1. © University of Reading 2006www.reading.ac. uk June 1, 2015 Can Australia build a way out of its affordability problems? Lessons from the UK Geoffrey Meen Professor of Applied Economics, University of Reading

2. To put your footer here go to View > Header and Footer2 Central Issues Are Australia’s problems worse than elsewhere? Some background from the UK – Barker and her legacy Why affordability worsens in the long run or is it all a bubble? Can we build our way out of trouble or do taxes need to rise ? The role of income redistribution. Some “lessons”.

3. To put your footer here go to View > Header and Footer3 The International Growth in Real House Prices

4. To put your footer here go to View > Header and Footer4 The International Growth in Real House Prices: Are they correlated (1987-2006)?

5. To put your footer here go to View > Header and Footer5 The Ratio of House Prices to Average Earnings

6. To put your footer here go to View > Header and Footer6 Private Sector Commencements - Houses

7. To put your footer here go to View > Header and Footer7 Some Initial Conclusions Australia’s worsening affordability since mid 90s is not an uncommon experience. But this doesn’t mean the causes are the same – important structural differences e.g. tenure, taxation. For most countries, e.g. Netherlands, UK, it is not at all clear that this is associated with a bubble. In UK, prices broadly in line with fundamentals once lower nominal interest rates and structural changes are taken into account. In the long run, there are good reasons why affordability, measured by prices/earnings, would be expected to deteriorate. These are associated with weak construction, taxation and the income distribution. On a per capita basis, Australia has higher levels of construction than the UK, but price movements are still strongly correlated. So are building even more homes sufficient?

8. To put your footer here go to View > Header and Footer8 The Barker Review of Housing Supply (2004) In the UK the view has largely been that building many more homes is necessary to improve affordability (little emphasis on “controlling” demand). Recent Green Paper raises the housing target to 240,000 new homes (net additions) in England by 2016, compared with 180,000 recently. Barker emphasises making land supply more responsive to market signals. Also recommended the introduction of affordability targets at national and regional level. Methodology on the number of houses to be determined by a new National Housing and Planning Advice Unit. In fact, they use a regional housing affordability model built at the University of Reading. The model was constructed as part of the government’s response to the Barker Review.

9. To put your footer here go to View > Header and Footer9 Why is there a long term affordability problem? (1) In the UK, planning policy attempts to match the number of new homes to the number of expected households. (240,000 versus 223,000 pa). However it can be shown that this is insufficient to stabilise affordability, because of increasing demand for better quality homes by existing households. (Formally if the income elasticity of housing demand exceeds the price elasticity, then affordability worsens). The problem is worse the wider the income distribution between young (potential first- time buyers) and older (existing) owners.

10. To put your footer here go to View > Header and Footer10 Why is there a long term affordability problem? (2) The choices are: (i) either to produce more higher quality homes. (ii) To reduce demand by existing owners (taxation?) (iii) To influence the income distribution

11. To put your footer here go to View > Header and Footer11 Housing Construction and Affordability: Results from the NHPAU “ Developing a target range for the supply of new homes across England” (2007)

12. To put your footer here go to View > Header and Footer12 New Construction NHPAU argue that affordability could be approximately stabilised with annual construction of 270,000 homes pa in England. Requires the land to go with it, but no analysis of whether this is urban or green field building. Of course, homes are constructed primarily by the private sector rather than government and there are questions whether the industry would build this number  OFT launched a market study into the house building industry in June.

13. To put your footer here go to View > Header and Footer13 Office of Fair Trading Market Study into House Building 2 Strands (i)How competition and the planning system affect the delivery of new housing. (ii)Home buyers’ level of satisfaction Issues (i) How land is brought through the planning process (ii) How land with planning approval is converted into new houses (competition issues).

14. To put your footer here go to View > Header and Footer14 Taxation It is surprising that so much emphasis has been placed on supply shortages alone in the UK. Taxation advantages are capitalised into house prices (although tax advantages to ownership have been reduced over the years). But local property taxes are higher in the wealthier South of England than in the North. In RBA submission to Productivity Commission Inquiry on First Home Ownership suggested that rising house prices mainly due to investor demand due to tax advantages, rather than supply shortages In UK the closest equivalent in the UK is the rise in the Buy-to-Let market, since mid 90s (easier finance). Jury out on the price effects of this. But just because it affects tenure does not necessarily imply that it affects prices.

15. To put your footer here go to View > Header and Footer15 Income Redistribution First-time buyer grants are probably not adequate. The real problem is the relative income growth of existing home owners since housing demand is income elastic.

16. To put your footer here go to View > Header and Footer16 Messages It is worth while attaching more weight to market indicators. But, typically, considerable numbers of new homes have to be produced in order to have a significant effect on affordability. These are not small marginal effects. If the approach is adopted in Australia, the analytical framework to go with it is necessary. But this is a non-trivial task. Don’t forget the demand side. One of the main reasons affordability worsens is not increasing numbers of households or immigration, but increasing housing demands by existing households if incomes continue to grow strongly.