A new book aims to fix housing affordability, but there’s a better solution for Victoria

Melbourne’s time in the property price doldrums could be over, ending a dream run for first home buyers in the Victorian capital. But it wasn’t only the politics of Abundance, the economics book that’s sitting on the nightstands of federal cabinet members, that got us there.

The new book by US-based journalists Derek Thompson and Ezra Klein calls for deregulation to ease supply-side restrictions on housing and other vital industries to make houses (as well as healthcare and clean energy) more affordable, accessible and abundant. It doesn’t deviate from conventional economic wisdom in this regard, and it’s been widely read in Canberra. Its ideas are likely to be part of the discussion at next month’s productivity summit.

Australia’s political system already has a neoliberal consensus; there is bipartisan support to grow the economy by making it easier for corporations to do business and for capital to flow. This same logic is already applied to the housing market, visible in our recent preference for supply-side solutions.

One key area where Thompson and Klein hit the nail on the head, however, is the negative effect that restrictive zoning has on housing supply. Victoria has been building more new homes per person than NSW for years, but, like much of Australia, it still faces challenges from local councils to promote infill development and improve housing access in inner Melbourne.

It’s against this backdrop that the latest house price figures were released on Thursday. Victoria’s affordability achievement was modest; house prices in Melbourne are 2.7 per cent below their December 2021 peak on Domain data, but remain unaffordable to most. Melbourne’s median is $1,064,000, Sydney’s is $1,722,000, and Brisbane’s $1,060,000. However, lending data show first home buyers made use of the 3½-year window to purchase.

“It was good, it has to be seen as good, prices did come down a bit,” AMP chief economist Dr Shane Oliver says.

“That would have provided some opportunities for first home buyers that they wouldn’t have otherwise had.

“But affordability is still relatively poor in Victoria, it’s just not as bad as some other places – Sydney, Brisbane and even Adelaide.”

Four converging factors created this environment: a healthy, but not quite on target, supply pipeline for home building; a weak economy and weak population trends; high interest rates; and crucially, added costs imposed on investors.

It is true we’ve added more rules and regulations following our post-war building boom, like Thompson and Klein identified in the US. These standards are intended to improve the quality and safety of our homes, but barely work as is. I invite fans of Abundance to tell prospective homeowners which living standards they must give up to add more homes to the market, which may or may not bring down prices.

Oliver said he thought regulations were too restrictive, but noted a further decrease in construction quality could create its own problems.

“There is always that risk that you end up with lower quality properties. If you’re a [buyer], you tend to look more favourably on something built 40 or 50 years ago than something built this year or five years ago,” he said.

“Newer builds, which took longer to complete, often come with lower quality, so something has gone amiss here.”

A raft of prevalent issues and defects in recent builds – flammable cladding, waterproofing issues, poor energy efficiency – explain this preference.

It’s not clear how much the Victorian government’s moves to increase taxes on investors have contributed to price stagnation in Melbourne. This masthead has reported that many investors listed their properties after being hit with an expanded land tax and new minimum standards for rentals, creating a perception that property investment was no longer worthwhile.

It became a regular sight on auction day: an ex-rental sold to first home buyers because the poorly maintained home was only attractive to budget buyers.

The increased friction for investors likely contributed to price stagnation, and appears to be a similar result to scenarios modelled to predict the effect of limiting negative gearing. Prices drop slightly or go sideways for a time, and allow first home buyers a chance to catch up.

“I don’t want to abolish negative gearing,” said Oliver, “but I think people are making excessive use of it … it should be limited to a certain dollar amount or one or two properties. [And] the capital gains tax discount is too generous.”

Victoria’s falling population and weak economy following the lockdown era contributed to this price weakness as well, but now that these trends are reversing, prices could be suppressed by cutting demand and causing more investors to exit through increased taxes or reduced concessions.

Prosper Australia Research Institute experts argue that we have enough housing, and Australia instead suffers from an underutilisation issue. The institute’s research last year found more than 100,000 homes in Melbourne were empty or underused.

“We need all of it. We do have an accessibility crisis,” Prosper advocacy director Rayna Fahey said. “We have stuff that’s been left off the market for capital gains, stuff heading into the short stay market … that’s an important part of the question.”