The graph that shows why building more homes won’t be enough

Property prices have risen faster than rents over the past 16 years, especially in locations where not enough new homes have been supplied to the market.

This shows there are more reasons for soaring house prices than just a lack of supply, researchers at think tank e61 Institute have concluded. If the supply-demand imbalance were the only reason, it would be pushing up rents in a similar way to house prices, they found.

The research note, Should housing home people or money?, comes amid a focus on addressing years of under-building pushing up house prices. The federal government has a target to deliver 1.2 million new homes in the five years to 2029 by streamlining building regulations and working with the states, which are in turn targeting more homes close to public transport and trying to expedite approvals.

Dr Nick Garvin, research manager at the e61 Institute, agreed there was a lack of supply, and that more homes were needed to ease prices and rents, but thought there were more issues at stake.

“It’s almost certainly true that we haven’t built enough homes,” he said. “Do we expect that if we address that, that our house price affordability issues are going to be solved?”

He compared average annual property price growth and rent growth from 2008 to 2024 by location. Average growth in the inner cities is marked as 1 on the chart below, then the numbers on the x-axis rise for each ring of the city travelling further out from the centre to the most distant outer suburbs, followed by regional areas.

Garvin found that in Sydney, where housing supply is arguably most constrained, rent growth was the furthest below price growth.

Rent growth was also below price growth across suburban Melbourne, although not in the city centre.

“If the dynamics were fully being driven by supply constraints, we would expect the high prices to be reflected in high rents as well. Because when there’s a shortage of supply, there’s a shortage of places to rent as well, and rents go up,” he said.

“If there’s high price growth and not high rent growth then it’s not about desirability to live there, which is the flipside of supply constraints. It’s not about excess demand relative to how much supply there is.

“It more suggests that it’s something about how profitable people expect the purchase to be, aside from the rental income.”

Garvin noted that Australians tend to see housing as a way of building wealth, and the more money someone expects to make from a home purchase, the more money they are willing to pay.

He said drivers of property price growth include how much a buyer has to pay on their mortgage, how much capital gain they could make, and how much they could either earn from rent on an investment or avoid paying in rent on a home.

But making home loans more expensive or more difficult to get would be counterproductive to improve housing affordability, he said.

But he thought property taxes were worth more investigation.

“If home ownership for future generations is something we really want to achieve, I think we need to be thinking about whether this low tax on housing profits is really what’s best for Australia because the tax rate on housing profits is just a direct determinant of how profitable a housing purchase is for someone,” he said.

“Reforms in this direction would be politically difficult without a cultural shift in how Australians relate housing to wealth.”

He said reducing property owners’ capital gains through changes to taxes would be a politically unpopular reform, and should not be done without further investigation.

“But this trade-off is one that may have to be faced because it does seem quite clear that the desire to build wealth through housing-price appreciation is quite at odds with the desire for future generations to be able to buy homes. One requires prices to go up, the other requires prices to not, essentially.”

Centre for Independent Studies chief economist Dr Peter Tulip, who was not involved in the research, highlighted expectations of capital gains in Sydney and Melbourne, saying as the cities grow, NIMBY objections get stronger and make it harder to build, causing prices to rise more quickly than elsewhere.

But he noted that even though property prices rose faster than rents in Sydney and Melbourne, both prices and rents have risen faster than prices for consumer goods.

“The reason why both house prices and rents have risen faster than inflation is because of the shortage of houses, because supply hasn’t kept up with demand,” Tulip said.

“The reason why house prices have risen even faster than rents is mainly because of a fall in mortgage rates.”

He added that previous research finds removing tax concessions for negative gearing and the capital gains tax discount affected house prices by just 1 to 4 per cent.