While their has been many comments in the past few years about the need to reduce housing prices in the North West of Western Australia (both purchase and rental), this is a much more difficult problem than it seems in passing. Currently, due to limited supply, the cost of housing in places like Broome, Karratha and Port Hedland is at an almost unsustainable level. For a number of years their has been discussion regarding the inability of people on low-average incomes to afford basic housing and the pressures this is putting on these communities.
When in Broome recently I heard of a family that had just moved to Perth as, even though they were both working full time, they couldn’t even afford to rent accommodation in Broome, much less purchase anything. For the whole of their marriage they had been sharing a property with one of their sets of parents however they had decided that they needed to change something as they didn’t want their kids to continue to grow up in such a cramped environment, especially since their was no expectation that they were going to be able to change these circumstances in the foreseeable future. This is certainly not an isolated case in these areas.
The solution that is often spouted is simply to release enough additional residential demand to remove the demand-side pressures. This however doesn’t take into account either the higher building costs in these areas than Southern areas of WA or the local negative social and economic ramifications this sort of policy could create if it isn’t thought through and planned carefully.
The building cost issue isn’t easily solved, but initially an understanding of what the current premium is and the likely escalation caused by increased construction demand is needed. The only way to ease the construction demand is to increase the number of builders in the area – this of course initially hits a hurdle as their is a need to accommodate them. The trade shortage in the area due to the demand for trades from within the mining sector also means that residential housing construction costs are largely driven by the incomes available within the mining sector, otherwise the majority of trades people are going to continue to be syphoned into the mining sector.
The second issue is that of land pricing. Even if the State Government made a policy decision to develop large scale residential developments themselves and release them at a price point that matches the affordability level they are chasing, the risk is run that anybody who has already made a commitment to the area and purchased at current prices will be significantly disadvantaged. This is because all property values will be devalued if land starts being released at a significantly lower price than is currently available. It is not too much of a stretch to see a large number of people being made insolvent through this type of policy and this is clearly intolerable.
The answers therefore need to include mechanisms to ensure that construction costs at least stay at current levels and existing property owners aren’t disadvantaged.
The property value issues could be easily solved by gifting current owners the equivalent value in land within the new sub-divisions that they have lost from the reduction in land costs caused by the reduced land prices would maintain peoples existing equity levels as well as providing these people with the option of either on-selling this land or building on it. The additional benefit of this is that, while the State Government has effectively made a significant loss on the early land releases, land has very quickly been spread across the community to give impetus to getting new residential construction occurring.
Maintaining construction costs in the face of the potential increase in demand is a whole different issue however. One solution may be to offer tax incentives to people working in the residential building industry for the time they are within the North West to allow real incomes to match those earned within the mining industry without increasing the amount businesses having to ay trades people. Additionally, relocation assistance to people currently unemployed in other areas of Australia who are prepared to move to the North-West (provided they have immediate employment) could be made available. In order to ensure that this achieves its objectives this money would need to be repayable if the recipients didn’t stay within the residential construction industry within the North West for at least two years.
I am sure there are other ways of achieving these objectives and I hope that policy shapers fashion something soon as the current availability of housing and the price of the housing that is available appear to be two of the most significant limitations to these communities benefitting from the resource boom currently occurring in this region.
