Labor’s new housing affordability subsidy is dumb

Australia has a housing affordability problem, both for renters and buyers. Labor has announced a policy to address this problem. It involves subsidising landlords who rent properties for less than the market rate. If the rent is 20% under market rate, the landlord gets $8500. This seems like a sophisticated subsidy at first, but it isn’t at all.

The root causes of Australia’s housing affordability problem are twofold. On the supply side, zoning restrictions and vested interests in the boomer generation impede the construction of new (higher density) housing in desirable locations, like along train lines. On the demand side, decades of economically illiterate policies like the first-home-buyers grant have stoked demand despite inelastic supply, resulting in price pass through and, consequently, high prices. A quick illustration:

Figure 1.0 (above) depicts a market where demand is relatively more elastic (flat) than supply. After the demand side is stoked by say, decreases in interest rates, people’s willingness to pay increases and so does demand, to D₂. This higher price attracts more supply into the market. The market equilibrium of housing sold increases to Q₂, but this is a relatively small change compared to the price shift. You get a small increase in quantity for a large increase in cost because supply is inelastic. This is the story of housing in Australia: restricted supply and policies that constantly fuel increases in demand.

Labor's policy makes no sense in this context as it doesn’t address any of the root causes of unaffordable housing in Australia. What it will do is shift some existing housing stock from slightly unaffordable to slightly affordable at great cost to the taxpayer and great benefit to land lords. 

Let me put some numbers on this, borrowed from Cameron Murray, who does great work on real estate and corruption in Australia. The median rent in Australia is $462/wk, which is only $4800 p.a. At this median, $3700 of the subsidy will go to the landlord, the rest to the tenant. For lower priced homes, which are presumably the target of the policy, the situation is much worse. If the median rental in an area is $300/wk, the landlord only needs to offer a $60 discount ($3120 p.a.) to get $8500, enabling them to pocket $5380!

Moreover, note that the subsidy is a recurrent cost. Labor is suggesting that in the long run it will inject $6billion dollars every year into the real estate sector. This is 1970s shit. We know this kind of stuff is economically toxic. This isn’t even a band-aid solution: it’s pumping blood into someone continuously rather than patching up their wound.

This policy is dumb in such elementary ways that I can only assume some form of corruption or lobbying lies behind it. Best case scenario this is some hack policy solution going into an election.

It might just be a hack idea drive by polling. Evidence for this comes from the rollout rate, which seems to be extremely slow: only $102 million over the first four years post-election. Announce this for an election and then quietly shelve it in the first budget, or certainly by the second election.  

Circumstantial evidence for lobbying is also present, however. People on twitter immediately commented that this looks like a bailout for off-the-plan builders. Rather than putting their newly constructed houses and units up for sale on the shrinking Sydney real estate markets where they won’t sell or collect low prices, this policy allow developers to put their properties out to rent at good rates while they wait for the market to recover. It just so happens that off-the-plan builders are a critical part of Labor’s base.

Like Cameron Murray, I don’t understand why the government doesn’t just build social housing if that’s what it wants. There are so many ways to do this that don't involve a state owned enterprise (which I agree is dicey). You could inject capital into not-for-profits providing affordable housing so that they can build more units. You could create state builders with start-up capital, then immediately privatise them with a not-for-profit mandate. They behave exactly like private companies (including hiring subcontractors) except that they don’t price gouge in markets with artificially restricted supply. You could give not-for-profit social housing charities first dibs on brownfield and greenfield development so that where social housing should be built, it does get built. Or you could copy the Vienna model (or Singapore). It makes financial sense for the government too. The AHURI estimates that it only costs $6500 per year to build and run a public housing unit with a rental price of $155 per week. That’s a 75% discount on the median rent! Go nuts. Housing is a merit good—something we think should be distributed on the basis of need, not capacity to pay. I don’t see a reason why the government shouldn’t be partially involved in the sector. A subsidy is just a terrible way to do it.