The NSW Productivity Commission (PEC) recently released a report addressing Sydney’s housing crisis, proposing solutions centred around rezoning, streamlining development approvals, and offering tax incentives to developers. This report has gained significant media attention for its promise of quick fixes to boost housing supply, presenting itself as a roadmap for tackling the affordability crisis through rapid policy changes.
However, another report recently tabled to the NSW Parliament titled The Economics of Housing Supply, offers a more nuanced analysis of the factors influencing housing markets but has received far less media coverage. In light of this report's insights, the PEC Review appears deeply flawed. Its narrow focus on zoning reforms and developer incentives overlooks critical aspects of housing supply and demand, and adopting its recommendations could worsen the housing crisis by ignoring the underlying complexities driving Sydney’s affordability issues.
This article provides a brief review of the PEC Report in the context of the key findings of The Economics of Housing Supply.
Flawed Assumptions of the PEC Report
At first glance, the PEC report appears ambitious, focusing on rezoning, streamlining development approvals, and offering tax incentives to developers as solutions to housing supply issues. However, these recommendations are built on several flawed assumptions.
Overreliance on New Supply
The PEC report wrongly assumes that increasing new housing supply alone will solve the affordability crisis. As The Economics of Housing Supply paper explains, housing stock in Sydney is dominated by existing dwellings, and focusing solely on new builds overlooks the significant role that established housing plays in the market.
Neglect of Developer Behaviour
One of the most glaring blind spots in the PEC report is its failure to account for developer behaviour. Developers often pace projects to maximize profits, even when zoning and planning regulations allow for more rapid construction. Without addressing this profit-driven behaviour, merely relaxing planning restrictions or providing tax breaks won’t lead to more affordable housing – it may even exacerbate price increases by encouraging land-banking and delaying projects. Anti-competitive practices such as land banking have plagued the housing market in recent years and played a significant role in the current housing crisis. Ignoring such practices would do nothing but embolden developers and further distort the market.
Misguided Planning Reform Focus
The report places heavy emphasis on easing zoning restrictions and simplifying development approvals. While this is a recurring theme in housing policy debates, The Economics of Housing Supply demonstrates that planning reforms alone will not lead to significant reductions in housing prices. The PEC report fails to recognise that other bottlenecks, such as post-DA approvals, increase in cost of construction materials and labour, and infrastructure provision, play a much larger role in delaying housing projects.
Key Blindspots in the PEC Report
The PEC report’s policy suggestions stem from several critical blindspots that result in incomplete solutions:
Infrastructure Overlooked
The report inadequately addresses the impact of infrastructure contributions, which are critical for making new housing projects viable. Without proper investment in infrastructure, development remains slow, regardless of zoning or tax breaks.
Ignoring Housing Demand Dynamics
While the PEC report largely focuses on supply-side interventions, it fails to consider how housing demand factors interact with supply. The Economics of Housing Supply paper highlights how demand, driven by migration, interest rates, and investor activity, complicates the supply-affordability relationship. Policies that fail to address demand will always fall short.
Long-Term Sustainability
Many of the PEC’s recommendations, such as rezoning and tax incentives, might provide short-term boosts in housing activity but do not address the long-term sustainability of Sydney’s housing market. Without tackling issues like developer land banking or the responsiveness of established housing stock, Sydney risks creating temporary bubbles in the housing market rather than sustainable affordability.
The Better Path Forward
The Economics of Housing Supply paper, though not making explicit policy recommendations, offers a much more nuanced understanding of Sydney’s housing market. It stresses the importance of addressing both new and existing housing supply and understanding the complex market behaviours that affect affordability. Policymakers should be wary of adopting the PEC’s recommendations wholesale, as doing so could result in unintended consequences that worsen the affordability crisis in the long run.
Instead, the focus should shift towards a more balanced approach that includes:
Regulating developer behaviour to prevent land-banking and unnecessary delays.
Addressing the role of existing housing stock in the market.
Implementing tax reforms to deter money laundering and reduce the financialization of the housing market.
Implementing meaningful minimum affordable housing requirements on new developments.
Shifting away from tax incentives like negative gearing, which encourage speculative investment in property.
By acknowledging these overlooked factors, Sydney can move towards meaningful solutions to its housing crisis rather than the quick fixes proposed by the PEC report.
Conclusion
The PEC Review may offer an appealingly simple solution to Sydney’s housing crisis, but its flawed assumptions and blind spots will lead to misguided policies. Drawing from the insights in The Economics of Housing Supply, it’s clear that Sydney’s housing market requires a more comprehensive, long-term approach to deliver real affordability. Policymakers need to reject one-dimensional solutions in favour of strategies that address the market’s true complexities.
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