There is one area where Australia leads the world. Demographia’s 10th Annual Survey of house prices – this one covering 360 cities in nine countries – shows Australia imperiously blitzing all opposition other than Hong Kong in house prices. To ensure against distortions from different standards of living and costs, the survey compares median house prices in terms of average family incomes.
Although considerably higher than land-constrained Hong Kong, Australia (and New Zealand is similar) has average house prices relative to incomes that ate 60 per cent higher than those of the US, 12 per cent above the UK and 20 per cent above Japan. Australian house prices are even higher than those of Singapore.
The prices are driven by the stock of new houses being built in comparison to the demand for houses – a significant factor of which is population growth. Although new houses add only 2-4 per cent of total stock each year, it is these small numbers that drive the overall average price levels. And the number of new houses built is critically dependent on approval regimes.
This can be seen by breaking down new house costs into their three components: the house itself, the land preparation and the land itself. Thus for Sydney, a standard “22 square” new house itself costs some $130,000 and the preparation of land, roads, sewerage etc. costs a further $70,000.
While the third component, the land itself is worth only $2,000 as farmland (far and away the most prevalent usage of the land) because of government rationing (euphemistically called “planning”) the block costs perhaps $300,000. So a new house which should cost under $250,000 costs twice this much and this lifts the whole of the market – the median price of a house in Sydney is now $723,000 and in Melbourne it approaches $600,000.
The comparisons are even more stark once individual cities are taken into account. Australia’s restrictive planning laws are pretty much a constant across the continent but Melbourne and Sydney are two of the least 10 affordable cities worldwide.
Remember, these comparisons take into account different building costs and income levels. Relative to income levels, even thriving metropolises like Atlanta, Dallas, Memphis and Houston have house prices that are half those of Australia’s major cities
We have the tory toffs like Boris Johnson opposed to changing the nature of the “stockbroker belt” beyond the conurbations, versus Save-Our Suburbs urban preservationists, versus the anti-sprawl pro compaction crowd.
For his part Johnson writing in the London Daily Telegraph today in opposition to the Deputy Prime Minister Nick Clegg’s suggestions of building outside of established London. He says,
Into the immemorial loam of England the diggers will bite – chomping their shiny steel tines through Saxon burial grounds, ripping up coppices planted by the Normans. Views that have delighted the eye since the Middle Ages will be lost for ever. Rolling hills will be submerged beneath the crawling roofs of Cleggton Keynes. And then there will be the access roads scything through the valleys, the vast new service stations, the multiplexes, the shopping centres.
The prattish, syrupy orotundity goes on for a good few further paragraphs. And London, though also unaffordable, is less so that Melbourne and Sydney. While the latter cities are in states where less than one per cent of land is urbanised compared to perhaps eight per cent in England.
For our part we have pressure groups that prevent “sprawl” whose fellow-travelers now dominate the planning department that control land use backed up by thickets of interlocking regulations amassed over decades. Some relief is possible by redevelopment of the brownfield sites along the lines that Boris Johnson claims to support. But though he suggests there are thirty such areas in London, he does not specify their size and even if, his goal of them providing 47,000 new homes a year were to be realised this would be inadequate. Moreover, Johnson will find, as redevelopment proposals in Australia find, that there is persistent and vigorous opposition to such plans, even for areas (think Camberwell in Melbourne) where the population density today is only a third of its level two generations ago.
Inner city redevelopment is a help but the only solution to the exorbitant house prices faced by Australian non-house owning younger people is to free up land supply. Few politicians will bite this bullet, not only because of the bicycle riding ant-urban sprawlers but also because of existing home owners who have paid for the costs imposed by supply restraint and do not want to see the values of their investments brought down to their underlying worth.