Australia’s governments can encourage the construction of more affordable housing by targeting first-home buyer subsidies to specific locations and housing types, according to a new study from the Bankwest Curtin Economics Centre (BCEC).

The study, entitled Housing affordability: Land supply and new housing in Western Australia, also recommends incentivising developers and builders to create smaller houses with more cost-efficient designs.

Focusing on the housing market in Perth, the study notes that historically, building single houses, as opposed to units or townhouses, is a more effective way of delivering affordable housing in the city fringes.

“The report examined housing affordability through individual transaction records over a six year sample period. It compared prices between established and new housing, showing that new land and building developments play important roles in supplying affordable housing options,” Greg Costello, associate professor at Curtin University, said in an op-ed piece for The Conversation.

In Perth, new dwellings comprise 13% of single house transactions and 33% for dwellings such as townhouses and apartments. Although apartments provide some affordable housing options, in general, they are selling at a premium over existing houses.

“Australia’s largest cities, like Perth, are stretched to the limit of land supply and infrastructure for affordable housing. The most infrastructure exists in city centres where houses are expensive,” Costello said.

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Governments should make subsidy schemes more flexible

The current challenge in Australia’s housing markets is providing an adequate supply of affordable new dwelling types within a range of suitable locations, such as the inner city and outer suburban areas, according to Costello.

“Clusters of cheaper housing on the urban fringe and more expensive inner-city development suggest new building activity is confined to specific locations. These are defined by the price the constructor or buyer is willing to pay,” he said.

“Housing policy in Australia has relied on market outcomes to determine aesthetic and economic characteristics of housing in our cities. Government intervention has mainly been through zoning, predominantly at local levels. More recently there’s also been stimulus at state and federal levels for first-home buyers through various deposit subsidy schemes.”

Subsidy schemes, in the form of cash payments and stamp duty, have been vital in helping first-home buyers bridge the deposit gap.

“In some states additional payments have been made for new building and for purchases in specific locations. But the Perth study indicates that some of these subsidies are becoming ineffective,” Costello said. “Standard ‘one-type-fits-all’ subsidies are limiting first-home buyers’ choices of location and housing type.”

Costello believes the solution to this problem is to make subsidy schemes more flexible, which in turn will nudge more first-home buyers towards affordable locations.

“This would even out the supply of affordable houses from areas where housing is densely clustered in certain locations. Policy would also need to take into account the needs of different demographics in certain locations. Housing requirements of young singles are obviously different than for young families.”

Also read: How zoning restrictions impact the cost of housing