A couple of weeks ago I made the case that building luxury apartments improves housing affordability for everyone. I was wrong because I didn’t go even further, when it turns out I probably should have: building luxury apartments is the most effective form of housing supply there is:
“Our analysis indicates that effective policies must increase housing supply. While supply interventions may target specific market segments, their effects extend across the entire housing market. Notably, expanding high-end housing supply reduces competition for mid- and lower-tier units, improving affordability more broadly. A straightforward long-term strategy is for local governments to permit and even support developers in building the housing they find most profitable—often at the higher end of the market.”
That’s from a new paper in the highly respected Journal of Economic Perspectives, and has clear policy lessons for Australia. You see, the Albanese government’s Housing Accord is full of “affordable housing” mandates, which are counterproductive in the sense that they don’t improve housing market affordability as much as they could per dollar spent on that goal. In other words, they’re not maximising social welfare. As I wrote back in February 2024:
“The federal government doesn’t just want homes; it wants certain types of homes. By putting restrictions on the type of housing supply that qualifies, these conditions will make it more difficult for states to improve housing affordability.
To borrow from the great Chinese reformer Deng Xiaoping, it doesn’t matter if a cat is black or white so long as it catches mice. The thing you have to understand about housing is that it all helps improves affordability, regardless of whether it’s “social” or “luxury”.”
My advice would be to quit with the labelling, stop being so prescriptive, and just legalise more housing of all shapes and sizes. I recognise that’s mostly a state and local government issue, but the federal government has plenty of levers it can pull to nudge them in the right direction.