Economist Adam Smith’s ‘invisible hand’ is looking a bit arthritic when it comes to the housing market, according to Professor Duncan McLennan.

At a seminar in Sydney this week, Professor McLennan proposed a strong set of economic arguments for government investment in housing to support the traditional arguments of affordable housing as a merit good which makes a critical social contribution.

Professor McLennan observed that, across the western world, governments had stepped back from investing in affordable housing in the 1980s, following the idea that the market should prevail. It is now abundantly clear that Adam Smith’s theory of the invisible hand of the market would see the self-interested actions of individuals frequently benefiting society more than if actions that were intended to benefit society is not ensuring good outcomes for those on low incomes.

The broader housing market is made up of a mosaic of housing sub-markets that interact in complex ways with the wider economy. In cities like Sydney, the housing market has become so overinflated compared to the wider housing market that government cannot manage it using the usual monetary policy solutions without disrupting the wider economy.

It is surprising how little analysis there has been in Australia of the impact of housing on the economy, he said.  Yet housing represents 20 to 25 per cent of the household budget; it is the most significant asset and major debt of households.

When households spend more and more of their income on housing costs, they divert spending away from consumption of other goods and services and they save less. Productivity is lowered by the long commutes of key workers, congestion in our cities, and the mismatch of jobs and housing.

There is a strong intergenerational impact as well he said.  Children’s educational outcomes are impacted by poor housing and concentration of low income households in more affordable areas, away from job opportunities, compromises the school to work transitions of young people. A new narrative is needed, he argued, which deals with housing as part of a country’s essential infrastructure, not as separate or in opposition to investment in transport or energy, for example.

McLennan’s presentation was followed by a panel discussion involving Jennifer Westacott, CEO of the Business Council of Australia, Emeritus Professor Judith Yates, and Dr Marcus Spiller of SGS Economics.

Ms Westacott  flagged that the Business Council of Australia is keen to work with the sector on housing policy.  She identified that one of the reasons for our housing problem was the failure of planning systems to take a long-term, integrated view of transport housing and other infrastructure.

We need to encourage large scale private sector investment into affordable housing and reform the taxes and charges that distort the housing market. Westacott said it was time to look again at how housing subsidies were delivered into social housing, observing that the situation now might be very different if the Howard government’s 1996 proposals had succeeded (to replace the Commonwealth-state housing agreement funding to the states with  rent assistance).

Innovation in the monolithic public housing system was nigh impossible, Ms Westacott said.

Judith Yates urged the audience not to abandon the social justice narrative in the pursuit of stronger economic arguments for government investment in housing. There is plenty of evidence that growing inequality itself lowers a country’s productivity, she said, but we should not just be concerned about inequality because of its impact on productivity.

Yates asked if we succeed in changing the housing system to increase productivity, how will the benefits of that increase be shared across the community? Looking towards Australia in 2117, she challenged the audience to think more creatively about the housing challenge – should we be building more cities for instance?

Marcus Spiller of SGS Economics challenged the audience to consider why governments had become so deaf to the economic arguments for intervening in the housing market.  Since neither the Federal nor state governments appear able to deal with Australia’s housing challenge, he proposed that a better way to transact housing policies would be to devolve authority for matters such as planning and taxes to the regional level.  Regional, he hastened to add, means metro-wide planning approaches. Spiller also asked the question of who owns the development rights to land – while ownership of the land is clear, surely the development rights belong to all of us.