Zoning isn’t to blame for Australia’s soaring house prices

I'm a planner based in Sydney and have always felt a little disconnected with conversations around housing affordability on this sub as there is so much emphasis on boosting supply to address affordability. I'm not suggesting that isn't the case elsewhere, and encouraging denser infill development is great for a bunch of reasons, but in the Australian context I agree with the article that supply really isn't the reason for our crazy house prices and relying on supply to fix the problem is never really going to work on any useful timeframe. Here's a comment I've previously made, slightly edited for context:

People often sum up the situation it being simple supply and demand and therefore the issue is a simple the balance of migration and housing supply. That drastically oversimplifies demand though, housing markets are complex and it isn't the case where 1 new migrant increases prices by x, 1 new dwelling reduces prices by x. There's so many more factors at play from lending practices to interest rates to tax incentives (negative gearing and capital gains discounts the classic examples) to wealth distribution to investor confidence to recent price movements and on and on.

That's not to say supply doesn't impact things, but boosting housing supply has been the focus of most state governments for over a decade now and prices have only gone up in that time. It's the go-to line for Federal governments when discussion housing affordability, consistently blaming the states for not pulling their weight on supply. Yet Sydney has poured on an astonishing amount of new supply over the last decade, meanwhile prices have increased at record rates. Some will argue that this hasn't lowered prices because of historic undersuppy, though those claims are a bit shakey.

Infill development is insanely profitable in capital cities and developers hold a massive level of influence on state governments to upzone major sites, loosen building restrictions and pay for supporting infrastructure. It's an industry where the stroke of a pen can provide you with millions in uplift value through rezoning. It's difficult to look at a market like Sydney or Melbourne, cities who have consistently had some of the highest construction rates in the world, and say that planning rules are far too restrictive for supply and we're not creating environments conducive enough to development. Approvals have generally outpaced supply. That isn't to say planning rules are perfectly applied of course, just looking at things from a pure dwelling supply standpoint.

New housing stock is a tiny fraction of the housing market as a whole (about 2%) and prices are set by the total housing stock, most of which is already built. In most other markets, increasing prices encourage extra supply and reduce demand, so they work together to reduce price when supply increases. Housing is weird in that as prices increase, demand in the short term actually increases as people feel more optimistic about the market, people will take out larger debts, FOMO sets in and investors absorb as much new supply as they can. That makes it really difficult for supply to reduce prices, coupled with the fact that developers and banks that fund development control supply and won't allow supply to get so ahead of demand in a way that would make prices slump substantially. That's why large developments generally have staged releases to market.

Constrast this with changes in lending criteria and their impact on prices. After the Royal Commission into Banking gave out its recommendations to make some pretty substantial changes to reckless lending policies and Labor looked like they'd win the election and start to reel in negative gearing and CGT discounts, prices across the board started to decline for the first time in decades. Of course, LNP won the election signalling no changes to housing policy, APRA changed the interest tests of mortgages and most of the Commissions recommendations haven't been implemented. Surprise, surprise, prices started heading north again.

There's a lot of good reasons to support more infill devleopment but it's not a very effective way of addressing prices across the board in Australia. There are policy changes we know would work to make housing more affordable right now but there is very little political will to use them.