Housing supply is often touted as the one and only solution to unaffordable housing. It is a favourite topic of both the development industry and many government inquiries (including the current Inquiry Into Housing Affordability and Supply). The problem, according to the private sector, is always Government planning regulation, and the “solution” is deregulation and more flexibility for the industry.

There are two key questions which are overlooked in these discussions. The first being, is there really a shortage of dwellings? Too often it is assumed that high prices indicate a shortage, but prices are more a reflection of property as an asset class rather than supply and demand. There are clearly far more influential factors at play when rents are stable, but prices are not. Especially when there appears to be a poor use of housing stock, in the form of vacancies off the market and short-term rentals.

The second follows on from it, to what extent does government planning policy influence actual dwellings built? When politicians, industry, and economists talk about supply, they are usually talking about potential supply. They are not suggesting that governments build additional housing (with the rare exception of social housing). They instead focus on state and local governments changing the planning rules around development (zoning), so as to permit more potential supply if the private sector finds it profitable.

This so-called potential supply refers to “zoned capacity” – the maximum potential number of dwellings that could be built on all developable sites. Zoning determines the maximum permitted density of individual sites, and thus zoned capacity. There is an assumption that increasing potential supply will lead to an increased housing supply. But it is worth noting that the profitability of individual (re)development sites is influenced by market conditions, as well as other policies.

Policy remains focussed on increasing potential housing supply via giving away additional planning density worth millions and billions. Despite this, little attention has been paid to just how much zoned capacity and vacant housing already exists. There is, in fact, no adequate and holistic measure of zoned capacity – what little does exist appears to indicate over a decade of potential supply. In terms of vacant housing, Prosper’s Speculative Vacancies report has consistently reported tens of thousands of long term vacant homes in Greater Melbourne.

It is all well and good for housing supply advocates to beat their drum and continuously blame government planning, in order to demand rezonings that provide windfalls of hundreds of millions of dollars. But it would first be beneficial to determine just how much zoned capacity already exists, and what amount of zoned capacity is necessary to significantly influence prices. Exactly how much zoned capacity is needed, and how much of that (if any) translates into additional housing supply? Furthermore, how much additional housing supply is needed to reduce housing costs (rents)?

These questions bring the whole housing supply lobby unstuck. Their claim is that more housing should be built (at a faster rate) until housing becomes more affordable. This is despite housing largely keeping up with population growth. How many homes are necessary then? Is it 1 home per person? Is it 10? Putting aside the ludicrous infeasibility of reaching such significant numbers, escalating marginal building costs, and the apparent insignificant affordability impacts,this implies ever-increasing unused, vacant homes, with escalating resource and environmental demands. None of these issues are adequately addressed.

The final elephant in the room lies at the crux of the housing supply debate: The private sector only builds more housing when it is profitable to do so. Because private developers and landowners have the power to decide when zoned capacity is converted into housing supply, the rate of housing built is ultimately constrained by private sector profitability maximisation. This occurs for individual developers, but also for the market as a whole.

Private developers will never build out and sell housing at the fastest rate feasible, they will build out housing at the rate most profitable – constraining supply to maintain prices and maximise profits. In many instances changing market conditions will influence the optimal rate of development, and constrain the amount of housing built from available zoned capacity. So even if building 10 homes per person was in fact the solution to affordable housing, we would never see the private sector achieve this purely due to it being unprofitable to build at the required rate.

Housing supply advocates have a lot to answer for on these issues. Housing supply continues to be a red-herring to the wicked political economy problem of housing. Affordability issues are mostly driven by distributional and demand side issues. We need to keep the pressure on, calling out the housing supply myth, to make sure real change can happen.