Many overseas will see the most astonishing feature of Premier Baird’s NSW budget as being the subsidy to first home buyers of a new home of up to $17,000 plus remission of stamp duty.
The subsidy is remarkable not because of its generosity but because it is available on a median priced home which is $640,000. According to figures released today by the Real Estate Institute of Australia, the median Sydney house sells for 20 per cent more than that of Melbourne, is 50 per cent above Brisbane’s and 36 per cent above the mining-boom fuelled Perth housing market.
And all Australian houses are massively overpriced compared to their counterparts overseas. In relation to median family income levels, Demographia puts the average Aussie home 60-80 per cent above that in the US and Canada and higher even than the rather more space constricted UK.
In fact, in relation to incomes, average Sydney prices are over three times average prices in comparable major US cities like Atlanta and Dallas and even two-thirds higher than Los Angeles in regulation-wracked California.
Within the factors boosting Sydney’s prices, the cost of building houses themselves is not material. The weekend newspaper pages have many ads for three bedroom, two bathroom, two garage houses on your own land priced from $140,000.
The cause of high Sydney prices lies squarely with regulatory approval processes. Starting with the designation of land as potentially available for housing development there are mountains of approvals to gum up the process of getting a completed house on the land. In Melbourne the Growth Area Authority identified 540 separate ticks required and Sydney would certainly have no less.
This restrictive approach drives up the price of a serviced block of land (including water and sewerage facilities, roads, electricity and so on). A serviced block of land has an underlying cost of around $80,000. Regulations boost this by $250,000 and more, converting a house land package from $220,000 to $400,000 and more. And yet, notwithstanding national parks and mountains, there is no shortage of developable land on the outskirts of Sydney or any other city in Australia.
The Treasurer has allocated $50 million to help expedite the planning process time. There are undoubtedly measures that can be taken to better computerise applications so that developers can see where the process application is within the planning and approval network. But the real problem is not the state and local bureaucracy but the bevy of environmental, cultural, anti-sprawl and cost enhancing requirements that successive governments have enacted. These measures have been in response to pressures from noisy groups.
Because most voters already own their homes, these pressure groups have natural allies from those who see each accumulation of regulations adding to the cost of new housing and boosting the value of their own. In places like Germany and Texas, where restrictive regulations on new housing are absent and prices are low and stable, house prices are rarely on the agenda. By contrast, house prices are the number one barbecue topic in Sydneysiders who see their apparent wealth increase, albeit at the expense of their children who find it impossible to get the first step on the housing ladder.
But those US housing markets that had, like Sydney, seen prices fuelled by land and building restrictions are now experiencing price collapses. As a result the median net worth of US families fell by 39 per cent between 2007 and 2010, with adverse if not yet clear consequences for economic recovery.
NSW Treasurer Mike Baird called housing prices, “The biggest challenge we face”, and asked, “What can we do to start to attack that?” Maybe the allocation of $50 million to expedite the approval processes is a start. But its solution will only be accomplished by the sort of courageous regulation removal that governments have avoided for so long. The piecemeal approach of expanding the urban growth area boundary is of only limited help in expanding the available supply of land. Such programs are underway in Sydney and Melbourne but they are inadequate. Even eliminating those boundaries is only the first step in expanding market supply. Governments also have to eat into the detritus of years of regulatory accumulation in the processing of applications and the various hoops they must pass through to demonstrate that they are sound and in accord with the planning objectives.