17 October 2022

Home Truths: a Region campaign on Canberra's housing crisis

| Karyn Starmer and Genevieve Jacobs
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Townhouses in Canberra

What are the solutions to Canberra’s growing housing crisis? Photo: CHC.

Canberra and surrounding regions are facing intense housing supply issues with flow-on effects for our economy.

Across the ACT, affordable rentals are rarer than hen’s teeth. While housing costs have declined slightly in recent months, Canberra’s median housing and overall housing prices remain the highest in the country.

The problem is bigger than simply putting a roof over our heads: as the ACT grows rapidly, we’ll all need housing security, whether it’s for teachers, service economy workers, health care workers or the public service.

This week, Region launches Home Truths, an in-depth examination of the problems we’re facing and potential solutions.

We’re looking at issues ranging from build-to-rent and whether abolishing stamp tax has worked to how we can provide vulnerable Canberrans with housing security. As the new territory plan launches, we’ll look at design, urban planning and our vision for the future.

This is not a future problem, it’s in front of us right now and it’s urgent. So what are the facts?

Home Truths logo

Housing security is no longer a problem just for the ‘disadvantaged’. Image: Region.

According to the latest ACT population projections, Canberra will grow by 50,000 in the next decade to 482,300 in 2031/32. That’s a faster population growth than Tasmania, which we may well overtake at some point.

Despite recent declines, Canberra has maintained its position as Australia’s most expensive capital city rental market and there’s a critical lack of affordable rental properties in some areas. In 2022, median house prices hit record highs and residential vacancy rates were at record lows.

Greenfield development is not the only answer. The government has focused heavily on increasing urban density, but this faces strenuous opposition from many in the community who want to preserve Canberra’s low-density neighbourhoods.

READ ALSO Housing crisis enters dangerous new stage and government needs to act

The government needs to review its housing strategy to allow for a diversity of housing choice to meet the needs of our growing and ageing population. This means having planning controls that allow multi-dwelling medium-density housing in our established suburbs. At present, the rezoning required on a case-by-case basis is costly.

Changes are forecast with the new Territory plan’s district focus, but much of the low-hanging fruit – dual occupancy on RZ1 land – is still impossible. Rezoning faces strenuous opposition from inner suburban residents guarding expansive house blocks.

Part of the problem is the ACT’s unique history and demographics. The city’s suburbs are young by comparison with other capital cities, only entering a major growth phase in the post-war period.

If you’re an ‘old Canberra family’, chances are you’re third generation at most.

In the Territory’s early years, retiring public servants would escape back to their place of origin or down to the coast, but increasingly, there are reasons to stay.

Retirees may not wish to rattle around in their emptied nest, but if they wish to keep their local butcher or pharmacy or GP, with few medium-density, freehold offerings, it isn’t easy to downsize in the community they know and love.

This cohort prefers the security of freehold, which apartments do not offer, while retirement villages do not necessarily meet the needs of all the upcoming retirees.

As retired people stay in place in the inner suburbs, young families must move out to the greenfield developments on Canberra’s fringe to find their homes. Small block sizes in greenfield developments don’t always offer opportunities for families to build or buy their forever homes.

This also means there’s nowhere affordable for workers to live, limiting the ACT’s economic growth. A rapidly expanding tertiary education sector also increases the number of people competing for affordable and accessible housing.

READ ALSO Release more land to boost housing, report tells government

Extended greenfield development puts a greater strain on our transport infrastructure, unlikely to be remedied in the short term by light rail.

Density is also putting pressure on Canberra’s ‘salt and pepper’ model for public housing. Inner city sites reserved for the most vulnerable become increasingly attractive for development, filling the Territory’s perpetually strained coffers.

But our most vulnerable have no wish to move further out where their networks are fragmented, transport is complicated and they face isolation and lack of access to services.

Older women are also increasingly vulnerable to homelessness.

So what should we do?

Will increasing supply solve the affordability crisis? What role does property investment play? Is better design the solution to affordable housing and retaining green spaces?

Watch this space: Region will speak to experts and pundits across the community as we seek solutions together.

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devils_advocate10:54 am 20 Oct 22

Oh lawd. Again, to summarise:
-rates and land tax are taxes. They are a deadweight loss. They impose a gap or a “tax wedge” between what the buyer is willing to pay (tenant) and what the seller will accept (landlord)
-the legal burden of the tax falls on the landlord. Where the economic burden falls (I.e. the extent to which the landlord can pass on some or all of the costs) depends on the market.
-there is nothing the landlord can do legally to reduce the amount of the tax.
-in a supply constrained market the landlord can and will pass on increased costs to tenants (taxes, interest rates, everything)
-because all landlords are getting railed on taxes there is no competitive pressure on landlords to undercut each other.

“-because all landlords are getting railed on taxes there is no competitive pressure on landlords to undercut each other”
Error. There is always competitive pressure between individual landlords in pricing their rental property. The question is market pressure. Currently, the market as a whole is high (see your previous point). That increases average profit margins, yet there is still competitive pressure within the market which is why prices cannot be raised arbitrarily high by a single landlord. There is a difference between whole-of-market and single price.

devils_advocate1:13 pm 20 Oct 22

The landlords cannot compete or become more efficient to lower the component of their cost base that is represented by tax. The whole-of-market on the supply side has been hit with the same cost imposts and the balance of supply and demand favours landlords. Leaving aside the theory, Canberra is now one of if not the most expensive rental market in the country. Why would the government add to the landlord’s cost base knowing they are in a position to pass it on in full?

devils_advocate, your opening sentence addresses a straw man of your invention, nothing I said or implied. I spoke about pricing, not “efficiency”. Single prices cannot be increased arbitrarily, as has been covered extensively below by more than me.
Your last sentence is riddled with small errors (and the ones between first and last do not matter).
Landlords are not in a position to pass on increased costs “in full”, despite it currently being a seller’s market. For example, raising rents improves the equation on purchase, especially in a context where house prices are now falling. Rental demand is not simply inelastic.

Some landlords are not borrowing-constrained so can well afford to undercut more stressed landlords to maintain a stable revenue stream on their CGT-advantaged capital asset (or even pick up another cheaply when a distressed landlord sells). That is, there is competitive pressure. In extremis, there is also a cap on rental increases for an existing tenant or a six-month lag on raising rents via no-cause eviction, the latter of which options will likely disappear next year in any case.

You speak of Canberra having high rents without considering that Canberra also has high incomes. No help to the poor, of course, but still it is erroneous to speak of one in isolation from the other.

“Why would the government add to the landlord’s cost base knowing they are in a position to pass it on in full?”

Because they aren’t in a position to do that.

It seems strange that you are arguing that Landlords aren’t in a position to compete with each other, which would mean that they can already increase their rental prices without the government increasing the tax burden. Also that demand for rental properties is completely inelastic to cost. If that’s the case, why don’t landlords raise prices right now?

You seem to be suggesting that landlords are running a charity and charging less than the market will bear right now for no real reason. Strange.

devils_advocate2:53 pm 20 Oct 22

The article is about affordability. By definition it is not looking at the entire market, so demand-side substitutability among tenants who can also afford to buy is irrelevant. As things stand today, at the bottom end of the market – which is the topic of this article – tenants are price takers and landlords are price makers. Raising the cost base for landlords has one result and that is a 1:1 cost impost on tenants. This compounds the taxes, charges, fees and regulatory hurdles that the ACT council has imposed on bringing new supply to market, as well as the ongoing rental reforms that will increase risks and costs for landlords.

devils_advocate3:08 pm 20 Oct 22

Let’s suppose the market is competitive, as you say. In a perfectly competitive market, economic profits reduce to zero. Certainly price information is nearly perfect. If the cost base were to increase, but landlords didn’t increase their prices, they would take a loss. There are only very specific reasons for businesses to take a short-run loss and none of them apply here.

For clarity, I am not suggesting that landlords are running a charity; indeed landlords would at a minimum seek to recover their expenses. I am simply saying that in a supply constrained market raising that cost base means raising costs for tenants. This is unremarkable in any other industry and I’m not sure why it’s controversial in relation to residential tenancies.

Devils Advocate,
Why have you now flipped from a completely inelastic demand argument to attempting to talk about a perfectly competitive market?

No one has said of claimed these things for the Canberra market except you.

And no, the article is not solely about affordability, it is about the operation of the housing market and prices which are inherently affected by demand side impacts as well.

Raising the cost base for landlords simply does not result in a direct pass through to tenants. Tenants are not remotely only price takers, unless you try to narrow the scope of your comments to become meaningless.

“Let’s suppose the market is competitive, as you say. In a perfectly competitive market…”

So, devils_advocate, you noted I said “market is competitive” and then went on to talk about a market which is “perfectly competitive” which you have just agreed I did not say.

Not the same thing, are they. The old game of changing the subject while hoping nobody notices what you have done.

What a waste of time are your arguments.

devils_advocate9:42 pm 20 Oct 22

Fair point – the arguments are probably a waste of time. The figures on Canberra’s rental market both in terms of price and vacancy speak for themselves.

“The figures on Canberra’s rental market both in terms of price and vacancy speak for themselves.”

Indeed, they do. Vacancy rates are low everywhere so prices are high in each capital relative to that city’s typical income.

If the ACT government really wanted to fix it they need to look at the housemate system proposed here https://www.google.com/url?sa=t&source=web&rct=j&url=https://osf.io/nxq2u/&ved=2ahUKEwjj3Y6B–j6AhWCwjgGHe74C0IQFnoECAoQAQ&usg=AOvVaw3DbfQPws7WKqcYt_iedylm . Cuts out the housing developer leaches and provides affordable housing at a cost that would be less than current rental costs.

“Extended greenfield development puts a greater strain on our transport infrastructure, unlikely to be remedied in the short term by light rail.”
We need to be very clear that the tram is unlikely to do anything for existing and new suburbs ever. The plan is all about building flats along Flemington, Northbourne, Adelaide and Athllon. Even in the optimistic government forecasts, it makes public transport slower for all existing Canberrans, and even those new flat owners if they’re silly enough not to go to school or work further along the tram line. It’s such an expensive stupid idea, I find it hard to discuss politely.

It is all about business, and big companies wanting huge profits $$$$.
Housing is viewed as a big corporate money making business in the USA and the UK, and this model is sadly now moving to Australia. Make no mistake, the government here (the ALP) is selling out Australian families, and selling Australian land and homes to foreign big business corporations and these big businesses will become your ‘landlord’.
The next step they want, is to remove small private landlords (mum and dad investors who might own one or two investment properties for their children or their own retirement) and to replace small landlords with big corporate company ‘landlords’ like Blackrock, Tricon etc. Big corporations will buy up homes (also the terrible rent to buy buildings), so they can rent them out and make huge profits for the companies. It is ALWAYS about the government doing deals for their corporate mates through any scheme they can (and this is particularly bad in Canberra with the terrible ACT govt). If you think anything else is going on, sadly you are disillusioned.

devils_advocate1:16 pm 20 Oct 22

Developers may or may not make big profits on land developments, depending on their efficiently and cost of capital. Indeed many developers and builders have gone out of business having been unable to absorb the cost increases in supply chains for fixed-price contracts.

What IS certain is that government fees, taxes and regulatory burden is adding hundreds of thousands (yes hundreds) to the purchase price of individual homes.

HiddenDragon11:33 pm 17 Oct 22

The ACT is not alone in facing this problem, as this fairly blunt piece by Alan Kohler points out –

https://thenewdaily.com.au/finance/2022/10/17/alan-kohler-labor-policies/

but it does seem to be “punching above its weight” – as the over-used expression goes – in badly mismanaging its little piece of the national population Ponzi scheme.

In the longer term, the problem will be eased for the ACT, and many other parts of the country, when fiscal reality truly hits and governments are finally forced to stop their chronic over-spending and start dealing with the cumulative consequences of a few decades of profligacy. That will take a lot of jobs and demand out of the economy and will likely have a serious impact on population growth, particularly here in the ACT.

In the meantime, a much better approach to housing choice and quality (instead of just talking about it and continuing to churn out shoddy, monotonous, over-priced, one-size-fits-all crud) might help.

Incidental Tourist7:25 pm 17 Oct 22

Looking for truth? The truth is when a landlord leaves the market so goes the tenant.

It’s no coincidence that Canberra once had, but now doesn’t have affordable housing for lower income earners, single income earners, pensioners and first home buyers. The change can be dated back and directly attributed to Barr and Rattenbury. Housing for both home buyers and home renters has became less affordable as a direct consequence of higher ACT taxes, formula driven increases in unimproved land values (30-60% last year), annual rate rises, land supply restrictions, densification, apartmentalisation and of course the expensive tram focussed policies of Barr/Rattenbury. Vested beneficiaries and promotors of these policies, probably without families and kids, but motivated by self-interest, continue to defend these policies and deny the impact on housing affordability. The lack of a viable alternative government means we are stuck with them.

Barr and Ratrenbury must be extremely powerful to have been massively increasing housing unaffordability over 10 years before they came to power, through the huge price increases of the early 2000’s.

Almost like a large part of the problem existed well before then and has continued through to today.

But you are right about the strong self interest involved in the housing market. Mostly around older, wealthier people and investors consistently supporting taxation policies (and repeated changes) that have enriched them, whilst objecting to any changes in urban planning and land zoning that would allow others to benefit from the same level of amenity they take for granted. These people have received massive windfall gains from these changes to government policy yet they still complain it isn’t enough.

You’ll even see them claiming that higher holding taxes on existing property somehow increases house prices, which is extremely strange seeing as it makes them less attractive an asset to own.

devils_advocate2:00 pm 20 Oct 22

Barr and Rattenbury have indeed made some of the more egregious policy decisions that have increased the cost and extended the time it takes to bring houses to market. The more recent rental reforms will double down on this, reducing supply, raising costs for landlords and driving rents even further up.

devils_advocate1:20 pm 17 Oct 22

The short answer is taxes. Landlords have to pay BOTH rates and land tax on the property, having already stumped up tens of thousands in stamp duty. These costs add hundreds of dollars per week to rents.
Urban infill is similarly saturated with tax. Stamp duty on the site, $30k in lease variation charges per unit, then the new buyer paying stamp duty on all that. Taxes being levied on top of taxes.
The new environmental requirements are another nail in the coffin, driving up costs for developers who must then pass it on to buyers.

This is not remotely correct.

If landlords could just arbitrarily increase rents and automatically pass on costs, they would already do so. They aren’t running a charity and will always try to maximise profits.

If tax rates truly were unbearable, property prices would fall as investors left the market, allowing former renters to be able to purchase their own dwellings, a net result of zero to the rental market.

In reality, it isn’t that taxes are too high for investors but the opposite. At a federal level they have been incentivised for the last few decades through successive taxation changes which has led to a large proportion of the problems with affordability that currently exist.

So tax reform at a federal level and the completion of the transition away from stamp duty at a local level will help.

If backed up with better urban planning to provide a greater mix of dwellings within the city, we’d be a long way to addressing the problems.

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