States and councils need to work on housing supply bottlenecks

Everyone who has studied economics knows that house prices are ultimately determined by supply. To be sure, fluctuations in ­demand can affect prices in the short run, but policies such as ­improving land release and planning approval processes are the most effective means of ensuring affordable housing.

It is a worthwhile for Scott Morrison to point out this truth and to pressure state and local governments to act in ways that permit timely construction of new dwellings, both in new suburbs and as infill developments.

There have been some noticeable improvements in NSW and the construction of new homes has recently been running at historically high levels. But there are still too many supply impediments preventing the demand for housing being met, including exorbitant developer charges for infrastructure.

Mind you, it is cold comfort telling people whose stage in life would ordinarily be associated with buying a first home that, in the long run, supply wins out.

One thing the government could do is reduce the annual ­intake of permanent migrants to ease this short-run influence on house prices. The fact that immigration contributes more than half our annual population increase would doubtless surprise many people.

So is the Treasurer right to dismiss Labor’s radical ideas of killing off negative gearing (for all assets, not just residential real estate) and reducing the rate of capital gains tax “discount”?

Here’s the thing: negative gearing has been an unchanged feature of the tax system for 100 years. To suggest negative gearing is responsible for recent rapidly rising house prices is a big stretch of logic. And the fact that house prices have moved very differently across the country also damages this claim.

There may be an argument that the interaction of negative gearing, the capital gains tax, credit availability, low interest rates and bracket creep (people being pushed into higher income tax brackets) has contributed to rising house prices. But the current capital gains tax arrangements have been in place for 16 years, so that doesn’t look like an immediate influence.

In any case, demand-side influences can only sustainably inflate prices if housing is inflexible. Free up the supply side and the effect of these factors washes out over time.

Ditching negative gearing is no panacea — those laws have recently been tightened in New Zealand and Britain for no noticeable impact on house prices. The case for altering this longstanding tax rule for all asset classes, which would create a major distortion for present and future investors, just doesn’t stack up.

Can Morrison cajole the states to do much about supply impediments affecting new housing? The politics are tricky: no political leader wants to drive too many recent homeowners into positions of negative equity. And let’s face it, there is considerable resistance to infill developments from residents. But getting the states to think about supply is worthwhile.