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Jun 27, 2014

Does housing supply impact on inequality?

The supply and price of new housing affects affordability and is implicated in growing inequality. Debate about planning issues like city centre towers needs to take account of this wider context

Dwellings approved, metro Sydney and metro Melbourne, Jan 2010-April 2014 (source data: Minister for Planning, Vic, media release)

Victoria’s Planning Minister, Mathew Guy, announced this week he’s approved another three new apartment towers in the centre of Melbourne, this time ranging in height from 185 metres to 319 metres.

If they’re built, they’ll collectively accommodate 4,000 residents. The tallest one, Australia 108, will be “the first 100-storey building in the Southern Hemisphere” and will have 1,105 one, two and three bedroom apartments.

New residential skyscraper approvals are becoming almost routine in Melbourne. Mr Guy’s copped plenty of criticism, including the common charge he’s turning Melbourne into “Hong Kong by the Yarra”.

If you read The Age regularly you’ll know there’s concern in some quarters that most or all of these new towers are too tall, too skinny, too close, or too ugly; that they dominate the skyline; generate strong winds; cast shadows; and ignore good urban design guidelines.

There’re also plenty of complaints that the new apartments are too small, poorly designed and will inevitably be “the slums of the future”. And some worry there’re too many absent owners; too many young singles; too few families; too little attention given to urban design; too many greedy investors; too many foreign investors; and too big a bubble that will inevitably burst.

In its report on Mr Guy’s announcement, The Age said the three new approvals “have led the state opposition to question the speed with which Mr Guy is approving high-rise towers for central Melbourne” (Matthew Guy approves thousands more apartments for Melbourne CBD). Opposition planning spokesman, Brian Tee, is quoted:

Tall towers belong in the city, but there is no regard to what impact these towers are going to have on anything else…Every CBD site isn’t an opportunity to put a tall tower on it. I have an old fashioned view that we should plan these things …so we don’t end up with wind tunnels and we maintain a vibrant city.

These are all important issues and get a pretty fair and frequent airing in The Age. But both the paper and Mr Tee missed the really big story in the Minister’s announcement.

Mr Guy included some astonishing ABS statistics on new dwelling approvals in his media release. They show that more dwellings – both detached and medium/high density – were approved in metropolitan Melbourne between January 2010 and April 2014 than in metropolitan Sydney (see exhibit). According to Mr Guy:

Since 2010, 54 per cent more homes have gained building approval in metropolitan Melbourne than in Sydney, and 11 per cent more than the entire state of New South Wales.

That’s an extraordinary set of numbers. Their significance is underlined in Mr Guy’s next sentence: by building more homes, he says, Melburnians “are ensuring we won’t have the drastic and harmful housing shortage Sydney is experiencing”.

As I’ve explained before (Are apartments cheaper than houses?), a 2010 study of dwelling costs by the National Housing Supply Council found it cost $186,000 more to deliver a typical three bedroom house and land package on Sydney’s fringe than on Melbourne’s fringe.

Infill and high-rise housing is more expensive in Sydney too. The Council found a typical two bedroom apartment within 2-10 km of Sydney’s CBD cost $554,000 at the time; in Melbourne, a comparable apartment cost $490,000. Anecdotal reports suggest the cost difference has subsequently widened to well north of $100,000.

Most of Melbourne’s additional supply relative to Sydney came in the form of detached dwellings. Even so, there were 13,478 more medium and high density dwellings constructed in Melbourne over the period, notwithstanding this form of housing makes up a much larger proportion of the Sydney market.

These differences are down to a number of factors including Sydney’s more constrained geography and (much) higher developer contributions. But a key one in relation to medium and higher density housing is likely to be land use regulations that restrict the redevelopment potential of land and consequently constrain the supply of new dwellings. Higher prices lead to lower demand.

We already know from recent books by writers like Edward Glazer (Triumph of the city), Ryan Avent (The gated city) and Matthew Yglesias (The rent is too damn high) that throttling dwelling supply has a pernicious effect on housing affordability and consequently has negative distributional consequences.

There’s been a renewed focus this year on the role of housing in increasing inequality, sparked by the international debate around the new book by French economist Thomas Piketty, Capital in the twenty-first century.

Here’s what Harvard economist and former US Secretary of the Treasury, Lawrence Summers, has to say in his review of Piketty’s book:

Probably the two most important steps that public policy can take with respect to wealth inequality are the strengthening of financial regulation to more fully eliminate implicit and explicit subsidies to financial activity, and an easing of land-use restrictions that cause the real estate of the rich in major metropolitan areas to keep rising in value.

University of Canterbury economist Eric Crampton draws on responses to Piketty’s work by MIT’s Matthew Rognlie, The Brookings Institution’s Justin Wolfers, and The Economist’s Ryan Avent, and concludes that “restrictive zoning laws exacerbate inequality”. He says:

Would that Kiwi campaigners against income inequality came to recognize the important role played by both anti-density and anti-sprawl regulations in fairly directly helping the rich at the expense of the poor.

Dr Crampton cites Avent’s thesis that the rich have “used zoning regulations to inflate the value of their main housing asset, at the expense of those then unable to afford a house”. He goes on to quote this passage where Avent addresses the question:

What would happen if we got rid of all restrictions on the construction of new housing? We should see lots of new investment in places where the gap between housing costs and construction costs is largest: in central London, New York, San Francisco, and so on. Housing cost growth in those cities would slow relative to income growth, real wage growth would soar, and many more people would move in. Over time, prices would converge toward construction costs. More people would be working at higher wages and productivity levels, which suggests that inequality in labour income should fall and the labour share should rise.

Some of the complaints published regularly in The Age about sprawl and the rate and scale of development in the centre of Melbourne are important and warrant the close attention of planners. But as the stark contrast between housing supply/prices in Melbourne and Sydney shows, everything comes at a cost.

At least in comparison to Sydney, Melbourne is getting some aspects of housing supply mostly right, especially in the city centre and the fringe. Progressives who’re concerned about issues like inequality and social justice need to understand everything involves trade-offs; they need to factor in the big picture as well as traditional planning concerns.

The new metropolitan strategy for Melbourne, Plan Melbourne, actively limits the scope for construction of medium density housing in the established suburbs (see Does this strategic plan really spurn sprawl?). Mr Guy therefore needs to make sure that his proposed alternative sources of supply, especially urban renewal areas, have the muscle to keep up with demand.

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7 thoughts on “Does housing supply impact on inequality?

  1. Jacob HSR

    The cost of apartments in Battersea Power Station:

    4-bedroom apartments for £4 million
    3-bed for £2.7m
    2-bed for £1.5m
    1-bed studio from £800k

    But in the tallest apartment tower in the Southern Hemisphere they will not build any 4-bed flats?

  2. Tom the first and best


    Imputed rent is just some statistical trick used by people trying to push a society will far lower home ownership. It is based on the ludicrous idea that every home owes a land lord a profit, housing market permitting, and that people who buy their home, pay it off, maintain and insure it for themselves are somehow rorting the system. Home ownership has front-loaded costs and generally more variable costs compared to renting, it is not free as imputed rent is intended to imply.

  3. Alan Davies

    IkaInk #4:

    There is very little purpose in making housing affordable if in the process the city is destroyed of what makes it somewhere people want to live in the first place.

    Is Sydney so much more attractive as a place to live by virtue of limiting supply that it justifies the enormous difference in housing prices? Alternatively, has Melbourne’s city centre really been “destroyed” in comparison to Sydney’s by lower apartment prices?

    I agree that the housing prices are also a function of demand (let’s include tax free capital gains and imputed rent while we’re at it). But bear in mind that the financial issues you raise apply equally to Sydney and Melbourne; so other factors must be pretty important to account for the enormous difference in prices/supply between the two cities.

    I think the numbers are a reminder that planning and design can have both a positive and negative effect on affordability and consequently equity. No doubt there’s a balance, but I’d be pretty confident Sydney hasn’t found it.

  4. IkaInk

    I don’t disagree with your overall premise Alan, but as you say there are trade-offs. There is very little purpose in making housing affordable if in the process the city is destroyed of what makes it somewhere people want to live in the first place.

    Probably the two most important steps that public policy can take with respect to wealth inequality are the strengthening of financial regulation to more fully eliminate implicit and explicit subsidies to financial activity…

    This part of the equation is almost certainly doing more harm to affordability than any land-use planning restriction that would be reasonable to consider scrapping. For example allowing high-rise development anywhere would certainly result in a significant drop in housing prices, but it would be totally inappropriate in many locations; whilst it is reasonable to argue that we need to allow more high-rise outside of the CBD in key locations, but this is likely to have less of an affect on housing affordability across the entire state than the abolition of negative gearing and removal of stamp-duty (to be replaced with a land-tax).

    @Waffler: A bit of old fashioned HTML is needed. <a href="[URL]">[Your link title here]</a>

  5. Waffler

    There is no point in anyone, Asian or otherwise, investing in an apartment and leaving it empty if the 2nd-hand apartment prices aren’t being drive up by a supply shortage!

    Anybody doing due diligence on an investment property in Melbourne will be aware of stories about apartment gluts, leasing difficulties and slow price rises – suggesting you would be mad to be relying on capital gains alone to make a buck. If a shortage of new stock is leading to sale prices exceeding construction costs, then I can can see that capital gains may make a “buy it and sit on it” worthwhile, but this clearly isn’t happening in Melbourne.

    On a slightly different, but related, note is the article in The Age tonight (–australian-housing-obsession-is-holding-us-back-20140627-zsodc.html – one day I’ll work out how to do hyperlinks!) about how we Australians over-invest in housing (a non-productive investment), probably to the detriment of investing in economically productive activities. I see the trend to long term-renting, smaller apartments, smaller households, Gen Z’s investing while still living at home and inner-city living as maybe a change of direction in this regard.

  6. Alan Davies

    melburnite #1:

    You might well get the answer here: House of Representatives, Standing Committee on Economics, Inquiry into Foreign investment in residential real estate.

  7. melburnite

    OK, so houses and apartments cost less in Melbourne than Sydney, presumably because there are lots more of them here. But they’re still not affordable, just less unaffordable than if there were fewer.

    I would still like to know definitively if at all possible whether the prices are higher (at least for the 100s of smallish apartments in the many towers) because they are satisfying a demand from asia for investment purposes, and are then left empty (in both cities) ?

    If that is so, would prices would be lower, and fewer built, if that market wasn’t there ?