I don’t buy the idea that immigration is the cause of the housing crisis, any more than young Australians buying their first home. I’m not even sure if it’s the investors either. They all may be sources of demand pressure, but I think there’s a sort of blockage in Australia’s housing market, and I would pin the blame of high housing costs on that blockage.

We live in an economy that assumes that the basic ideas of supply and demand lead to capital investment into production, leading to more supply. In housing, the way it’s expected to react to increased immigration is as follows:

1. Increased immigration leads to increased demand for housing.
2. Demand for housing leads to higher house prices.
3. Higher house prices lead to higher demand for construction.
4. Higher demand for construction results in more profits for construction companies selling houses.
5. Construction companies reinvest more of their profits into making houses, increasing supply of houses.
6. Increased supply causes housing prices to drop back to where they were before immigration rates increased. I takes a few years, but it’s supposed to be “self-adjusting”, always restoring prices back to a theoretical “ideal”, not counting inflation.

Except as we all know, it doesn’t do that, at least with housing. In particular, I think steps 3, 4 and 5 don’t follow in the modern Australian market. I think the key to solving the housing crisis, short of the government building it all themselves, is to figure out why 3, 4 and 5 don’t follow, and to change things so that they do.

It might look like decreasing immigration would at least alleviate demand pressure, but that’s just kicking the can down the road. There isn’t enough housing supply for demand caused by our natural birth rate, and so we’re accumulating demand pressure anyway. I view it as a distraction from discussing real solutions, that allow housing prices to not just increase more slowly, but fall.