Report on Housing Productivity has New Data but No New Ideas

 Did the Productivity Commission miss an opportunity to change the debate? 

 

The Australian Productivity Commission has released a research paper on the residential building industry, with new data on its declining productivity and recommendations to improve it. The Productivity Commission (PC) is an advisory body that provides research and analysis to the Treasurer and, as an independent agency mainly staffed by economists, has a long history of advocacy for market-based solutions. It plays an important role in developing policies through inquiries done at the request of the Australian Government on policy or regulatory issues, does its own research across seven work streams, and has benchmarking performance monitoring responsibilities.

 

The research paper is titled Housing Construction Productivity: Can We Fix It?  A team of eight people worked on it, there were three roundtables with the Urban Development Institute of Australia, the Housing Industry Association and the Australian Local Government Association, and over 40 organisations and individuals participated in the research. There are new estimates for a set of proxy measures for dwelling construction productivity that ‘encompass the entire homebuilding process, from site preparation and project management to the installation of fixtures and fittings’.

 

This post looks at the key outcomes of the research. These are the five issues that have contributed to falling productivity and the seven ‘reform directions’ the paper has identified. How significant are these outcomes?  How should the reforms be implemented? What other industry issues or characteristics have not been considered relevant or important? 

 

 

Productivity Performance

 

Because there are no ABS estimates of productivity for Australian dwelling construction the PC developed a set of labour productivity proxies. This involved estimating outputs and labour inputs from ABS construction statistics across the two industries of residential building construction (builders and developers) and construction services (tradespeople that build the dwelling). The claim is these ‘productivity proxies capture the broad underlying changes in productivity in the sector’. 

 

Figure 1 shows the PC’s measures of productivity in the dwelling construction industry declined between 1994‑95 and 2022‑23 as:

·      The number of new dwellings built per hour worked declined 53%;

·      Dwelling construction gross value added per hour worked declined 12%; while

·      Labour productivity in the broader economy increased 49%.

 

Figure 1.  Housing productivity

 

 

 

The average time taken to complete new housing has increased significantly. ‘In 2023‑24, the average time to complete a single detached house was about 10.4 months, up from about 6.4 months a decade earlier. The average time taken to complete new townhouses rose from about 9.4 months to 12.9 months, and for new apartments, from about 18.5 months to 27.8 months (though this only covers apartments in New South Wales, Victoria and Queensland)’. Higher density construction performed better than houses according to the PC, in Figure 2. 

 

Figure 2.  Houses compared to higher density 

 

 

Methodological issues with these proxy measures include: indexation and the choice of 1994-95 as the base year; lack of data on annual growth rates; how accurately construction services are accounted for in hours worked; and the use by the PC of their own deflator. The ABS productivity measures for the whole of construction show no growth but nothing like the decline the PC has found. In a 2022 post on construction productivity for the ABS sectors of Building, Engineering and Construction services I found no significant fall in GVA per person employed between 2007 and 2021, in Figure 3.

 

Figure 3. Australian construction productivity by industry sector

 

 

 

Factors Driving Poor productivity

 

The PC discuses five issues that contribute to falling productivity in housing construction. The PC’s issues are: 

 

1.  Complexity and slow approvals –the development and construction approval process is complex, with major development projects such as new housing estates and apartment complexes taking ten years or more. After approval delays can continue as projects need construction certificates and infrastructure connections. Because construction is highly sequential, delays and disruptions can create ‘cascading failures’, which push up costs. 

2.  Fragmented - construction is done by small firms and individual subcontractors and is one of the least concentrated industries in Australia. The combined market share of the largest four firms is the lowest of any sector, at 12% in 2017, and the average residential building construction firm employs less than 2 people. ‘To a degree this is a function of the development and building process and subcontracting’, however:

·      Regulations differ across geographic areas, which makes it hard to replicate a development or construction process across the country and for successful firms to scale up;

·      Building regulation tends to be project‑based rather than firm‑based, requiring new regulatory approval for each new project. In other industries, regulations are a fixed cost that encourages firms to scale up to spread those costs over a larger revenue base. In construction, if a builder scales up, regulatory costs scale up proportionally, reducing or even negating the benefits of expansion;

·      Project risk management and a regulatory focus on the builder as head contractor leads to highly disaggregated specialisation and outsourcing of work. 

3.   Lack of innovation – innovation activity and spending in construction is low compared to other sectors. Only 35% of all construction firms are ‘innovation‑active’ and the sector has been slow to adopt digital technologies and new processes like prefabrication. Estimates are less than 5% of total construction is prefabricated. ‘Low levels of innovation are due to fragmentation, industry culture, lack of direct benefits to firms from innovation and the ‘chilling effect’ of frequent regulatory changes’ [1].

4.   Regulatory burden – to develop and construct housing requires compliance with layers of regulation on: 

·      Where housing can be built and state planning that affects which land is zoned for residential development;

·      How housing should be built and the National Construction Code’s minimum standards on how buildings are constructed; 

·      What housing should look like, through local government planning requirements for setbacks and roof pitches; 

·      Other indirect regulations, such as environmental regulations; and

·    The regulatory burden is increasing which ‘unambiguously increases the cost of development and construction, and ultimately the cost of housing for Australians’.

5.   Workforce issues – the sector struggles to attract and retain some skilled workers because of ‘stagnating apprenticeship commencements and completions, restrictive and inflexible training pathways for trades, and competition for labour from public infrastructure projects in recent years (at least for the higher‑density housing sector)’. Regulatory settings contributing to low labour mobility are inconsistent occupational licensing accreditation across jurisdictions and limited pathways for migrants to join the construction workforce.

 

The PC uses the housing sector, housing construction and residential construction to describe the industry that the ABS calls residential building. In discussing the issues the paper frequently moves between total construction and residential building. This might be because data is often only available for the whole of construction, but it is not helpful as it obscures the points being made. Residential building is completely different from engineering construction and there are limited similarities with non-residential building, which together have a larger share of construction industry employment and output than residential building. 

 

Reform Directions

 

To improve housing construction productivity, the PC identified seven reform directions:

 

1. Coordinated and transparent planning approvals and appropriately funded regulators – governments need to improve coordination in the planning approval process, and should consider establishing coordination bodies to speed up the process and address delays such as the Queensland State Assessment and Referral Agency. Governments need to adequately resource regulatory and service delivery agencies, ensure there is sufficient accountability, and set performance targets for planning approval decisions.

2. Review building regulations – governments should commission an independent review of the National Construction Code and its implementation by state and territory governments. A review should consider the NCC’s objectives, the regularity of code updates, consistency in implementation by governments’ in approvals, certification, compliance and enforcement, and impediments to innovation and local government rules that affect construction of dwellings.

3. State and territory governments should continue implementing ratings systems that improve information available to consumers about new and existing building quality to help create a price premium for higher quality builders and building.

4. There are opportunities to increase diffusion of technology across the housing construction sector, similar to the government‑funded extension services provided to agriculture. 

5. Governments should consider the adequacy of public research and development funding for housing construction to improve productivity performance. And better information, including rating schemes, could improve building quality.

6. Governments should continue to reduce unnecessary regulatory impediments to greater uptake of modern methods of construction in housing construction, including prefabricated and modular construction.

7. Improve workforce mobility and flexibility – governments should continue removing occupational licensing exemptions and conditions and work towards national consistency, address barriers to migration to improve labour supply, and improve training pathways (including microcredentials) and support for apprentices. 

 

Implementation is Missing

 

Discussion on implementation of the reform directions is not included in the paper, a serious oversight that leaves the recommended directions rudderless. For example:

·      How to reform planning if state governments are not prepared to make difficult, unpopular decisions on allowing development while restricting appeals and reviews of planning decisions? How does the PC propose coordinating planning and approvals across the 537 local councils in Australia?

·      Who will finance and who should undertake the independent review of the National Construction Code and its implementation by state and territory governments? Over the last decade the Commonwealth Government has actually been reducing funding for the Australian Building Codes Board, and the PC could have usefully recommended increasing funding;

·      What about the relationship between building defects and the National Construction Code? The reason there is a Code is to set standards and measure compliance, and state variations typically reflect different conditions [2]. The states are also responsible for the regulators that are dealing with the plague of defects in apartments built over the last ten years, their programs to replace flammable cladding that was illegally installed, and they all have different licensing criteria for builders. How would ‘consistency in implementation by governments’ in approvals, certification, compliance and enforcement’ be achieved?

·      How can funding for public research and extension services be increased when competing with priorities like defence, health and aged care?

·      What are the ‘unnecessary regulatory impediments to greater uptake of modern methods of construction in housing construction’? if these are not identified how can they be reduced? Why didn’t the PC draw on the 2024 research on regulatory barriers by Swinburne University and  the Housing Institute of Australia  or the 2023 prefabAUS industry roadmap for example? 

 

Other Industry Issues

 

A number of other industry issues or characteristics have not been considered relevant or important. Not discussed in the research paper are:

·      The volatility of approvals, commencements and demand means the building cycle from year to year can vary by 10% or more – one solution is to allow builders a tax free sinking fund so in good years money can be saved to be used to finance projects during downturns;

·      Industry contractual relationships – subcontracting is flexible and a method to manage costs and risk but direct employment has a smaller span of control and is more efficient, however, builders will only increase direct employment if there is continuity of work (see above);

·      The cyclical boom-bust nature of residential building also makes increased modular and prefabricated housing and successful industrialisation is less likely than in manufacturing;

·      Improving project management through training and education would significantly improve productivity, particularly for smaller firms. This should include access and training on digital platforms and AI enhanced systems;

·      The reluctance of banks to finance modular and prefabricated houses - although this is starting to change the traditional method of financing and standard contracts do not work for prefab;

·      The lack of standards and an industry quality assurance accreditation system for modular and prefabricated housing - there is work being done on these but nothing official so far;

·       The lack of a building products compliance system – the exception is Queensland’s 2017 Non-Conforming Building Products law that creates a chain of responsibility and requires the supply chain to take responsibility for building products being compliant and fit for purpose;

·       The potential of digital platforms and AI enhanced systems to increase productivity;

·      Automated planning assessment and compliance with codes.

 

Vocational Education and Training

 

The PC focused on occupational licensing, but there is no discussion on vocational education and training (VET) beyond noting the need to improve training pathways. This is bizarre, because beyond attracting and retaining new entrants are many issues with access, curricula, articulation and the new skills needed with digitisation and automation. To be fair, the PC references their 2020 review of the National Agreement for Skills and Workforce Development and the 2024 Department of Employment and Workplace Relations report Skills For Tomorrow: Shaping The Future of Australian Apprenticeship, Strategic Review of The Australian Apprenticeship Incentive System. Nevertheless, in this paper the discussion is limited to a few points on occupational licensing, although there have been other reports with detailed recommendations on Australia’s VET sector that could have been built upon. 

 

The 2019 review of Australia’s VET by Steven Joyce, a former New Zealand Minister for Tertiary Education, Skills and Employment made 71 recommendations. The key issues identified were:

·      Variations in quality between providers and the relationship between the regulator and providers;

·      A cumbersome qualifications system that is slow to respond to changes in industry skills needs;

·      A complicated and inconsistent funding system that is not well matched to skills needs;

·      A lack of clear and useful information on vocational careers for prospective new entrants;

·      Unclear secondary school pathways into the VET sector and a dominance of university pathways;

·      Access issues for Aboriginal and Torres Strait Islander Peoples and second chance learners seeking skills that will help them obtain and stay in meaningful work.

 

The Joyce review concluded ‘the sector needs to be more active in emerging skills areas in order to be seen as a more modern method of education’ and the essential role for VET is training new entrants and upgrading the skills of current workers as digitisation and automation spread through the economy, including support for second chance learners needing foundation language, literacy, numeracy and digital skills.

 

A more recent 2024 review of NSW VET made 21 recommendations, including better governance, funding and pricing, with industry compacts, regional skills plans, microcredentials, updated curricula, and apprenticeship roadmaps. Other recommendations were for the government to employ apprentices, particularly in regional areas, provide support to VET teachers, simplify the complex and highly prescriptive approach to VET qualifications, expand pathways to entry for teachers, and invest in facilities. 

 

 

How Significant Are The Outcomes?  

 

None of the productivity issues in the PC paper are new and can be found in many other reports on the industry, and the recommended reforms are peculiarly limited. For context, below are the recommendations of four comparable reports on construction productivity that show how constrained the PC’s reform directions are, two in 2024 from the NSW Productivity and Equality Commission and McKinsey, and two older reports from the CIOB on the U.K. and the McKinsey Global Institute on the U.S. 

 

The 2024 NSW Productivity and Equality Commission report Review of Housing Supply Challenges and Policy Options for NSW found barriers to housing supply included high construction and borrowing costs, capacity constraints in the construction sector, and bottlenecks in the development process, with over half of the 32 recommendations on planning. It recommended reforming planning to streamline the development process and reduce approval times, and reviewing the Design and Place State Environmental Planning Policy because ‘prescriptive rules’ on land block innovation. Other recommendations included education and skills training, business regulations and tax, improving infrastructure and transport, replacing stamp duty with a land tax, establishing an Urban Development Program to report on the housing market and a housing supply council to advise on housing targets, and incentives for local government to meet targets. It argued for non-regulatory approaches wherever possible, and avoiding excessive regulation. The NSW report’s planning reforms were controversial because they would lower the quality of high density apartments, but the range of recommendations show a more ambitious agenda than the PC’s conventional and well-known seven reform directions is both possible and required. 

 

A 2024 McKinsey Insights paper called Construction Productivity is No Longer Optional identified seven issues holding back measurable productivity gains and made five recommendations: adopt project steering with production rate metrics instead of conventional project management; nurture a supplier ecosystem across projects; upskill project staff; scale initiatives across project portfolios; and apply technologies such as generative AI to streamline and accelerate engineering, procurement, and construction.

 

That report followed up on The McKinsey Global Institute’s 2017 Reinventing Construction Through a Productivity Revolution, which was particularly blunt: ‘while other sectors from retail to manufacturing have transformed their efficiency, boosted their productivity, and embraced the digital age, construction appears to be stuck in a time warp … The industry is extensively regulated, very dependent on public-sector demand, and highly cyclical. Informality and sometimes corruption distort the market. Construction is highly fragmented. Contracts have mismatches in risk allocations and rewards, and often inexperienced owners and buyers find it hard to navigate an opaque marketplace. The result is poor project management and execution, insufficient skills, inadequate design processes, and underinvestment in skills development, R&D, and innovation’. Changes are needed in seven ‘key areas’: regulations; contractual framework; design and engineering; procurement and supply chain management; onsite execution; digital technology; and upskilling the workforce. Changes in these areas would also benefit Australian housing productivity. 

 

A 2016 CIOB report Productivity in Construction had the subtitle Creating a Framework for the Industry to Thrive. This overview of the issues in the UK says a number of times the problems are well known, as are solutions that have been proposed. Some of the recommendations that would also apply to Australian housing were:

·      Create construction innovation and excellence hubs and promote, through incentives, clusters of construction-related businesses in key regions;

·      Improve leadership and behavioural understanding and shift the emphasis in construction thinking and policy making from industry processes to behavioural aspects of construction;

·      Develop new business models and financial models because the business models currently used inhibit progress on productivity;

·      Get better data and measures of construction productivity, and compile built environment satellite accounts, similar to those produced for tourism, to capture inputs from related professions, materials, manufacturing, plant and machinery suppliers [3]. 

·      Invest more heavily in attracting new entrants to the industry and improve the skills of the existing workforce. Investing in management professionals has great potential to improve construction productivity. 

 

Conclusion

 

By the middle of the twentieth century residential building had developed the materials, methods and processes largely in use now. While there have been changes like more electrical appliances and offsite manufacturing of trusses, windows, doors and cabinetry, the structure and services like electricity, water and plumbing in a 1960s dwelling are those found in a new build today. Houses are often larger and apartments smaller than a few decades ago, but how they are procured and built, and what they are made of, has not substantially changed in decades. Fundamentally, that is also why the level of productivity has not changed [4]. 

 

The PC has focused on regulation and planning as the main issues, but these are just two of the factors that affect onsite productivity, and arguably skills, technology and project management are more important. Also, planning and zoning decisions have no effect on other important supply side issues such as the construction and finance costs for new housing, constructing the infrastructure needed for new developments, and the rate of conversion of approvals into commencements by developers. 

 

A major problem is not what is in the PC’s research paper, but what has been left out. Without question the five issues driving productivity are important, however these are long-standing and well-known, and the paper says nothing new about them. Similarly, the seven reform directions have been suggested many times by many different industry analysts and organisations. Missing is any discussion on implementing these reforms, or how barriers to their implementation might be addressed, which undermines both the usefulness of the research and the relevance of the recommended reforms.

 

There are several other industry issues not discussed, like the volatility of the building cycle, the lack of standards for offsite manufacturing, and product compliance laws. It is disturbing that the PC does not appear to understand why there is a construction code and how it works. Improving productivity through better project management and reform of the VET system are also overlooked. There is no discussion of digitisation and automation in residential building. Apparently, as far as the PC is concerned, digital tools and platforms, AI enhanced systems and automated planning and code compliance checks are not relevant to productivity. 

 

The PC’s recommended reforms are peculiarly constrained and limited, and the paper is a missed opportunity for introducing new ideas and a failure of imagination. Although an agency like the PC is not expected to be imaginative, residential building is stuck with a well-established system of production that will only change when and if there is a clearly superior method of delivering quality housing that is also profitable. Tinkering with regulation, the NCC, planning and approvals processes, and occupational licensing might make a difference at the margin, but will not deliver the big improvement in housing productivity that is required. 

 

                                                                            *

 

[1] Innovation in Australian construction was discussed in a 2024 post, incremental innovation in this post, and innovation and procurement in this post. 

 

[2] The PC does not seem to understand how the construction code works. For example, in Far North Queensland houses have to withstand a category 5 cyclone with roof tie downs, window shutters and a safe room, but in rural Victoria bushfires are the main issue and houses have to be of non-combustible material, have cavity barriers and provision for escape. See also https://theconversation.com/better-building-standards-are-good-for-the-climate-your-health-and-your-wallet-heres-what-the-national-construction-code-could-do-better-166669  

 

[3] I have argued for a built environment satellite account for many years, including the post here and a 2019 journal article here. 

 

[4] With current technology, tools and processes, construction may be close to the efficiency frontier, see Is Productivity Growth in Construction Possible?

  

The high price of housing is undermining society and the economy

 Alan Kohler’s The Great Divide: Australia’s Housing Mess and How to Fix It

 

There is widespread agreement that the housing market in Australia has developed serious problems. Houses and apartments are too expensive, too hot, and often too far away. There is a shortage of stock, and too few new ones are being built. Opinions on both causes and solutions range from economically irrational to unrealistically ambitious to unhinged optimism, and usually reflect one or another of the many vested interests involved. Federal and state governments have their targets, political parties have their competing policy platforms, developers, builders, banks and manufacturers have their industry associations, owners, tenants and consumers have advocacy groups. Local councils are typically spear carriers for the not-in-my-backyard (NIMBY) movement, but recent elections have seen yes-in-my-backyard (YIMBY) candidates. It is not just the market that’s a mess, the debate over housing policy is as well. 

 

Into this cacophony Alan Kohler is trying to introduce a note of reason with his book The Great Divide. He is a journalist and former editor of the Australian Financial Review, and while not a vested interest he declares himself one of the home owners who have benefited from the increase in house prices over the last few decades. He says that ‘escalation in house prices is a pain that has altered Australian society. It has increased inequality and profoundly changed the relationship between generations – between those who have a house and those who don’t. It has caused a rental crisis, a dearth of public housing and a mortgage crunch’. 

 

The first three chapters outline the problem. Fundamentally, this is because the median house price in Australia has doubled as a multiple of average weekly earnings in the past 25 years, from three to four to seven or eight times, increasing household debt from half to twice average disposable income and from 40% of GDP to 120%. ‘This is the most important single fact about the Australian economy’. Chapter two has data on the housing market and chapter three the history of housing policy. In chapter seven he argues for U.S. style 30 year fixed rate mortgages. Although Australia has the world’s highest house price to income ratio and the 66% of total lending for residential real estate by bank levels is also the world’s highest, Australian banks only provide floating rate mortgages. There are also chapters on homelessness and the global nature of the housing crisis. In this review the focus is on Kohler’s analysis of supply and demand for Australian housing, which includes all types of dwellings (detached and semi-detached houses, town houses, low and high-rise apartments). 

 

The Supply Side

 

Three chapters are on supply problems, covering public housing, Australia’s ‘crowded sprawl’, and state and local governments. In 1945 the Commonwealth State Housing Agreement provided federal funding for public housing, ‘the first and only serious housing policy in Australia’. Between 1947 and 1961 governments built 24% of new housing and home ownership increased from 53.4% to 71.4%, due to war service loans to veterans and the Menzies Government forcing the states to sell public housing. Under Menzies ‘public housing increasingly became a matter of welfare and social services’ rather than the ‘right of every citizen’ as in the 1945 Agreement. The ‘disappearance of public housing removed what had been a steady flow of affordable housing’. Today’s governments are not going start building houses themselves, as they used to, but relying on developers to increase housing supply and improve affordability ignores the basics of the business model of profitable property development, which is to meet demand but not flood the market with new stock. 

 

The second supply problem is the ’crowded sprawl’, the Australian pattern of settlement and urban development. We are crowded into a few large cities despite living on a large continent with a lot of space, 40% of people are in Sydney and Melbourne and over 90% are in capital and regional cities, and our cities are low density, sprawling outwards from a single city centre with houses on large blocks in new suburbs that were built without public transport after cars became affordable. 

 

Finally, while the federal government and banks encourage demand for housing, state and local governments restrict supply through their zoning and planning laws. The local councils and residents of the new post-war suburbs immediately became NIMBYs, and made it impossible for developers to get both sites and permission for medium density town houses and four storey apartments. Australia’s ‘archaic planning laws’ have created cities with high rise apartments around the city centre and low rise to the fringe, and the missing middle of town houses and low-rise apartments ‘remains as much a problem today as it was forty years ago’. While there are many potential sites in existing suburbs that could deliver new homes that aren’t 12 or 20 storey apartment buildings, developing them will need different planning and tax rules.

 

What is missing from Kohler’s analysis is increasing supply using modern methods of construction, like prefabrication and offsite manufacturing. These reduce the time it takes to complete onsite work, and so can increase the number of houses delivered without needing more workers. Currently this is typically used for buildings like schools and hospitals and social housing, for example QBuild in Queensland is manufacturing 600 new houses this year for regional centres, and NSW and Victoria have started prefab social housing programs. Although not the solution to the housing crisis, more government built or purchased prefab for social and affordable housing could play an important role in addressing the problems of homelessness and affordability for low income households if the barriers to adoption were lower and production capacity was increased. 

 

The Demand Side

 

Chapter eight is on the explosion in demand as four factors increased demand for housing after 2000. First, in 1999 the Howard government cut the capital gains tax (CGT) introduced by the Hawke Government in 1985 by 50%, and second, in 2000 reintroduced first home buyers grants. Third, in 2001 the Reserve Bank reduced interest rates, and fourth, between 2003 and 2009 net migration tripled. These boosts in demand were not matched by an increase in the supply of houses.

 

Australia has a unique system of negative gearing, that allows deduction of interest payments and losses on an investment from other income. The Hawke Government banned negative gearing in 1985 but, after a determined campaign, reinstated it in 1987. ‘The halving of CGT was the kerosene on the smouldering coals of negative gearing and the lack of an inheritance tax, and turned property investment into the leaping flame of everybody’s tax avoidance scheme’ as the 50% discount to CGT led to an immediate surge in investor demand for housing. In other countries investing in real estate is for rental income, but in Australia its ‘about getting an income tax deduction and then a capital gain’, and because institutions don’t get the tax deduction they can’t compete to buy sites and there is no build to rent market providing long leases here either.  

 

Adding more fuel to the flames were interest rate cuts by the Reserve Bank in 2001, after a US share market meltdown in the ‘tech wreck’, and investors bought property funded by cheap debt. Also, the Howard government reintroduced first home buyers grants in 2000, also adding to demand. Since then first home buyers grants have been provided by both federal and state governments, but these are ‘political attempts to appear to be doing something while making things worse’. The Homebuilder programme during the COVID pandemic was a particularly egregious example [1].

 

Another of the causes of the housing affordability crisis is excess immigration, and the problem with immigration is that the government doesn’t control it. Most of Australia’s migrant intake has been outsourced to universities and colleges, who see new arrivals as customers rather than migrants. The foundations of this were laid in 2001, when two changes were made by the Howard government when Philip Ruddock was Immigration Minister. First, entry from ‘non-gazetted’ countries like India, Pakistan and China, was opened up and streamlined, and second, there was a more transparent and open pathway to permanent residency for foreign students. The foreign student changes took a few years to get going, but between 2005 and 2008 Australia’s overall migrant intake tripled to more than 300,000 a year. Keeping Australia’s population growth to something approaching the actual capacity of the construction industry to build houses by reducing immigration is not going to be easily done. 

 

The outcome of CGT breaks and negative gearing, lower interest rates, first home buyer grants, and more immigrants, was that after 2000 the ‘nitro of a surge in demand mixed with the glycerine of existing restricted supply to create an explosion that has blown up’ both Australia’s society and economy. There are three other important demand side factors not discussed in the book. The first is the decline in household size, which has fallen from an average 2.9 people in the mid-1980s to less than 2.5 people now, with an increase in the number of one person households. Over the last ten years this trend has increased the number of households by over one million, and thus added a million houses to demand. The second factor is short stay rentals like Airbnb. While these are estimated to account for only 2.2% of long term rental accommodation, in regional towns with limited housing they have had a major effect on both availability and affordability. A third factor is stamp duty acting as a barrier to downsizing from large family homes with empty bedrooms. 

 

Solutions

 

The most important chapter in the book is on potential solutions to the housing crisis. What is striking about Kohler’s ideas is that they are not the standard mix of demand side reforms to tax, or supply side reforms to regulation and planning. He describes their advocates as Tribe 1 and Tribe 2, who have spent the last few decades arguing between themselves for their preferred reform option/s without affecting the housing market or house prices. ‘Solutions by the dozen have been proposed’ but he asks ‘what’s the aim, exactly … what’s the real national mood, and therefore the politics?’

 

The politics are simple. A majority of homes are owned (65%) so two-thirds of the population wants to restrict supply, and owners, banks, developers and state and federal politicians all want house prices to rise for their own reasons. ‘Renters don’t stand a chance.’ Any attempt to address affordability and the shortage of rental accommodation ‘would have to contradict the interests of a majority of citizens and those with the most power.’ And that is why governments have targets that ‘are never actual promises to build anything, just aspirational forecasts’.

 

Improving housing affordability by returning the house price to income ratio back to three to four times, instead of the current seven to eight, would take 20 years of oversupply and stable prices. However, as Kohler says, house prices are not going to halve, so they ‘need to stay put for a while and allow incomes to catch up’. This is difficult when ‘Half of Australia’s home owners are locked into a wealth-creation partnership with a bank’ and ‘everybody regards housing as an appreciating asset’. As a result ‘there is no consensus there is a problem … let alone how to fix it’. 

 

What can be done? First, limit negative gearing to new builds and reduce CGT to 25%. Second, link immigration to construction industry capacity, at around 2.5 times the number of housing approvals. Third, pressure local councils within 30 kilometres of the CBD using both carrots and sticks to increase density. Fourth, increase the cost of holding undeveloped land so developers cannot landbank so profitably. And fifth, extend cities and increase the supply of well-located land (i.e. with access to jobs and services) by building fast trains so commuters can live in regional towns and get into the city in an hour. Not a mythical ‘very fast train’, but a good fast train travelling at 100-150kph would double or triple the commutable distance from the capital cities. 

 

For many years this has also been my preferred solution to the housing crisis. The reason houses are so expensive is that urban land in and around capital cities is expensive, it is not due to the cost of building a house or block of apartments. Cheap land means cheap housing. Currently, government policy on housing affordability is to increase density by building apartments near existing train stations because it costs them less than building new regional railway lines and train stations. 

 

 For whatever reason, Kohler does not include any discussion of financing regional fast trains through betterment taxes, also known as value-capture taxes. These are used to fund projects from the increased value of land when new infrastructure is provided. For example, governments can establish a levy before the preferred routes and sites of train stations and other infrastructure are announced and land values increase. In the ACT, a betterment tax is levied at 75% of the uplift in land value after a site is rezoned, an important point not included in the book. Another, more difficult, option is to allow a private sector consortium to build the railway and finance it through development rights on a corridor of adjacent land. 

 

Conclusion

 

As a journalist who has been covering financial markets and economics for four decades Kohler’s writing is clear and concise, and the measured tone of the book will be familiar to anyone who listens to his nightly finance segment on ABC News. But there is an undertone of anger throughout the book, he argues housing is a ‘stunning failure of public policy’ at all levels that has changed Australian society for the worse. He says ‘My view, and the basis of this book, is … that the high price of housing is undermining social cohesion and the proper functioning of the economy and the nation’. The cost of housing has created a generation of insecure renters and working poor, because the supply of housing is so inadequate. 

 

To solve the housing problem needs a policy with a clear, explicit aim. Kohler argues this should be improving affordability by increasing supply in and around the capital cities. ‘Merely bringing the rate of increase in house prices back to the rate of growth in incomes isn’t enough – that ratio needs to come down so it isn’t a stretch to buy a place to live’. NIMBYs, consumer preference for houses, and construction costs, make building new high-rise apartments in existing inner suburbs difficult, which is why he believes the solution to more housing supply must be fast trains to regional areas that open up cheap land for subdivision. This would be expensive and require federal funding, but ‘every other solution looks too hard’.

 

Over the decades hundreds of reports and research papers on Australian housing have accumulated. However, although Kohler has used many of them, his book is very much a personal statement. He is not an advocate for any industry or other interest groups, but believes the high price of housing is undermining society and the economy and this is a problem that needs to be addressed effectively and quickly. Solving Australia’s housing mess ‘requires true political leadership – that is, doing something right that’s unpopular’. Like so many other key points made in this book, that is both correct and deeply troubling. 

 

Coda

 

After governments shifted the cost of infrastructure like roads, water and sewerage to developers in the 1990s, this is now included in the price of a house instead of the tax system. The GST in 2000 added another 10%, and state governments have increased stamp duty. As a result, 30 to 40% of the cost of a new house is now government taxes and charges. 

 

Tax reform is essential. Windfall gains from rezoning and new infrastructure should be taxed. Housing should be regarded as a right, and on the list of essentials excluded from GST. Halving the CGT discount and restricting negative gearing will reduce demand. 

 

Supply can be increased through innovation, lowering regulatory and financing barriers to modern methods of construction, and streamlining the planning and approvals process. Governments should also address inconsistent national occupational licensing systems and improve support for apprentices to increase labour supply. 

 

Developing and constructing housing requires compliance with layers of regulation by three levels of government on where housing can be built, how housing should be built, and what housing should look like. Other regulations are indirect, such as environmental regulations. These regulations are necessary to ensure safety and quality, but increase the cost of houses, and at a minimum should be reviewed to improve consistency across approvals, certification, compliance and enforcement. 

 

In some places housing policy is based on an assessment of the need for different types of housing, however Australia’s housing targets are for a total number (i.e. total need). But they could be set with different numbers for social rented housing, intermediate rented housing, market rented and built-for-sale homes. 

 

Many European cities zone certain areas with minimum, non-negotiable amounts of affordable and social house building. France requires municipalities to ensure 25% of their housing stock is available for social renting and fines them if they don’t. Vienna has a zoning programme which only grants building permits on the condition of builders meeting affordable and social percentages. These rules get incorporated into the value of land in the zoned areas, which acts to make higher levels of social housing viable. 

 

Currently, residential development land is valued on the basis of maximum profit, and social housing is added in afterwards. Construction costs are high, but it is the cost of the land which makes social housing unaffordable. However, land value is set by what is allowed to be built, and although enforcing a high level of social housing would cut developer profits, the land will be cheaper. The planning system could also require public land which is being repurposed for residential housing be retained by the public sector for social housing developments, instead of being sold off to the highest bidder. 

 

A national tenancy code with 10 year leases and levies on short-term rentals is essential. Other options are removing stamp duty for downsizers, increasing the depreciation allowance on new residential buildings, and taxing developers with undeveloped sites who landbank approved projects. There is no one simple solution to the housing crisis, but there are many ways it could be addressed and incremental small steps might be the only way to make progress. 

 

 

Alan Kohler, 2023. The Great Divide: Australia’s Housing Mess and How to Fix It, Black Inc. 

 

[1] A previous post was on the Homebuilder program