Richard Yetsenga (pictured above), chief economist at ANZ, challenged the notion that increasing housing supply is the silver bullet for Australia's affordability issues, arguing that a market-based supply response alone is insufficient.
“Much of the discussion around Australia’s worsening housing affordability challenges offers a market-based supply response as the ideal solution,” Yetsenga said in a recent analysis.
“But responding to these challenges with new supply, in the absence of pushing just as hard on other policies, is unlikely to materially improve affordability, even in the medium term.”
The complexities of the housing market, including diseconomies of scale and speculative behaviours, contribute to the difficulty in addressing affordability through new construction alone.
“If existing dwellings are cheaper than new ones, new build commencements will dry up,” Yetsenga said. “New supply either won’t be sustained or prices of existing dwellings will rise. Either way, the affordability challenge is unlikely to be meaningfully addressed.”
This highlights the interplay between new and existing housing stocks and the speculative demand that can further drive up prices.
Cost and policy challenges amid climate transition
The rising costs of labour and materials, exacerbated by a booming major projects pipeline and climate transition requirements, further complicate the feasibility of significantly boosting housing construction.
The economic implications of such efforts not only affect the housing market but also broader financial stability, making a supply-first strategy seem increasingly untenable, according to the ANZ analysis.
With Australia having 11 million dwellings for 26 million people, Yetsenga suggested that focusing on the misallocation of existing housing stock could be far more effective than increasing supply.
He noted that policy focus on existing stock rather than new supply "has the potential to be 50 times more effective,” pointing to the need for pragmatic interventions that manage demand and limit misallocation.
The debate over housing affordability is not limited to the cost of acquiring homes but also includes rental affordability, which has become a pressing issue alongside mortgage costs.
The overall worsening of affordability across housing values, rental costs, and interest rates calls for a reevaluation of both supply and redistributive policies to address the multifaceted nature of the crisis effectively.
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