Can the housing crisis be fixed or is this the new normal? | That's Business with Alan Kohler

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[00:00:00]Alan Coller here with That's Business and it's been a big couple of weeks in housing policy. So we've got Susan Lloyd Herurwitz, the chair of the National Housing Supply and Affordability Council which was created as part of the National Housing Accord in 2022. Now Susan Lloyd Herurwitz was chief executive of Murvac, the property development company for 10 years. So she knows more than most about uh how to get more housing and what demand looks like.

[00:00:26]In her new job, she is supervising the collection of data about housing supply and demand, doing forecasts of it, and keeping an eye on the housing accord of 1.2 million homes in 5 years from the middle of 2024.

[00:00:41]And the answer is it's not going well.

[00:00:44]They're behind and according to the council will not make the deadline.

[00:00:48]But perhaps the most fundamental question is and we get on to this in the interview is whether housing affordability will go back to the way it was or will we have to get used to the way it is now. That is will the housing crisis the housing affordability crisis become a permanent crisis? Well, to answer that and more, here's Susan Lloyd, chair of the National Housing Supply and Affordability Council. Good day, Susan Lloydwitz. Thanks for joining us on That's Business.

[00:01:20]>> It's a pleasure. Thanks for having me.

[00:01:22]>> Now, um there have been a lot of developments in the past week on housing policy. Are you surprised that it's now become a focus of both major parties?

[00:01:31]>> I think it's been a long time coming.

[00:01:32]We've underbuilt in this country for decades and there's been a growing focus during the accord period with with all states and territories and the Commonwealth government focusing on housing. So, this is just an extension of that I think. But uh certainly a lot of activity in policy settings around the country.

[00:01:49]>> Both major parties um are now talking about demand as well as supply. Um is that a good thing now? And has it taken too long to get to that?

[00:02:00]>> We we do need to think about both sides of the equation. We need to think about demand in a in a couple of ways. the the total amount of demand which should guide our thinking around how many houses we need to build, how much demand will there be in the system and how should that inform our policy settings around migration for example. But we also need to think about it in terms of the seductive nature of demand side policies which usually only serve to do one thing and that's push prices up. So the real hard work that takes patience and persistence is focusing on supply.

[00:02:32]So the the budget from the government obviously was largely about um the redistribution of tax and wealth in the name of uh intergenerational fairness.

[00:02:42]The opposition in its budget reply was talking about immigration and number of people versus number of houses. Um so do do you think the fundamental problem is tax and and and wealth distribution or is it the uh a build and supply number of people issue? I think the the complicated thing about this problem that has been decades in the making is that there isn't one culprit. There isn't one thing which is causing the very significant increase in house prices and in and in rent such that you know almost 30% of rental households are in rental stress. Now it takes 11 years to save for the median deposit and if you get a new mortgage that takes 40% of of your income on average. I mean that's that's a problem that is multifaceted.

[00:03:30]It's not just migration. It's not just tax. It's not just construction costs.

[00:03:34]It's not just planning. It's not just land release. It's not just infrastructure. It's all of the above in a complicated spaghetti web if you like of causes that need to be unraveled and and picked apart. But the tax is a contributing factor as is net new demand.

[00:03:50]>> Right. So, let's just go through the the um policy announcements one at a time if that's okay. the the reversion of capital gains tax back to a CPI adjustment after 26 years of 50% discount instead. Will that result do you think in in less demand and fewer houses or or or or sorry or fewer houses or will it be both? I mean because a lot of people are saying oh will actually lead to fewer houses and and rents will go up. So, I think the Treasury modeling that they released suggests, and the council hasn't done this modeling, so I'm just taking Treasury modeling, um, for for what it's worth, suggest that it would have a negative impact of around 35,000 dwellings, um, over over the next period. Um, but they also saying that is that it will be offset by 65,000 new homes supported by the$2 billion of the infrastructure payments that they're giving to the states. So on balance they're saying that um it's pro supply.

[00:04:46]So we'll have to see exactly how consumers behave. It's it's untested, unproven. We don't know how investors are going to uh think about investing in shares or businesses or property what whatever the investment is. We don't know how people will respond yet. We'll have we'll have to wait and see on that one. And I would say the taxes aren't to be picked off one by one. they they work together for good or or bad. And so the combination of three particular taxes.

[00:05:15]So the the previous setting on capital gains tax, negative gearing and stamp duty highly incentivizes to overconume housing. And so we do because it is has been particularly your primary residence a very very tax effective way to invest.

[00:05:30]Uh so we'll have to see how consumers behave. Um and but as I said it is but one it is but one contributing factor into the whole echo the whole housing ecosystem.

[00:05:40]>> Now what about limiting negative gearing to new houses? Is that a good idea?

[00:05:44]>> I think uh it will encourage that's that's pro supply. It should encourage people to invest in new builds rather than in existing housing because the tax settings are more attractive for that.

[00:05:53]So again we'll have to wait and see how investors behave. Uh but having um having negative gearing available for new bills is pro supply. So that's a good thing.

[00:06:03]>> A lot of people are suggesting that the the the problem that that both of those things, those those changes will limit people's ability to save for a deposit for for to buy a house because of what they're doing is rent vesting. They're renting in one one house and then buying another house as a an investment. Um is that a concern for you?

[00:06:24]I think again the it all depends on how people behave with these new settings and we just don't know uh yet how people will think about whether they rent and save and as I said before it's now 11 years it takes you to save for the median deposit which is a long time um to be focused on that. So we'll have to wait and see how consumers behave >> and and what do you think of the coalition's plan to limit immigration to housing to number of houses being built?

[00:06:51]Is that a feasible idea? I think the question of migration really needs to be looked at for the overall economy because this is a nation that is built on immigration and we need skilled labor and in particular we need skilled labor for the construction sector. One of the problems in the housing sector of why we've got approvals are up but uh commencements and completions aren't is because we don't have enough skilled labor as well as costs um being being very elevated and causing feasibility problems. So I think that the the greater good is that we need skilled migration and so we need to make that a feature of our economy and then we need to build the houses uh for for the migration setting that we're thinking about not just migration is effect on housing but migration's effect on the broader economy and the greater good is to bring skilled migrants into this country for the the overall economy.

[00:07:46]Well, one of the things about your state of the housing uh market report that comes out, the most recent one, um is that you talk about net new dwellings rather than housing completions because I mean obviously and I've been forgetting that myself, you know, I tend to look at housing completions, but forget about demolitions and um according to your data, there's about 24 25,000 demolitions per year. So if you look at net housing, what's the over the accord the the housing accord period of 5 years from, you know, middle of 2024 to 29, what what's the council's prediction of the number of net new dwellings that will be built over that period.

[00:08:27]>> So net new supply is 862,000 whereas gross new supply before the Iran situation we were forecasting at 980,000.

[00:08:38]So, you're saying that net net dwellings over the five years of the accord period is 862,000. Well, that's um a long way short of the 1.2 million target. I mean, but we don't know, I suppose, what the whether the 1.2 million target is net or gross, do we?

[00:08:55]>> No, that's never been clarified. Um and we always look at the the target as suitably ambitious and and I think it has the whole accord has galvanized action in the markets. All states and territories are reforming their planning systems. There are an enormous number of measures being put in place and you can see it in approvals are up. So that it is starting to work. We just got to translate those approvals now into commencements and completions.

[00:09:23]>> Right. But you're but you're saying the council's saying that they're going to fall what 340,000 houses short over the five years >> of the of the 1.2 target but yes that's number >> net net dwellings are the relevant number aren't they?

[00:09:38]>> Yes.

[00:09:40]>> So um what do you think I mean well let's look at the target for a minute.

[00:09:44]What the 1.2 million was that do you think was that based on any as far as you aware and any forecast of demand?

[00:09:51]Was that was or was it just a round number that they came up with?

[00:09:54]>> I I I have no insight into how they came up with the with that target. But as I said, I think it is a target which has galvanized the market and you can see changes in the system which are going to take some time to bear fruit and you know I often think that life isn't going to end at the end of the accord period.

[00:10:11]We're going to keep building houses. So it's a it's it's a nice target to have.

[00:10:16]Galvanizes the system, but the the key is just to do everything we can to build more supply.

[00:10:22]>> Right. And so the the accord I think is largely focused on approvals, right? So the the states have come up with the Commonwealth's got this number and then they give it to the states or they divide it up among the states and the states then uh divide it up among local councils. Is that that's kind of the way it works?

[00:10:40]>> Yeah. So the the target is aortioned um to the states and that the states then are are going about trying to meet that target partly because of the some of the money that's on on the table for exceeding that target.

[00:10:52]>> Yeah. So but is there a difference between approvals which is what they're kind of talking about and the amount of housing being constructed? I mean someone told me that there's um uh 100,000 houses in New South Wales that have been approved but aren't getting built. Is that is that kind of thing happening?

[00:11:08]>> That absolutely is happening. My understanding is that 1.2 is completions, not approvals. Uh but you need to get through approvals to commencements to completions. But absolutely the combination of lack of skilled labor and escalation in costs are largely due to the supply chain shocks that we're seeing are really making feasibilities enormously challenging and that's hampering commencements.

[00:11:31]>> Yeah, that's right. I mean I you're right. I mean that that 1.2 million target is is h actual houses, not just approvals. The trouble is that the the state government and the local councils, they can't actually make force builders to build houses, can they? I mean, and developers because the projects have to stack up. So, I mean, to what extent is that becoming the issue that that the that the um development of of new housing is is proving difficult to uh to be profitable? It absolutely is one of the key problems currently along with lack of productivity that has been is one of the least productive sectors in the economy. The combination of a whole raft of features cost being one of them, infrastructure being another, planning being another. Uh they all combined to make the system very challenging. It's why it doesn't respond properly to demand signals. So, and and both parties now, as you mentioned, the Labor government in the budget has got this fund, an infrastructure fund of $2.1 billion, which they say, as as you point out, will lead to 65,000 houses. Does that sound right to you that that that number will that that amount of money will actually produce that many houses >> to the extent that the other problems in the system are don't get in the way? So enabling infrastructure is is one thing, but you need to have a feasibility that will stack up as well because as you rightly point out, people are not going to invest in building more supply if it's not economically feasible.

[00:13:05]>> And and the coalition's got an also got an infrastructure uh amount that they're talking about, which is $5 billion. And they say that that's going to lead to 400,000 houses.

[00:13:16]>> Well, got some calculations going on there.

[00:13:18]>> Well, they have. The coalition's numbers work out to be $12 a half thousand dollars per house and the governments is more than twice that $32,000 per house.

[00:13:28]So what do you reckon is the right number?

[00:13:30]>> Oh, I haven't done the modeling on that.

[00:13:32]So I I couldn't speculate on which is the right number, >> but okay. So but but clearly that that's those this sort of money going into infrastructure is a good idea. It needs to this is one of the one of the issues that needs to be dealt with.

[00:13:45]>> Absolutely. Absolutely. and and and and the other things you you were talking about, you know, um uh productivity and so on. What what what does the council what do you think is needed to be done um to improve that?

[00:14:00]>> A couple of things really stand out there which which are being addressed to some extent. Uh one is simplifying the national construction code and the environmental laws to make things less complicated and less ownorous. I mean the the national construction code is something like 2,000 pages long. It's very dense. It's not digitized. It's very hard for small builders to um to work around. And there is some work going on in simplifying the national construction code and actually making it national, which it currently isn't uh in any meaningful sense. Uh and then thinking about modern methods of construction and how we how we build differently. Uh which a number of different parties and and companies are getting quite close I think to being able to do modular construction um in an economic way and we haven't seen it yet at scale in this country. It it I often think we shouldn't call it modern methods of construction because in other parts of the world been doing it for decades. It's just never taken off in Australia. So, if we could take some red tape out of the system, um improve the national construction code and really crack um modern methods of construction, I think that would make a difference to productivity.

[00:15:07]>> But by modern methods of construction, do you mean prefab prefabricated houses and building them in factories and then bring them out to the site and so on?

[00:15:15]>> Yeah.

[00:15:16]>> Yeah. So, that's that's one one element of it. Um also digitization and using AI more effectively for site management, for example, in when you're thinking about a high-rise. So there's a a raft of different ways you can think about modular construction, but but the basic principle is prefabbing um in a factory and assembling on site.

[00:15:34]>> Just on the national construction code, it's very difficult to wind these things back. I mean um you it's 2,000 pages, but I mean how did that happen? And and and h how it possibly can they get it back? I mean that's a really these things tend to ratchet up and stay there, don't they? Well, it's very important that we we don't let that happen. Um, so I'm I applaud the government for um for tackling the national construction code because particularly for small builders, it really is very cumbersome and very ownorous and costly.

[00:16:06]>> The council has developed something called the housing outcomes framework.

[00:16:10]What is that and and what does it show?

[00:16:14]>> So what we were developing for this report is a broader assessment of how the market is functioning. getting away from the singular measure of how many houses do we think are going to be built because that's just one measure of is it a healthy housing system and so the outcomes framework looks at eight different outcomes with a a couple of measures for each and then assesses are we going backwards or are we going forwards on each of those measures so uh if you take take one example um that uh so outcome seven is homelessness is brief and non non-recurring so we look at the rate of homelessness and we we look at whether homeless services can um can adequately cope with the amount of homelessness that's getting worse um in in terms of homelessness or if you looked at uh outcome two is housing is safe and environmentally sustainable we would look at energy efficiency for example in housing and that is getting better. So the across the across the eight measures there are 23 um metrics that we're measuring and 11 of those are getting better and six are getting worse. So on balance we are making progress ac across the 20 23 metrics that we're measuring.

[00:17:23]>> Right. And homelessness is getting worse you say?

[00:17:27]>> Yes. So there's a a slight increase in the amount of um people experiencing homelessness but and that's that's one measure that we are looking at.

[00:17:36]>> Do do you think the there should be more public housing government actually building houses like they used to do in the um I know the 50s and 60s? What do you think? That certainly would be one option because we've let the proportion of stock that is social and affordable is down at 3% of stock and and in the period you were just referring to it was more like 6% when we were actually building social and affordable housing.

[00:17:59]Uh it it needs to be financed by someone. The market won't deliver it on its own. So the housing Australia future fund is one way to put money into the system. Although I would say that the the community housing provider segment uh works very hard to deliver housing.

[00:18:14]But it's largely fragmented and quite small scale. So difficult to deliver the amount that we need. And so one option would be for the government to directly build as we did previously because as I said the the market isn't is not going to deliver um social and affordable housing because it's not economic.

[00:18:33]>> No. Well, in fact, what's what seems to be going on is they're saying they're requiring new developments to have say 10% social and affordable housing. Do you think that's actually making a difference?

[00:18:44]It's a it's definitely a good thing to do. Although I I always get a little frustrated with the term affordable housing because it's it's largely defined inconsistently for one thing around the country, but as a discount to market rent. Now, that doesn't make it affordable. It just makes it less than market. So, you can say to a developer, please have 10% of your apartments which are going to going to be 10% below market or 20% below market doesn't make them affordable. So it's it's a good thing to to to have a requirement of developers to have some affordable housing in in developments.

[00:19:20]>> So you've been chairing this um national housing supply and affordability council for what three and a half years now? Um >> that's right.

[00:19:28]>> I mean it was it was basically born out of the National Housing Accord, right?

[00:19:32]So I mean how do you feel about it? I mean you have you been enjoying it? Is it something you feel like it's it's making a difference?

[00:19:41]It is such a complicated problem and I think what we have been able to do is to create a peer-reviewed model which is providing I think very very solid forecasts of supply and demand. It is it is taken as the number that the market says agrees yes this is the number um according to the the model that we that we have have produced. Uh I think the evolution of our thinking along those three and a half years has been um very interesting to be part of uh culminating in the outcomes framework that we were just talking about as a a broader look at how the housing system is is performing and you know I took it on and I'm I'm very pleased to serve in this capacity because it's such an important social problem that we are creating in Australia which is being divided into people who have have housing wealth and people who don't as you've pointed out in some of your work uh and there's a deep inequity in our system. It has enormous social consequences across a whole raft of outcomes including education and health and wealth and intergenerational inequity. And so it's such an important area for us to get right so that we have healthy communities where people have housing security and are able to live in fitfor-purpose housing at a price they can afford.

[00:21:00]>> Yeah. And I suppose the core of the problem is that the the house price to income ratio has gone from four times to eight or nine times depending on where you live and you know I think it's even above 10 times in Sydney. I mean the I suppose the question is do do you think that given all the things that are being done now um including your work that that that ratio the the ratio of housing to incomes will go back to what it was or we are is Australia going to have to get used to the way it is now and just hope that we can keep it where it is rather than increase that ratio even further. What what what do you think we can expect to do? I think your latter comment is the right way to look at the situation. I I can't I cannot see a scenario in which we wind back to three to four times income for house prices.

[00:21:52]So we we need to make sure that we don't let it keep rising. So I think the best I can I can think of is that we keep the ratios largely where where they are. All the all the modeling uh around the the recent tax changes that Treasury's done suggests that house prices will flatten or growth will slow but they won't fall.

[00:22:12]Um it's very rare that you get significant falls in house prices in Australia if you look at the long-term data. So I think we would have done an okay job if we keep the ratios where they are.

[00:22:22]>> What does that mean for the country do you think? I mean because you know what with the ratio where it is everyone talks about an affordability crisis. So are we are we basically looking forward to a permanent crisis? I >> think what it does mean is that more and more people will will rent but some some people will never be able to own a home and we've seen the proportion of renters steadily increasing and so we need to think about the the rental stock. We talk a lot about house prices but 30% of Australians rent and that number is going up and will continue to go up because of the um the house price escalation. So thinking about what would make a better rental market, what would be better rental stock including having some institutional ownership in that sector to provide secure housing of uh or good quality that give people security of tenure in a in a rental format. Uh and we we are in a situation that we've made for ourselves over decades of underbuilding where it takes 11 years to save for a deposit. The new mortgage currently current rates takes 45% of the median income. rent takes 30% of the median income. That's a very they're very significant costs >> and one one of the issues given that it now takes 11 years to save for a house a lot of people as you say that can't do it or at least just takes too long um which means that the um early inheritance comes comes into play what's been called the bank of mom and dad is there some way of in some in some way institutionalizing that do you think is that going to have to become a part of the way we live in Australia that um you know you don't have to wait till your parents die in order to get the inheritance, you have to get it earlier.

[00:24:02]>> Well, it's certainly the Bank of M and Dad is uh providing quite a lot quite a lot of financing in into the system. I'd like to see more institutional investment into the system uh which which currently is focused on the build to sell sector, but I think would be very good for the system to have institutional owners of uh highquality secure rental stock for for the amount of time that people are renting. Yeah, that's a very good point. I mean, we haven't talked about bill to rent, which is been a part of the policy mix. Do you think that um what's being done in that in that space on that score is is going okay? I mean, should should more be done to encourage uh institutions to build um housing developments, apartment blocks, so they can just rent them out and own them?

[00:24:50]>> Absolutely. And in fact, Australian super funds invest heavily in this sector overseas. they just are slow to invest in it um in Australia and it's largely a nency problem because uh institutional investors and we actually wrote a report on this three years ago.

[00:25:04]The institutional investors will say to you there's no price discovery. You have to build the things that's very complicated. Uh all the things we know about how hard it is to get planning. Uh they they're not entirely sure how the income stream will behave. They're not entirely sure what downtime will be between leases. There's a lot of risk.

[00:25:21]There's a lot of unknowns still because it's a a very naent industry but it is growing and there are a number of participants in it where five years ago people would would say to me all the time build will never work in this country but now it's an accepted asset class. It's small and it will take time to grow. Um and I I look forward to the day when Australian super funds invest at scale in Australia like they do overseas in this sector.

[00:25:46]>> Yeah, it's interesting that they invested overseas. Is there something the government could do to make it um to encourage it in Australia more?

[00:25:52]>> I think it will just take time. It's not it's not I don't think there's any policy setting that would take away the perceived risk currently until the institutional investors see how this asset class behaves over time and there there's enough stock that they can buy one rather than build one.

[00:26:06]>> Just finally um back to the housing accord of 1.2 2 million and you know the the number that you came up with of net new dwellings over the 5 years of 862,000. Do do you think it's possible they'll catch up or should should they just accept that they'll fall short um by then and it'll just take a year or two longer? I think that having the target is a very important thing to galvanize a system as we were talking about before and it's it's not necessarily a question of falling short of the target and I I'm very careful to frame it around that the 1.2 to will be met. That that number will be met about a year after the accord period, which isn't too long after the accord period.

[00:26:50]And there are so many things in the system now that are pointing in the right direction. Um that if we can get costs under control, maybe we can we can accelerate faster.

[00:27:00]If we can improve productivity, if we can crack modular construction, if we can make sure that the planning system is working properly and and all of the fast path pathways that are now in place are actually pumping out uh approvals at scale, u maybe maybe there is some upside on on that number, but uh the important thing is to keep going with persistence to build supply into the system because that is the only answer.

[00:27:24]>> Thanks very much Susan Lloyd Herwitz.

[00:27:26]That's been great talking to you.

[00:27:28]>> Pleasure. Thanks so much for joining me on That's Business. You can find That's Business on the ABC Business Daily feed every Friday. So you don't miss out, make sure you follow ABCus Daily to find us on ABC Listen or wherever you get the podcasts. Dan Zipper and the ABC Business Daily team will be back in the feed on Monday.

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