Sydney and Melbourne have been adding population at high rates for more than a decade.
This made housing affordability the most pressing issue in these cities. Let’s explore why renter-dominated areas oppose new residential construction just as much as homeowner-dominated areas.
Australian towns are heavily tilted towards home ownership. About 70 per cent of all Australians own their home either outright or with a mortgage.
We will take Berlin as an extreme example of a city dominated by renters. In the German capital, 85 per cent of households rent their home.
Let’s start with the basics. When a city is booming, when population grows at high rates, housing becomes more expensive. The simple logic of supply and demand in action. Booming owner-occupier and booming renter-dominated towns have different reasons to oppose much-needed new residential developments.
When most households are owner-occupied, rising house prices are a problem for people trying to enter the housing market, like young people moving out of their parents’ homes — but the homeowning majority benefits. The owned home makes up the lion’s share of the wealth of the average Aussie household.
Homeowners not only wish for rising house prices to increase their own wealth, but also act and vote in a way to ensure house prices stay high.
Homeowners are against new developments in their area as they fear this might affect the value of their home.
This results in widespread opposition to new housing developments. We can see this in well-established wealthy suburbs where residents and local governments are trying their best to minimise new construction.
The term NIMBYism (not in my backyard) grows from this. I might theoretically favour new housing developments but will argue against these new buildings being in my neighbourhood.
NIMBYism in areas dominated by owner-occupiers keeps the housing supply down and further intensifies the affordability problem. Spoken bluntly, in an owner-occupier city or suburb most residents are not interested in fixing housing affordability.
What about booming towns where the majority live in rented apartments?
Australian towns aren’t dominated by renters the way European cities are. Some suburbs however, usually inner-city areas, are often dominated by renters.
In areas dominated by renters, a housing boom is perceived differently. But opposition against new developments is just as strong as it is in owner-occupier cities.
In renter neighbourhoods, rising house prices don’t have the nice side effect of increasing net worth of the largest part of the population. Renters only see their rents grow faster than their income. Life becomes more expensive and renters become angrier.
An extreme example of a renter town is Berlin. Housing costs went up but there was no owner-occupier public around to benefit from the boom through an increase in their net worth — remember, only 15 per cent of Berliners own their home or have a mortgage. This led to big public support for the idea of dispossessing big property investors in an attempt to push rents down to affordable levels. This idea was first voiced by a prominent member of the SPD (the German version of the Labor Party), but hasn’t been translated to policy yet.
Berlin’s renters fear the new housing added to their suburbs might further fuel gentrification. Rents in new dwellings tend to be more expensive than in old ones. New buildings therefore attract not only more but richer people to the area. The rich new arrivals demand improved (and more expensive) amenities and local living costs go up. The existing renters now pay more for rent and all the other little things in their neighbourhood as well.
You can see why developers are being blamed for this. It’s the big investors, after all, that build these expensive new apartments.
But what would happen without their investments? Rents would probably rise even faster because no one is around to provide capital for much-needed housing developments.
Berliners don’t seem to recognise how risky property development can be, even in a booming city. Developments cost a lot of money and tons of things can go wrong. Developers run the risk of bankruptcy with almost every large project.
Unless the state is acting as developer, willing to take that financial risk, every booming city needs profit-oriented investors to increase its housing stock.
Let’s look at some new research into how newly constructed luxury housing options might entice high-income earners who currently live in relatively cheap apartments to move to a more expensive housing option and thereby free up affordable living space for medium-income earners (who in turn free up space for low-income earners).
The economist Evan Mast empirically tested the impact of new housing stock on the local housing market. He found that, in the US, adding a new apartment building to a low-income area decreased rental costs within a 250m radius by $154 per month (relative to listings 250m-600m away).
Importantly, this pattern didn’t appear in a set of placebo locations the researchers identified where no new buildings were added.
Mast found that the people who moved into high-end luxury apartments (which opponents of gentrification so passionately hate) moved there from cheaper apartments in the same area.
Without new apartments there was one less apartment available for a medium-income earner.
A move by the medium-income earner would free up an apartment for someone from yet a lower income level. This can lead to a domino effect, allowing even low-income earners to upgrade their housing option.
In short, the research by Mast suggested that limiting new housing construction in an attempt to slow gentrification may be counter-productive and actually contribute to making housing less affordable.
The issue of housing affordability is, of course, too complex to be fully covered in a short piece such as this.
In any case, we must avoid the temptation to rule out luxury apartments for ideological reasons as a tool to solve the housing affordability crisis.
Simon Kuestenmacher is co-founder and director of research at The Demographics Group.