Housing and the State Election

I rarely get political, but I feel like I’ve got no choice here…

Victoria is has a state election coming up at the end of November, and I’ve just had a look at the Greens Party’s election platform on housing.

Frankly, what I’ve seen of it makes me wonder who’s writing this – it’s ill-conceived, dog-whistling political opportunism, and is selective in its use of data. It will only lead to further pain for those who they claim to represent.

Before I get into their policies, let’s establish a base line. Australia runs more or less on a Keynsian economy, with some variances depending on the political ideology of the government of the day. Central to Keynes’ theory is that where the private sector can’t or doesn’t supply a particular service or commodity, government steps in as the provider – now that’s a simplistic version of it but it’s the essence. In relation to housing, the private (ie, landlords) have done most of the provisioning, with government acting as housing provider more for the less fortunate of our society; by allowing this and having a focus on incentivising landlords through tax benefits and the like, along with a strong promotion of housing investment as a desirable choice, governments have largely created an investment housing market populated by the “mum and dad” investor.

Various state governments have enacted legislation which, while seemingly popular with a proportion of the tenancy market, these new Acts have been far less well received by the investment community, with the majority sentiment being that they have had control of their investment mode taken out of their hands and this has led a large number of reconsider long-term housing as an appealing investment prospect – and combining this with a very strong sales market over the last year or so with prices rising rapidly and tempting landlords to sell out of the market, we are seeing a shortage of housing, at least on the eastern seaboard.

It’s clear something has to be done and I’m not arguing against that, and as we are in the run up to the Victorian state election – enter the Greens with their proposals.

So, let’s dissect their policy one piece at a time…

Firstly, there’s their proposal to tie rental increases to the wage price index. The rental market operates as part of a free economy, where supply and demand dictate prices; where there is more demand for a commodity than supply then the price rises to meet the level of demand, and where there is lower demand, prices fall to (again) meet that level.

At the moment, there is a limited number of properties available for rent, the predominant reason for this is that many investors have left the market due (from a recent survey of close to 2000 investors in August this year) to legislation in many states has taken the ability to determine the current and future management, and therefore use, of the property out of the investors hands and tipped the scales too far in favour of the tenant. This creates a strain on supply so economics 101 comes into play just on this point.

We also need to understand that while rents have jumped considerably from where they were in 2021, those rents were a response to the pandemic and were lower than where they were in 2019, before this started, so what is being experienced is a catch-up effect; if we go back 7 years, rents have only increased by around 3.5% when taken across all housing classes – investors costs have increased by at least 15% over corresponding timeframe, if you look at someone who has a mortgage, repayments have jumped significantly more over the last 6 months. 

I’m using SQM Research data on Eastern Melbourne as a region for these figures, in other areas of Melbourne, the increases are lower on pretty much all yearly data points. The assertion from the Greens about historic increase simply doesn’t have the data to back it up.

Next, they want to reintroduce the social and affordable housing levy which Labor canned earlier this year after they listened to the housing sector and saw sense that this was a bad tax. One of the primary reasons that this was opposed then was that it would add further costs to the purchase of housing at a time when housing is already being seen as out of control – but the Greens now think it’s a good idea. All this will do is add a further $20,000 burden to the buyer of a new property as developers will have no choice to pass this on in their efforts to stay solvent, at a time when borrowers are already dealing with rising mortgage payments.

 Then they want developers of larger holdings to commit 30% of the development to affordable housing and sell them at 80% of market value. This is too ludicrous to put into words – just how do the Greens expect that this is going to happen?

They’re effectively saying that the developer has to build 70% of the properties to fund the other 30% – I’m struggling to see how a large-scale development would be attractive to a developer when this is applied as there would simply be no profit in it without grossly overinflating the value of all the properties within the development just to meet this sort of suggestion – this as a policy is completely self-defeating as it would simply kill off development, limit supply further and contribute further to price increases.

The above two thought bubbles from the Greens (along with a further levy on deposits held in the guarantees imposed by the Federal Government to ensure the stability of the banking system), are supposed to assist in building another 100,000 affordable housing properties over the next 10 years – something which, in principle, I fully support; but I have questions around how they’re going to free up enough land and provide the infrastructure to service the developments, we’re already pushing the fringes of the Urban Growth Boundary as it is – are they proposing to rezone more land or designate areas as “social housing only” estates, think we’ve seen that model before and know how that worked out…

Yes, we are in a rental crisis in a number of areas, and everyone’s costs are under pressure, but if they think that this will in some way ease any of the burden on the more marginalised members of our communities, they’ve got it badly wrong.

Unfortunately we’ve seen the effect of housing policies written by those with little to no business experience before – and this is just another example of ivory-tower thinking in an effort to appeal to voters.

None of this policy proposal will in any way reduce the strain that the increased rental prices places on tenants, it will only worsen the situation by taking further supply out of the market as these policies by giving more investors reason to quit property investment and those who have struggled to afford rents will be forced to compete for fewer properties – maybe they should have done some quantitative research first and asked the Irish how it’s worked out for them…