Summary of my piece in the AFR today
Out of 86 cities across the world with over a million people house prices relative to incomes in Sydney and Melbourne were the third and sixth most expensive. That’s the findings of the latest annual survey of house prices released this week by Demographia.
Australia’s regulatory induced scarcity of land increases the cost of a fully serviced housing block complete with telecom, water, energy and road infrastructure from less than $100,000 to $300,000 or $400,000. And on top of this there are special taxes on development – at least $36,000 per block in the case of Sydney.
Back in 1983, according to data from the Housing Industry Association, the land component cost of a new house on a standard sized block comprised 40 per cent of the total house/land package in Sydney and 30 per cent in Melbourne. This year the land component cost in the two cities was 72 per cent and 70 per cent respectively. The same pattern is seen throughout Australia since planning authorities have adopted similar restraints on land availability.
Unlike elsewhere, Australian house price rises barely paused in the recession. This chart by Demographia sums up the affordability situation around Australia.
The Financial System Inquiry Chaired by David Murray suggested that negative gearing and the capital gains tax regime were a cause of Australia’s price increases. But negative gearing opportunities for investors in housing have always been with us and many other countries have similar tax laws. Moreover, negative gearing is available to all investments and excluding housing from it brings distortions by treating investments differently. In any event, a ready antidote to demand-induced housing price increases is to permit more land to be used for this activity.
The people disadvantaged by unaffordability of housing are those who have not bought a house. In Australia, young people are the most vulnerable to the high prices, and are showing a much increased interest in owning their own place.
Mission Australia conducts an annual survey of youth which offers insights into young people’s aspirations and concerns. The past four years have seen marked changes in attitudes.
In the 2014 survey 72 per cent of young people think it important to own their own home and a similar number expected to be able to do so. However, home ownership by younger people is declining. Amongst 25 to 34 year-olds those owning their home has fallen from 56 per cent in 1991 to 47 per cent in 2011.
It is regulatory scarcity has driven Australian house prices to stratospheric levels of unaffordability. And smashing the constraints is the only means to bringing house prices within range of younger people’s incomes.