In NZ the government has long proclaimed a determination to reduce house prices by deregulating land availability, the clear number one reason why prices are excessive. NZ outcomes have been disappointing and the government has replaced the responsible minister. Such an admirable example of ensuring ministerial accountability should be followed in Australia.
The problem there as here is that the regulatory measures have grown so thick and interlinked over the decades that politicians don’t know how to cut through them. Moreover, their advisers inside the bureaucracy and sometimes even their staff, are seasoned participants in the existing system. Much the same is true of the building and land development industry – many of the more successful operators have stocks of land bought at inflated prices and might incur losses if land was freed up for housing development; incumbents have also learned how to work around and profit from a system which would involve new entrants in some considerable initial familiarisation costs while they navigate the hundreds of different approval steps that are required.
I have the following article in the Herald Sun this morning
The ninth annual Demographia survey of house prices across the world was published this week. It again shows Australian house prices, adjusted for income levels, are well above those in the UK, US, Canada, and Ireland. Out of the 81 large cities in the survey, Melbourne’s prices were the fifth highest. The typical Melbourne house costs seven and a half years average household income, more than twice the household income required in Chicago, Houston, Ottawa and Atlanta.
If you have owned your home in Melbourne for the past 10 years ask yourself, “Could I afford to buy it today?” In spite of low interest rates, chances are you couldn’t.
That’s because over the ten years the average house price increased by 92 per cent while average earnings increased only 68 per cent. The reduced affordability is due to skyrocketing land prices – prices for the “bricks and mortar” component increased by only 28 per cent.
New Zealand also has high house prices. Commenting on the survey, New Zealand’s Deputy Prime Minister, Bill English placed the blame on “regulation that locks up land for development” making it artificially scarce. He said the NZ government is addressing misguided environmentalism which he blamed for the cumbersome and restrictive planning controls that cause the excessive prices.
The Victorian Minister responsible for planning, Matthew Guy, has tried to increase building land availability. But so far, he has had little success. Prices have remained high and new starts have remained depressed.
Politicians favouring deregulatory measures that allow land development are thwarted by several factors.
Among these are concerns by existing home owners that increased land supply may dampen property values. Recent home buyers in the outer suburbs may be especially fearful of seeing negative equity in their home values.
Adding to such fears are noisy environmental lobby groups seeking to prevent “urban sprawl”. Even though only half a per cent of Victoria’s land area is urbanized, these slogans are attractive to many in the media and to politicians, found in all major parties, who oppose development.
In addition, the accumulated regulatory barriers are formidable. Thus, in Victoria, even proposals inside the Urban Growth Boundary face an array of further regulatory hurdles to clearing land and building houses. Plans need to be prepared and approved by multiple government agencies. Surveys must ensure there are no rare species or “threatened ecological communities” on the land and woe betide a prospect should there be any “remnant native vegetation” or traces of aboriginal settlement present.
According to the Victorian government’s Growth Areas Authority, 540 different regulatory ticks are required between an area being designated as open to urban development and the completion of a house on it. This means years of uncertainty and costly too-ing and fro-ing all adding to the cost.
Regulation once in place attracts vested interests making it difficult to remove, even though it imposes colossal costs to consumers and businesses. In Victoria, the government has recently established a Red Tape Commissioner to tackle over-regulation generally. Planning regulations are only one target area, but for people being denied housing by regulatory inflated land prices relief cannot come too soon.
PS The NZ Prime Minister in his State of teh Nation Address has just raised the stakes
“We want to work co-operatively with local councils and I believe our goals in the end are the same,” said Key. “In particular we are keenly awaiting the Auckland Council’s spacial plan, and I’m expecting it to include multiple options for both greenfields and brownfields residential property developments.
“But if councils aren’t able to change their planning processes, then the government would have to get a lot more proactive, because we are very serious about resolving this issue.”
Regulation. Low interest rates. Inadequate and poorly driven land tax. Largely covers the problems.
Alan seems to have addressed the regulatory side quite well.
Given much land is purchased on a loan basis, the inverse of the interest rate is a significant influence.
Finally, rates should be exacted on the basis of land value, at a fixed percentage of the market interest rate applicable to that form of land. Doing so makes council aware and averse to any actions that they take which depress the market.
If, between state and local government, land tax is high enough, then the parasitic returns of speculation are eliminated, and prices will stay low and stable.
It’s not complex; its also not easy to rectify.
DriftForge
25 Jan 13 at 11:18 am
I know Australia is influenced by Agenda 21 and the Bioregionalism movement out of the UN wanting to restrain devt to within certain boundaries of urban areas.
I am writing from the US where I tracked this as part of what is now called Metropolitanism internationally.
How on the radar screen is Agenda 21 in New Zealand?
NZ is tracking the UN driven ed reforms too closely for land regulation also to not follow suit.
Robin
25 Jan 13 at 11:24 am
Unless land ownership/regulation is reduced to “you own it, do what you want with it (within reason)” Local councils will be some of the biggest roadblocks.
I have spent months trying to find a business premises to buy, 1/2 of our “high street” in town is effectively derelict, empty.
Yet prices are still 1 million dollars a look. Why? Because local government has zoned it so 90% of business activity can ONLY occur in the derelict heart of town..
So prices are artificially high, new business is restricted and it sees the town decline..
BUT, rates are kept high, and the existing owners are sitting on millions in assets kept higher because of the zoning.
thefrollickingmole
25 Jan 13 at 12:17 pm
All the Australian government needs to do is build great harbours all along Australia’s coast, with lots of rivers diverted into the harbours, and people will want to live there! Harbours for safe shipping, and fresh water for drinking. What more would you want!? Prices elsewhere, with competition, will plummet!
Nuke Gray
25 Jan 13 at 12:18 pm
It is time to start hunting down Town Planners with guns and dogs. A small bounty should be offered for prize giving purposes but I am sure plenty of patriotic citizens would seek no reward.
Town planning has no beneficial effect, causes interminable delays and wastes money.
Rodney
25 Jan 13 at 12:21 pm
If you want to know how much a house can cost just look at a place where demand is low (e.g. Moe). Same materials and labour required.
Harold
25 Jan 13 at 12:32 pm
Rodney
The one in town here I call “darth” Nerada… She said once apparently and thats why she has one child, she swore never to make that mistake again….
We just had the only asphalt plant within 500km of us crap itself during major roadworks.
There is another plant in town, still awaiting assembly 5 years after the bloke brought it.
The planners want about $500,000 worth of “landscaping” in the industrial area to hide it from sensitive eyes..
They need culling
thefrollickingmole
25 Jan 13 at 12:55 pm
As it did the ten years before that. And before that. And before that. Infact going back to 1950 you’ll find the same rate of increase.
My family sold a single-fronted victorian terrace in the heart of Drummond Street North Carlton in 1969 for the princely sum of $5,500 (stamp duty $2.50!). That might be worth $1.2M now. It’s not a recent phenomena.
It all comes back to our small number of major cities, their radial development, and a lack of regional alternatives – ports included. Our state capitals are virtually infrastructure monopolies. That’s what the market has chosen, but success brings its own problems.
Craig Mc
25 Jan 13 at 1:30 pm
Actually it’s been deliberate State policy since before Federation to route as much infrastructure as possible through the respective capital.
So it’s not merely a question of market choices; the market doesn’t choose whether new ports open and it doesn’t choose where roads and rail go. In Australia those have always been entirely politician’s decisions, and unsurprisingly the considerations have therefore been entirely political.
wreckage
25 Jan 13 at 1:53 pm
Craig Mc
Land pices have certainly outpaced general inflation but there are two facets here. The scarcity value of inner city homes and the newish homes. The latter are measured by the Demographia data since the measure is the mode. there is a vast disparity in these prices – many cities including coastal ones – have not seen the price escalation we have experienced in Australian cities and that’s because land has not been rationed. Most of N. America is like this as is Germany.
Inner city homes and others with “positional” good attributes have risen far higher than inflation everywhere. But such increases, unlike the run-of-the-mill housing increases do not price would-be owners out of the market and create other econ distortions
alan moran
25 Jan 13 at 2:10 pm
Wreckage, I agree. But, “Build it and they will come” only goes so far. See the ghost cities of china for proof.
Any new business wants to be around as many customers and as big a pool of talented employees as possible. It gets back to why some cities grow and others die.
Detroit is currently the world’s leading model for reducing housing costs. Be grateful for the problems you have.
Craig Mc
25 Jan 13 at 2:54 pm
Quite a bit of this problem is outside state government control via the local councils which often operate as a type of green fiefdom.
We the serfs need to demand the constitution is enforced so their power is removed; in Australia Councils are unconstitutional bodies.
Chris M
25 Jan 13 at 3:07 pm
AM, true, except that today’s new homes are tomorrow’s inner city ones.
Moving the fringe out increases the scarcity of any existing housing. That’s just geometry at work. Even governments shouldn’t be blamed for that.
It’s a fundamental problem – should we make existing cities bigger, or find a way to start new ones that the market will happily sustain?
Craig Mc
25 Jan 13 at 3:30 pm
Unfortunately the next election is going to include a referendum to formally include this collective of Nazi window lickers.
Infidel Tiger
25 Jan 13 at 3:37 pm
IT – what, are you kidding? Tell me more….
Chris M
25 Jan 13 at 3:57 pm
http://www.qt.com.au/news/labor-mps-push-referendum-local-government/1730670/
It’s not a done deal, but the ALP are pushing for it.
Infidel Tiger
25 Jan 13 at 4:06 pm
I thank it’s too simplistic a view Alan. “high values are casued by regulation” Regulations can’t push prices up beyond what buyers can pay. What’s enabling them to pay such high prices? (negative gearing and high rental income) Also, while regulation does add to the cost it’s not much as part of the overvaluation of properties in Australia. Australian homes are somewhere around double the value they should be (comparing AUS with elsewhere). Now even if regulation was causing 50k on a 600k home, what’s causing the other 250k overvaluation? There are plenty of jurisdictions in US that have excessive regulation causing higher house prices, and yet their house prices are still far less than ours.
People also seem to forget that cities can go UP and not just OUT. Further releases of land on the outskirts (regardless of who is hording it) is not the only (and probably not the most profitable) way to increase the housing supply. 40 units in a close city suburb incurs a hell of a lot less demand (aka bribe) for infrastructure payment.
Also, with whatever it is that’s enabling people to overpay for houses, reducing costs by de-regulation won’t do anything to decrease prices as the savings will just become increased profits. Established homes that have a fraction of the costs associated with regulation are not any cheaper than new homes.
I agree most of the regulation of housing is simply a make work scheme and individuals protecting their fiefdoms. But I think libertarians are commonly used by developers as useful idiots when it comes to property development. Developers don’t see de-regulation as a way to reduce house prices. They see it as a way to increase profits and cut corners.
Luke
25 Jan 13 at 4:06 pm
Luke, if supply were greater then the prices would not be so high irrespective of capacity to pay, which is a constraint on demand.
Yes, cities can go up, but planning restrictions also affect that. Plus, going up is not necessarily cheaper than going out.
People also forget that most are not vitally interested in the inner city, where only a small percentage of the population actually work. Because a relatively high proportion of the highly paid work in the inner city, that increases the effective demand for the relatively scarce inner city desirable homes.
Construction costs are a very important part of the problem. They are way less in the US. The big variations in home prices in the US are caused by planning restrictions just like here.
Pedro
25 Jan 13 at 4:24 pm
Luke,
Your $50 k is a bit conservative – probably over $250k due to land and associated regs in Sydney though less than this in Melbourne and Adelaide. Yes we can go yp but people prefer houses -that’s why builders prefer building them. There are subtleties here – labour arrangemeents mean building up is uionised and that roughly doubles the cost but the world over people prefer stand alone.
Reducing costs in ahighly competitive market will be translated into lower prices not higher profits.
Also the NZ PM has just got tougher in his state of the nation address.
alan moran
25 Jan 13 at 4:33 pm
The problem out bush is getting worse. You just can’t get tradesmen to do the job. Sparkies are as scarce as rocking horse shit, brickies non existent. Plumbers are harder to get than a root on a Friday night in Julia Creek, carpenters to do repairs are all fighting each other for scraps on the right side of the sandstone curtain.
A major reason for people to leave the bush now is because the infrastructure can’t be maintained by the reduced amount of licensed personnel.
And there’s the problem – “licensed”
Winston SMITH
25 Jan 13 at 5:02 pm
Reality check right here, thanks.
I’m no fan of melbourne, but who in their right minds would seriously want to live in violent and/or frozen dysfunctional dumps such as chicago, ottawa and atlanta, FFS?
I’d rather remove my own teeth without anaesthetic – and I’ve visited all four cities above.
Sometimes we forget just how good it is in this country. Climate counts for a shitload. It may get cold in melbourne, but you’re not going to be snowed in for three months a year.
My sister and brother in law used to live in the states and the extremes of weather they put up with I literally found incomprehensible. Add in a shitload of intractable social problems and it’s no thanks, bigtime.
I do agree that land could be cheaper. However, proximity is everything (hence the premium) – too much commuting and you are seriously cruelling your quality of life.
Rabz
25 Jan 13 at 5:13 pm
We were visited by a Telstra guy a couple of days ago. He said he now spends a lot of time installing second phone lines for business purposes in our country area. Most of those new lines are for folks who have moved down here from Sydney and Melbourne. They commute to those crowded places when they are needed in the office.
Ellen of Tasmania
25 Jan 13 at 5:57 pm
Atlanta and parts of Chicago are Okay, Rabz.
I actually like the cold as it’s a dry sorta cold in Chicago and NY well most times and the autumns are really nice.
Summer is crap in both places.
Frank Walker from National Tiles
25 Jan 13 at 6:07 pm
Craig Mc, I was talking about a factor, it’s certainly not the be-all and end-all, but Sydney’s housing problem would be eased greatly by a serious motorway across the mountains, for example.
wreckage
25 Jan 13 at 7:26 pm
Crikey what a complex problem we have here. Regulation, land tax, red-tape ombudsmen, councils, town planners, interest rates……
Immigration ?
Podsnap
25 Jan 13 at 11:05 pm
Agree podsnap, you’d think immigration, particularly in Melbourne, would dampen wage increases, by increasing the pool of labour, and at the same time increase demand for housing.
Joe
26 Jan 13 at 2:42 am