Below is an extended version of an article published in the Sydney Morning Herald on Monday 28th March 2016.

By Laurence Troy and Bill Randolph

A major myth that permeates the recent debate on housing affordability is that the present level of housing supply is not meeting demand. Scarcity of housing, we are repeatedly told, is driving up prices. The answer lies not in tampering with the housing finance and taxation system, but simply to generate more supply. Indeed, negative gearing and capital gains concessions act to encourage investment in housing, driving increases in supply.

Instead, the culprit lies elsewhere – in every Town Hall across the country. The principle cause of the housing supply problem is the land use planning system, which inhibits the effective release of land for new supply. Reduce the barriers caused by planners and housing supply will respond, bringing affordability back into the market.

Of course, more reasoned voices can be heard above the clamour, focusing on the perverse effects of our highly skewed housing taxation and subsidy system as well as a complete lack of a national housing policy framework to support new affordable housing supply. Nevertheless, throughout this debate there is little recognition of the broader shifts in housing stock, tenure and opportunity that these policies have created and the impacts on the housing supply issue they help to create.

What follows are a couple of major points that illustrates that there are serious limitations in current debates. The first is that when we talk about supply, a large portion of the existing housing stock which is standing empty is completely ignored. The table below shows the number of dwellings at the last census that were unoccupied, together with the number of dwellings that were being used for non-residential purposes such as short stay accommodation.

Source: ABS 2011

The data highlight that there are very large volumes of unoccupied, or at best underutilised, dwellings in all our major cities. At the last census there were nearly 120,000 empty dwelling in Sydney alone, representing nearly one fifth of the projected new housing demand to be met by 2031, or equivalent to nearly 5 years of projected dwelling need. If you chose to accept that there is a housing supply problem in Sydney at the moment, then these figures strongly suggest that this is an artificially produced scarcity as the number of empty dwellings could more than account for the notional supply shortfalls.

When this is combined with dwellings not being used for permanent a residential purpose, that is they were being let out as short term accommodation and so on, the total number of dwellings reaches 230,000 in Sydney, and 238,000 in Melbourne. The sheer scale of these numbers cannot be the result of sampling error or short periods of vacancy at census time.

There is of course a possibility that these aggregate figures could be accounted for by a spatial mismatch between supply and demand – that they are in places that people simply don’t want to live. But this turns out not to be the case. When these numbers are mapped there is a clear concentration of unoccupied dwellings in central parts of all our metropolitan areas. As an example, the following map shows concentrations of unoccupied dwellings by SA2 in Sydney from the 2011 Census. It shows a clear bias towards inner, eastern suburb and north shore locations. This aligns with established areas of highest rents and prices. This picture is repeated in the other cities. Why, then, are these home left vacant when they could command the highest prices or rents?

The second major point is that the underlying investment structure of the housing market is driving a mismatch between the existing supply of housing and housing need. The next map shows the rental yields for residential property by SA2 across Sydney in 2011. What it reveals is that rental yields tend to be highest in the outer suburbs where residential property is cheaper to purchase. Where rental yields are lowest is in the inner city and eastern and north shore suburbs where capital values (and therefore gains) are highest. And this is where we also see higher rates of vacant properties. This is not a coincidence.

This observation reflects the dominant driver of negative gearing together with capital gains tax concessions in which capital gain is the main objective, not the rental yield that you would expect from a positively geared property. Unsurprisingly, on the fringe where there can be less expectation of capital gains, there are much lower rates of empty dwellings.

Together these maps highlight some of the perverse outcomes that current tax and housing policy settings are driving in Australian cities. This only further exacerbates the emerging spatial inequalities experienced in our major cities, helping drive unaffordability in central, well connected and serviced parts of the city and an overall supply crisis driven not by the planning system, but by a concentration of empty and underutilised housing.

Furthermore, much of the new higher density residential market in Sydney is being built for investor owners in precisely the locations where there appears to be a concentration of homes standing empty. Of course, there are clearly reasons why some homes are vacant for short periods of time and it is entirely possible that the period since 2011 has seen some of the homes enumerated then brought into use. But there is little reason to believe that, overall, the picture has changed dramatically.

If anything, this trend is likely to have worsened. Housing supply is being increasingly driven by a property investment market which is failing community expectations of affordable homes in places people might want to, let alone need to, live. It’s this part of the market that is likely to be to blame for largest numbers of empty homes – given that losses against a rental investment can be offset by negative gearing and resulting capital gains taxed at a much reduced rate when the property is eventually sold. Leaving housing empty is both profitable and subsidised by government. This is both taxation lunacy and a national scandal.

Moreover, the failure of governments to acknowledge the pervasive prevalence of empty homes only adds to the on-going affordability crisis. Other countries take a much less sanguine approach to owners deliberately leaving properties vacant when there is a clear housing shortage, often by imposing significantly higher rates or property taxes on housing known to be empty for long periods.

It’s high time the NSW State government looked at ways in which reluctant property owners were encouraged to bring property deliberately left vacant onto the market. We have plenty of data that can easily identify properties that appear to be vacant – just ask Sydney Water or look at the electoral roll. Until such time as we act decisively on this issue, arguments about the need for less planning to support increased housing supply will continue to ring hollow.

Let’s start to address both the housing supply and the housing affordability problems by solving the empty homes problem first.