A poster in the head office of a state planning agency claims: “Highest Housing Approvals in a decade: Keeping homes more affordable”. Indeed, the latest figures show national housing approvals rose 16% between June 2013 and 2014. Given ongoing concern about housing affordability and supply in Australia, this sounds like good news. But that assumes increasing supply will fix affordability.

Some people liken houses to bananas. When the supply of bananas drops, prices rise. The Property Council of Australia has called this “banana-nomics”. In 2007 it sent plastic bananas to state and federal MPs with a crib sheet on housing affordability. Recalling Cyclone Larry, which devastated fruit farms in Northern Queensland, its message was simple – when there is a shortage of bananas, the price goes up. With housing, the disaster wasn’t a cyclone but rather “excessive delays”, “inconsistent planning” and inadequate land supply.

Banana-nomics does seem to explain the behaviour of fruit markets. When the next cyclone hit Northern Queensland (Yasi in February 2011) the price of bananas again skyrocketed because of a shortage of supply. As predicted, when banana supply recovered (doubling from 200,000 cartons in week 44 of 2011 to 400,000 cartons in week 48 of 2011) net prices reduced for farmers by 61%.

But by way of contrast, between 2010/11 and 2013/14 when Sydney dwelling completions doubled from 14,000 to 28,000 dwellings, housing prices went up by 21%. In other words, a “just make more” strategy will fix the problem of expensive bananas, but not expensive houses.

Houses are not like bananas

Julian Smith/AAP

Here are some reasons why.

Prices for housing are set by the total housing market, not just the 1-2% that are built every year.

When the price of bananas goes up, consumption goes down, and vice versa. Not so with housing markets – perversely, demand for houses in the short term often increases along with prices, due to expectations that prices will continue to rise and the fact that we all need somewhere to live. Aspiring homeowners and investors want to get into the market before it lifts further, both to minimise housing payments and to enjoy capital gains.

A rise in house prices is often accompanied by a decrease in interest rates. Home purchasers focus on the repayments they have to make and hence are not discouraged by rising prices, in some cases because they see their repayments reduce because of interest rate decreases.

Increasing housing supply is very important and price increases over the last few years would have been more severe if we hadn’t been able to double the supply of new stock in Sydney. The boom in inner-city apartments in Brisbane, Melbourne and Sydney is also leading to rents decreasing in some suburbs. And in some suburbs if we keep building high rise apartments, prices will correct.

But a simple policy of “let’s just build more housing” is not enough to meet the pressures falling on the shoulders of low and moderate income households.

The problem with industry-led policy

Industry submissions to the pending Senate inquiry into housing affordability don’t seem to get this point. They continue to emphasise a supply-based response to the problem of housing affordability, calling for planning reform as the way to achieve this.

Where specific reforms have demonstrated impacts on housing supply, there are good arguments for wider replication.

One example is permitting accessory dwellings (a.k.a granny flats) as of right, on suburban lots in NSW. This enormously popular measure has resulted in a notable spike in dwelling approvals (around 1000 per year since its introduction in late 2009). Certainty has enabled manufacturers to prefabricate designs, bringing down costs and helping diversify and intensify housing options in existing neighbourhoods.

Another recent reform in NSW greenfield growth centres codifies integrated townhouse and other low-rise medium-density designs in new-release areas, over-riding the stagnant mono-zoning that has imprisoned Australian suburbia since the 1970s.

But the objective behind these and other planning strategies to increase housing supply – particularly through new medium- and high-density homes near public transport – is not really about lowering house prices. Rather, the policies aim to transform and expand the existing housing stock in response to changing demand.

Structural issues remain

More is needed to address the structural affordability barriers faced by low and moderate income earners. These barriers reflect unprecedented price rises enabled by financial deregulation in the 1980s, falling interest rates and rising household incomes in the 1990s, and, in the latter period, increased capacity for home owners to leverage this wealth in a competitive housing market.

Despite this demand-fuelled price inflation, Australia has generally avoided the speculative over-building that infected the US, Ireland and Spain before the global financial crisis. That’s a good thing, since in those countries oversupply weakened the housing industry overall and has undermined economic recovery. Worse, the crash didn’t correct affordability problems facing low and moderate income earners (hit particularly hard by the crisis).

Australia’s housing and development industry have (in general) moderated output to match changing market trends. That’s why we see increased housing production at the same time as rising prices.

Rather than pretending that more apartments in the inner city and greenfield estates on the fringe will correct the affordability barriers faced by low and moderate income earners, we need a commitment to increasing the supply of dedicated affordable housing – including approaches like the aborted National Rental Affordable Housing Scheme, and serious capital funding for social housing. Several of the submissions to the parliamentary inquiry call for these measures, including submissions by the Property Council and other industry representatives.

However, without widespread provisions to ensure social, rental and low-cost home purchase options are incorporated within major housing developments, particularly developments involving government land, our deepening affordability problems won’t go away.

Looking at recent projects such as Barangaroo in Sydney where affordable housing requirements are only 2.5% of total residential floorspace (and the developer is now trying to shift them off-site) provides reasons not to be optimistic. However, the public mood could be changing about this issue.

John Howard once said no one was going to complain about their house prices going up. Many parents in capital cities in Australia are realising that instead of using this housing windfall to fund their retirement, they are now going to have to use it to fund the housing and careers of their children. They are not happy about this. Their children are just as angry. The family coalition is looking for someone to blame. They want some action: not just glib slogans on posters or banana-nomics.