Why building more won't make houses affordable

From Sydney to San Francisco, the housing affordability crisis is affecting communities across the world.

Younger generations priced out of home ownership are locked in a precarious private rental market, while declining government support for social housing and income support has pushed lower income renters to the brink of homelessness.

A growing chorus claims these problems could be fixed by simply building new homes. According to this view, housing is more expensive because there's not enough new supply. They argue that land use regulation and planning processes restrict new construction, adding costly delays and uncertainty to the development process.

Others contest that simple 'supply side' narratives ignore the 'demand side' factors underlying global house price inflation, such as low cost credit under financial deregulation, or government incentives to encourage property investment.

They point to the political power of property industry groups who seek to maintain housing demand while lobbying for lower regulations. Some even caution that wholesale rezoning reforms will unleash waves of redevelopment and gentrification, displacing lower income earners.

Historically, land use zones and restrictive development controls have operated as barriers to new and more diverse housing development.

Dubbed 'exclusionary zoning', in many parts of the United States, for instance, restrictive 'single family' zones continue to prevent multi-unit dwellings and apartments. Often local communities oppose changes to these rules and contest developments they regard to be out of 'character' with their neighbourhood.

In recent years a counter movement dubbed 'Yes In My Backyard' (YIMBY) has emerged, gaining particular steam in North America.

Calling for regulatory reforms to dismantle barriers to diverse and higher density development, the YIMBY movement argues that more housing will resolve affordability pressures. It calls for higher density apartments to be permitted in residential areas, housing targets to be imposed on local communities, and to make planning processes faster and more certain.

These approaches are used in many parts of the world. For instance, in the state of New South Wales, Australia, local governments have long been to 'upzone' to accommodate higher density housing in response to state mandated targets. Uncooperative councils are able to be overruled by the state which also dictates the nature and extent of development controls for subdivision, building height and appearance.

The uncertainty associated with local politics or neighbourhood opposition has been managed by referring all contentious developments to expert panels. Legal appeal rights are strictly limited, meaning that objectors are not able to appeal a planning approval - although developers can challenge a refusal in court.

However, land use regulation may not be the primary barrier preventing new housing development.

Regulatory barriers are unlikely to explain a shortfall of new housing supply if there are high numbers of residential development applications and approvals coming through the planning process, but fewer homes being commenced or completed. Instead, market conditions, such as the cost and availability of finance, or issues around labour and materials will cause producers to reduce new construction.

Further, since commercial housing developers need to return profit, they time the release of new properties to optimise, rather than lower, their sales prices.

YIMBYS argue that even high end housing construction would improve affordability across the market. This is because higher income earners will move into better quality accommodation, releasing other units to filter down the market.

However, the evidence to support this filtering is mixed. Although research in some countries has shown that new rental supply can moderate and even reduce local rents, in countries like Australia, an overall increase in housing units hasn't improved affordability at the bottom of the market. This may be because wealthier people purchase second homes for holidays or the short term rental market, or because the new housing supplied is not in the locations of greatest demand.

New supply will only moderate prices if it is both cheaper than other properties in the market, and a suitable substitute for households looking to relocate. For instance, new apartments on the city fringe will not impact on house prices in inner ring suburbs which are more accessible to employment opportunities.

Government money is needed to support housing that is affordable and appropriate for very low income earners. The minimum cost of delivering housing, comprising physical construction costs, land and the profit required for taking on the risk, means that appropriate accommodation for low income earners is unable to be delivered by the market.

Governments can fund the difference between the capital costs of new construction and the amount able to be paid by target groups. They can also use their planning system levers to ensure affordable homes are included in new developments. 'Inclusionary zoning' requirements are used in many US cities to deliver affordable units, while in England, the planning system produces a significant proportion of the total new affordable supply.

By subsidising affordable housing development, and supporting affordable housing developers to access land or enter into partnerships with private providers, governments boost overall supply even when market conditions are weaker.

In Australia, despite the range of regulatory reforms to support new and diverse housing supply, governments have been reluctant to require affordable homes as part of new developments. So despite a construction boom, dramatically increasing the number of new dwellings overall and multi-unit housing in particular, the shortage of homes available and affordable to those on low incomes has continued to rise.

The solutions to housing affordability problems are multi-pronged, and should be tailored to local conditions.

Governments could direct subsidies towards affordable supply outcomes rather than simply support property investment and regulate rental providers to ensure tenants are protected from unfair evictions, rent rises, and substandard accommodation.

Removing regulatory barriers to new and diverse housing production may be part of the solution in cities where supply constraints persist. But additional strategies are needed to fix the shortage of affordable homes.

Nicole Gurran is Professor of Urban and Regional Planning and the Director of the Henry Halloran Research Trust at the University of Sydney.

Originally published under Creative Commons by 360info™.