NSW’s housing led recovery

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.

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16 Responses to NSW’s housing led recovery

  1. Matt

    Great article Alan. The artificial boosting of housing and property prices by both sides of politics here in Australia is a disgrace.

    That Australia of all nations has a supposed land shortage is laughable.

  2. Infidel Tiger

    This is the madness that ensues when State Govts become addicted to stupid taxes like stamp duty.

  3. Max

    RESPECT MY HOUSE!!

    1.3m for a shitbox in Home-a-bush

    http://www.realestate.com.au/property-house-nsw-homebush-110170665

    V.s. Immaculate 4 bedroom modernhouse in Silicon Valley

    http://www.realtor.com/realestateandhomes-detail/2768-Greer-Rd_Palo-Alto_CA_94303_M24653-41254

    No do I want my kids to study American cutting edge Hi-tech or Car-rebirthing???

  4. SteveC

    Gotta wonder where they get their advice from. Looks like money straight in the pockets of developers to me.

  5. Simon

    The reason housing is so expensive near capital cities is because house and land packages are complete crap, all the value is gone, no backyard, no frontyard, just hideous wall to wall hovels. If you want a house with some actual land attached you have bid against others in older more established suburbs that were developed during times when having house meant being able to walk out the front or the back of your property without the neighbours objecting to the noise. Some idiot allowed the last generation of spoilt babyboomer brats to subdivide all these so they are becoming fewer and fewer. The councils wanted rates, the BBs wanted to retire in luxury and the cities wanted to pretend they were urbanized (you know, piss, vomit and violence everywhere). There was so much money in it foreigners started investing and state governments then finally wanted their share. To blame red/green tape is a joke. Flats and apartments are undesirable in this country but you can still hear the losers pushing them as a modern necessity. We are an outdoor nation, if developers can’t accomodate this then cities are doomed, it’s only the desperate rent seeking of governments and their refusal to move facilities to country towns that has effectively killed homemaking and housebuilding.

  6. H B Bear

    There are no votes in falling housing prices.

    Ask John Howard who was the first to hit the inflate button.

  7. Bruce

    all Australian houses are massively overpriced compared to their counterparts overseas … 60-80 per cent

    House prices are only 20% higher than overseas if you recalculate with $A at 70c.

    It would then be an unsurprising valuation given we have high immigration and a housing shortage whereas more or less everyone else has a surplus.

    I’d hazard also that house prices in Karratha would shock the socks off Americans…since they don’t learn much history in school anymore. San Francisco in 1849 was much worse, but they didn’t have fly-in-fly-out to spread the fallout in those days.

    In short, ‘high’ house prices are not due to useless pollies, though we have plenty of those. Fundamentals. Which is why Steve Keen shouldn’t throw away his hiking shoes just yet, Kosciuszko may beckon for him again.

  8. Jeremiah

    My take is yes Oz properties are expensive, but you get decent bang for your buck in a lot of cases ie: decent size, close to the city centre, close to the beach, great weather etc. If you can find a stat that takes all of that into account and compares it to international properties I’m sure we’ll fare quite well.

  9. Alan moran

    Jeremiah

    The places that fit your housing profile cost $1million plus. The point is that it is those who don’t own their own home that face the great regulation-imposed discrimination and a price execs of up to $200k.

  10. Steve of Ferny Hills

    When I built my first house in a good Cairns suburb in the early 80’s the land component was approx 20% of total cost. In the mid 90’s in what was then greater Brisbane northern fringe the land component was about 30%. Now in BNE north fringe suburbs eg Narangba the land component is about 60%. Something is very wrong.

  11. Infidel Tiger

    You think land is expensive, try ordering a beer in Australia. This country is a joke.

  12. David Brewer

    Another excellent article Alan.

    But, in enumerating changes needed to cut housing prices, don’t forget the thing you first thought of: subsidies. $17 000 from taxpayers puts a good fraction of $17 000 on top of all prices in the low end of the market. In fact, maybe it even raises prices by more than $17 000, by driving people to buy houses who would not otherwise do so.

    Contrary to some of the comments here, housing in Australia is still very expensive by international standards. One measure of this not so far mentioned is number of years’ rent needed to equal purchase price. In most markets, it is under 20. In Australia it is often closer to 30. For some history, see here, page 6.

    Red tape is a major reason for high prices, as you say. But subsidies to housing, including first-home owner grants, capital gains tax exemption on own residence, and negative gearing for investors, are also major price-pushers.

  13. Chris M

    Well put Alan.

    I’m surprised this is not a much bigger issue, the younger folk in Australia seem too supine on this IMO. They should be making a real loud noise and keeping at it. It should be a major election issue – so many Australians are living in mortgage imposed serfdom.

    We badly need a house prise crash, it’s gonna hurt a lot of people and banks but the longer we wait the worse the pain will be. Besides all that I’d like to see the Baby Boomers loose a large chunk before they die having created this problem (and many other).

    One thing with all the vagrants arriving daily I believe they will crowd into various locations and literally force the real estate prices down in those spots, a kind of ghetto effect. They won’t be too bothered with government regulations like housing laws either as we have already seen from their arrival method etc.

  14. Uber

    Maybe once they’ve finished with housing approvals the NSW govt could start looking at major projects. Maybe, rather than adding more years, cost and uncertainty to the almost impossible process of getting a mining approval, they could start to encourage investment in the State’s economic engine room. Because so far all they’ve done is create a bigger mess to satisfy political vested interests. Hmm, maybe horse stud ownners and weekend retreaters aren’t actually contributing much to the NSW economy after all. I’m talking to you, Jones and Turnbull.

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