At last a strategy that will ease the housing shortage

It has taken Australians a long time to twig that rapidly rising house prices aren't as good as they sound. For ages home owners happily imagined higher prices made them richer. But richer in what sense?

For a start, you can't get your hands on that wealth unless you're prepared to trade down to a smaller or cheaper place. You can borrow against it, but what's so great about that? You still have to pay interest - and pay back the principal. Should you wish to trade up to a bigger or better place, the price has gone up for you as much as for anyone else. Exactly how are you better off?

Politicians will never tell you this, but economists will: a nation can't make itself richer by contriving to charge itself more for its housing.

All that really happens when house prices rise is a redistribution of wealth. People who own their home are better off at the expense of people who don't. (Even if those people have never aspired to own their home, they'll end up paying higher rent.)

For the most part what we're talking about is a transfer of wealth between the generations. The older generation gains at the expense of the rising generation. Which is fine if you don't have kids. If you do, however, you have to wonder how on earth they'll be able to afford a place of their own. One way they'll manage it - provided there aren't too many of them - is via a generous subsidy from their property-rich oldies.

Oh. See what I mean about in what sense are you richer? As this realisation has dawned, most of us have stopped seeing rising house prices as a great boon (and the pollies have stopped boasting about it).

Since 1995 house prices across Australia have risen about 230 per cent faster than the rate of inflation. That's a real increase averaging about 6 per cent a year (whereas the conventional wisdom was that house prices rose by only 1 or 2 per cent a year in real terms).

Australian house prices are now high even by the standards of other developed countries. Up until the middle of the noughties, the main reason for the increase was the marked fall in interest rates following our return to low inflation.

This allowed people to borrow a lot more for the same level of monthly mortgage payments, so a lot of people decided it was a good time to trade up to a bigger house in a better suburb. Trouble is, when so many people decide that at the same time, all they succeed in doing is bidding up the prices of the limited supply of better-located houses they're fighting over.

Since the middle of the noughties, however, the main cause of house-price rises has changed. High immigration has caused the population to grow faster than the number of homes. As ever when demand outstrips supply, prices rise.

Several years of this have left us with a chronic and growing shortage of dwellings. We seem to have trouble building more than about 155,000 homes a year. Allow for the homes we pull down each year, and for the proportion of holiday homes built, and this shrinks to about 133,000 a year.

According to the estimates of the federal government's National Housing Supply Council, at June last year we had a nationwide shortage of 178,000 dwellings. It estimates by the end of this month this will have increased to 202,000 (but don't be surprised if it's higher). NSW accounts for almost a third of the shortage.

With the business community and the Rudd government keen to maintain high levels of immigration, you can see why the housing shortage is becoming a matter of great concern.

The problem seems to be blockages in state and local government planning and approval processes, which limit the amount of new land being made available and built on. A related problem is the reluctance of many councils (under pressure from their voters) to approve medium- and high-density "infill".

NSW in particular has had a problem with exorbitant developer charges, which made newly released land unaffordable to young couples.

But here's the good news: yesterday's state budget introduces an impressive "comprehensive housing supply strategy" that looks like it really will increase the supply of new homes coming on to the market and thus limit the upward pressure on house prices.

In 2008 the government reduced its own "state infrastructure charges" on developers from about $46,000 to $11,000 a lot. Now it's imposed a cap of $20,000 a lot on local council charges, which at present can be as high as $50,000 or $60,000 a lot.

All council developer charges will have to be approved by the NSW Independent Pricing and Regulatory Tribunal, which will only permit passing on of infrastructure costs essential to the development sites, not general community betterment projects. This suggests some councils' charges may be lower than the $20,000 cap.

One reason councils have been so savage in imposing developer charges is the long-standing practice of pegging their rate increases to the consumer price index, which has left them with insufficient funds to finance needed capital works.

Now the rate-pegging process is to be handed over to the tribunal, which will develop a more realistic local government cost index and consider councils' requests for higher rate increases.

The government will spend $44 million over two years to speed up the planning and approval process and ensure more weight is given to economic concerns. Almost half that will reward councils that process more development approvals. Much of the rest will allow the Department of Planning to accelerate its implementation of reforms.

If ever there was an area where NSW needed to lift its game, this is it. And now, remarkably, it has.