The swiftest solution for housing affordability

There are three major buckets, here.

A man sits at a desk holding a small replica house in his hand, upset at the sale of his property.

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Usually, I write about investing. Sometimes, I try to take an analytical approach to some of the other economic problems we face.

This column crosses both.

So… with a little trepidation, let's look at housing affordability.

See, I try to assume the best of everyone. Most of the time, it's the right approach.

Yes, even when discussing our parliamentarians.

I'm really impressed with many of them, especially the work ethic and genuine interest shown by the various independents in recent years.

But sometimes, I wonder.

See, there's been a lot of talk about housing affordability recently.

A lot of talk… and no action.

I'm not a house price bear, for the record. I'm not one of those people who have been predicting a crash for the last 30 years.

But I do think housing is unaffordable for too many.

Something that should be considered 'shelter', first and foremost, is instead treated as a 'financial asset'. It's both, of course, but the order matters.

And there are a lot of influences on it. A couple years back, I took a rough stab at why house prices are where they are.

But things haven't slowed down much since. And that's despite the shock of interest rates increasing by 4 percentage points (I'm supposed to say '400 basis points' to sound smart but… I reckon you know that jargon is just that).

Instead, we have house prices that are out of reach of most young people, and – not coincidentally – vacancy rates at not far above 1%.

So it's worth another look.

Frankly, I think my original piece was roughly right.

But none of what I covered, there, explains how things have kept climbing, particularly with interest rates back on the rise (and fast).

I have thought, for a while now, that we're ducking the difficult questions, when it comes to housing.

There are three major buckets, here.

The first is taxation.

We incentivise (essentially subsidise) property investment, through negative gearing. I think we've got that one wrong. I have no issue with claiming losses against taxation as a general concept. But in doing so, we financialised residential housing, and that creates perverse societal outcomes.

And staying with tax, the arbitrary 50% capital gains tax discount, which replaced the previous indexation of the cost base, also puts stars in property investors' (and investors in other assets, too, by the way) eyes.

The second is supply.

The number of residential dwellings (boffin-speak for houses and units) being built is, if not fixed, at least governed by supply constraints – there are only so many tradies to do the work. And, in some areas at least, planning restrictions are limiting the ability of builders to create more housing stock.

(Whether people actually want more higher density homes, or choose it because that's all they can afford when they'd prefer a backyard, is the topic of much heated debate. It's almost certainly a bit of both.)

The third is – deep breath – population.

This is an extraordinarily dangerous public-discussion minefield. But, because I think we should wrestle with hard questions, and not avoid them, I'm going there. (Brave? Crazy? Crazy brave? You decide…)

But here's what I learned in Commerce in Year 8: At a given level of supply, an increase in demand will push up prices.

It's about the least controversial thing in economics. Until we get to population, anyway.

See, At a given level of housing supply, excess growth in 'household formation' – the number of people/couples/families living together in groups – will push prices up.

That's about as unarguable a statement as you could find, if we all just focused on the unavoidable maths.

Of course, this is where things get trickier.

Population is a deeply political topic. The swing factor – the thing we can control – is net migration: the number of people who arrive less the number of people who leave.

Now, some people want Australia to be bigger, for security reasons, or because businesses prefer a larger market.

Some people flinch when you mention population and immigration, reminded of some of the more distasteful episodes of public racism and xenophobia in our recent past.

And, frankly, some people will use discussions of population to again advance those very racist and xenophobic views, which should be widely and loudly denounced.

All of that said, though, we still need to have an adult conversation.

We need to work out how quickly we want the Australian population to grow.

And to what level.

We need to understand our ability (and willingness) to supply new infrastructure (as we go into another El Nino, it might be worth recalling the very low dam levels of a few years back), and to build additional social services (health, education and the like).

We might want to think about what the impact will be on the environment, as we sprawl ever-further, and consume more resources.

We might want to ask ourselves how many dwellings, given the above, and the general constraints of supply (workers, materials etc) we can reasonably construct, and where.

To have a serious national conversation about the impact of those things (and others) on the total number of new Australians (born here and from overseas) we think is reasonable.

And to decide on an appropriate level of immigration as a result.

It's a broader social question, of course, but a meaningful reduction in population growth should have a significant impact on housing affordability.

Yes, there are also some downsides to slower population growth, including a reduction in economic growth. But if we're only getting growth at a national level by growing the population, then the pie is getting bigger, but we're all getting a smaller slice.

That, to be frank, is the definition of self-delusion.

So, we need to have a serious conversation about population growth.

To be clear, I'd do some other things on housing affordability, as well.

I'd get rid of negative gearing on residential property (but grandfather existing arrangements).

I'd re-index CGT.

I'd look at the opportunity to reduce red tape to help speed up new construction (in the right places).

I'd look at deposit requirements, removing one of the bigger hurdles to home ownership for young people.

And I'd reduce the maximum mortgage term to 25 years.

But the quickest and most significant way to relieve pressure on house prices (and rents, too, by the way) is to slow the rate of population growth.

(And it's not just me saying it, either. There's – finally – a growing tide of economists starting to say it out loud, too.)

To put it another way, as I tweeted recently:

If you had more people coming into the MCG to watch the Grand Final than you had seats for, you might announce a 10-year plan to build more seats. But in the meantime, you'd probably limit the number of people entering the stadium.

Because, the simplest, fastest and most direct way to address housing affordability is to reduce (the growth in) demand.

It's not the only thing, but it's the fastest and most direct.

When you boil it down (and put away the vested interests and ignore the racists) It truly is that simple.

It's the conversation we need to have. If we don't, housing will remain out of reach for too many, and more expensive than it needs to be, for the rest.

(And if you want an investing 'so what', imagine the extra consumption that would be possible if less of our incomes were tied up in mortgage repayments and rent. That'd be good for the economy, and good for business.)

Fool on!

Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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