Cross Post: Zeev Vinokurov How government increases housing prices

Australia’s housing prices are astronomical. Indeed, compared to local salaries, Australian cities are among the world’s most unaffordable places to live. But you may not know why. The startling truth is that housing unaffordability is a costly, unfortunate consequence of zoning laws. These prevent developers from building enough properties to meet housing needs and boost the economy. It’s a problem which the NSW government largely skirts over in its recently floated housing policy proposals. Substantial zoning reforms are unlikely to occur because not enough people realise that zoning increases prices.

Zoning laws like Melbourne’s or Sydney’s restrict developments based on their height, and on whether they are residential, commercial or industrial in nature. That makes it harder to build multi-storey apartments or commercial developments outside the inner city and commercial districts, which increases the cost of land. Indeed, economist Alan Moran estimates that many properties could sell for hundreds of thousands of dollars less if developers were generally allowed to build upwards and outwards throughout our cities.

Melbourne’s South Eastern and inner Western suburbs, for example, restrict construction of buildings over two storeys high except on main roads. That means no apartment buildings or commercial complexes in some of the most hotly demanded and wealthiest parts of Melbourne. This may help explain why Melbourne’s current median house price is $770,000Relative to local median incomes, that makes Melbourne the tenth most unaffordable housing market in the world.

Sydney’s zoning laws also impose restrictions on development. Large proportions of its suburbs consist of residential houses, units or small apartment blocks. Much of it is bereft of larger apartment blocks or commercial centres. Sydney approves construction of about as many new dwellings as Melbourne, despite its higher population. Consequently, Sydney is the second most unaffordable city in the world, with a median housing price of $995,000.

The housing affordability problem has even spread to country towns. NSW regions are experiencing rapid increases in property prices as city-siders buy holiday homes. Relative to regional median income,  Wingecarribee and Tweed Heads are the seventh and eighth most unaffordable housing markets worldwide. It’s clearly not for lack of space. Zoning is preventing these towns from building upwards and outwards.

Australian cities are also much dearer compared to Houston, Texas, which has no zoning laws. Houston’s median housing prices are low at $230,000 USD, despite its booming economy and 6.4 million residents. In Houston, the median house costs about triple the median wage. By comparison, the median house in Melbourne costs nine times the median wage and in Sydney it costs about twelve times the median wage. Moreover, its residential, commercial and industrial centres largely stick together anyway as it is more efficient. Houston offers a model for reform.

Scrapping zoning also benefits us in other ways. Businesses profit by selling goods to more customers for lower prices as more people live in the same place. Deregulation also avoids housing “bubbles” by stabilising prices. As economist Thomas Sowell notes, Houston escaped the 2008 American housing crisis, unlike Californian cities with strict zoning and unaffordable housing. Deregulation may also reduce congestion by causing multiple city centres to develop, as in Houston.

As for the NSW government’s housing policy ideas, they’re too little, too late. Unlocking land around train stations for development is welcome but insufficient. Victoria has and its prices keep rising. Moreover, making apartments ‘permanently affordable’ by requiring developers to gift one floor to the government amounts to a tax that discourages housing construction and therefore increases prices. NSW risks taking one step forward and two steps back.

Housing could be cheaper if our suburbs expanded upwards and outwards with apartments and commercial complexes and industrial centres. Until that happens, our housing affordability problem will continue to exist.

Vladimir “Zeev” Vinokurov is a solicitor. This op-ed was first published in The Spectator.

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77 Responses to Cross Post: Zeev Vinokurov How government increases housing prices

  1. Cui bono

    Destroy property values now!

  2. struth

    It was amazing to watch the mining boom create wealth in this country and see just how much the state labor governments sabotaged the needed land release for a number of reasons.

    Political advantage, stuff the proles, we’ll make them hurt and they’ll blame the federal government.

    Higher priced housing is a massive gain for council rates and state taxes including stamp duty and they are too short sighted and greedy to see beyond that.

    Keeps the developmentphobic watermelons placated.
    Etc.

    This is one of the largest crimes visited upon the Australian people and absolute proof of the socialist toilet we now are.
    For a country with the geographical size of Australia to be in this housing position is criminal.

    That this can happen here is, when you think of it, is very, very scary.
    They have completely brought the Australian people to their knees on this issue and succeeded.

    Now like socialist factory workers, Australian home owners fear the free market that would have their dumb choices receive the consequences of this mental laziness.
    Now there has been really no pushback on this critical area, housing, the commo’s are going for the jugular now, power.
    They’ve succeeded there, so the quickening continues.

  3. duncanm

    I wouldn’t forget the complicity of the banks — 2 of the 5 largest businesses in Australia.

    They’re quite happy that the population is kept in enormous amounts of debt — paying down mortgages that will only end upon the sale of the property to the next sap (when the state gets its payout via transactional taxes)

    Extracting ourselves from this pit with two such powerful players (govt and bank) will be very difficult indeed.

  4. struth

    This is a subject that I have pondered about for now, many years and it seems finally, my stubbornness may pay off, but I will have to time it right still.

    I lived in Alice Springs.
    It went from a great private sector (tourism , beef cattle, rail head) town, to an aboriginal “services” public sector toilet.
    The public sector has the money.
    Prices were always too expensive in Alice Springs and I loath to buy.
    I was still young and unsure exactly which way life would take me.
    I rented.
    When the boom came to Alice, via public funding, the prices of housing went (is this a pun?) through the roof.
    I wasn’t going to pay 600 ooo for a besser brick 3 bedroom commission home in a town with all the problems Alice was getting.
    My friends told me I was nuts, prices will always go up!

    I scratched my head and said, Na, don’t think so.
    Many of those who said that to me are in deep do do today.
    They cannot sell for what they paid as Alice is now a complete welfare crime ridden shit hole, so the yanks were scaling back (pine gap) and now the economy is rooted everywhere so are they.

    I panicked a bit, because my theory was that I could see [email protected] was going to kill the mining boom and wages for people not in mining were not going up.
    Wages and house prices.

    So the prices kept going up and up.
    I thought, shit, my theory must be wrong.
    So I bought a cheaper place in regional Qld due to inlaws being there and QLD had bugger all stamp duty.
    I sunk enough money in that I didn’t have to take out a big loan.
    I rented it out.
    Never again.
    Now I live in it.
    My theory looks like finally coming to fruition.
    I didn’t trust the government to keep their hands off super and retirees come to the area I bought into.
    My house price is stable due to retirees selling their massively overpriced houses in the cities if they can, and buying here for their retirement, living off the difference.
    I am in the process of doing the place up a bit to sell it .
    I won’t make a profit.
    I lose because of the effort and time I spend to get back what I paid.

    I haven’t lost like many I know.
    Few are winners in housing in Australia.
    It is truly devastating what it has done to many lives.

    I have good work opportunities if I moved interstate.
    Mrs Struth and I would be making a bit of money, however, I will not invest in this country again.
    I will not buy property here again.
    I will not rent, and I will not pay a moving tax (stamp duty).
    I will not spend my life paying down hundreds of thousands of dollars and the interest for an overpriced piece of Australian crap housing.

    I will not bust my arse in work , when the wealth that work generates is stolen from me.

    I sit in my nice old Queenslander this morning, and Mrs Struth works and I play music for a living, earning a third, or not even that, of what I am capable of.

    Fuck Australia.

    I tell you this story, because I know that thousands of people are now making similar type choices.

    Government have got too greedy.
    Wealth creators are going on strike.
    How many, like me are not playing the game, long since rigged against them.
    Some farmed humans are waking up to the pigs in the farm house.

    A disaster for all involved.

  5. Dave Owen

    I know some couples who have been able to get into the Sydney and Melbourne property markets by saving hard and doing without. I know of one young couple who built their own home, saving thousands of dollars. This is something discouraged by the HIA and the government. There are ways around this problem and I do not think this article has all the answers.

  6. Tim Neilson

    Destroy property values now!

    But it’s not real “value” CB, it’s smoke and mirrors value. Just like a carbon dioxide certificate has zero inherent value but can be made to sell for a fortune by government fiat.

    Having said that I’m not enthralled by the idea of giant towers overshadowing my property. Even though my place is very nondescript I’m subject to a heritage listing forbidding me to build upwards (if I wanted to) because of the nearby Victorian terraces, so a sudden abolition of restrictions on the surrounds would destroy my quality of life without giving me a corresponding chance to cash in and move elsewhere. So there are complexities with Zeev’s proposal no matter how much merit it has in general.

  7. Mother Lode

    People with houses see its value as an asset.

    Anything which reduces the value of their houses will be unpalatable.

    The fact that government policy has created the shortage that has inflated the value of property beyond what it would be absent the excess policy will be easily drowned out by the cacophony of widespread indignation.

    It is like taxi licenses, except most people’s houses do not stink of vomit, and they don’t keep the temperature at 35 degrees because they are natives of warmer climes.

  8. Ray

    Perhaps it is not surprising that a solicitor would conclude that property prices are a function of zoning laws, after all, that is what solicitors are concerned with. However economists recognize that the issue is far more complex than this.

    Economics tells us that, in a market for normal goods, we face a downward sloping demand curve, which means that if the price rises, the quantity demanded will fall. So let us assume for a moment that real property is a normal good. As supply is restricted by government laws, the price will rise and demand will fall, resulting in a new equilibrium.

    Yet the real world shows us that rising property prices do not lead to falling demand. Indeed, in many cases we enter a bubble wherein demand rises chasing the higher prices, in other words we have an upwardly sloping demand curve. In economics, there are two types of goods which describe an upwardly sloping demand curve, these are veblen goods and giffin goods. The former are luxury items which act as a status symbol, the latter are inferior goods which rise in demand because there is an income effect in which consumers have less surplus to buy substitutes. However, housing is clearly not an inferior good, one in which demand falls as income rises. If this were the case, we would observe an income effect wherein higher house prices would translate into lower demand for all other goods and services. This is clearly not so given that demand across the economy for consumption has remained relatively strong in the face of record house prices. Housing is also not a veblen good, except perhaps for properties in the more fashionable suburbs.

    So if real estate is neither a veblen good nor a giffin good, how can its demand curve be so perverse? The answer to that question is housing demand is not perverse at all. Instead it is being affected by an external factor independent of the normal forces of supply and demand. The source of this is obvious, weak monetary policy.

    I am not suggesting that zoning laws do not have an impact on supply and hence the market price. However, this factor can only explain a limited increase in house prices and only if we were to see a corresponding income effect. The scale of house price inflation and the absence of any discernible income effect means that this is an inflationary issue and, as such, we must look to the causes of inflation to explain our housing price boom.

    As always, inflation is a function of the expansion in the money supply and so the cause of the property bubble can be laid at the feet of the Reserve Bank and only the Reserve Bank.

  9. King Koala

    Importing 200,000 people a year pushes up prices more than zoning. Put a moratorium on immigration and the housing issue would soon be solved.

    The sad truth is too many boomers have an overpriced house and would piss and moan if their house lost even a cent of its current value. The government is caught between trying to appease boomers and appease young people wanting affordable housing. Unfortunately for young people the government would rather keep the boomers onside than do what’s best for the future of Australia.

  10. struth

    Ray is living proof of the confusion and damage economics does to people.

    Ray get your head outa the graphs created by mindas.

    A home is more than just a luxury good, but even if it has nothing to do with security and shelter and is just an unnecessary luxury item it is still this simple.

    If people can afford one , they want one.
    When people get some money to buy, (due to the mining boom and some of Costello’s activities)
    The government (states in this case) want that money.
    They get that money by restricting supply and taxing the shit out of housing.
    It’s classic socialist wealth transfer..

    People could afford to pay up to a point, and now they can’t.

  11. stackja

    Hong Kong has towers to house its population. So just put all of ‘Sydney’ suburbs population in towers.

  12. Angus Black

    A far easier and more effective solution to the price of housing in Sydney/Melbourne etc is clear once you recognise that the problem is that the vast majority of jobs – and the overwhelming majority of well-paying jobs – are in the capital cities. This simple fact drives the behaviour of the population, drawing people from the regions toward the cities and ensuring that essentially all immigrants settle there.
    State and Federal government policy has supported this centralisation process for decades, with government departments leading the push.
    It is probably true that, if you take a narrow enough view of the issue (say at the organisational level) there are cost savings to made by the centralisation process, but the costs of this process ripple far and wide, well beyond organisational boundaries.
    Firstly, there is the cost of over intensively populated cities – there is a point beyond which economies of scale in the provision of food, transport, housing ceases to be an economy and becomes an ultimately, sharply increasing cost – especially at the foci. House prices in Australia are only an issue in the capital cities (those of you who have not looked would be amazed at how far your money would go in a regional city). Decentralisation of jobs would not destroy this effect (though obviously there would be some impact) – check out house prices in the UK ex-London, Europe, the US. Beyond a few foci, there are many affordable small, medium and large towns/cities where property is affordable, jobs and services for treh population exist and life is really very very good.
    Secondly, centralisation has denuded and destroyed many regions of Australia.
    It is well beyond the time government should change its policy and support decentralisation. Teleconferencing is cheap, and effective and almost universally available to support either distributed workplaces or teleworking – for much of our service economy, there is absolutely no reason why the work needs to be provided in geographic proximity.
    Government could begin by aggressively decentralising both the Federal and the State public service, and by offering some form of support to commercial organisations able and willing to move from the capitals into regions of medium to high unemployment.
    It has been done before, in other countries, and it has worked really quite well – and the examples I’m thinking of where before the existence of the cheap and effective telecommunications facilities of today. It is hard, though, to get people to “think outside the box” and it is hard

    I guess, in one way, I hope that no-one takes this suggestion seriously. I don’t really want your company! I’m able to live and conduct my IT/IS/Mgt consultancy practice from a lovely home with wide-ranging rural river and mountain views (at a cost far less than Sydney median) in rural Tasmania. Internet shopping allows us an absolutely first-world inner-city lifestyle (though I must plan a little more than I was needed to , I guess). Example: I like good coffee so I buy in the green beans we like, 10Kg or so at a time and roast them myself weekly – our espresso machine does the rest. Everything I can think of works more or less like that – we don’t have to forgo anything. In addition there are all the benefits of peace and a negligible commute. Hobart is less than an hour away door-to-central-carpark if I do need anything from a city – to be honest, I might get there once a quarter or so, Add in a flight to the mainland occasionally (not strictly necessary, but some clients just like to see your face – and I can time it to suit a test match or a West Coast Eagles game).
    So the solution to a demand/supply imbalance which I recommend is to act to shift demand from areas of shortage of supply, to areas of plentiful supply (just not down here, if you don’t mind).
    You know it makes sense!

  13. Angus Black

    Goodness, are there some typos in my last post or what?

    Sorry!

  14. Diogenes

    WRT to Tweed Heads, considering the median income is heavily weighted downwards because of the large numbers of pensioners and otherwise unemployed, the

  15. Diogenes

    housing , unless you really desperately want to buy an ocean view or river frontage the affordability is not that bad.

  16. struth

    House prices in Australia are only an issue in the capital cities (those of you who have not looked would be amazed at how far your money would go in a regional city).

    This is bullshit.

    House prices are cheaper in some regional areas but are way overpriced when put up against employment opportunities and wages in those areas.
    You are looking at this through townie eyes.
    The difference between average income and housing prices is just as steep in regional areas, if not steeper, due to the lack of employment , just on a smaller scale.

  17. Recent Historian

    We all scoffed at Japans 100 year mortgages in the 90’s and new it would end in tears. But the reality is with Interest Only Loans here in Australia we have Infinite term mortgages. Let that sink in.

    Anyone with more years left on their mortgage that they have in the workforce has to sell. Basic maths.

    Here is how APRA can safely avoid a house price crash and save many Australians and our banking system from a financial crisis. Simply make the following financial system adjustments over a 5 year timeline:

    – Phase out Infinite Term mortgages (i.e. Interest only)
    – Phase out racking up foreign debt to by houses that are already here (i.e. Offshore securitisation )
    – Phase out using your home loan like a credit card (i.e. Redraws, top-ups and re-financing)
    – Phase out Negative Gearing (i.e. beneficial tax treatment for investors over owner occupiers)
    – Slowly equalise the capital adequacy rules for banks between home financing and business financing.

    The money that would otherwise flow into housing financing would then flow into business financing, jobs, and the broader economy. Everyone would adjust in a calm manner.

    Sensible?

  18. struth

    The difference between average income and housing prices is just as steep in regional areas, if not steeper, due to the lack of employment , just on a smaller scale.

    To finish this statement off, I mean to say that decentralisation doesn’t stop the core problem.
    Government.
    Anywhere in regional Australia there are good working opportunities, house prices go through the roof, as we have just seen during the mining boom.

    The cause is this.

    You got the money and the government wants it.

    You could start an Australian silicon valley next to Woomera and the town’s housing prices would immediately go through the roof, and there would be just as much government restriction and cost immediately placed on the town.
    The only way geography plays a part in house prices, is the geographical boundary of our Socialist governments.
    The Australian border.

  19. struth

    Sensible?

    So I can’t deduct the business expenses from my rental income, and should be taxed on the gross?

    How fucking sensible is that?
    You’ve just put rents up and made it harder for those renting to buy.

    Sounds like you love a bit of regulation there Recent Historian.
    What could possibly go wrong?

  20. Recent Historian

    Sounds like you love a bit of regulation there Recent Historian.

    At present the Capital adequacy rules on Business versus Home lending are arbitrarily dreamt up buy a cardigan wearing french guy in Basle.

    I say we make our own regulation in our own national interests, you know democracy, liberty and all that stuff.

  21. struth

    I say we make our own regulation in our own national interests, you know democracy, liberty and all that stuff.

    I say we “cut” our own regulation in our own national interest, you know, democracy, liberty, freedom, true market values, and all that stuff.

  22. Joe

    So I can’t deduct the business expenses from my rental income, and should be taxed on the gross?

    Isn’t that what the GST is?

  23. Roger

    Housing could be cheaper if our suburbs expanded upwards…

    Most Australians do not want to live in high rises.

    Cut immigration, increase land releases and reform building codes.

    Problem solved.

  24. RobK

    If I could distill Zeev’s argument to: regulation should be kept to the very basic minimum that allows for the basic doctrines in law to be protected, then I agree wholeheartedly with the thrust of the post.
    Trying to fix problems by more legislation/regulation, so often drafting layer upon layer, trying to control the finest of detail, or trying to guess the future, or play god; all leads to confusion, debilitating complexity and gross inefficiency which makes no-one happy. In many cases I think this is the situation that has been created. Upwinding it is the challenge.

  25. John Bayley

    As always, inflation is a function of the expansion in the money supply and so the cause of the property bubble can be laid at the feet of the Reserve Bank and only the Reserve Bank.

    Exactly right.

    And to ‘struth’: Sorry mate, while I would more often than not agree with your observation about economics, in this case Ray is correct.

    Property prices, apart from artificial scarcity of land, are a function of how much people can afford to pay. This comes down to two factors: Wages and the ability to borrow & service a loan.

    With the RBA (and other central banks) having over the last 15-20 years relentlessly pushed interest rates lower, this has encouraged a huge increase in speculation on the property markets here.

    You can see that when you look at the rates of mortgage stress, which are not far off the 20% plus of Paul Keating’s early 90s. These days if interest rates were to go to their long-term average of 7-8%, many borrowers would be instantly broke.

    The Yanks have lived through a property crash, so it’s plain to see why the current speculative activity arising from loose monetary policy (the “real” inflation) is more centred on the stock markets there. Australians, however, still by and large believe it’s impossible to lose money on real estate and that borrowing to the hilt to buy more houses is a guaranteed way to riches.

    Sooner or later – and I think sooner – this delusion will meet with reality, and then watch out.

  26. notafan

    Government could begin by aggressively decentralising both the Federal and the State public service, and by offering some form of support to commercial organisations able and willing to move from the capitals into regions of medium to high unemployment.

    Of course that would impact on regional house prices but so what? You can’t cry out one eye that young people have to to the big smoke for jobs and then cry out the other because someone suggests a way people can move back.

    In the long term it is a good strategy. And btw when it is the public service that moves they get paid the same regardless of location. Though I would rather see private companies relocate, and I suspect that they won’t be cutting wages either.

    NBN was supposed to make this all happen right?

    One of the things I like about the States is that there are lots and lots of bigger cities, for new migrants to Aus it is Melbourne, Sydney or bust.


    Jersey City made it attractive for large corporations to cross the Hudson from Manhattan. Okay it’s not far but in a tech age why not more more to Australian regionals?

  27. Dr Fred Lenin

    This is another huge problem created by the career political wankers ,it cannot be solved without pissing of a large section of the community, councils banks real estate agents state goernments,the federal government ,housing speculators ,investment property owners ,all stand to lose squillions of dollars if this shambkes is rationalised . Like the welfare and muslim immigration stuff ups any solution will invole massive pain . Meanwhile the muppets who created and compounded these problems still suck on the Taxpayers blood in luxury and comfort. Roll on the Revolution ,it may not solve the problem s but it might punish the miscreants who caused them ,perhaps a little justice ?

  28. notafan

    And yes we don’t want to live in high rises and given how sparsely populated the country is, it is ludicrous to jam millions of people into vertical slums.

    Nothing more depressing.

  29. Joe

    … jam millions of people into vertical slums.

    Most high rises/apartments in Aus. are not slums. That being said, unless your gregarious or have a reason to (walk to work), apartment living can be wearing. You get to hear more about your neighbours than you would comfortably live with. You have to queue for all the common facilities. Rubbish removal (other than food) can be problematic. Busybodies abound in the body corporate. It’s just plain nasty – and that’s in the up-market ones.

  30. notafan

    Most high rises/apartments in Aus. are not slums.

    The housing commish ones are and if we continue to cram migrants in to Syd/Mel we can expect a similar experience,

    Eight adults in a 2 bed apartment etc. (which already happens)

  31. RobK

    As always, inflation is a function of the expansion in the money supply and so the cause of the property bubble can be laid at the feet of the Reserve Bank and only the Reserve Bank.”
    Valid point but is the RBA proactive or reactive (or a little of each)? In any case it could be interpreted that the difficulties the US market experienced with deregulation was market reaction to the release of the imposts of the regulation, an over reaction. If various banks were allowed to go under, would we eventually have ended up in calmer waters with less regulations?- ultimately I suspect so. People and markets have go relearn how to live in a less regulated world. It’s a long road to back track the long march.

  32. Roger

    Eight adults in a 2 bed apartment etc. (which already happens)

    I own a unit in inner suburban Brisbane in which my mother lives – handy to bus and trains.

    I was approached by a local Indian entrepreneur with an offer – he said he could fit half a dozen students in it.

    It has two bedrooms, one toilet and one bathroom.

  33. Alex Davidson

    Anyone who thinks that zoning and the associated planning empire aren’t to blame for skyrocketing prices for housing needs to try improving land outside the existing urban footprint. In Sydney at least, the government controls what you can and mainly cannot use your land for with an iron fist that is impervious to reason.

    For decades landowners all over Sydney’s outskirts have attempted to get their local councils to lift absurd minimum house lot size restrictions of 25 – 100 acres imposed in the 60’s & 70’s. Recently some have been successful in achieving very modest reductions, but only with outrageous conditions, e.g. set aside 60% for ‘the environment’ and agree to manage and preserve it ‘in perpetuity’; agree to spend 100’s of thousands or even millions on public works such as providing NBN infrastructure, repairing neglected roads and utilities, revegetating useless scrub, etc, all for a handful of lots.

    At the heart of this mess is the total lack of respect for property rights shown by the government. They operate by the rule of force, not the rule of law. It’s what you get when you allow democracy without limits, i.e. anything goes as long as you have the numbers.

    I’m quite certain that the whole planning system is just a racket. Its main purpose is to create a perpetual artificial shortage of land so that house prices keep rising. That keeps a large group of voters very happy, it keeps banks happy, and provides a very strong incentive for individuals who wish to engage in development to support the political class. But like all Ponzi schemes, it cannot last forever, and many will get their fingers burnt when it collapses.

  34. Joe

    Housing Commission High Rises make up a small fraction of the high rises in Aus.

    One more thing. As the high rises are usually in desirable areas, the councils in those areas find perverse pleasure in blocking the roads for idiotic “arts” events at all times of the year and at the drop of a hat – regardless of what the residents actually want. This is especially so if the high rise adjoins an open area or water-course. Maximum disruption to residents is the name of the game.

  35. Leo G

    Most high rises/apartments in Aus. are not slums.

    Some new apartments do have the appearance of slums. The Sydney suburb of Carlingford has seen an unprecedented increase in units over the past 5 years, with more than 20,000 due for completion in the next few years.
    Unfortunately, along with the development has come an army of squatters and an epidemic of trespass, theft and assaults. One 4 hectare site in one year was subject to two major police operations, each of up to 60 officers including 3 riot squad units.
    Several of the complexes are now awaiting repair following fire and smoke damage apparently arising from cooking on open fires in the units.

  36. thefrolickingmole

    Zoning.

    Even the mad Germans know zoning restrictions are crap.

    Germany has some distinct features that enables it to provide a plentiful supply of housing in response to increasing demand.

    First and foremost, the German constitution contains an explicit ‘righ-to-build’ clause. According to The Policy Exchange:

    this “means that everyone is entitled to a permission to build on his or her property as long as there is no explicit legal rule against it.

    …if the proposed building fits into the plan, permission has to be granted and if the local authorities deny it then a court will enforce it…

    Although there is very close control of what can be built on any site, provided it meets the requirements of the master plan, a developer just can get on and build new housing without seeking development permission.

    Most importantly, the local governments that control the planning process have a direct financial incentive to provide land for housing, since they receive grants based on the number of inhabitants. Therefore, encouraging development is an important way for local politicians to increase their budgets.

  37. Joe

    Unfortunately, along with the development has come an army of squatters and an epidemic of trespass, theft and assaults.

    Feral’s do as feral’s are.
    The UK has shown the futility of creating high-rise accomodation for feral’s. High-rise only works for the middle and upper class.

  38. Leo G

    The UK has shown the futility of creating high-rise accomodation for feral’s

    In the case of Carlingford and nearby Epping, the ferals have been moving in to houses awaiting demolition.
    The open fires in the units were lit by lessees. It is not uncommon to see Weber-type cookers in use on unit balconies.

  39. Joe

    It is not uncommon to see Weber-type cookers in use on unit balconies.

    And I have seen similar and more expensive cookers in use on balconies in multi-million dollar apartments. It’s all in how you use the tool and the respect you hold for the building and it’s occupants that matters.

  40. Zulu Kilo Two Alpha

    I was approached by a local Indian entrepreneur with an offer – he said he could fit half a dozen students in it.

    It has two bedrooms, one toilet and one bathroom.

    I’ve seen accommodation like that, in London. Two double decker bunks in one room.

  41. Infidel Tiger

    Housing could be cheaper if our suburbs expanded upwards…

    Most Australians do not want to live in high rises.

    Cut immigration, increase land releases and reform building codes.

    Problem solved.

    The developers love feeding this lie that people no longer want to live in suburbs with big blocks. There’s a helluva lot more margin in developing shitty urban ghettos.

    Funnily enough all the wealthy and successful people live on large pieces of dirt in the suburbs.

  42. Struth

    So a crook has control of supply.
    He ups the price of the item to astronomical levels (extortion) and some are stupid and desperate enough to take a loan out to buy the item and some here claim the lender is to blame.
    Amazing.

  43. Roger

    The developers love feeding this lie that people no longer want to live in suburbs with big blocks.

    And so we get hapless residents inadvertently setting fire to units because they want to have a BBQ but the only place they can is on the balcony.

    Can you imagine raising kids in a high rise?

  44. Ray

    Let us try a quick experiment.

    Assuming that your bank will lend against 70% of the value of a house and will allow you to borrow such that repayments do not exceed 30% of your gross income and the maximum term is 20 years. Now let us assume that these lending criteria have not changed over the past ten years. In this context, a person earning $100,000 per annum before tax could have borrowed up to $260,000 ten years ago when mortgage interest rates stood at around 10%.

    Suppose that the same borrower is looking to buy a house today. Given that average wage has risen by some 39% over the decade, the person’s earnings are now $139,000 per annum. All else being equal, this individual could borrow up to $360,000, a 38% increase. Now let us factor in current mortgage interest rates of around 5.25%, and the amount our individual is allowed to borrow rises to $520,000, a jump of approximately 100% on the amount to be borrowed a decade earlier.

    What the above experiment suggests is that the borrowing capacity has risen around 100% over the past decade, half of which can be explained by wages inflation and the other half is due to a significant reduction in interest rates.

    Over the same period, the median price of a house in the eight major capitals has risen around 92% over the past decade, not far removed from the 100% increase in borrowing capacity demonstrated above. That the median house price has risen in synch with the capacity of home buyers to borrow is no coincidence. After all, ability to buy a house for many of us, is based on our ability to borrow.

    Of course, wage inflation and interest rates are not the only drivers of house prices. However, these are the only factors which can possibly come close to explaining the significant surge in property prices we have seen over the past decade. That house prices have expanded far beyond the rate of wage inflation then is a result of interest rates which are, in turn, controlled by the RBA. That the RBA has cut official rates from 6.25% in 2007 to 1.5% today is the reason we are experiencing such a significant period of asset price inflation.

    In this context, talk about government zoning rules, housing density etc are merely side shows.

  45. Infidel Tiger

    Can you imagine raising kids in a high rise?

    Hell on earth.

    Kids need a back garden a lot more than they need a theater room and a second bathroom.

  46. Tim Neilson

    Ray
    #2341724, posted on March 31, 2017 at 1:04 pm

    Of course wage inflation and interest rates affect the nominal value of what’s being paid, but “affordability” calculations take them into account. Your experiment doesn’t explain why Sydney is the second least affordable housing market in the world and Melbourne is in the top ten.

    Your experiment would disprove the relevance of zoning only if there were evidence that the zoning situation had changed materially over the last ten years and the market had failed to respond accordingly.

  47. Joe

    Can you imagine raising kids in a high rise?

    They might actually learn discipline – the horror.

  48. Mellen

    I’m pretty certain it was Bob Carr who said Sydney is full way back in the 90’s.

    As for decentralisation, we have hundreds of thousands of hectares of forest here, although some of it is locked up in National Parks courtesy of Bob Carr who did his damndest to close down the local timber industry we don’t have too many foresters here because their families refuse to move too far from Sydney. Same goes for teachers and medical specialists, the very thought of moving a 100 kms let alone 500 kms from Sydney is spew inducing.

    Even family members who grew up here are astonished that we might suggest a move to the coast. You would think we had suggested Siberia. Some of them would prefer to be underemployed in the city than strike out for the bush.

    So I think there is a definite mindset which is stopping people moving to the regions and instead of offering incentives government departments are actually playing along with this ingrained prejudice and moving jobs even things like forestry jobs to the city.

  49. Infidel Tiger

    They might actually learn discipline – the horror.

    What rubbish.

    Most likely they will turn into couch bound leftists.

  50. Tim Neilson

    Re some of the comments above:

    The last thing we need is governments “supporting” or offering “incentives” to distort people’s decision making.
    However, I agree with the idea of governments decentralising their own activities. I’ve got no problem posting an ASIC form to the Latrobe Valley rather than to a capital city, and I’m glad for back office stuff for TAC etc. being done in Geelong rather than Melbourne.
    The real blocker to that is the incumbents in the public sector. Hewson had a policy to move some navy related Dept. Defence functions to Jervis Bay so that the officials might actually see a ship or meet a sailor, but the backlash was so big that he dropped it.

  51. Leo G

    I’m pretty certain it was Bob Carr who said Sydney is full way back in the 90’s.

    Bob Carr’s failure to address the planning issues associated with Sydney’s high population growth is at the heart of its present housing crisis.
    I cited Carlingford as a particular instance of a suburb in distress from the rate of construction of very large scale developments, absence of adequate supporting infrastructure, clear major breaches of safety standards on the use of roads affected by construction, misbehaviour of construction workers, lack of support for established households affected by the changes, local government avoiding responsibility for an area in transition (from authority of Hornsby and Hills Shire Councils to Parramatta) and missing-in-action NSW MPs.

  52. Ray

    Tim, actually comparative international studies generally look at the median house price divided by median income, as you see, such a calculation includes wages but not interest rates. Thus such comparative international studies make good headlines but are pretty meaningless in the scheme of things.

    Given that average housing interest expenses have fallen from 9.2% of household income as at December 2006 to 6.9% as at December 2016, you will observe that the interest rate reduction explains a considerable difference. For this reason, the RBA has not observed a significant deterioration in housing affordability in Australia over the past decade.

  53. A H

    Good post, Ray.

    Another reason why you have people crowding in cities is because that is where most government subsidies go, eg. government provided infrastructure and ammenities. This interference distorts the market.

  54. Dr Fred Lenin

    God aloneknows what will happen in the housing shemozzle when interest rates eventually rise,the market will force the rates up to attract capital for investment ,a shortage of capital will ensue and banks will mot have the funds to lend at low interest . Many overextended people will lose all ,mrtgage sales will force ,governments will go into oanic mode the prices down as the narkets is saturated . Governments will go into panic mode as politicians see their carefully crafted careers crash ,the investment property negative gearing crowd will be in trouble as rents fall due to over supply . The revival of the US economy under Trump and revived UK industry under Brexit will cause a ripple effect round the world . This of course will not affect Australia in the safe hands of ruddbull or shortass ,Yeah Right ?

  55. A H

    Dr Fred, yes I am really wondering what this is going to look like when it ends. This is a very long term credit bubble.

  56. EB

    Let’s not forget credit. I don’t own, but I have enough equity to buy outright where I live, but I’ve been privy to some things that make me shudder and also think “why they hell am I competing against these people who shouldn’t even be in the market?”

    People putting down the monetary value of a second hand kia as a deposit and then going interest only for their PPOR.

  57. Leo G

    This is a very long term credit bubble.

    It’s hard to understand why there wasn’t a major ‘correction’ years ago. Real housing prices have escalated to the situation where long-term rental investments are often earning only 1% to 2% pa in Sydney suburbs- do the investors really expect further large real capital gains?

  58. Paul Farmer

    Good analysis Ray………….I agree the main cause is very low interest rates. It has made the demand curve for housing shift to the right. However that move rightward but becomes much more severe in terms of higehr price outcomes when you have a supply curve that is also moving to the left with restrictions on zoning and locking up land. Part of the problem here is also Australian’s view their own house as more investment than shelter alone.

    Its interesting to contrast the US. They are much more sensible about housing in terms of seeing it more as something of utility rather than an investment class, particularly post the GFC. There was a brief and severe run up in housing prices sparked by Greenspan’s lowering of rates in the US post 2000. This was designed to offset at the time the effect of the tech wreck that was dragging on the US economy and it was the lending to poor quality mortgagees that followed in this period that became cycled into derivatives that ultimately led directly to the GFC. Interesting in that its same “culprit” again at the scene of the crime, although low interest rates got far too little press as being an underlying cause that lead to the end result , it was all shuffled onto various other memes including capitalism is a bad thing and markets cannot be relied on by all the leftists.

    Milton Friedman in his work with Anna Schwartz on the monetary history of the Untied states showed clearly that loose monetary policy caused the run up in stock prices and commodity prices in the 1920’s and too tight a monetary policy post the crash caused the severity of the great depression. Friedman moved monetary policy to the centre stage in macro management but it has become perverted in the hands of Keynesian thought as a panacea for all ills of an economy. They are quick to take his advice on a downturn but never heed the problems created by leaving it too loose for too long. It would be interesting if he had lived to see the GFC what he would have recommended post the immediate turnaround phase. I am sure he wouldn’t as the Fed has done left rates so low for so long as they have done.

    Post the GFC the Americans have given up on housing in the main as an asset investment class and returned in droves to the sharemarket, hence the rally in the US market has far exceeded ours post GFC. Their market has increased by 165 % whereas ours has rallied over the last 8 odd years a mere 75 % from bottom to top. Striking difference and coincidentally the difference is about 100 %, the amount our property has increased. Their low interest rates have pumped up share prices in the US, ours has flowed more into local property prices, reflecting in large part the cultural differences of the two countries towards investment classes.

    The problem at its origin but is central banks believe with no sign of inflation on the horizon they can just open up and do whatever it takes to pump an economy’s nominal GDP growth back to long run growth trend rates. Keynesian economic wisdom is that any sort of recession is to be avoided at all costs even if it means playing a nuclear option of reducing interest rates to ground zero. The Austrian school says this is sheer madness and a day of reckoning will come. Unfortunately but the people running the worlds central banks have in the main tended to be Keynesians.

    Weak monetary policy is all to often now a panacea to solve all problems in the macro economy. Instead of sensible microeconomic reform, encouraging productive workplace practices and encouraging free trade that over many years improve our economies, its all too easy for central banks to think they are the only true agencies in the world who can influence economic outcomes and this hero mentality has lead to a “whatever it takes” attitude in terms of monetary policy to get the short term outcome they are seeking.

    As the Austrians argue this is just setting up a bigger problem down the track and when the correction in asset prices comes and it will, will anything have been learnt and will we apply the same misguided prescriptions again ?

  59. Dr Fred Lenin

    Another thought the housing crisis is contrived bullshit so therefore fits perfectly into modern political thought , which is totaly based on contrived bullshit ,nakes the country look richer “, see what a great job we career pollies are doing , your house is worth five times more than you paid for it “! But only if you can sell it for that price ,and think of what a replacement residence It will cost you ! They will be found out as soon as interest rates rise , which they will inevitably . It will be a financial slaughter like the South Sea Boubble and the Dutch Tulip Scam of History ,now we have the Housing Bubble and theClinate Scam ,history has a habit of repeating its self dont it ?

  60. Infidel Tiger

    It’s hard to understand why there wasn’t a major ‘correction’ years ago. Real housing prices have escalated to the situation where long-term rental investments are often earning only 1% to 2% pa in Sydney suburbs- do the investors really expect further large real capital gains?

    Sydney prices are up 20% in the last 12 months.

    A million dollar property is making its owner $550 every day. No wonder they don’t want the circus to leave town.

  61. notafan

    I get the point about distortions but in the US there is genuine competition between states and it works.

    If NJ simplified code to allow more high rise office buildings and has lower rates and charges than Manhattan then I don’t have a problem with that kind of ‘incentive’

    It is how it should be.

    All I would expect from a regional too, a reduction in red tape and lower property taxes.

    On the other hand Shepparton, for example upped its rates for the CBD so much half of the shops were empty three four years ago as no one could afford the rents though Shep is a town run primarily for ‘asylum seekers’ with a big fat public sector so no surprise they though they could milk the capitalists dry.

    Don’t know if that has changed.

  62. struth

    Sydney prices are up 20% in the last 12 months.

    I get what Ray is trying to say, but individual responsibility is not taken in to account.

    If Sydney prices are up 20% in the last twelve months, there has been no real wage increase in that time.
    The economy is going down the toilet.
    There has been no significant rise in wages as he suggests.
    His analysis reeks of aloof economic babble from those that have confused themselves into believing their own economic annalistic superiority.

    Please tell me where this statement is wrong.

    The government (states in this case) want that money.
    They get that money by restricting supply and taxing the shit out of housing.
    It’s classic socialist wealth transfer..

    If it isn’t wrong, that is the problem.
    If market forces were less regulated and taxed, and there was SUPPLY, at market price based on COMPETITION , the price rises would not happen as he states.
    There is such an acceptance of government control by Australians that they look at senarios without properly understanding where the fault actually lies.
    Restricted supply by government, and a corrupt and uncompetitive market on the supply side.
    I would also question very seriously the data that states wages have increased in the last ten years.
    Maybe in the Public sector, but the loss of work in the private sector would still bring that average down.
    The boom busted many years ago.

  63. Squirrel

    I thought this was going to be about government policies which support and encourage the mad speculative bubble in Australian real estate. Let’s just pretend that the (foreign) debt-fuelled idiocy can go on forever, and that all we need to do is whack up even more shoddily built high-rise dogboxes and everything will be OK.

  64. stackja

    How many Red Chinese ‘refugees’ can Australia house?

  65. Tim Neilson

    I get the point about distortions but in the US there is genuine competition between states and it works.

    If NJ simplified code to allow more high rise office buildings and has lower rates and charges than Manhattan then I don’t have a problem with that kind of ‘incentive’

    yes, fair comment, my remark about “incentives” was not properly qualified.

  66. Tim Neilson

    How many Red Chinese ‘refugees’ can Australia house?

    Maybe if the Termite gets the extradition treaty signed that influence on the housing market will decline.

  67. .

    Ray – please shut up and stop abusing economics. Zeev is right. I could make you a millionaire tomorrow with zoning laws.

  68. Wozzup

    I have known about this issue for some time. In fact studies have been carried out in various countries and it is now well established that there is a strong correlation between cities and states with strict planning regulations and shortages in land suppl and not unnaturally, consequential increases in housing costs. The same phenomenon has been established in the USA even more clearly as there are 50 states with some states have much less strict zoning laws than others. Longitudinal studies show them consistently to be cheaper and housing/land prices more stable (i.e. they do not suffer the boom and bust of the other states).

    The following study conducted by the Institute of Public Affairs in 2009 shows it quite clearly in the Australian context and also argues for supply side responses through relaxation of absurd zoning laws.

    https://www.ipa.org.au/library/publication/1238734419_document_moran_novak-wahousing.pdf

    As an Adelaide resident, what struck me most forcefully on this report, was the table on page 9 which shows that Adelaide urban land prices rose by a price increase multiple of 69 times between 1973 and 2006. This whipped Sydney at 49.6 and Perth by 45.o. I am talking about Adelaide remember which has limp population growth a crap economy, and not much else but dirt and land as economic resources. So if Adelaide land price increases in this period are around 50% higher than in Sydney what do must attribute that to – insane supply side restrictions courtesy of our zoning and planning rules and our inept and economically ignorant pollies.

    It is typical of our drop kick politicians (especially Labor who love regulation and social justice initiatives) though that when the house price issue becomes a hot political topic what do they do? Why, they ignore the supply side and instead fiddle with demand side – usually adopting measures like first home owner grants etc which increase demand further, not reduce it, hence driving prices even further in the wrong direction. Oh and what else – at the same time as they are doing this they are implementing even stricter planning and zoning controls with things like urban growth boundaries which institutionalize land shortages and ensure that they to prevent further land coming onto the market. All the time chasing population growth. Go figure!

    One thinks these fucking dick heads learn their economics from Lewis Carrol the author of Alice in Wonderland.

  69. Ray

    Why don’t we look at a few numbers.

    Over the four years to June 2016, the weighted average house price in the eight capital cities rose 7.3% on a compound annual growth rate basis, on population growth of 1.5% and an average rate of completion of new dwelling units per thousand persons of 7.4. Over the previous four year period, the corresponding average house price increased a more modest 3.0% per annum while population growth was faster at 1.7% and housing completions lower at 6.8 per thousand.

    What this tells us is that the last four years saw greater price increases despite the fact that housing completions were up and despite population pressure being less. In other words, supply has actually been rising faster during the housing boom than it did in prior years.

    So if government zoning restrictions are the prime cause of the recent price inflation, then we would expect to see housing prices rising faster in the four years to June 2012 when dwelling completions were fewer. Clearly this is did not happen such that it is difficult to see how government restrictions on supply as being the cause of the house price inflation.

  70. .

    Now you’re talking sense Ray. Good to see.

    Keep in mind, you are only talking about a four year period and aren’t discussing and feedback effects.

  71. sdfc

    The RBA started cutting rates in late 2011.

  72. Rabz

    Sydney prices are up 20% in the last 12 months.

    A million dollar property is making its owner $550 every day.

    Wonderful, innit? 🙂

  73. King Koala

    I was approached by a local Indian entrepreneur with an offer – he said he could fit half a dozen students in it.

    Typical immigrant. He wants to turn his new country into the carbon copy of the shithole he fled from.

  74. .

    Yep the horrors of students living in cheap, high density accommodation, as they do on university campuses in Australia anyway.

    Is there a “problem” you don’t blame darkies for?

  75. King Koala

    12 people living crammed into a 2 bed apartment. Welcome to Dot’s vision for the future of Australia.

    Dot, its clear you like people crammed in houses like sardines, would like less zoning laws, and defend pedophilia so why don’t you move to Thailand?

  76. .

    I don’t think I should tell people how to live. Zoning laws are bad – the evidence is overwhelming.

    Your last comment is complete crap, you pi$$agate weirdo. No one on this blog has ever defended child abuse, you utter bloody moron.

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