Unions have little to do with unaffordable housing
at 12:12 am on November 25, 2016 | 37 comments
http://www.macrobusiness.com.au/2016/11/unions-little-unaffordable-housing/
By Leith van Onselen
In the lead-up to the Federal Election, Prime Minister Malcolm Turnbull scapegoated Australia’s building unions, promising to crack down on union corruption as a way of improving housing affordability:
“We’re paying up to 30 per cent more for hospitals, schools and roads. Even housing affordability is affected because of the high cost of building apartments”…
This crackdown is to take the form of the Australian Building and Construction Commission (ABCC) bill, introduced into the Senate, which would set up a watchdog overseeing the construction industry (see here for explanation).
The Australia Institute (TAI) yesterday released a detailed report debunking the argument that unions have pushed-up the cost of construction and caused the decline in housing affordability. Below is the summary along with some key charts:
In an effort to mobilise public support for their plan to create an Australian Building and Construction Commission, Prime Minister Turnbull and other Coalition leaders have blamed union activity in the construction industry for the escalating cost of housing in Australia. The Prime Minister expressed sympathy for “young Australian couples that can’t afford to buy a house because their costs are being pushed up by union thuggery.”
His Minister for Immigration, Peter Dutton, made a similar case: “When young Australians go to an open house this weekend, to a unit that they may not be able to afford or that they have been saving up for, they know that that unit is more expensive because they have seen building costs increase as a result of the involvement of the unions and bikies.” An implication of their argument is that housing will become more affordable, if legislators support the government’s effort to restrict union activity (including union negotiations over apprenticeships and training, and health and safety measures) in the construction industry.
This claim depends on the simultaneous validity of several underlying sub-hypotheses: including that union activity has expanded in construction, that construction wages and labour costs have accelerated as a result, that total construction costs have also accelerated correspondingly, and that housing prices rise in tandem with escalating construction costs. In a step-by-step empirical investigation, every one of these claims is proven to be false. The government’s effort to blame unions for high housing costs is not credible at any level.
Among the surprising findings of this study of the relationship in recent years between construction labour and housing prices, are the following:
Average earnings in the construction industry have grown more slowly than the Australian average over the last five years.
Real wage increases in construction have been slower than real productivity growth, with the effect that real unit labour costs in construction have declined.
Construction labour accounts for only 17-22 percent of the total costs of new building.
Construction costs, in turn, account for less than half the market value of residential property.
Construction labour costs correspond to less than 10 percent of housing prices (and even less than that in Australia’s biggest cities).
Construction workers receive far less income from the housing sector than land-owners, property investors, and banks.
Construction labour accounts for about the same proportion of a house purchase as real estate commissions and stamp duty.
Homes in Australia are becoming unaffordable even for the workers who build them: on average, a construction worker would need to spend 9.2 years of their pre-tax earnings to purchase a median home (25 percent more than just four years ago).
If the government is genuine in its desire to make housing more affordable in Australia, it should turn its attention to the real causes of soaring housing prices: by cooling off property speculation, more carefully regulating the banking sector, and reforming property-related taxes.
Couldn’t agree more.
The Turnbull Government conveniently won’t address the fact that hyper-investor speculation has directly crowded-out first home buyers (note the inverse correlation below):Or that virtually all of the cost appreciation in housing has been in the land, not the structure component:No, the Government has instead pinned the blame for Australia’s atrocious housing affordability on the unions. Convenient, hey?
When you think about it, there are two broad approaches at Turnbull’s disposal to make homes more affordable for younger Australians: Remove artificial (speculative) demand from the market; and/or Introduce measures that improve the supply of affordable land/housing.
Unfortunately on the demand side, the Turnbull Government has opposed Labor’s sensible reforms to Australia’s negative gearing and capital gains tax system, despite describing them as “tax shelters” and “tax avoidance” in 2005.
So this leaves the supply-side.
If Government was serious about housing affordability he would offer incentive payments to the states to free-up land supply, relax planning, and build housing-related infrastructure.
It is the federal government, after all, that has decided to run a high immigration program, so the least it can do is provide the states – the ones primarily responsible for service delivery and infrastructure – with the means to cope with this growth.
Given the massive vertical fiscal imbalances present in the federal system, it is not surprising that the states have attempted to prevent growth of the urban footprint in a bid to save on infrastructure costs.
Accordingly, the best way to overcome the states’ reluctance is to ‘show them the money’ and offer them incentive payments in return for genuine supply-side reforms.
None of these solutions are rocket science. But it will take genuine leadership from the Turnbull Government to achieve reform, not lazy lip service scapegoating the unions.