Peter Tulip — What Will It Actually Take to Solve the Housing Crisis? [Aus. Policy Series]

This episode is the fifth instalment of my Australian policy series, recorded live in Sydney on February 12, 2025.

I speak with Peter Tulip—Chief Economist at the Centre for Independent Studies, and a former senior researcher at both the Reserve Bank of Australia and the US Federal Reserve.

We go deep into what's driving Australia's housing crisis, the problems with heritage rules and height restrictions, critiques of both NIMBY and YIMBY thinking, the sobering 10–20-year timeframe that even an “extremely ambitious” supply plan might require, and the cultural shift needed to reach a new equilibrium where housing is truly abundant.

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Transcript

JOSEPH WALKER: Okay. Thank you all for coming. 

Before we start the conversation, I want to place it in a broader historical context. 

For most of human history, the stuff we needed was scarce. And because it was scarce, it was expensive. This was true until quite recently. Economic historians tell us that in 15th century England, about 80% of personal spending went to food, with 20% of that on bread alone. 

But since the Industrial Revolution, and thanks to innovation, the human story has largely become one of ever-increasing abundance. We know this because the price of the things we need, measured in terms of how many hours work it takes to buy them—from bread to cars to televisions—has been falling, often steeply, over time. 

But one particular durable good has broken this pattern of progress: housing.

It's become a fact of life that the cost of the structures we live in—or more accurately, the land underneath them—keeps rising, even as the prices of the stuff we fill them with keep dropping.

Over the last quarter century, Australia's house-price-to-income ratio has roughly tripled, depending on how you measure it. And according to the latest Demographia report, Sydney and Melbourne are the second and seventh least affordable cities on the planet. 

Australia's unaffordable housing market has meant that too many of us have to live too far from the jobs in which we'd be most productive. It means that we have to shoulder enormous debts or live with the precarity of renting. It means that we don't get to live close to our friends or relatives. It delays family formation, contributes to urban sprawl.

Australia's housing crisis is the defining social policy disaster of our times. But I won't belabour this point. Presumably you're all here because you agree. 

Rather, the real questions are: What's causing it? And how do we fix it? 

To help us answer these questions, we have joining us one of Australia's leading experts in the economics of housing. Peter Tulip is chief economist at the Centre for Independent Studies. Before that, he was a senior researcher at the Reserve Bank of Australia and at the US Federal Reserve. 

As a mea culpa, I used to be much more concerned about the re-emergence of a housing bubble in Australia. But it was largely through reading Peter's work and engaging with Peter that I became convinced that isn't the main issue today; the main issue is rather one of constricted housing supply.

So it's a pleasure to have Peter finally on the podcast. Peter, welcome to the show.

PETER TULIP: Thanks, Joe, and good to be here.

WALKER: So, since you left the Reserve Bank, we've caught up for a beer or coffee every couple of years. And I'm hoping tonight's conversation can be the latest iteration in our series of chats, but with two major differences. Number one, we have an audience this time. Number two, I'm going to try and dial up the disagreement tonight. Are you ready?

TULIP: We'll pretend.

WALKER: So first question: constricted housing supply isn't a problem just in Australia; it’s also a problem in the US, the UK, Canada, New Zealand, Ireland. So what's your general theory as to why this phenomenon seems to be common across the Anglosphere in particular?

TULIP: It's a good question and I actually don't know the answer. One thing that many English-speaking countries have in common is high rates of immigration. So the pressures on us to supply more housing are much stronger and clearer than they are in many other countries. But that's a partial answer and there are a lot of exceptions on both sides to that.

A common argument is that the English tradition, the English-speaking government and culture, that tradition places a lot of emphasis on local control, and it gives neighbouring residents a lot of say as to what you can build on your property. And that, as we'll get into, gives rise to all sorts of terrible problems.

But it's a good question which I don't know that anyone's had a good answer to.

WALKER: So if we go back to the 1970s, correct me if I'm wrong, but I think this is when zoning regulations start to become a problem for countries like Australia. Do you know what the historical shift was or what was it that happened beginning around the 1970s that saw these rules start to pile up?

TULIP: So in Australia, a lot of it was [that] we had in fact much stronger population growth in the 1960s and 1970s. But this was an era in which people were getting cars. And you could do car-based sprawl relatively inexpensively, and it was attractive, going out to the suburbs.

But as those commutes went from one hour to two hours to even three hours in some cases, people said: “This is crazy; we have to stop going out; we have to start going up.” And that's combined with just the natural size of cities. I mean … as Melbourne and Sydney got up to 3, 4, now 5 million people, you can't go out; you have to go up. And as you go up, the zoning restrictions are much more severe and much harder to get around.

So again, it's a good difficult question to which I don't know that the research supplies a clear answer. There isn't any dramatic legislative change. Well, sorry: there are changes, but they're in different times, in different states, and in different countries. So it's difficult to tell a story directly attributing it to any clear institutional change. It's just this unfortunate combination that … 

Well, a simple way of putting it: over a period of several generations, demand for housing seems to have been increasing about 3% a year, whereas the supply has just been increasing about 2% a year. And so demand is just continually outstripping supply. And there are lots of cycles about this rising trend, but that incompatibility between supply and demand means that prices have to rise over time.

WALKER: Thinking about what motivates the typical NIMBY in Australia, if we go to the literature, there are two distinct sets of motivations. One is the homevoter hypothesis, which says that NIMBYs are selfishly trying to protect their home equity values. The other is the neighbourhood defenders hypothesis, which says that NIMBYs are actually acting altruistically on behalf of their neighbourhoods to kind of protect the amenity and local character of those neighbourhoods. Which of those two motivations is more accurate?

TULIP: The statistics seem to show that the second story is more important, that there are lots of glaring exceptions to the rule that NIMBYs are selfish—sorry, are financially motivated. For example, lots of renters seem to be NIMBYs. And that very naturally lends itself to the second story you talked about, of just wanting to protect their neighbourhood … Obviously it's a big mix, and lots of NIMBYs have different motivations. I think the financial story matters most in that the story people like I are trying to sell is that Australian society would be better off if houses were more affordable—that is, if house prices fell. And that's an unattractive and unconvincing argument to people whose entire wealth is in housing. So it's hard to make the case to a majority of voters because of the financial factors.

WALKER: Yep.

TULIP: Consistent with your second story about being neighbourhood defenders, it's consistent with that. But putting it in slightly different words, a lot of it, I think, is just fear of the unknown. And in particular, you see this because I and, I imagine, many others have had the experience of hearing neighbours or friends or relatives say, “We strongly oppose the development at the local shops, but now that we see it's actually not that bad, and we like the new cafes and the restaurants and the more frequent bus service.” And it is very common to hear stories of people changing their mind once they see the actual product—which suggests, if not irrationality, that people were worried that these developments are going to turn out much worse than they actually do.

WALKER: So a kind of status quo bias.

TULIP: Yes, very much so. And in fact, Bryan Caplan, who I think has been a guest on a previous episode of yours, strongly emphasises the status quo bias—that it's strongly demonstrated in the psychological literature that people will strongly prefer the status quo to changes, regardless of the relative merits of the alternatives. And that … seems to be clearly a factor in housing also.

WALKER: It does feel kind of difficult to falsify the homevoter hypothesis though. Because I mean, people are always going to cloak even selfish, financially motivated concerns in altruistic language. You're not going to persuade a local council by saying “I want to protect my home equity values.” You're going to say “I want to protect the unique character of the neighbourhood.”

TULIP: Yes, there is clearly a lot of bad faith in this. One thing we haven't mentioned is [that] a lot of existing residents don't like the new people that would be coming into a neighbourhood if flats were built, partly for ethnic reasons, partly for class reasons. And that's probably more important in mixed-race societies like the US than it is in Australia. But again, that seems to be a very strong motivation. But again, the opponents don't like to word it that way because it's socially unacceptable. So you do get a lot of the rhetoric about neighbourhood character that's actually quite difficult to believe.

WALKER: Right. So a little bit earlier you mentioned that home equity values are more important at the kind of state or federal policy level. I just want to make sure I'm understanding correctly. So it seems like, okay, maybe these amenity concerns are relevant to the local level, but when we're talking about national policy or state policy, it's the home equity concerns that are more relevant?

TULIP: No, the argument I was trying to make was that home equity just is a counterargument to my argument that we need to improve affordability. When I say that, it becomes fairly clear to most people that I'm talking about a reduction in their wealth. And, they say “Oh, in that case it's nowhere near as attractive.”

WALKER: Absolutely. I have several questions on this, but I'll save them for more towards the end of our chat. 

So, next question. Obviously not all zoning regulations represent a deadweight loss, right? So there's this classic example of Houston. I think Joe Stiglitz wrote about it in his book last year. But Houston has very light zoning regulations and you have situations where there are kink-friendly adult stores right next to preschools. 

So when you think about zoning regulations in Australia—or maybe you want to just narrow it to New South Wales, whichever you like—how many of them, or which ones, are on your chopping block?

TULIP: Height restrictions are the worst. Because it's understandable that as density spreads and encroaches into detached housing neighbourhoods, it will change the character of those neighbourhoods in a way that going up does not—especially around train stations. There's a huge demand to live within walking distance of train stations. People will pay top dollar for it. It doesn't really change the character of the neighbourhood: these are already busy, lively areas. And what I'm saying is not new to anyone. I mean, this is standard argument in the planning literature—that we want more transport-oriented development.

And that's what the New South Wales and Victorian governments are very strongly pushing. And I strongly agree with that. I think that priority is exactly right.

WALKER: So height restrictions are the worst. Okay, what would come after those?

TULIP: So heritage restrictions are not super-important, but they are pretty stupid. Everyone agrees that we want to protect, preserve buildings that are unusually old or unusually attractive. But our heritage laws go far beyond that, protecting huge swathes—I mean, entire suburbs in some cases—of what's pretty ordinary housing. And the legislation imposes these restrictions without consideration of costs or benefits. It's just some architectural exp—well, they're called an “expert”, in fact they're hired guns—says this ordinary suburban Californian bungalow is architecturally distinctive . and so it gets a do-not-build stamp on it. I mean, it's important in the old suburbs of Sydney and Melbourne, which is a minority of council areas. So it's not decisive for the affordability. But … yeah, that's at the top of my list too.

WALKER: So height restrictions and heritage. So I'm sure you probably have some other regulations that would warrant being placed on the chopping block, but let's just start with those two. So I want to understand the maximum upside here if we got rid of those zoning regulations.

So you have a paper with Ross Kendall which shows that zoning's contribution to house prices is, or was, 42% in Sydney, 41% in Melbourne. Then you had a later paper with Keaton Jenner which showed that zoning's contribution to apartment prices was 41% in Sydney, 16% in Melbourne. But obviously that doesn't necessarily mean prices would fall by that much without zoning, because these are just partial equilibrium models. You're not building a larger model of the economy that looks at what would actually happen to supply and demand if you remove zoning restrictions.

But could you still help me understand what's the kind of ballpark upside here for how much we could bring prices down? If we got rid of height restrictions, we got rid of some of those heritage laws, what can we look forward to?

TULIP: So the other really big thing we would need to do, which is directly relevant in particular to the paper I did with Ross Kendall, is we need to allow detached houses—what Americans call single-family houses—with medium and high density.

And that, in fact, has been where the real payoff has come in New Zealand. [It] is leading the world in changing zoning regulations. And they've done it largely through townhouses. Huge swathes of Auckland and parts of Wellington are being replaced with two- and three-storey, relatively densely-packed buildings. And as a result, I mean, the construction has doubled in those industries. The housing stock has increased by several percentage points. Prices have fallen by … I think the estimate is about 28% in Auckland and 21% in Lower Hutt, which is the leading municipality of Wellington that's done this.

So I'll add that to the list of reforms that need to be done.

WALKER: Just before you go on, that's … zoning as conventionally defined, correct?

TULIP: Yeah.

WALKER: Because I'm conscious in this conversation, both you and I will probably use zoning to refer to really the broader set of what might be called planning restrictions. But the kind of “what can you use this land for” [question] is traditionally what's meant by zoning. So you're adding zoning, heritage, height restrictions. So then if we cut these things ...

TULIP: Change all of those. So those estimates of the zoning effect, as we called it, I think they were a reasonable approximation to what would happen to housing prices in those cities if you were to completely liberalise the markets now. 

But that's not what we're suggesting. To be politically realistic, our aims are much more moderate than that. But ultimately, if you were to take it to extremes, that's where it would hit.

WALKER: And so how much more moderate are your aims than that?

TULIP: I think the national cabinet target of 1.2 million homes over five years is sensible. The numbers that we were talking about before with this pure free-market deregulation would involve something like a 10 or 20% increase in the housing stock in Australia. And you clearly can't do that overnight. In fact, you can't do it within any reasonable planning period. But you can build a lot more.

And the national target of 1.2 million homes essentially takes the previous peak in construction that we saw before the pandemic and [says], “Let's hope we can do that on a sustained basis.” That strikes me as a feasible short-term objective—feasible both economically because we've built at that rate before, but also politically in the sense that the community accepted those rates of construction in the past.

I can run the numbers on what that would mean for affordability if you want.

WALKER: Yeah.

TULIP: Okay. So one million homes is sort of a neutral baseline. And that was the original target. And so the national cabinet target of 1.2 million homes is 200,000 on top of it. We have a national housing stock of 11 trillion homes, so those 200,000 is about, with a bit of rounding, a 2% increase in the national housing stock. As a rough rule of thumb, every percentage point increase in the housing stock reduces the cost of housing by about 2.5%. So that 2% increment that National Cabinet is targeting would give you a 5% reduction in affordability. That is relative to a baseline of housing prices trending up. In real terms, house prices outpace inflation by about 2.5% over a very long average. It's more or less than that, depending on exactly when you take the average from.

So you take 5% over five years from that and … prices are still increasing in nominal terms.

WALKER: Right. So it's not 5% lower than today's prices. It's 5% lower than the counterfactual in five years.

TULIP: Yeah, 5% lower than what was a pretty unattractive counterfactual of continually deteriorating affordability.

WALKER: This feels like an incredibly, thoroughly modest achievement.

TULIP: It's a start. It's a start. And if we can get everyone agreeing that affordability is a problem and the way to solve it is to set, I'm going to call it an ambitious target, and start meeting that, then that's somewhere to build on.

As I said, one of the constraints is the capacity of the construction industry. It's just very difficult to ramp that up very quickly. We can go back to what it was in the previous cycle. Let's get there and then talk about increasing it even further. But that's beyond this five-year horizon.

WALKER: I see.

So I don't quite know the best way to phrase this next question. But I want to try and understand what the worst case scenario is, if we don't allow housing supply to be more responsive. So say we, I don't know, continue with the current trajectory of net migration; maybe interest rates stay about where they are at the moment. How much worse can it get? So how much … I don't know, how much worse can the price to income ratio get?

TULIP: Go to San Francisco or Manhattan or London … The numbers on all of these things are very sensitive to how big you define those cities [as being]. But if you go to the central neighbourhoods of those cities, the only way you can afford housing there is to inherit it, or to win the lottery, or to run a high-tech company. And as a result you see all the disastrous consequences of unaffordable housing. Homelessness is terrible in those cities. The social divisions are severe. All the young people are leaving. All the entrepreneurial dynamic people are leaving. It's very bad for their productivity growth. Inequality is terrible. There's all sorts of terrible problems. But they're an example of, yeah, things can get worse. And in some places on the globe they have.

WALKER: Right, can get even worse, can always get worse.

TULIP: Well, that's the way we're trending.

WALKER: Sure, sure. So, like you, I would consider myself a YIMBY, but I said I would try and dial up the disagreement in this conversation. So I want to try and, you know, push a couple of critiques of the YIMBY movement and get your reaction.

TULIP: Sure.

WALKER: So the first critique is, at least as I see it, there are two broad objectives in the YIMBY movement. One is to make housing more affordable by increasing supply, and the other is to get these gains from agglomeration by densifying our cities. And the problem is there's an interaction or tension between those two objectives, because if you increase supply and densify cities, the gains of agglomeration make it even more attractive to live in those cities. So people become even more productive. That's reflected in higher incomes and those incomes ultimately push up prices and rents.

Now, YIMBYs will tell me that the supply effects just dominate the agglomeration effects, and I'm perfectly happy to accept that. And you've mentioned your rule of thumb that in Australia about a 1% increase in supply will lower average prices by about 2.5%. Meanwhile, I think doubling city size gets us pretty modest productivity gains. So if that's true, doesn't this mean that the YIMBY movement is just massively overstating the gains of the agglomeration objective?

TULIP: “Productivity isn't everything, but it's almost everything,” someone said once. (Paul Krugman said it.) Don't dismiss gains in productivity. That's the big thing that drives living standards. If you can do anything to boost productivity, then you've got a policy that is more clearly advantageous than most of what governments do.

WALKER: Right. I don't mean to contest that productivity is important. I'm saying that building supply is just a really slow means of actually getting those productivity gains.

TULIP: Sure. Yes. I agree. … Okay, so the YIMBY movement is a very broad coalition. I mean, there are a few members here today and some of them come from the far left of the spectrum and some come from the far right and some are very difficult to categorise [audience laughter]. And so they have a lot of different views—and I'm not sure they'd all buy into your description of what they say. But I think what does unite them is the sense that more housing supply will improve affordability. And that is one of the very top social problems in Australia at the moment.

WALKER: Right.

TULIP: And so it will have a lot of other effects on a lot of other variables. But if you can improve housing affordability, then that's enough.

WALKER: Second critique. So let's talk about how we might improve the movement at its current margins.

Recently I've been thinking: what are the major bottlenecks that YIMBYs are not paying enough attention to? It seems to me like the major bottleneck is that YIMBYs don't acknowledge the importance of aesthetics and architecture. And I think that's because they're always fighting people who cynically invoke heritage concerns. And so they've developed this thick skin. They don't want to admit that beauty is important. But I think it is. And unfortunately, I mean, the survey evidence kind of goes both ways. But I just have this deep intuition that if the mid-rises and high-rises that we built were just as beautiful as the old heritage buildings, people would be much more accepting of those mid-rises and high-rises...

Here's one anecdote. Recently I was chatting with Sam Hughes. He's one of the three guys who was a coauthor of that UK Foundations essay. He was saying that … So Ben Southwood, another one of the authors, published this report a few years ago about doubling the height of all of the heritage buildings in South Tottenham. And I'm told it was met with universal acclaim. And it seems like that was because there were very strict design codes in this plan and if there weren't, people wouldn't have been as accepting.

So … what's your reaction to this idea that YIMBY should be thinking a lot more about the importance of aesthetics and architecture?

TULIP: And you want to get your beautiful buildings by some government committee of bureaucrats? [audience laughter]

WALKER: Well, I mean, so last year I had a conversation with Lucy Turnbull and she was pointing out how all of the lovely terraces in Paddington, you know, the inner suburbs of Sydney were all built with pattern books in the late 19th century. So why can't we have pattern books that … They make it easy, you know, any kind of builder can follow them and you just get these very nice consistent designs.

TULIP: Yeah. So it's a genuine issue. And okay, so one common argument is that tastes differ.

WALKER: Right.

TULIP: But I mean I think there's pretty general agreement. People go to Paris and almost everyone agrees it's a beautiful city. It's typically seven-storey apartments everywhere. And then they cross the Channel to London and universally agree that all the buildings are ugly. You spoke earlier about the English-speaking tradition. We build ugly buildings, and I don't know why that is. And so as a result I don't know how to put that in legislation. You can't call Baron Haussmann back from the 1870s and say “Do it again.”

WALKER: Right.

TULIP: We don't know how to get a city filled with beautiful buildings.

WALKER: Yeah.

TULIP: I mean, I think it's a genuine question. The big problem is that I don't think it's representative of the overwhelming majority of planning debates we have in Australian cities, that in particular the Minns and Allen governments, talking about transport-oriented development ... Okay, so most people here are from Sydney. Many of you will have caught the train in from a typical suburban Sydney train station which is surrounded by two-storey shops. And no-one is going to call them attractive.

WALKER: Almost no-one.

TULIP: Almost no-one. And I'm not going to claim that your typical block of flats is a marvel of art and aesthetics. But it's not demonstrably worse than the stuff that it's replacing. If people want to design beautiful buildings, I have no objection to that, but nor do I know how you go about doing it … But I do know that preserving mediocre suburban tracts of land is not how you get beautiful buildings.

I will say one other thing though. What makes attractive streetscapes is not the age of the buildings. It's not even the appearance of the buildings. It's trees. And there's huge amounts of evidence that streets with trees, everyone likes. And so the argument about aesthetics really is how do we get more trees. It's not an argument about which buildings we have or don't have.

So the way you get more trees … The big enemy of trees is overhead wires, in most of suburbia, and the way you get rid of that is to bury them. Ordinarily that's very costly. But if you're up-zoning a neighbourhood, then you're disconnecting all the utilities and digging up the pavements anyway. The marginal cost of burying the wires is relatively low. And that's your opportunity to put in tall trees that, okay, for 10 years or so won't be much, but in 50 years will be magnificent.

WALKER: Right, okay, I'll grant you the trees. I still think facades are important though. I want to try and prove this right now with a very non-scientific poll. So I've printed out some images of different facades. I'm going to ask our lovely audience to vote on which ones they prefer. We'll do two sets of two alternatives. And I just want a show of hands. The question will be which facade do you personally find more beautiful?

So, okay, here's the first set of facades ...

We'll do the second set. So again, here are the two facades...

Okay, so the clear winner of the first was [Image A], which is a Victorian terrace from Potts Point, probably made in the late 19th century. And the other clear winner was [Image C], which is a Haussmannian apartment from Paris made sometime in the mid-19th century. The two losers are two of the three winners of the New South Wales government's 2024 mid-rise apartment competition. I rest my case. [audience laughter]

TULIP: So one issue is [that] you can't put car parking with a Haussmann apartment. They look great, and in fact I lived in one. But they have functional problems, that the demand doesn't exist. But anyhow, that's an interesting question for architects and planners to decide. I mean, how do we get our blocks of flats looking a bit more attractive? That's not the policy question facing Australia. Almost no-one is talking about pulling down Haussmann apartments.

What they're talking about is pulling down California bungalows and large areas of detached suburban red brick or fibro housing. That's the relevant policy question, and I wish we had a slide of that. Well, in fact we don't need a slide of that because as you go down, I mean, I think there's a shop underneath here selling postcards. When you go to Paris, you see lots of postcards of all the Haussmann apartments. Nobody takes postcards of Roseville suburban houses. And that's the housing that we're protecting that really no-one actually considers as especially attractive.

WALKER: Sure, sure. My point is just if the YIMBY movement wants more mid-rises and high-rises, people would be much more accepting of that if they were as beautiful as some of these other buildings.

TULIP: I have no objection to beautiful buildings.

WALKER: Fantastic. Great. Well, I think we've made progress. So next question: in anticipation of some possible questions from our audience on negative gearing and the capital gains tax discount, I just want to put to you how I understand the significance of those tax concessions. And then you can edit my story or tell me if you think it's correct.

So what's important is the interaction of the two. And until the capital gains tax discount was introduced in 1999, negative gearing had proven to be a mostly insufficient incentive for property investing. But as soon as we had both, what it meant was that property was disproportionately favoured. Although the capital gains tax discount applies across any asset class, obviously property is the one that is much more leveraged.

And what that meant was that the gains of a property investment were taxed at precisely half the rate at which the costs were subsidised. So it really capped the downsides of property investing relative to the upsides. And I think what that meant is that there was a new kind of fundamental value for housing. And in moving to that new equilibrium, a lot of investors overreacted to that. A lot of momentum traders were, so to speak, attracted to the market. And we had these kind of self-sustaining price rises in the early 2000s …

TULIP: A bubble.

WALKER: … that created that little—you said the B-word—created the little bubble we had in the early 2000s. But then if you come today, the impact of those two tax concessions working in concert is very small.

So a lot of the research shows that somewhere between 1% and 4% of prices are attributable to negative gearing in the capital gains tax discount. So that's my story. Does that make sense? Is there anything you'd change?

TULIP: Yes. The big problem with thinking the changes in taxes of 25 years ago lit a fire under the housing market is that you had huge increases in house prices all around the world, and especially in those English-speaking countries you mentioned earlier. In Canada, the United States, the United Kingdom, New Zealand and many other countries, house prices all took off. We have a good explanation for that. Global interest rates and in particular long-term interest rates were falling. And we know, for both empirical and theoretical reasons, that will drive house prices up.

So what happened? Okay, there are residuals around it, but the basic story is not really a surprise. What's puzzling is if people somehow think Australia was different because of its tax concessions. It wasn't. Since then, prices have more than doubled, depending on how you measure it and your benchmark. And the tax concessions are worth between 1% and 4%. So you took off those tax concessions? It would take us back to our prices, where we were in June, where we were having exactly the same conversation.

I think there are good reasons for looking at the tax concessions and in particular capital gains on the taxation of capital gains on housing.

WALKER: The sort of equity concerns … 

TULIP: And fiscal policy reasons and tax policy considerations. I mean, there was a review by the Ralph Committee in 1999 that recommended these changes. I don't think things have turned out the way that committee recommended. I think there is a good argument for revisiting these provisions. But it doesn't belong in a conversation on housing affordability.

WALKER: So the capital gains tax discount and negative gearing can't explain all or most of that early-2000s run-up, because similar run-ups were happening in other countries around the world. So we need some kind of common factor to explain it.

TULIP: Which we have.

WALKER: Yeah, interest rates. Okay, so I want to talk about your policy goal and your transition plan, just to briefly understand your policy goal. And sort of a 30-second answer here is plenty. But do you want to see prices fall or do you just want to see growth slow?

TULIP: I would like housing to be much more affordable and that is essentially the ratio of prices or rents to incomes. You could achieve big improvements in affordability by holding prices and rents flat at their current nominal levels and let incomes keep rising by 3% or 4%, 3% a year.

We should be so lucky to get that. Current policy is not delivering that. So I'd like us to be doing a lot more talking about long-term objectives. I'm not sure it's relevant. Yeah, I mean I would like, and I think we ultimately could get, very big increases in affordability. But to be relevant, the main question is we need to be building more. And so we need to have some downwards pressure on prices and rents, which we don't currently have.

WALKER: So earlier in our conversation, you mentioned that to get those kinds of 40% price falls in Sydney and Melbourne, it would require increasing housing supply by, did you say, 10 to 20%?

TULIP: Yep.

WALKER: How many years would that take, roughly speaking, if we got rid of those zoning regulations on the chopping block?

TULIP: As a simple calculation, if we increase the housing stock 1% a year, it would take 10 to 20 years. That's doing it over and above what we would normally do.

WALKER: Okay, so over and above the current baseline? 

TULIP: Yeah. But even that is extremely ambitious. I mean, the national target that we talked about before is an increase of 200,000 above baseline over five years. So that's what, 40,000? Just 40,000 a year.

WALKER: So if we removed all of the zoning regulations on your chopping block, how quickly do you think we would get that 10% to 20% increase in supply?

TULIP: No-one has bothered to do that calculation, I think for good reasons.

WALKER: What are the reasons? It's just not realistic?

TULIP: It's not realistic and it's not on the agenda, and no-one is proposing it. I'm not proposing substantial or immediate changes to the legislation, or the process, or how we approve houses. All we need to do is relatively simple: under existing processes, we need to set higher targets for local councils that add up to 1.2 million homes. So that's being done in the New South Wales and Victorian governments.

And that just means local councils need to start approving a block of flats in every third or fourth suburb every few years. Relatively modest changes in the built form of our city will over time amount to a substantial increase in supply. And … there are good reasons for changing the process, but they're not necessary to deliver housing affordability. We just need councils to stop saying no and start saying yes.

And that can be achieved. I think what the New South Wales and Victorian governments are doing is basically right. They've said they're setting ambitious targets for councils. The next step that they need to take is to announce how they will be enforced, which hasn't been done yet. And there is a real worry that once these plans are lodged before councils, councils will start saying no. And then you do get a fight between the state government and the councils. And it's not clear that the state governments have the stomach for that.

WALKER: Right.

TULIP: So I'd like them to pre-announce automatic remedies for councils that don't make satisfactory progress towards their targets.

WALKER: Yeah, but even if we do achieve that national cabinet target of 1.2 million new homes over five years, you're saying that it's only going to lower prices about 5% relative to the counterfactual. And that is ambitious. I mean … I buy your point that realistically that's probably as good as we can expect from our political system. I'm now just kind of feeling a bit deflated listening to you. It feels like we're actually not going to solve the housing crisis, all the people who say we should be cutting immigration are probably right … that seems like the only solution.

TULIP: So 5% reduction after five years, but then you do it again the following five years and that adds up to a 10% reduction and so on. I mean, this was a problem that built up over generations, so it is going to be very difficult to solve it quickly. It will take time, particularly as it requires a very substantial increase in our construction industry, which has difficulties. I mean, we can do it. Other countries have done it; Auckland doubled its construction workforce. But it will take time, and requires changes to training and immigration and accreditation and wages.

WALKER: Do you think over those five-year intervals we can ratchet up the amount of supply we provide each time? 

TULIP: I would hope so.

WALKER: Ok. And do you think that's more likely than the opposite? I guess maybe people come to accept it, or people realise it's working, so you can add more supply each time.

TULIP: That's a good question. I mean, so what's happened in Auckland is [that] you've had two effects. One is people have seen that it works, that rents have risen substantially less in Auckland than in other New Zealand cities. But at the same time you've got a backlash, that some people think that the new buildings going up are ugly, and there's this fear of change element we talked about before. And it very often happens that when you change what people are used to, they're uncomfortable with that, and they object. And how those two balance, we don't know.

WALKER: Right. So it certainly feels as though achieving that 1.2-million-homes-over-five-years target is going to require a lot of political will. If we want to do even better than that, it's going to require even more political will.

I want to talk to you about what your transition plan is. Because the expectation that your home equity values will increase handsomely over the course of your lifetime is so deeply entrenched in Australian society and so entwined with how people plan for how they'll build wealth, how they'll retire, that it seems like you need to have that conversation with them and offer them some kind of alternative.

Let me just kind of quantify how deeply entrenched this really is in Australian society. So obviously there's a home ownership rate of about 65%. I think that equates to about 10 million Australians who own their own homes. Our residential real estate market amounts to about $11 trillion in total, which is about three times the size of the total value of the pool of superannuation.

And people view their homes as nest eggs. Older people think that's what they'll use to retire on when they downsize. Younger people think that's how they'll build wealth. Obviously, tax concessions enable this. Primary residences aren't subject to capital gains taxes. They're not subject to the pension assets test. You also have a lot of mum-and-dad property investors. So on the last ATO data, about 15% of Australian taxpayers own at least one investment property.

Half of those taxpayers are negatively geared. So in other words, most of them are probably only invested because they're expecting capital appreciation. And property is the largest source of net capital gains in Australia. I think it accounts for about, again, on the last tax data, maybe about 40% of capital gains. So property is the way the middle class builds wealth in Australia.

What's the Peter Tulip alternative?

TULIP: You're talking about this as though it's somehow normal and natural, which it's not.

WALKER: I don't think it's good.

TULIP: I mean, this is mainly a Sydney culture, where the affordability problem is terrible.

WALKER: Okay.

TULIP: And the culture changes depending on what the property market does. Okay, it is true that housing is also very expensive in the other big cities. But as you go to small cities and regional centres, the housing becomes affordable. And those people are perfectly normal and natural, and they have a sensible culture; it adjusts when the prices adjust. And I don't think people that live in regional towns—where you can get a large family house for just a few hundred thousand dollars, just a fraction of what it costs in Sydney—that they somehow think their wealth accumulation is unnatural or there's something wrong with it. I mean, they save in other ways.

WALKER: That's great, but I think you still have to convince the homeowning constituency. Or politicians will need to.

TULIP: That is definitely true. You mentioned before that two-thirds of Australians own their own home. And … a lot of people think that as a result, you won't get a majority voting for lower house prices. And there's a strong element of truth in that.

But what it misses is that those homeowners care about their kids, and they are aware that the housing market we have at the moment is locking their children out of the opportunities that previous generations had, and that that's unfair. And it's also driving the kids away from the neighbourhoods [where] they grew up.

And so the wealthy homeowners in Sydney's affluent suburbs, the north shore, eastern suburbs, inner west, have to ask themselves the question: “Do I want to drive to Bathurst to babysit the grandkids?”

And many of them will not want to do that. And so they will want a housing market that lets the rest of their family live near where they grew up.

WALKER: Right. So if we want to achieve this political compact between all these different groups in society, all these different stakeholders, I wonder why we haven't tried anything like the Hawke government's Accord, but for housing. Do you think that would be a good idea? And why hasn't it happened already?

TULIP: There has not been agreement on what needs to be done. So a lot of the conversations we have just been having are ideas that were not in circulation even a few years ago. You mentioned the YIMBY movement, which has grown from zero to being one of the more influential grassroots movements in current society.

WALKER: Right. Only in the last three or so years.

TULIP: Two years. Well, Dom, when did Sydney YIMBY launch? About just a year and a half ago?

DOMINIC BEHRENS (audience): Coming up on three years.

TULIP: And you know, Canberra and Melbourne a little before that, Brisbane a bit after. Yeah. And so one reason we haven't had this national conversation or a National Accord … I think what I'm saying is very widely accepted amongst economists. But there are important people in this debate who are not economists, who don't trust market forces, and in particular large numbers of town planners and architects. And in particular, the academics who assume the role of spokesman for those professions are actually very sceptical that you can rely on the market to improve affordability. So there's not agreement that this needs to be done. And there's certainly not agreement that house prices need to fall.

WALKER: Say in five years time, we realise this was all too politically challenging, and the boosting-supply, cutting-zoning project has failed. Where would you refocus your energies? What's the second-best set of reforms? Is it land value taxes, or what is it?

TULIP: At the moment we're winning. So I've had no reason to think about your question. We've gone from very substantial opposition to the ideas that I was saying, or what the yimbys were saying, just a few years ago to now substantial—I'm not sure you'd call it, whether it's a majority depends on how you measure it, but to a very substantial—agreement. So the pendulum is all our way. Yeah. The question is, what happens if we're too successful?

WALKER: Hypothetically, what would be the second-best set of reforms?

TULIP: I work on something else.

WALKER: Give up on housing? 

TULIP: So the housing reforms … Sydney is a great place to live, except for two things: house prices and traffic. So number two is congestion prices.

WALKER: Right, right. But I'm asking about housing reform specifically. If the kind of boosting-supply agenda through de-zoning fails, what else have you got?

TULIP: Yeah, no, it's a disaster; you're right.

WALKER: Great. Well, so we've got time now for audience questions. If you'd like to ask a question, just stick your hand up and we'll get a mic to you. I'm going to prescribe three things. As always, my two heuristics for asking good questions. Please ask a question to which you genuinely want to hear the answer. And secondly: the more specific your question, the better. I also add a third thing: just think of the clearest and most concise version of your question and just say that; don't cycle through three different articulations of the same question.

So hands up and we'll get a mic to you. Just there in the front row.

AUDIENCE MEMBER #1: My question was about the transition question, which I think was an interesting one. And my observation is that the pain of the transition is not all … in fact, most homeowners aren't exposed to it. If you've got a fully paid-off house, then you sort of own a unit of housing. So it seems that's probably a smaller problem for highly leveraged millennials such as myself. And do you not think that we can solve that with a more targeted solution?

TULIP: A good way of rephrasing what Tom says is that most homeowners are sitting on hundreds of thousands, possibly even millions of dollars of net worth. And the prospect of that not growing quickly is not something that should really worry us. These are people that have benefited enormously over if they've owned a home for any period of time. And so the fact that they're upset that their wealth doesn't keep growing is not a big problem. Is that a good paraphrase? And I agree.

WALKER: Great. Next question. Maybe we'll just go across to Mitch in the front row.

AUDIENCE MEMBER #2: You've spoken about this briefly, but there's some literature suggesting the general public is either sceptical that increasing housing supply will lower house and rent prices, or even actively believes the opposite—that more housing will push prices up. Most economists see it as fairly obvious that increasing supply will lower prices. Do you have any thoughts on why this belief persists? And should policymakers and public intellectuals be doing more to correct it, to reduce opposition to greater development?

TULIP: Yes, it's a really important question because this supply scepticism is one of the biggest obstacles we have to better housing policy.

For those who don't know: opinion polls, when they ask people “Would extra supply in your neighbourhood raise prices, lower them or keep them about the same?” the answers tend to be [apportioned] about a third, a third, a third. So a third of the public gives what economists would think is exactly the wrong answer: they say extra supply is actually going to make prices worse. And so obviously selling them on the idea of extra supply to improve affordability is very difficult. And interestingly, you get pretty much the same opinion poll results in Australian polls as in the United States: a third, a third, a third.

And why that arises is difficult to say. I think one factor is that when economists are talking about an increase in supply, it's natural for them to think that they're holding everything else constant. And so you're talking about a policy experiment where for a given level of demand, we dump a few thousand more apartments in an area. But that's not what the general public sees or thinks of when they're thinking about increases in supply. They see these extra thousand apartments go up and almost invariably where they have gone up has been in response to stronger demand. And so the [perceived] correlation goes the other way: that extra supply is often associated with higher prices. And the general public sees that. And so they think that's what's going to happen if more apartments appear. And that is obviously realistic and consistent with their experience.

But we need to explain to them … that observation isn't what's relevant to an experiment where, for a given level of demand, we increase supply. And the empirical evidence that that will improve affordability is just extremely strong.

WALKER: Great. David?

AUDIENCE MEMBER #3: Thanks again. Wonderful commentary. So, on the financial issues, particularly the capital gains issues, one of the very simple ways of thinking about it is: “Look, there's two-thirds of Australian households that own a home, they like having the capital gains; there's one-third that don't, and they complain because the prices are going up.” But if you actually go to those young people—and I've asked many young people who are currently renters—and say, “Well, you're currently renting, you've got housing services, you're living in a place and doing what you need, why are you so passionate about owning a home?” they say, “Because I want to get on the property ladder,” meaning “I want to start getting the capital gains as well.”

So if you go to them and say, “Well, think of a government that would come along and say, ‘I'll tell you what, instead of quibbling about the price, let's just do enough policies to keep the prices flat, [with] no capital gains for the next 30 years’,” suddenly they lose all interest in buying a house. So the question is, these people that were complaining about, “Look, I want to get in, it's too expensive,” are they just quibbling about the price—whereas as soon as they've got it, then they want the highest rate of capital gain, and offload it to the next poor chap that comes in after them, and make their capital gain? In other words, do we really have any constituents that truly want to keep house prices low and not have this continued wealth-generation strategy, at least here in Sydney?

TULIP: I think the premise of your question is incorrect, that we do see housing markets without rapidly exploding prices, in particular in the south and midwest of the United States. In fact, those areas tend to have higher home ownership: people are more willing to buy a home, or maybe more accurately are more able to buy a home if prices are low, even though they don't get the capital gains that people in San Francisco and New York are enjoying. So I don't think that's an obstacle. And in fact, I think if prices were more affordable, young homebuyers would actually enjoy that.

AUDIENCE MEMBER #3: But do they have a history of knowing that's the way to make your wealth over time and comparing it against that? That's the key question. I think it was Joe's question: once that psychology is embedded, how do you get out of it, including for the people that would like to buy a home and jump on the bandwagon?

TULIP: If you increase supply, the price will fall.

WALKER: Okay, let's just go behind you, David, and then we'll work our way back.

AUDIENCE MEMBER #4: So we were discussing the aesthetics of how the homes that we want to look at are quite different to the homes we seem to be building. And I'm not sure if you would know the answer to this, but how much of that might be that … houses are built to be sold, either to people who want to live in them or to people who want to rent them out. And the houses that people want to live in might be quite different to the houses that people want to look at. And yet the houses that people want to live in are the ones that actually get built, because those are the ones that, you know, the money comes in to build.

TULIP: Yeah. There is a clear externality in housing. I mean, as there are with cars and clothing and all sorts of other property. I mean, we don't insist that our neighbours wear nice clothes or drive attractive cars. Yeah, so there is an externality there. The available evidence suggests that it's worth very little to people, that people much prefer a comfortable, affordable house to a house surrounded by pretty buildings—with the one qualification that people will pay a lot more for a neighbourhood with a lot of trees. They do consider that to be attractive. The other buildings, it's hard to see that in an effect of that in the data.

WALKER: How big is the tree premium?

TULIP: I can't remember, but substantial.

WALKER: Substantial. Well, all right, next question. Let's go to Tim.

AUDIENCE MEMBER #5: On the topic of externalities in housing … So if there is a disproportionately negative externality to me … If I'm in the suburb that's proactive about adding housing and another suburb is not as proactive, why can't the government just compensate me for that negative externality and say, “Yeah, that was nice of you guys to let more housing in”? Because no-one's giving that property right to those people, and Coase's Theorem in economics would say: if you have that property right, you solve the problem.

TULIP: Yeah. And many housing economists in Britain in particular, are pushing that argument in arguing for street votes to allow developers to, essentially, buy out the neighbours. I'd like to see that as an experiment. I am sceptical that it would have much effect, partly because the opponents of housing deny that they're doing it for any financial reason. But maybe it would change. Anyhow, I'd like to see it tried. But I'm sceptical that it would have big effects.

WALKER: What would it take to get street votes up in Australia? Would it be [that] you change New South Wales legislation, a state thing?

TULIP: Yeah, that's a good question. I don't know.

WALKER: Next question. Yep, we'll go to the guy in the hat.

AUDIENCE MEMBER #6: Joe mentioned earlier that we don't have to worry about agglomeration offsetting the supply effect because it's quite slow within a city. But the agglomeration benefits between cities is realised immediately when you move. And so since the premium on, say, apartments is so much bigger in Sydney than it is in Brisbane, would we expect that New South Wales or Sydney has a version of the free-rider effect, where if we increase the supply of apartments and you offset that zoning impact and bring prices down significantly, you'll get interstate migration that essentially offsets that, because they realise the agglomeration straight away.

TULIP: There's a mix of effects in your question. One is the effect of interstate migration: what happens if one state or one city up-zones and other states don't? And we're sort of seeing that in reverse at the moment, that a lot of people, in particular young people, are leaving Sydney. And it ties in with what you said about productivity because the people that are leaving tend to be our most dynamic, entrepreneurial citizens. So that's bad for our city's productivity. And that's an argument for why we need central government control to coordinate the up-zone and to up-zone everywhere. Responses to prices are going to be much larger than responses to productivity. Just in terms of the magnitudes that I can remember what you said about the effect on productivity, a 10% increase in supply maybe boosts productivity 1%, but it's going to have a 25% change in affordability in prices. And that's what's really going to drive the interstate migration.

And it is a factor, but because of the price differentials rather than the productivity differentials.

AUDIENCE MEMBER #7: Why are the state governments so ineffectual, versus the councils? And is there anything state or federal governments can do about that?

TULIP: So state governments have not had the stomach for a fight with councils. In large part, historically, that was because I don't think they had the votes behind them. That is changing now. And we now have state governments in New South Wales and Victoria that are committed to housing policies that are being strongly opposed by some councils.

And what happens when decisions start being made where the state and local councils disagree? We don't know what's going to happen there. The state governments have said they're going to push it through and insist that the councils meet their targets. What happens when the councils start saying “no” remains to be tested.

Sorry. I mean, does that answer the question? Well, no, clearly it doesn’t. It clearly doesn’t answer the question.

AUDIENCE MEMBER #7: Is there anything else they can do?

TULIP: So I worry that we are heavily reliant on the courage of politicians, which is something that's very variable. And I would feel what the governments are doing is much more secure if the remedies were pre-specified in legislation, and were automatic rather than relying on …

I mean, I think the current setup invites obstructionist councils to call the state governments’ bluff—which is sort of what Ku-ring-gai Council did in 2020. They basically said to Rob Stokes, who was then planning minister, “We're not interested in meeting your target.” And anyhow, that process was unsatisfactory. And I think we need for the remedies to be automatic.

WALKER: All right, let's go to Trent at the very back.

AUDIENCE MEMBER #8: Thanks. I'm just wondering how much of the supply is being held back by … what parts of the economy is it? Is it councils? How much is it to do with the feasibility of developments? And that's sort of to do with prices of land going up heaps and maybe construction costs or whatnot. And then if you know … how far is supply away from zoning under current zoning?

TULIP: So the constraints on the housing sector vary a lot from area to area. In the expensive areas of Sydney, it's a zoning issue. And once you get west of Parramatta, then the feasibility of apartment buildings becomes quite marginal. And of course, zoning is not an issue at all for many country towns. I mean, no-one wants to put a skyscraper in Tibooburra. Even if they were allowed to, it wouldn't make any difference. And substantial bits of the outskirts of Sydney are similar to that. The high-rise housing is not feasible there.

But there's still huge ... I mean, in the areas where people really want to live, which are the inner suburbs, zoning is the constraint. And so that's where we should focus, allowing the building where people want to live, which is our inner suburbs.

WALKER: Next question.

AUDIENCE MEMBER #9: Somewhat related … You talk about construction constraints in regard to the 1.2 million houses target. But if you believe in market forces, largely all we need to do is make sure there are the right incentives. So if we were to enact your sort of zoning deregulation wishlist, why don't you think there will be sufficient incentives for the construction industry to respond, and actually build more housing?

TULIP: So the construction industry in Australia is extremely cyclical, more so than almost every other sizeable industry. From peak to trough it will often go up and down 50%. And we're seeing that again. And every time you have a boom, there are worries about “where do we get the workers”, that it's going to be difficult to ramp up construction.

But they get drawn from other areas of the economy. And that does require adjustments in wages, adjustments in immigration, adjustments in training. But this is not a new problem. I mean, this happens every cycle, and every cycle we address it. That will need to be done now. And it's not trivial. It may not even be easy. But it is a problem that we address every single cycle, and we manage to build a lot more houses.

WALKER: And so if we were to go the other way, as opposed to having a target, and just kind of deregulate zoning and not really worry about the target, is that not feasible?

TULIP: It's more than feasible. I mean, in fact, that's sort of the New Zealand model, where rather than setting targets for local councils, the central government said: “[In] all of these areas that were reserved for detached housing, you now have to let townhouses be built there. And [in] these other areas, you now need to let apartment blocks there.”

So there's another … You can go two ways with up-zoning. And my view is that you want to do a mix, that they're setting a numerical target. I should also say that's what the Transport Oriented Development is doing. It's specifying to local councils, essentially, the form of housing that needs to be built in large areas.

I think I've got away from your question. But yeah, so there is another approach and we don't actually know—I mean, there are guesses, but you don't actually know—how many dwellings will be delivered by transport-oriented development, or even more so by the low- to mid-rise housing policy that the government is pursuing, or some of the other proposals.

So another lively agenda item is to allow granny flats. You can pass legislation saying granny flats are legal everywhere, which in fact Los Angeles has recently done. You don't know the numerical response.

WALKER: Okay, next question.

AUDIENCE MEMBER #10: So we're producing housing at a pretty decent clip compared to, you know, everybody else, according to various OECD reports. We’re in the top three or four consistently. And the other guys who are producing dwellings at a greater rate than us actually flips around a lot. To me, that tells me that either … it's the demand side, not the supply side relative to everywhere else in the world, [that] is our issue. And so the question becomes: what is the right growth rate for the population? What's the terminal? I know that we have a plan for big Australia; there is a plan for big Australia. What do we think is a fair terminal population, given the constraints that we have with simple things like water?

TULIP: Right. So immigration policy is complicated, with a lot of difficult trade-offs, and very controversial. And people have very different values driving all of that. My view is that that is a separate conversation to housing policy, that we have a democratic process for making those trade-offs and deciding those difficult issues, and whatever population outcome comes out of that, we then need to build enough houses to accommodate them.

As I said, it's complicated. There's a lot more that I could say than that. What you do on immigration clearly changes the numbers for what you're doing on housing, but it never changes bad arguments into good ones or good arguments into bad ones. However we decide housing policy, the principles will always be the same, regardless of what we're doing on immigration.

AUDIENCE MEMBER #11: For transport-oriented development or feasible development, you need transport—and a large part of Australian cities don't have sufficient transport, like the Northern beaches here in Sydney. But there's also a lot of media commentary saying that large transport projects, such as Metro Western Sydney and the [Melbourne] Suburban Rail Loop, [are] kind of crowding out housing through competing with the workforce. I was just wondering whether you think this is a legitimate concern, and whether … we're building the right amount of transport to support housing, or we should be building more or less.

TULIP: We need to better integrate our transport decisions with our housing decisions. That when you put a new rail line in, such as we just put out in the northwest suburbs—and now we're building one to Bankstown—that should always be accompanied with high density [housing] at the stations. Public transport and housing density are complementary goods … Either of them by themselves will often be marginal, but together they're an attractive package. Both of them make the other worthwhile. And so you mentioned the Suburban Rail Loop, in Canberra [we have] the tram out to Woden. Many cities are facing this issue: as they grow, they need more public transport.

And in fact …we haven't mentioned federal politics much, but this is a very important lever that Canberra should be pulling on, because Canberra subsidises many of these projects, and it should only do so contingent on high density being built at the train stations.

WALKER: Just on that, how likely is it that that proposal gets adopted?

TULIP: I've not heard anyone in Canberra mention it. So [audience laughter] … unlikely.

WALKER: Okay. Okay.

TULIP: But hopefully that will change after tonight [audience laughter].

WALKER: Right, next.

TULIP: Oh, well, no, that's actually not quite right.

WALKER: Okay.

TULIP: The federal opposition policy is to spend $5 billion on housing-friendly infrastructure which they think will unlock 500,000 houses. Now, mainly they've been talking about roads and sewerage, which in fact are the biggest infrastructure needs of housing. But in principle, those arguments apply just as much to public transport. So the opposition policy is very much along the lines of what I was saying before, of coupling infrastructure spending with housing.

And just to be clear that I'm not partisan on this, while I say that the federal opposition has a constructive, useful housing policy, at a state level it's the opposite. It's the Labor governments that are driving the country. So the partisan mix is different between state and federal politics.

WALKER: Is there some kind of structural explanation for that, or is that just random?

TULIP: So there's a huge amount of randomness in this. I mean, if you look at debates within the Labor Party, the Liberal Party and the Greens, there are very big divisions within each party. You've got very strong yimbys and very strong nimbys in each of the parties. So it does seem ... I think it's random. I mean, I think there's a very large random element.

WALKER: Interesting. Okay, so I think we've got time for about five more questions. We'll go there and then back.

AUDIENCE MEMBER #12: Hi Peter. Just picking up on the demand-side issue from another perspective … Like house prices, households have become a lot more indebted over the past 20 [or] 30 years. Banks provide the overwhelming majority of housing credit. They're encouraged to do so. It's secured, [has] attractive risk weights, and so on. Australian banks’ resilience is often predicated on the fact that housing is very safe. And when APRA [the Australian Prudential Regulation Authority] speak about stress-testing banks, they often talk about the unlikelihood of house prices falling significantly enough for banks to have to fall into trouble.

So … how do you see the role of the financial system in causing the housing unaffordability issue? And how do you weigh any stability risks associated with it?

TULIP: So we know from the global financial crisis that big collapses in housing values can have catastrophic effects on the financial system and hence the economy. So that's something we need to worry about a lot. The appropriate policy to deal with that is to ensure high capital requirements of the banks, so that if they do start making large losses on their mortgage book, that they have the equity to cover that. And you need to do that pretty much regardless of whatever your housing policy is. Whether you're building a lot of houses or not many, you need unquestionably strong financial institutions. So I think they're really separate policy questions.

WALKER: Yep.

AUDIENCE MEMBER #13: Yeah. Sort of building on that, to what extent do you think that expanding access to credit to buy houses is welfare-improving?

TULIP: It's mixed. We clearly have big obstacles to credit that seem to be inefficient. You hear many stories of borrowers that have been comfortably paying the rent for a long period of time; they decide to buy a house; the interest payments are actually less than the rent; and the bank says “No, you can't service the loan.” I think APRA's financial regulations—I mean this is straying off housing policy, but I'll take the opportunity—APRA has a lot of just very silly financial regulations that prevent borrowers and loans coming together to make mutually advantageous trades. If you were to expand credit … For example, they just did it today by loosening the HECS arrangements in how they measure serviceability.

But more importantly, Senator Andrew Bragg has an inquiry that is suggesting reducing the 3% serviceability buffer. That would boost credit and raise house prices. Were you to do that … I mean, there are strong arguments for doing that, but if you wanted to avoid the affordability problems, you would want to couple that with measures to boost supply. Or you would take away some of the less defensible measures that support demand, such as first home owner grants. And so you could do a demand-neutral shift, allow more extra credit while reducing the first home owner grants, and that would be welfare-improving.

AUDIENCE MEMBER #13: Just to maybe put it the other way, then: would measures to reduce access to credit be welfare-improving on their own?

TULIP: These are people that are happy to pay well above the cost of supply for housing, and you're telling them “No, you can't have it.” That's a large and clear welfare reduction.

WALKER: Okay, so we can do about three more questions.

AUDIENCE MEMBER #14: It appears to me at least that Australians broadly trust institutions, experts and public servants, especially on non-partisan issues that don't get a lot of attention. To what extent is our housing issue partly driven by the fact that until proof is pushed into their face, people assume that when Ku-ring-gai Council knocks back units, it's probably got a good reason to do so—despite the fact we probably both agree it's probably a pretty crap reason?

TULIP: It's a good question; I don't know the answer, sorry. Yeah, I don't know. I haven't thought about it, to be honest. Sorry.

WALKER: Do you have thoughts?

AUDIENCE MEMBER #14: I think it's significant. I think we have a lot of trust in institutions. People don't usually think there's a lot of insidious things going on in boring parts of the public service—be it town planners, whatever—that doesn't get a lot of attention ... It doesn't get a lot of attention because the Sydney Morning Herald is not usually covering a huge amount of local council stuff there. So people just don't look at it to see that they're getting screwed.

WALKER: Right. Next question. Yeah, very back.

AUDIENCE MEMBER #15: Are developer charges helpful? And if not, what's a smarter way to finance the new infrastructure that's required when you build more housing?

TULIP: I like developer charges. If we were to get to a position where we were building more housing, we have to decide where it goes. And one of the very important factors in that is different locations.

The cost of supplying housing is very different. It's relatively low-cost to supply extra housing in the inner suburbs—sorry, low-cost to the government, because the infrastructure is already in place and there's a lot of excess capacity—whereas it's extremely costly to do it the further you get from the city. Water costs and the road costs, in particular, increase with distance from the centre. And that is one of many factors that the government needs to concern [itself with]. Whereas setting targets for local councils, we have to decide: do we want our extra housing to be on the outskirts or in close? And that's one factor. I think it's a relatively small factor. 

And having developer charges makes it easier to make the correct decision that the relevant decision-makers will factor the costs of different locations in. I think it's greatly exaggerated, including ... Alan Kohler did a 7.30 Report [segment] the other day where he was going on about the costs of providing housing in the outskirts, the infrastructure. That's trivial relative to the demand-supply imbalance, that inner-suburbs people will pay in some cases a million dollars over what it costs to supply the housing. There's a huge excess demand in the inner suburbs, whereas that margin is quite small on the outskirts.

And that is the decisive factor in terms of where we want to locate our housing. We should be putting it where people want to live, not where utilities find it easy to link things up.

WALKER: Okay, who wants to do the final question? Phil?

AUDIENCE MEMBER #16: Yeah. You've been rather supportive of fringe housing greenfield over infield in Sydney. Maybe that makes sense, but all the YIMBYs kind of hate that. So just tell me why you think fringe housing is still okay and what effects of the filtering effect have over fringe housing, if we build more infill housing?

WALKER: And you might want to explain the filtering effect as well.

TULIP: Well, I'm not sure what Phil means by filtering in this context. But why don't I answer the first question and then you can explain what you mean by the second one.

If the costs, in particular of utilities, are properly charged to the buyer, then government should be relatively neutral as to whether we have greenfields building on the outskirts or high-density infill in the inner suburbs. People can decide for themselves what housing suits them. And when I say the costs need to be charged, that includes externalities of carbon emissions and traffic and … utility costs and urban heat, and there are a bunch of things you can think of as being relevant. As much as possible, we want to internalise them for buyers, so that they can decide.

But I wouldn't want to say that I'm especially supportive of greenfields in Sydney. I mean, I think overwhelmingly the demand—the excess demand—is for infill in the inner suburbs. And in particular—and we haven't talked about it much—but I think there's a lot of demand for high-rise in inner suburbs.

Where greenfields is most attractive, and the biggest priority, is in regional towns … You have a lot of towns, particularly along the coast in tourist areas and other attractive areas where … so Byron Bay is one extreme, but illustrative. Land within the town of Byron Bay can cost a million dollars for an average block. And you can walk down the road to get to horse paddocks or open fields where the land sells for just a few percent of that. And the difference is that the expensive land is zoned residential and the really cheap land is zoned rural.

And Byron Bay is having a housing crisis, and it's screwing down on Airbnb and other short-term accommodation. A lot of shop assistants and cleaners can't work in town. They're commuting; they have 30 or 40 minute commutes, driving through all those horse paddocks I mentioned to get to work, when they could easily be provided with land within walking distance of the CBD. And that is a problem that I think runs up and down the coast of New South Wales, to an extent Victoria and Queensland also … I mean, apartments in the CBD would be useful. But the easy solution to that problem is greenfields: just allow the towns to build out a bit more. I mean, because you're still just a few kilometres from the centre of the town.

WALKER: And Phil, did you want to explain the filtering thing?

AUDIENCE MEMBER #16: So if you're building in the inner city, people move one suburb closer and the fact of affordability reverberates throughout the whole city. So … can people put it in their head that that is a lot more important than building a new greenfield suburb in Sydney … Like how much dollars or whatever?

TULIP: I don't know an easy way of quantifying it. But the principle is exactly right, that you build housing anywhere of any type and it will make housing throughout the whole market affordable. That applies to locations, but also old versus new, luxury versus downmarket, [high-]density versus detached. On all of these margins there's a lot of substitutability, and if you increase the supply of one kind of housing, it makes all other kinds of housing more affordable.

WALKER: Great. That's a pretty important point to finish on. So that's all we have time for. Three quick things before we finish.

So, firstly, we have only two more salons left in this series. We'll be back here in two weeks with Sam Roggeveen from the Lowy Institute to talk about defence policy. And then, in case any of you happen to be in Melbourne, we'll be in Melbourne on the 6th of March to talk with Judy Brett about Australia's political culture and compulsory voting.

Secondly, we've got some more food coming out. If you can stick around and have a chat, that would be great. We had an event here with Andrew Leigh a few weeks ago talking about inequality and I bought everyone a copy of Andrew's book. I bought an excess number of copies. So there are a few left on that table there, if you'd like to grab a copy.

And then last but not least, Peter, you've been patiently and articulately educating the public about this issue for several years now. Very grateful that you also gave up your time to educate us tonight. Thank you so much. And please join me in showing Peter some appreciation. Thank you, sir.