In a recent Australian National University paper Regional housing supply and demand in Australia academics Ben Phillips and Cukkoo Joseph found supply levels from 2001 to 2017 were larger than necessary to cover demand requirements, with thousands of excess homes in Sydney, but prices boomed over the time period. This flies in the face of conventional economic wisdom, with the law of supply and demand dictating that the more of something you make, the cheaper it should be. There are many reasons why housing doesn’t respond to increases in supply in the way the market for coal, apples or t-shirts might be expected to react. When economists are making models they usually assume they are calculating the impacts on a “normal” good. One of the assumptions often made when modelling supply and demand for these goods is that what is produced is all homogenous, that is they are more or less the same. Typically, someone will pay the same amount for one item as they will for another that is identical.

Housing is not in this category. Even in the most sterile of apartment blocks, there will be many different design features, flaws, views and aspects that differ in each unit. Credit:Glen Le Lievre The impact of new supply on the property market is limited by whether the type of property being built caters to existing demand. For instance, new apartments on the outskirts of greater Sydney or Melbourne may not appeal to the same market bidding up the price of mansions with water views. Its impact is also limited by the price of the new properties. Frequently, new developments are priced higher than older pre-existing properties. This can actually cause a temporary upsurge in local prices. Much of the recent supply has been upwards rather than outwards, with the majority of new apartments having two bedrooms despite a sustained appetite for freestanding houses.

There are also few alternative options available when looking to buy a dwelling to live in. For many goods measured by economists, when the price rises the consumer can simply switch to something more affordable. But as real estate is also asset class, bought with the dual purpose to live and to speculate on potential growth in the market as an investment, entirely different behaviour occurs when prices rise. Rather than demand dropping off, it tends to encourage a ‘Fear Of Missing Out’ (FOMO) frenzy that further increases prices. As the ANU report's co-author Phillips explains, often the behaviour of property prices at a regional level "has nothing to do" with underlying fundamentals for housing demand. "Housing is an asset and assets don't always reflect the fundamental underlying value – it's not like the demand for ice cream or bananas," he said. You don’t get FOMO over bananas, you buy apples instead.

If you choose not to buy property, there are far fewer options available. There’s no true substitute to owning your own home or buying an investment property. Loading Renting can be an option – staying in your current home another – though someone still has to have bought the dwelling in the first place. Those who currently own can extend or renovate instead of move. For most people, these aren’t attractive alternatives and in some cases are not feasible at all. There are even fewer alternatives for investors, particularly those attracted to home ownership for its unique combination of being understandable, physically tangible and, in many situations, able to provide a ‘value add’ through renovation or development.

And then there’s the issue of how long it takes to bring new supply onto the market. It’s not uncommon for larger apartment blocks to take years to get to completion or for land to be locked up waiting for rezoning. This means the ability for the market to quickly provide supply to meet increased demand is limited. It also means that when properties are finally completed, the requirements of the next wave of buyers may be different. Supply can, eventually, have an impact on property prices provided enough is built over a sustained period of time. The Grattan Institute’s John Daley and Brendan Coates, in response to the ANU findings, said the “best evidence is that boosting housing supply will improve affordability, albeit only slowly” and housing would be “very strange” if a sustained increase in supply did not make prices materially lower.

There needs to be a lot of building activity to achieve this. At current record rates, new housing construction only increases the stock of dwellings by 2 per cent a year. Clearly, supply isn’t the only aspect of the housing market to consider. Nor is it the first aspect the government should be considering. A response letter to the Grattan Institute sent to the Herald from UNSW professors Bill Randolph and Hal Pawson, and the University of Sydney’s Peter Phibbs and Nicole Gurran, said housing economists would not be surprised by the ANU’s research, which was in line with findings from the Productivity Commission and the Affordable Housing and Urban Research Institute. They warned a "new supply only" approach from the government would be unlikely to succeed without complementary action. It's clear housing affordability policies should put reducing demand in the spotlight, with supply-side changes moved to a supporting act role.