One weird trick to increase the supply of housing
A stamp duty holiday could help solve the housing crisis
In an appearance before the Senate today Phil Lowe confirmed that the best three solutions to the housing crisis were supply, supply and supply. The unfortunate downside of building new houses is that it will take time. Even a new project announced today would take at least a year to come to market.
But what if there was one weird trick that increase the supply of housing in a matter of months?
Empty beds at empty bedrooms
One way to increase the effective supply of housing is to improve allocation of housing between households.
Ideally we would create some empty homes to house people, but a second best alternative is to use redeploy the many empty bedrooms to people who need them.
Consider a large house with five or six bedrooms that is only occupied by one person. We could swap this house with a family that does have one bedroom per person and relieve a lot of housing stress merely by reallocating existing houses between families.
We can use data from the 2021 census to quantify this mismatch of housing and occupants. Even allowing for the desire for a guest bedroom, it is clear that there are substantial amounts of housing misallocation in the Australian housing market.
Consider all the childless couples living in Greater Sydney - according to the census there are 404,203 such households. What sort of houses do they live in?
10% of these couples live in a one bedroom house or studio apartment - a snug fit
30% live in a two bedroom house - with one bedroom spare
33% live in a three bedroom house - with two bedrooms left empty
and 27% live in a house with four or more bedrooms!
There are over 100,000 houses in Australia’s tightest housing market in which a single couple is spread across four or more bedrooms!
The same is true of other types of households such as singletons who live in relatively large houses and even families with children who nonetheless have plenty of spare bedrooms.
We can also see misallocation in the reverse direction, calculating the number of households that clearly don't have sufficient bedrooms for their occupants. For example, of the households that consist of a couple with two children (267,747 in Greater Sydney) 12% are stuck in two-bedroom houses or smaller.
Over 9% of all single parents with three children (who would ideally have 1 bedroom for each of the four members) are stuck in houses that have two bedrooms or fewer!
There are plenty of reasons why a household might want to have multiple spare bedrooms. Perhaps they are empty nesters saving the bedrooms for when there kids visit or are planning on having kids soon. Or perhaps they use the rooms as home offices or gyms since the pandemic. Or maybe they just like to stay in the house they call home even if it has a few unused rooms. All of these are perfectly valid reasons to live in a house that has far more bedrooms than occupants.
However, for some households, they will be looking to downsize. If not today, then at some point in the next few years. Downsizing not only benefits the seller but the buyer who is able to upsize. Reallocating bedrooms from those that don’t need them to those that do can instantly increase the effective supply of housing, without waiting for the slow process of construction to catch up to demand.
Let’s try a house swap
Whenever you want to encourage something the first thing a government should consider is to stop taxing it. Stamp duty has long been a disincentive for households’ to re-allocate housing between themselves. Cutting it would help speed up that process as economists have long espoused.
But cutting it temporarily would be even better incentivising households that know that they are planning to sell in the next few years to bring forward their decision to today to take advantage of the temporary tax incentive. This would prompt people to downsize today and contribute to the additional housing supply when we need it most.
Unlike many of the other mooted policies, such as planning restrictions, public housing or more funding for affordable housing, this would increase the effective housing supply in a matter of months rather than years. It would also invigorate the housing market, hopefully generating a better set of matches as people embrace a period of increased housing market transactions.
How big of an effect would this temporary change in taxes have? That's difficult to predict as such temporary tax cuts are not common, but when the UK slashed stamp duty during the pandemic it saw the house sales soar by over 70% compared to the pre-pandemic period on the most affected homes! That is a substantial effect, especially given it was only a partial exemption from the tax. It may have been even higher assuming the pandemic reduced transactions during the period.
Housing turnover is around 5.5% each year, if we could double that to 10% we could achieve a substantial reallocation of housing between potential down sizers and growing families that could rapidly increase the supply of housing.
The obvious downside to this policy is the potential massive blow to state finances that would result. But you don’t actually need to cut taxes in order to achieve this outcome. While I may have to hand back my economist license for suggesting this, you could achieve a similar impact by promising to raise stamp duty in 12 months time permanently. This would have a similar incentive effect, encouraging sales today to avoid the future increase.
We need to build more houses. But it make take decades for that problem to be solved. In the mean time a great housing swap - facilitated by a temporarily lower stamp duty - could help resolve Australia’s housing crisis.