Whilst housing density has theoretically surged across Australia's cities in recent years, home prices keep hitting fresh record highs.

It's the number one issue around Australia, particularly in our biggest cities, groaning under record population growth — finding somewhere affordable to live.

Whether it's renting or buying, it has never been more expensive (at least in nominal terms) to find somewhere to call home across most of the nation.

After decades of policies mainly directed at giving out public money to allow people to pay even more — think first home buyer grants and rent assistance — attention is finally turning to other solutions.

The new fad is YIMBYism — the "yes in my backyard" counter to those NIMBYs who want to freeze the heart of cities at an arbitrary point in time.

Roughly a decade old, the YIMBY movement demands that localities start catering to the needs of prospective residents, not just their existing ones, by building more homes, even if it comes at a cost to the amenity of those who already live there.

And governments are catching on, with recent New South Wales changes to override local planning and heritage controls within 400 metres of key train stations and urban centres poised to take effect.

But, despite the catchy new title, the idea of building up rather than out is not a new one.

Although, long before many urban economists (such as my honours supervisor Frank Stilwell) and planners had written extensively about the costs — financial, environmental and social — of urban sprawl.

So, the key tenets of YIMBYism aren't new, just the catchy label and proliferation of activist groups under its banner. But is the cause more urgent now than it was in 2011?

Some new figures from CoreLogic shed light on that question.

They leave no doubt our cities have densified considerably over the past two decades, long before YIMBYs clamoured for it.

'Supply-first strategy unlikely to result in cheaper dwellings':

This is the flaw in the arguments from the more extremist YIMBY proponents.

This form of YIMBYism advocates a totally supply-side response favoured by sections of the orthodox economics community which take demand as a given and therefore see more output as the only solution whenever prices rise.

This thinking underpins the federal government's ambition to build 1.2 million new homes over the next five years, as well as state policies such as the New South Wales government's Transport Oriented Development planning overrides intended to contribute to that goal.

But, when it comes to housing, supply can never keep up if demand expands unchecked, either through high levels of population growth or policies that encourage the existing population to consume more.

ANZ chief economist Richard Yetsenga argues that experience suggests relying solely on new home building and increased density to fix the housing affordability challenge is "slow and complex" and "unlikely to affect the supply-demand balance in a timely manner".

"A supply-first housing-affordability strategy is unlikely to result in cheaper dwellings," he writes.

"The cost of new builds is critical to this strategy because the marginal price of new builds must inevitably be linked to the price of existing dwellings.

"If existing dwellings are cheaper than new ones (allowing for some consumer preference), new build commencements will dry up.

"New supply either won't be sustained or prices of existing dwellings will rise. Either way, the affordability challenge is unlikely to be meaningfully addressed."

The cost and quantity of new housing development is highly exposed to factors such as interest rates, credit availability, skilled labour availability and materials costs.

"Dwellings are likely to suffer from diseconomies of scale, whereby the cost of new dwellings rises as the number of new builds increases," Yetsenga explains.

This is a phenomenon we saw during the COVID stimulus period, where surging demand from ultra-low interest rates and the Morrison government's HomeBuilder subsidy collided with supply chain bottlenecks to fuel the biggest rise in building costs on record, at more than 20% per annum.

Is it any wonder those rising costs eventually fed through into price increases for existing homes, despite the higher cost of debt?

As Yetsenga goes on to point out, Australia has about 11 million dwellings for 26 million people, or less than 2.4 people per home, which does not suggest a massive shortage in physical space to house the population.

Yet a raft of policies interact to encourage Australians to over-invest in their homes and discourage them from freeing up their capital (and spare rooms) by downsizing into smaller dwellings when appropriate.

Among them, the tax-free status of the family home, its complete exclusion from various assets tests (notably the aged pension) and stamp duty discouraging property transactions.

The replacement of stamp duty with land taxes, including on owner-occupied properties, would further encourage the efficient use of land by charging people who sit on under-utilised large blocks in prime locations.

That's not to say building more well-located homes and putting the needs of would-be residents on a more level footing with existing ones are not useful objectives that should, over time, improve affordability.

But, to again quote ANZ's Richard Yetsenga: "Pragmatic interventions to manage demand and limit the misallocation of housing may well hold more promise than supply alone."

Unfortunately such policies don't have the same support from the well-funded property developer lobby.

Above | Ethan Gilbert from Yimby Melbourne in front of the Nightingale Village in Brunswick. Like their Sydney counterparts, they want greater density in inner suburbs.

Original Story By | Michael Janda