I wrote a comment piece about housing policy for Guardian Australia that ran on Boxing Day last year. The piece elicited quite a few strong reactions from people who agreed or disagreed with the piece, including from Godfrey Moase. Godfrey is Assistant Secretary of the National Union of Workers General Branch, and has been active in the Save Williamstown campaign. He took issue with my piece, expressing disappointment that I view neighbourhoods in “mercantile terms,” so I thought it might be interesting to tease out our disagreement a little in this exchange.
Matt: Hi Godfrey, thanks for agreeing to participate in this. To recap: I argued in the Guardian that, other things being equal, restricting the supply of housing will result in house prices (to buy or rent) that are higher than they otherwise would be. I argue that we can’t choose to restrict density in established areas, restrict sprawl on the urban fringes, and restrain prices from growing too fast. You can choose two out of the three.
The point of the piece wasn’t to argue that the desire to preserve neighbourhoods, or to restrict sprawl, is bad per se. The point was to note that restricting development comes at a cost, and it is a cost largely borne by younger and poorer people, those who can’t afford to buy with elevated prices and face higher rents as a consequence of restricted supply.
What was it about the piece that you disagreed with?
Godfrey: I’ve got a lot of respect for your obvious intellect and skill as an economist. The work you put in each day Matt makes a real difference to working Australians and their communities. So it was quite surprising for me to see you write an article recommending the curtailment of the democratic rights of our fellow citizens to have a meaningful say in the shaping of their communities, all for the more efficient operation of the housing market. For me, it is a belief that every person should be able to exercise real democratic power in their workplace, their community, the wider economy and their country that has led me to the union movement. I see our rights (or lack thereof) in our communities and our workplaces as intimately linked.
I agree that it’s a real problem that owning a home is becoming a distant prospect for those of us who don’t already own one while rents continue to increase as a proportion of our income. What I object to is how you’ve framed the question of housing affordability, and as a consequence our communities, in market-based terms. It is the way in which you’ve conceptualised the problem as one of supply and demand which leads you to your conclusion that “barriers to building will have to be reduced”, including the rights of residents to shape their wider communities.
Matt: Thanks Godfrey, I respect you too, which is why I’ve asked you to participate in this dialogue.
I didn’t recommend the curtailment of the democratic rights of citizens. I pointed out that the exercise of those rights can entail large costs, in the form of more expensive housing, and that these costs need to be taken into account. Too often development disputes are framed as “local communities vs. greedy developers”. This omits a key group with an interest in the outcome of the dispute – the people who would live in the dwelling under dispute if it were to be constructed.
To the extent that I object to our current system for giving citizens a say in shaping their communities, it is related to this question of who constitutes the demos, the populace able to exercise democratic rights. If an apartment block is proposed, in which 40 people would live, and an equal number of current local residents object to the construction of that apartment block, why should the views of the current residents take precedence over those of the would-be residents? The current residents have a right to have their say – and I am by no means recommending an extreme solution in which they don’t – but why are the interests of the potential future residents (who may not know they are potential future residents) not be taken into account?
I don’t understand your final point. Do you dispute that restrictions in housing supply – however they are caused – will lead to prices being higher than they otherwise would be? I should point out here that I don’t think that supply restrictions (of which ‘NIMBYism’ is only one element) are the whole story. Governments have propped up the demand side through things like negative gearing and First Home Owners’ Grants, which serve merely to prop up prices to the benefit of current owners. Maybe I am too thoroughly marinated in the language of economics, but I don’t understand what you mean when you object to the way I’ve “conceptualised the problem as one of supply and demand.” If you agree that prices have risen to an undesirable extent, what do you believe has caused that if not inadequate supply and/or artificially-inflated demand?
An answer at this point might be “inadequate construction of social housing.” But I don’t see how that gets us around the “NIMBY” problem and the question of the appropriate demos. Locals are likely to object to the construction of social housing at least as vociferously as they do to the construction of private housing, are they not?
Godfrey: I agree with you Matt that our current planning system needs a better way of incorporating a greater range of interests, such those of us (like you and me) who don’t yet own a home. The system in Victoria at least is weighted heavily in favour of developers with an opportunity for existing occupiers and residents to have a limited say. In the state of Victoria, the Victoria Civil and Administrative Tribunal (VCAT) considers any appeals from local councils with respect to planning decisions. The Victorian government is in the process of increasing appeal costs to VCAT. The effect of this increase is to place further cost pressures on local resident objectors, whereas the costs are relatively insignificant for larger scale developers. Regardless of the costs of accessing VCAT, I would suggest to you that a statistical analysis of VCAT decisions that are in favour of a developer versus those in favour of resident objectors, would provide a more accurate basis for your claim that “we’ve tipped the scales too far in favour of those who want to restrict development”.
I think your unconscious cognitive processes have led you to make this quite big call on planning administration without any apparent grounding in how the system works or any statistical reference aside from housing price increases outpacing incomes. When it comes to the concept of the “market”, we generally think of a place where a Buyer comes to purchase a commodity or good from a Seller. We think of a place where we can get our demands met. Within the idea of a “market”, however, is another meaning and a separate process; the “market” as a space for the extraction of profit. I believe (aside from a strong public sector) that housing should be mainly allocated on the basis of prospective home-owners purchasing a place. What I do object to is the use of housing as a space for the extraction of profit – it is this which I believe has made housing that much more unaffordable for the likes of us. The effects of residents objecting to proposed developments is marginal at best, and tipping the scales against them further will only give more power to big developers to extract further profit from housing.
Matt: I can imagine responses to my original piece that come in one of four broad flavours:
1) There’s not been a reduction in housing affordability, so the whole thing is moot;
2) There has been a reduction in housing affordability, but it hasn’t happened because of restrictions on housing supply;
3) There has been a reduction in housing affordability because of restrictions on housing supply, but those restrictions aren’t related to ‘NIMBYism’, etc.; or
4) There has been a reduction in housing affordability because of ‘NIMBYism’, but that’s OK – the benefits of allowing existing residents to block new developments outweighs the costs.
I am left scratching my head as to which of these categories you fit in.
You agree that housing affordability is a problem (“it’s a real problem that owning a home is becoming a distant prospect…”). That rules out option 1. So, why do you think housing has become less affordable, and what policy solutions would you propose?
My cognitive processes, to the extent I am conscious of them, lead me through a path like this: house prices have risen quite rapidly relative to incomes (and also relative to rents, though less rapidly) since the late 1990s – ie. there has been a reduction in affordability. In the same period, there has been a significant fall in the construction of new dwellings – see this Saul Eslake chart. The fact that a large increase in prices relative to incomes happened at the same time as a fall in housing supply relative to demand is what leads me to the view that there is a causal relationship between the two phenomena (that’s not to say that inadequate supply is the only thing going on).
I don’t know how much of the fall in supply is due to residents’ objections to new developments. I think it’s clearly not zero. So residents’ objections, on my reckoning, are therefore contributing to the housing affordability problem; the only question is one of magnitude.
To come back to the piece: with a rising population, if density is restricted from rising in the inner city, how is it possible to have anything other than some combination of expanded sprawl and/or rising prices? You indicate that the current planning system (which I’ll quite readily concede I know little about) tilts the playing field too far against current residents’ objections, which suggests you think there should be a greater ability for residents to prevent new developments. Do you think that that would be costless, or that the benefits outweigh the costs?
Godfrey: I don’t think, frankly, that I fit neatly into any of the four categories you’ve outlined. Categories and I have a complicated relationship. To the extent that I would locate myself it would be somewhere between 2 and 3; there has been a reduction in housing affordability, and it has come about through the growth of housing as an investment vehicle. Supply is part of the problem – to the degree in which it has been reduced through a lack of new public housing stock, depleted as more and more economic actors acquire multiple properties, and investors sit on unused and/or vacant land. A lack of supply, though, is a symptom of the disease and should not be confused as the disease itself. The disease is the transformation of housing into a space for the extraction of profit. House prices inflate as more and more capital is thrown into the space as a means to get a return – the point at which a decent return becomes problematic is when the bubble bursts.
When it comes to dealing with supply, I find your use of the term “NIMBY” in this debate problematic. It is a prejudicial label hiding a deeper process that might actually lead to a more affordable housing future. Nicholas Ridley, UK Secretary of State for the Environment in the late 1980s and a close ally of Margaret Thatcher, popularised the term during his stint in that office. The label delegitimises people taking an active decision-making role within their local communities. It does this by asking the audience to make a moral judgment against the so-called “NIMBY”. This moral judgment has two levels. First, there is a hidden claim after “not in my backyard” and it is “but anywhere else is fine”. To call a person a “NIMBY” is to call them a hypocrite. Second, the term itself presumes the motivation of the “NIMBY” – that is the person is motivated to protect the utility of their own property, their own backyard. The local residents become the selfish party, while the developer is pursuing the public good. “NIMBY” is thus a term of prejudice – it is loaded with moralistic judgments that are imposed on residents regardless of the facts at hand. As a couple of fun facts, Ridley was outed as objecting to social housing near his own residence while he was popularising the term “NIMBY”, and he was also the architect of the infamous poll tax.
No self-respecting progressive should ever use the term.
The deeper process that the “NIMBY” label obscures is a rudimentary form of direct democracy – that is local residents intervening directly in the shaping and development of their own communities. This is not the problem, it is the genesis of a solution. I believe that it is only when we have a form of land planning that is truly democratic can we even begin to solve the problem of housing affordability. Within such a process there is space for a considerable increase in density, particularly in a city like Melbourne, without resorting to the erection of large scale towers.
For me, housing affordability is a moral rather than an economic problem. As a civilised society, everyone should have the right to a healthy standard of living – this includes access to housing. We’ve, however, shifted the focus of housing policy from fulfilling the needs of the people towards housing as a space for the extraction of profit. Until this is fixed, housing affordability will remain a mirage – always just on the horizon no matter how much our generation attempts to save.
The question I have is how would an increase in supply, without any other changes, translate into fulfilling our need for more affordable housing?
Matt: I am confused by your response. Housing was a “space for the extraction of profit” in the 1990s, 1980s, 1970s, and so on. And yet the price/income ratio is much higher now than it was in any of those decades. We haven’t converted overnight to a market-based system for the allocation of housing. I don’t see how your explanation can account for the significant rise in prices over the past decade and a half.
When “economic actors acquire multiple properties” I can see this affecting the proportion of the population that rents rather than owns. I don’t see why it should necessarily affect price/income or price/rent ratios. I am not convinced that there is a widespread, increased propensity for investors to leave dwellings vacant and I don’t understand why they would choose to do so in any case.
Aren’t existing residents just as likely (if not more so) to object to new public housing developments as they are to new private developments? I don’t see how public housing gets around this problem of the conflict between existing residents’ desire to preserve their neighbourhoods as they are and the desire of all of us to have enough dwellings out there to match demand and therefore stop rises in the price/income ratio.
Do you acknowledge that restricting increases in density (through whatever means) in the inner city necessarily means more sprawl and/or higher prices? If so, surely this is just a debate about whether the benefits of allowing residents to restrict development outweigh the costs. If not, why not? What do you suppose happens to the people that would live in the dwellings that are barred from construction by residents’ activism?
You ask me the question as to how housing supply would help affordability. To me, that’s pretty straightforward. The price of housing tends to rise when demand exceeds supply. Increase supply and, all other things being equal, price will be lower than it otherwise would’ve been.
At this point, some people like to retort that increasing the supply of expensive, high-end apartments doesn’t help, because the new apartments aren’t “affordable.” I think that argument misses the way that parts of the housing market are connected to one another, as I argued last year. If the construction of a block of high-end flats is blocked, the people who would’ve lived there end up living somewhere else. That raises the price of those other places. This flows down and ends up affecting prices pretty much across the board.
On the language point: I get that “NIMBY” is a pejorative term. It’s convenient shorthand, but maybe I shouldn’t use it. But my whole point here is that the costs of restricting development are too seldom acknowledged. That means I’m pretty reluctant to use some alternative description, like “groups of concerned residents,” because that buys into the idea that battles over development pit altruistic, well-meaning residents against greedy developers.
Godfrey: Briefly on the language point I would suggest you use “resident objectors” – that term seems to me to describe the class of people and the action they are undertaking without any implicit moralising against either the residents or the developers.
I am aware that Australia historically has had a predominantly market-based system for the distribution of housing. As an aside, I’m always intrigued when an economic system geared primarily towards the perpetual growth of capital is justified on the basis of a market-based allocation of goods and services. I don’t think they are inherently related even if there is a tendency for one to follow the other – it’s more that they are two features of our current system. That’s what I was getting at before when I made the distinction between the market-based process for the distribution of goods, in this case housing, and people investing in housing in order to make a profit. Housing has shifted since the 1980s from a primarily market-based allocation to fulfil existing needs to a commodity that is also purchased in order to make a profit. That is what I mean when I write that housing has become a space for the extraction of profit.
This shift has occurred on two different but inter-related levels; the policies of successive Australian governments and the flows of global capital. On the government level, amongst a plethora of policy moves I would pick out the introduction of negative gearing in the 1980s, and the Howard government’s halving of capital gains tax while maintaining the same deductibility rate for losses in 1999 as the two most significant. These two policies amount to the state subsidising a markedly increased flow of capital into the housing market. As that hugely radical institution, the Reserve Bank of Australia, noted in a submission to the Productivity Commission, that with respect to housing “the taxation treatment in Australia is more favourable to investors than is the case in other countries”.
I don’t think that we can even begin to comprehend what impact residents objecting to developments have even had on prices until we remove the artificial demand caused by the policies of successive state and federal governments over the last thirty years. Even then we would still struggle to disentangle that thread from the growing elite of the developing world using Australian property amongst other like markets as a safe form of investment for their newly found wealth.
The growth in property values has been outstripping wage growth across the developed world over the last approximately forty years. That should give some indication that housing affordability (or lack thereof) is more a characteristic of a changing global economy as opposed to residents successfully opposing a development here or there. The stability of our present system rests on continuous growth – as we have more and more capital in the world it needs to flow into new spaces to continue its expansion. Against this global tendency, the Australian housing market specifically has become a favoured investment target for a growing class of developing world elites.
Australian government policy pushes up against this global flow to further exacerbate the problem. Under our law foreign buyer must seek an exemption to purchase existing housing stock. However, the Foreign Investment Review Board does almost nothing to stem the flow of additional buyers onto our market – for the 2011-12 financial year it only rejected 0.01% of all applications for an exemption (as above).
What I would like to know is where would you start to make housing more affordable?
Matt: You claim that the 1999 changes to capital gains tax and the reinstatement of negative gearing have increased house prices relative to where they’d otherwise be. I agree! I’d add first home owners’ grants to that list. I have no doubt that these demand-side measures have helped fuel the fire of rising house prices over the past decade and a half.
I don’t doubt that these measures have propped up prices. I’d reform negative gearing and end FHOGs (or maybe just confine them to construction of new dwellings). But I don’t think these demand-side measures are the whole story. House construction has slowed markedly over the past decade and a half, as I noted earlier. There are clearly problems on the supply side as well.
You say that property values have increased pretty much everywhere, so this can’t be an Australia-specific problem. I don’t buy this. Developed countries have experienced a wide range of outcomes, from falling to soaring price/income and price/rent ratios. Australia’s property price growth has been on the high side. I don’t think we can just wave our hands and blame this on globalization. Plus, this doesn’t fit with your argument (that I agree with) about the role of Australia-specific measures like negative gearing and CGT reductions.
So, in answer to your question, I’d:
- restrict negative gearing (no ability to deduct housing losses against your labour income);
- end or restrict FHOG;
- phase out stamp duties and replace them with a broad-based, progressive land tax; and
- ensure that there’s a high bar for resident objectors to prevent new dwellings from being constructed.
I don’t pretend that residents’ objections are the sole, or even main, cause of the price rises we’ve seen. I think it is odd to pretend that they’re not even a small part of the problem.
I had thought that you might concede that resident objectors, by reducing housing supply, do increase the cost of housing, but argue that this is a necessary and worthwhile price to pay for having grassroots democracy. Instead, you seem unwilling to concede that there has been a reduction in supply at all, let alone that residents’ objections might have had any role to play in that.
Why, in your view, was the past decade the first time since WW2 that the growth of private dwellings lagged population growth? Why, in your view, should we not believe that the historically slow pace of dwelling construction served to increase prices? Why, in your view, should we not accept that resident objectors played some role in the reduced pace of dwelling construction?
Godfrey: I am not simply waving my hands about housing affordability and saying “globalisation”. When it comes to the movement of global capital and local policy measures, it is not a matter of one or the other being primarily responsible for the deterioration in housing affordability. Between the two there is flow and reaction. Australia, amongst many other nations, is downstream of the flow of investment capital into housing. We, and other societies, have agency when it comes to how we react to the underlying trend but neither does it take away from the existence of the trend. Some countries have reacted to partially wall themselves off from the inflow, and as a consequence the displaced flood comes to us. An example of this is the increased flow of overseas buyers onto the Australian housing market after the Hong Kong authorities increased tax measures on non-resident property buyers. Globally, the playing field is anything but even.
If you had compelling evidence that resident objectors had any meaningful impact on housing prices, I would argue that it was a necessary part of maintaining fundamental democratic rights. That as opposed to curtailing existing rights in the community, we would need to look at new rights for those who are forgotten by the current system. I think there is an intrinsic right a member of a community has to shape its unfolding and development which transcends any cost-benefit analysis. You don’t, however, have enough information to state that resident objectors have reduced housing supply. I was expecting more data on this point.
Instead, you look at the changing data on housing supply and population growth, and posit in the abstract that if we curtail the rights of resident objectors then this should have a meaningful impact on affordability. To say that resident objectors have been part of the problem of housing affordability is akin to blaming a natural disaster on the wickedness of the people. You might be able to construct an argument for the proposition based on a pre-existing system of beliefs but it doesn’t really help us solve anything.
The idea that people must sacrifice some of their planning rights in order for the property investors to come down and solve our housing affordability problems has been tried. It didn’t work. Over the last 20 years in Victoria, various State governments have merged Councils to distance the authority from controversial local decisions, increased the authority of the planning appellate body VCAT, made it more difficult for resident objectors to appeal to VCAT, introduced government appointed planning panels for big developments, and narrowed the circumstances where objections can be made. Property developers have invested in the political process, and their investment has reaped legislative benefits for them. Residents today have less ability to object or influence the final outcome of a development (unless it is a wind farm). So far it hasn’t assisted the rest of us with housing affordability. We could go double or nothing, or we could try something else. I’d rather try something else.
I agree with you tough that across the nation we are not building enough housing. We have a problem. I put this down, however, to the fact that it is too easy for the private sector to make a profit from the existing housing stock and that the public sector has walked away from building new properties altogether. Let’s start with the public sector. From 1996 to 2007, the stock of public housing shrank by 32,000. In the decades following World War II, State governments built new public housing stock but a conscious policy change has led to existing stock being sold off instead. We need governments to build more public housing.
Neither has the private sector picked up the slack. Who can blame it really? As housing has increasingly become a space for the extraction of profit it has become too easy to make money without going to the trouble or risk of building new stock. Hence, we should not expect property investors to start meeting our housing needs even if certain democratic requirements were removed (which in some cases they have been). Take for example the Howard government halving the Capital Gains Tax, after this policy move investment in existing housing trebled, however, this was not the case with new building (ibid). Property investors are out to meet demand in the most profitable manner possible. Why build something new when you can profit off of what has already been built? To the extent that market demand and our need for more affordable housing meet it is at best a happy coincidence.
I’m still unsure how you would make it harder for residents to object to new projects. That is my fault though for not asking you. Given that I’m unlikely to convince you on this point of doctrine, what specific measures would you take to impede resident objectors?
Matt: You’re right that I don’t have much data on the role of resident objectors in increasing prices. But we do know that the number of new private dwellings grew less rapidly than the population over the past decade, for the first time since at least WW2 and we have rising prices. I find it odd to not link the two. And once you accept that the inadequate growth in supply played a role in rising prices, we have to then ask why supply growth was inadequate. There are surely a bunch of reasons for that, but I can’t imagine that resident objectors aren’t part of the reason.
To answer your question at the end, the main thing I’d like to see is a clear presumption in favour of the construction of new dwellings. There should be a high bar to clear to block the construction of new houses or apartments. The interests of potential future residents should be properly taken into account when weighing objections.
This exchange started from my assertion that there is a trade-off in housing policy. We can choose two out of the three following choices: restrict development in established areas; restrict sprawl on the fringes of cities; and keep prices under control. We can’t choose to do all three.
You haven’t convinced me that this trade-off doesn’t exist, and I see that I’ve failed to convince you that is does. A frustrating exchange all round! Anyway, thanks for taking the time to set out your views in more detail.