Immigration and the Housing Affordability Crisis in Sydney and Melbourne
Bob Birrell and Ernest Healy
The housing affordability crisis in Sydney and Melbourne is close to the worst in the developed world. As of 2017, the ratio of median house prices to median household income in Sydney was 12.9 and in Melbourne 9.9. Only Vancouver and Hong Kong were as bad or worse on this metric.
The result is an intergenerational divide in which the younger generation have diminishing prospects of attaining the housing their parents’ generation enjoy. Property owners are feasting on extraordinary capital gains at the expense of young people who, in Sydney and Melbourne, will never experience any similar benefits because they cannot get onto even the lowest rung of the property ladder.
Why is the crisis so severe? The answer is no secret. First, successive Australian governments have kept in place significant tax incentives for owner-occupiers to upgrade and investors to purchase existing residential property. Second, the Coalition government has maintained very high migration levels, with around two-thirds of the net intake currently locating in Sydney and Melbourne. Migrants are the main contributors to the growth in both cities’ populations of over 100,000 each year.
The consequences are disturbing. Most young households in Sydney and Melbourne cannot afford to buy a house in established suburban areas. The proportion renting is rising sharply. In Sydney, as homeownership rates fell, the share of households headed by 30-34 year olds who were renting jumped from 48 per cent in 2011 to 53 per cent in 2016 (Table 1). In Melbourne the increase in this share over the same years was from 43 per cent to 48 per cent.
Many young households have been prompted to move to cheaper housing on the remote frontiers of both cities. There, they have to pay high prices for houses on tiny lots (averaging 400 square metres or less).
Both state governments are encouraging this outward movement by providing financial subsidies in the form of cash payments and stamp duty concessions to first home buyers. These incentives are also available to all migrants holding permanent visas, regardless of the migrant’s property ownership record prior to arriving in Australia.
What to do?
In Sydney, the Greater Sydney Commission (GSC) is setting the pace. It is requiring all municipal councils to prepare plans for additional medium-density dwellings. Meanwhile the NSW State government has implemented a new medium-density planning code which will allow developers to put more than two dwellings on each detached housing site that they can procure.
This initiative has received the backing of the Grattan Institute and the Reserve Bank. Both want to see it implemented in Melbourne as well. They recommend that zoning constraints on medium density housing in Sydney and Melbourne be reduced in order to stimulate increased medium density dwelling construction. vi
The population factor
None of these advocates indicates how large the population factor is in the demand side of the equation. Nor do they explore whether their proposals can work given the scale of demand for dwellings in both cities. They have nothing to say about the immigration component of this demand.
The population factor is a black box. We open this box.
In Sydney, the GSC estimates that an additional 35,000 dwellings are needed each year to cope with projected population growth. In Melbourne the planning authorities are assuming a similar number of dwellings is required. The Australian Population Research Institute’s (TAPRI) projections are a little less for Sydney (around 31,000 extra dwellings needed each year) but the same as those of the planning authorities for Melbourne. TAPRI’s projections also indicate that around 19,000 to 20,000 of this need in both cities will be attributable to net overseas migration. As a result, around 64 per cent of Sydney’s need for addition dwellings each year is due to additional overseas migrants and around 54 per cent of Melbourne’s.
Our projections also reveal that, in each city, around 15,000 more dwellings each year will be occupied by the increasing numbers of older resident households. This is because of the ageing factor as the large baby boomer generation replaces the much smaller cohort born before 1950. By 2016 (Table 5) households with a household head aged 50 or older occupied 56 per cent of the detached housing stock in Sydney and 53 per cent in Melbourne. This share will increase.
It is a major contributor – rarely acknowledged – to the housing affordability crisis in Sydney and Melbourne. It in effect amplifies the demand side of the problem. This is because not only must both cities provide an additional 19,000-20,000 dwellings to meet the needs of the growing migrant population, they must do so in a context where the number of existing detached houses available is shrinking because of the ageing factor.
Will the zoning initiative work?
We do not think it will. It has already failed twice. On the first occasion, in both cities, large tracts of land in the inner city and around activity centres were rezoned for high-rise apartment blocks. Huge numbers have been constructed, yet prices for detached housing continue to rise in both cities. The reason is that most new households (including migrants) want family friendly housing. Apartments are unsuitable. Our analysis of occupants of high-rise apartments (Table 6) shows that barely four per cent of these apartments in inner Sydney and Melbourne are occupied by couples or singles with children.
The second failure concerned zoning changes introduced by the 1990s in both cities. These allowed two dwellings to be built, as of right, on most suburban housing sites. Our analysis shows that despite this zoning initiative, relatively few such dwellings have been constructed.
Why? The answer is site costs – that is the escalating price of detached houses in both cities. Developers cannot put two dwellings on most inner and middle suburban house sites for less than $1 million per dwelling.
The proposals to abolish remaining zoning constraints represent the last throw of dice for supply-side advocates. We argue that they will only have a limited impact, for much the same reason that the first zoning initiative has largely failed. The new initiative will add further pressure to site costs because developers will now have to pay even higher prices for detached houses. This is because of the extra value of the site now that more than two dwellings can be constructed on it. vii
To the extent that the initiative does work, it will do so by providing even less dwelling and protected external space than dual occupancy units provide. In the process, it will detract even further from the suburban ambience that most detached home owners value.
There are doubts that the state governments will be able to enforce the latest zoning initiatives once existing home owners become aware of the implications. The recent backlash in Sydney supports this expectation.
There is no easy solution to Sydney and Melbourne’s housing affordability crisis. Some relaxation of zoning restraints may help. But only if there is parallel action to remove the tax incentives referred to earlier and to reduce the competition for housing flowing from net overseas migration to both cities.