Homelessness, housing affordability and unsound public policy – Part 1

This semester I took part in an exciting program run by the Monash Law Students’ Society revolving around social justice and leadership. The group I was part of looked at homelessness in Australia and I focused on housing affordability. In this article I will consider the economics of this social justice issue.

Housing affordability and homelessness

The causal connection between housing affordability and homelessness is well established and well known amongst policy-makers.

The Homelessness Bill 2013 recognises the aspiration of all Australians to attain safe, secure and affordable housing. In the bill, the Commonwealth recognises that the factors contributing to homelessness include ‘a lack of appropriate, affordable, safe and sustainable housing’.

The 2008 White Paper, The Road Home: A National Approach to Reducing Homelessness recognised that the shortage of affordable housing was one of the key structural drivers of homelessness in Australia. The same issue was identified by COAG in 2008. Furthermore, according to the St Vincent De Paul Society, nearly 50% of homeless people seeking assistance are people who were unable to maintain payments in the private rental market.

Why then are we still experiencing a housing affordability problem? And what are some policies that may ameliorate this problem?

The economic fundamentals

The economics at play is straightforward and intuitive. Essentially, the growth in demand for housing in Australia has outpaced the growth in supply of housing. This results in higher prices. This growth in demand and consequent increase in prices is further exacerbated by the current expansionary monetary policy.

This year the media has been full of pieces about the remarkable rise in house prices. Bullish analysts are out in force, predicting further substantial price growth in the near-term. For example, the head of SQM Research, Louis Christopher, is forecasting strong price growth of 15-20 per cent for Sydney in 2014. The current property boom in Sydney has been described as ‘the mother of all housing booms’ and ‘a one-in-50-year event’. Whilst strongest in Sydney, the property boom is being experienced across the nation causing some commentators to posit that we are in a housing bubble.

The winners from this boom are those fortunate enough to own property. However, for those not so fortunate it is disastrous.

Impact of the first homeowner’s scheme

The first homeowner’s scheme is a policy which has been pursued in one form or another since 1964. The thinking behind this policy is that if you give cash to first homebuyers this will boost homeownership. Unfortunately, this has proved to be an unambiguous failure and an example of governmental waste.

The clearest and most cogent piece of empirical evidence demonstrating the failure of the policy is the fact that homeownership has never been higher than it was in 1961, displayed on the graph below:

Graph
(Sourced from prosper.org.au)

This is an empathic refutation of the underlying rationale of the policy: give cash to first homebuyers and you will boost homeownership. Furthermore, this policy is incompatible with the goal of housing affordability.

Prominent economist Saul Eslake points out the reason behind this policy failure:

“Cash grants and other forms of help to first-time home buyers have served simply to exacerbate the imbalance between the underlying demand for housing and the supply of it – an imbalance which, according to the National Housing Supply Council, amounted to a shortfall of more than 200,000 dwellings as at June last year [2010].”

COAG were less assertive in their language but came to similar conclusions in their 2010 Housing Supply And Affordability Reform Report. Their econometric modeling outcomes indicated that a first homeowners handout tends to ‘increase house prices in both the short and long term. This price increase is more marked in the short term when supply is constrained.’

The amount of money spent pursuing this policy adds up to a whopping $22bn, as displayed on the graph below:

Graph
(Sourced from prosper.org.au)

This money could have been spent on increasing the supply of affordable housing, further supporting specialist homeless services, funding mental health services or a host of other compassionate and worthwhile policies. Moving away from demand-side policies such as cash-handouts is a tangible way to improve housing affordability in this country, thereby mitigating a structural cause of homelessness in Australia.

Cynicism and public choice theory

Unfortunately, as I have mentioned in a previous article, there may be an element of public choice behind the continued existence of these demand-side policies. The majority of Australians are homeowners. Policies that increase prices are popular amongst this majority. Therefore, there exists a rational political incentive to keep policies such as this in place. Needless to say, policies which benefit an already privileged majority to the detriment of an unprivileged minority are not grounded in sound principle or good conscience.

Conclusion

In this article, I have omitted the elephant in the room of the housing affordability discussion – negative gearing. This omission did not stem from a desire to be innocuous or uncontroversial but rather a desire not to overload readers with content. In my next article, I will return to this issue and discuss at length the impact of tax concessions such as negative gearing.