It’s all about supply… not.

From Works In Progress

One consequence of Covid has been plunging rents in cities across the world, as tenants flock out of city centres and the long-term rental market is flooded with former Airbnb properties. This has left tenants jubilant, and landlords panicked.

Unsurprising so far.

Sydney, Australia, is no different. But what is remarkable is that rents and house prices in Sydney were falling some time before Covid struck. From a peak of A$550 per week in 2015 (£310, US $420), the median unit rent had fallen a substantial 7.3% by December 2019. House prices fell from a median of A$1,075,000 in December 2017 to A$865,000 a year later. By contrast prices in London, UK, have been broadly stable since 2016 after almost two decades of meteoric growth. The cause of this was pretty simple. Sydney built more houses.

OK, but read on…

The New South Wales (NSW) regional government had identified a failure to build feeding into worsening affordability problems since the late 1990s. In 2015, it set up an independent agency, the Greater Sydney Commission, to lead on land use issues and prepare district and regional plans. The Commission set and distributed much higher housing targets amongst the councils across Greater Sydney…

The optimal approach may have been to allocate higher targets to areas with higher prices, or more precisely, larger gaps between build costs and prices, as those gaps are the key indicator of substantial unmet demand. In fact the targets – and the “priority growth” areas – were disproportionately assigned to the less well off neighbourhoods. Relatively poor Parramatta, for instance, received a 0-5 year target of 21,650 homes – or a substantial 168 homes per 10,000 residents, over five years. Woollahra, Waverley, and Randwick – the richest suburbs in the country – collectively received a target of 3800 dwellings, or 38 per 10,000.

Right. So build and sell disproportionately more homes in lower-price areas, and the average price paid goes down. Hardly surprising, and seems to invalidate the whole thrust of the article.

Sydney’s experience demonstrates that liberalised planning leads to more homes. But do more homes lead to better affordability? To economists, the fact that building more homes reduces rents is so obvious, it is almost a truism. The theory and the empirical evidence are both clear.

Yes, the theory and evidence are both clear. People are gregarious. There are one-and-a-half times as many homes in Greater London as there are in the whole of Scotland, which has fifty times Greater London’s surface area; but there are also one-and-a-half times as many people in Greater London than in Scotland. And guess where prices and rents are higher?