if I was still spending 20% of my income on rent.

How do we escape the policy quagmire?

Murray proposes bypassing the private market altogether with a scheme called HouseMate. The federal government would buy or repurpose land, build homes, then sell them at a discounted price to Australians who do not own property.

The sale price would cover only the construction cost, not the cost of land, so it would provide a big subsidy for the people lucky enough to be chosen. Buyers would get to enjoy living in a discounted home, and could resell (to others eligible for HouseMate) after five years of ownership, pocketing most of the gains. But the catch is, there would only be a limited number of places available each year.

To build the homes, Murray suggests the government could compulsorily acquire sites, but that is not likely to fly at scale.

The government would probably end up buying most of the land at market rates. Murray estimates that it would cost the federal budget about A$3 billion to provide 30,000 places each year, although the government may eventually recoup some of that cost by taking a share of the capital gains from resales, and lending to participating buyers, as Murray also proposes.

Another use for that money might be boosting Commonwealth Rent Assistance: $3 billion a year would be enough to increase the maximum payment by at least 50%.

Rent Assistance is targeted to the most vulnerable renters. It is available to everyone who is renting and receiving an eligible income support payment. About 900,000 households currently receiving the maximum rate would benefit from an increase of up to $2,500 a year, helping to compensate for the hit rising rents have made to their household budgets.

In contrast, the only eligibility criteria for Murray’s HouseMate would be age; there would be no means testing. Anyone who did not own property would be mad not to apply. With a limited number of places each year, getting picked for HouseMate would be like winning the lottery – and indeed Murray floats the idea that “queuing could be managed using lotteries”.

This is a terrifically unfair way to distribute housing help: someone earning $250,000 a year would have the same chance of winning as someone earning less than $50,000. Many people struggling to afford housing would miss out altogether.

There is a reason governments don’t usually model welfare programs on PowerBall.

We already know what governments need to do

We do not need grand lotteries with catchy names in housing policy. Despite the distractions and debates, we already know what needs to change. The good news is that governments have started down the right path.

The federal government increased Commonwealth Rent Assistance by 15% in 2023. It has established the $10 billion Housing Australia Future Fund to fund 30,000 new social and affordable homes in the next five years. These are big steps in the right direction, although there is still much work to do.

The federal government has also put $3.5 billion on the table to encourage the states to reform land-use planning rules to get more homes built, the only real long-term fix to our housing woes.

State governments, especially in New South Wales, are starting to take action to relax land‑use planning rules and get more housing built.

What governments need to do now is follow through on what we know will work, not throw out the evidence book. Let’s not give in to the din.

Elizabeth Baldwin, Associate researcher, Grattan Institute and Brendan Coates, Program Director, Economic Policy, Grattan Institute

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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