Housing regulations: a blow to the poor and to everybody’s living standards

The information that the price of new housing land in Melbourne jumped 36 per cent last year might be great news for existing house owners who can expect a further leap in value of their main asset but it is a disaster for those who are renters or seeking to purchase a home.

The average Melbourne house price at the end of 2017 was $817,000 with Sydney at $1,117,000.  Across Australia, house prices adjusted for general inflation increased 34 per cent over the past five years, notwithstanding a slight fall  in prices last month as restraints on foreign buyers started to bite.  And although new stock of housing is only a small proportion of the total housing stock, its costs are the main driver for all housing prices.

The average Melbourne lot price of $329,500 is rapidly catching up with the $480,000 cost of a new lot in Sydney.  This is in contrast to the costs of new housing blocks in those US cities which have a permissive approach to new development on their outskirts.  Thus, in Australian dollars, fully developed lots in Houston and Atlanta sell for $70,000 – $100,000 and average house prices in those two cities are $300,000 and $350,000 respectively.

The difference in prices between Australian cities and those of Houston and Atlanta is solely due to government planning policy.  Although high levels of immigration are sometimes blamed for house price escalation in Australia – and demand is certainly important – the fact is that both Houston and Atlanta are cities that are growing faster than Sydney and Melbourne.

In contrast to US cities with permissive planning regimes, Australia has layers of regulation, starting with urban growth boundaries, outside of which no new housing is permitted.  Even within the urban growth boundaries new building proposals face multiple hurdles including establishing flora and fauna protection, heritage issues and running the gauntlet of bureaucratic processes demanding specific densities and project features.  The upshot is a tortuous process that adds considerable costs, not the least of which is delays – it often takes a decade to clear the intrusive government oversight.

Allowing supply to respond to increased demand prevents the price escalation we are seeing.  And that must start with dismantling the highly restrictive planning regime that has evolved in this country.

These administratively induced costs affect real living standards.  Housing researcher Wendell Cox has estimated these effects by examining the cost of housing in Atlanta and San Francisco.

Atlanta has a liberal planning regime which does not prevent new housing developments on its periphery.  San Francisco, like all major Australian cities, has a restrictive regime.

The upshot is that the average new housing block, including its service costs, in the San Francisco area is $US580,000 compared with around $US60,000 in Atlanta and the median cost of housing in San Francisco is $US900,000 while in Atlanta it is $US204,000.

Cox constructs a chart that examines living standards in the two cities once the effect of housing is included.  This transforms real living standards (median household income) in San Francisco from a level 50 per cent higher than those of Atlanta to levels slightly below the Atlanta level.

These same sorts of gains are available for Australians with regulatory reform.

The policy-induced housing land shortage and associated measures not only inflict cruel blows upon the less well-off but these measures divert savings away from productive venues.  As illustrated below, some 60 per cent of Australian household wealth is relatively sterilized in housing and if freed up much of this would add to the capital base on which living standards rest.

Australia has fabulous natural wealth but at every turn, we have forged political and regulatory structures that prevent this being translated into income levels that would surely, without such impediments, give us far and away the world’s highest income levels.

This entry was posted in Uncategorized. Bookmark the permalink.

36 Responses to Housing regulations: a blow to the poor and to everybody’s living standards

  1. stackja

    Sydney has limited space. And a 18th century transport system. Only solution seems to be to go up. Keeps developers happy.

  2. struth

    Is it really great news for existing home owners?

    Maybe if they plan to sell soon.
    This government control on supply is now becoming insane.
    It’s not a matter of if, but when this all collapses, and do you really want to be owning property when it does?

  3. RobK

    Would it be right to assume that the banks and rate collectors have had a dream run to now and remain relatively unexposed? Im guessing investors carry the brunt of the risk but the facilitators may lose their cash cow.

  4. herodotus

    Home ownership has always been the best way for the average punter to build wealth. Unfortunately our high cost of housing these days puts a heavy clamp on the economy for other businesses, as people have stuff all disposable income while paying it off compared to those in the USA buying in at maybe two thirds the cost in relative terms.

  5. Kneel

    “Sydney has limited space. And a 18th century transport system. Only solution seems to be to go up. Keeps developers happy.”

    In a sane market, limited space is reflected in the cost – and so it is in Sydney. But the limits are not natural limits, but “policy” imposed limits – Govt regulation. This pushes up the price. This keeps the (politically) loudest section of society (retirees) relatively quiet. It also helps keep young people (with little or no existing assets) out of the market.
    The flaw in this system is that our population is aging and many older persons wish to “downsize” or retire to the bush. What happens when there are not enough youngsters with sufficient income to support the price these retirees are being told is what their place is worth? Collapse in price. It would have already happened, except for the massive influx of migrants. This is not sustainable, it’s a bubble. When it bursts, plenty of people – but most especially young, relatively new buyers – will find themselves with a $1M+ mortgage, a property worth considerably less than that, and a tanking economy that means even having a job puts you in the “lucky” basket.
    Get ready for AFC (Australian Financial Crisis).

  6. Mundi

    As a developer, I think the author is mostly wrong about attributing this solely to zoning regulations.

    Firstly when you convert a farm to residential you have to:
    -pay for the main road, the main sewer line, the storm water, and water, and power. Depending on how far out your are, and if the council says it must be a two lane main road, this cost can be anywhere from $80,000 per block up to $120,000 per block. Roads can be over 2 million $ per kilometre.

    Next each block must pay infrastructure fees. Despite you just building the infrastructure, each block must contribute in general to sewerage treatment plant extensions, parks, other roads, whatever the council feels like. This is $30,000 to $50,000 per block limited by state government.

    Next you have to pay for the individual connection from street to house for power, data, water, sewerage. This can be $15,000 to $30,000 per block.

    You have now blown anywhere from $ 150,000 to $200,000 before a builder can even set foot on the land.

    Even when we got land from a farmer for $800 per 500m^2, we have to sell That block at $180,000 to break even. And that’s making some big assumptions about how many houses we can get in before the council requires more roads and now gold plates.

    The real problem here is that existing housing in existing areas doesn’t get rezoned to higher density, so it doesn’t get too make better use of the existing infrastructure: there is always the requirement to build more – for low density, which is the least cost effective from an infrastructure point of view.

    Rezoning the outer fringes won’t help.

  7. Last week I received an email from a US company called Really Right Stuff that makes camera accessories, advising that they are moving:

    San Luis Obispo, CA, 16 February 2018 – Really Right Stuff, LLC (RRS) is pleased to announce it is moving its manufacturing operations and headquarters to Lehi, Utah by the end of summer 2018. The move to a new, 2 ½ times larger building enables continued growth and allows RRS to better serve its customers.

    CEO Joseph M. Johnson, Sr. commented, “Continually rising costs in California make it tough for a small business to compete in the global economy. We love beautiful San Luis Obispo, but our employees can’t afford to buy a home. The business-friendly environment and low cost of living in Lehi, Utah made it a clear choice for us to best serve our customers and employees long-term. I’m happy to see most of our employees coming with us, keeping our RRS family largely intact.”

    Located 35 minutes south of Salt Lake City along the Wasatch Front of the Rocky Mountains, Lehi is an ideal location for Really Right Stuff. It is the fifth fastest growing city in the country at the center of the high tech “Silicon Slopes.” Lehi’s beautiful natural surroundings provide easy access to hiking, mountain biking, fishing, camping, skiing, hunting, and, of course, excellent outdoor photography that spurred the birth of RRS. Six national parks are within a 4-5 hour drive from Lehi, including Yellowstone and Zion.

    Apparently this is but one example of many.

  8. stackja

    Mundi
    #2649294, posted on March 1, 2018 at 1:26 pm

    Existing suburbs don’t necessary want high rise. Government resume property, like they did in the past?

  9. H B Bear

    Mundi – so what are they doing in Houston and Atlanta then? I’m assuming they have sewerage and electricity too.

    Your point about on the ground infrastructure expenditure passed across to the State is well made. The initial block purchaser pays for 40 to 70+ year assets with their mortgage – and hopes to recoup this when they on-sell. Secondary assets (water treatment plants, sub-stations etc) are properly funded by the utility through retained earnings and borrowings. Instead this is ripped out by government or shareholders as dividends.

  10. struth

    The real problem here is that existing housing in existing areas doesn’t get rezoned to higher density, so it doesn’t get too make better use of the existing infrastructure: there is always the requirement to build more – for low density, which is the least cost effective from an infrastructure point of view.

    Rezoning the outer fringes won’t help.

    All those costs you mention are far in excess of what their costs should be , due to government regulation and so with zoning regulation (restrictions) and everything else you spoke about regarding councils and excessive costs to build roads and infrastructure, are where the problem lay.
    You need to fix those problems, not build up because of them.

  11. H B Bear

    Apparently this is but one example of many.

    Toyota pulled over 5,000 employees out of California a few years ago.

    Toyota did the math and found that housing costs in Los Angeles County, where Torrance is located, are three times per square foot the cost of a house in Dallas-Fort Worth.

    “They’re paying the same salary,” Niemi said. “So in real terms, they’re going to triple the affordability of housing they can buy if they move to Texas.”

    Of course this is impossible in the Australian Federation where COAG works to simply unify laws.

  12. Crazyoldranga

    I’m not sure that I would want to live in Atlanta these days no matter how low the price.

  13. Peter

    Try getting politicians to pay attention to this! I have been trying for years.

    Even if they understand what you are talking about (and in many cases that is a big “if”) most are apparently too shit scared at the prospect of being seen as the Minister who destroyed middle income voter’s only tax free nest egg. Add to this that most of the remainder are under the spell of the town planning industry (or whatever the industry calls itself these days) who constantly spout new age gobbledygook and platitudes and you begin to see the impossibility of getting politicians to take any notice whatsoever. Further to these factors which prevent change, those on the Left of politics see urban design as the almost perfect tool for their plans to rebuild society in their own image. Game, set and match for the planners.

    The following link takes you to a good study of the magnitude of the impact of bad land release policy and regulation in Australia. https://mikaylanovakblog.files.wordpress.com/2016/06/moran-novak-housing-land-regulations-in-wa-april-2009.pdf

    Being a South Australian, I am amazed at the fact that no one seems to think it is unusual that in SA, Adelaide housing land prices rose by a multiplier of 69 times between 1973 and 2006. Compare this to even Sydney, which only managed 49.6 times in the same period. (Table 2, page 9). This is Adelaide – with its stagnant economy and population slipping behind the rest of the country. It shows exactly what incompetent and politically motivated governments can do with bad regulations when they really try hard!

    For those on the Left who respond by saying this is all caused on the demand side – greedy banks lending more to people than they can afford is the usual argument, ask them why it is that land prices are so much cheaper in USA states with light touch regulation compared with those that lock down land when this is the only difference – banks lending policies are the same pretty well everywhere. Some of it is demand side of course when idiotic governments commit to unrestrained immigration against voters wishes and then pack these people into the same over stuffed cities. But that is another story.

  14. Robbo

    In the area of greater Melbourne the biggest culprits in restricting the use of land are the local Councils. No better example exists than that of the Mornington Peninsula Shire Council. In that municipality an unholy alliance has developed between the Councillors and the local State MPs, all of whom are Liberals, to stop better use of large fully serviced allotments. Quarter acre and two-thirds acre blocks had planning overlays put in place by the Baillieu/Napthine Liberal Government to stop any property owner from being able to apply for a subdivision of those large blocks. Most owners would probably not bother but I believe that about 25% of owners would be interested. There rights as property owners to apply for permission has been removed following loud lobbying by a tiny minority of busybodies who are intent on keeping things as they are despite circumstances, and huge prices for vacant land, demonstrating that a different approach is absolutely necessary to cater for the housing needs of thousands of young couples wanting to build. I never thought I would see the day when a Liberal government removed the rights of property owners to even apply for permission to subdivide a large fully serviced piece of land. No wonder people are being forced to move to new urban areas many kilometres away from where they work thus creating the urban sprawl of Melbourne and the clogged roads during peak hours that extend from 6am to 10am and the from 3.30pm to 7pm. The idiots who think all of that is a good result are occupying the decision making seats in Councils and in the State Parliament. Not all that long ago we were hoping that intelligent planning would stop Melbourne from becoming another sprawled out Los Angeles. Now we make Los Angeles look like a well planned village.

  15. Ƶĩppʯ (ȊꞪꞨV)

    Lets punish homeowners for government stupid. Bound to end well.

  16. Speedbox

    “……. it’s a bubble. When it bursts, plenty of people – but most especially young, relatively new buyers – will find themselves with a $1M+ mortgage, a property worth considerably less than that, and a tanking economy that means even having a job puts you in the “lucky” basket.
    Get ready for AFC (Australian Financial Crisis)”.

    Australian Financial Crisis? Worse than that I believe. The world is awash with debt and for those who care to look, the growth in the various asset classes since 2008 look almost parabolic on the charts. In fact, I laughed out loud the other day when some commentator was talking about the “bubble” of cryptocurrencies and the “near parabolic chart of Bitcoin”. FMD – have you looked at the charts for traditional asset classes recently? Idiot.

    And yesterday, Westpac said that they didn’t see any downturn in the housing market in the foreseeable future as the current rate of arrears amongst their borrowers was low. Again, FMD – are you stupid. Current arrears are a forecast tool for the next market downturn?

    The next crash will be a whopper and will affect all asset classes (most badly) and it will not emanate from within Australia because of our housing prices or affordability ratios. I know we all get excited about housing affordability (yes, it is a scandal and unfair to the young/renters) but I suggest that those who want to profit from the coming financial maelstrom take a deep breath and look at the opportunities to profit. Who knows, maybe you will be able to cheaply pick up that house you wanted and pay cash!

  17. Bruce of Newcastle

    To some extent this should be self correcting. Lets say you sold your average Sydney home for $1,117,000. You could buy a 3 bedroom house in Glen Innes say, for $150,000, then invest $967,000 in Commonwealth Bank shares at a yield plus franking credits of 8%. That brings in just under $1,500 per week before tax – almost a quarter more than average weekly earnings. Then you could do whatever you want for the rest of your life.

    It’ll be interesting to see if improved broadband services in places like that town can make them more attractive to Sydney home owners. With good connectivity there’s no reason why a lot of people couldn’t work or run an on-line business in country towns for customers anywhere in the world.

  18. Tel

    You guys always miss the point. The entire banking industry rests on mortgage debt. Banks serve the government, and government serves the banks, so neither party wants to allow debt deflation unless the whole system goes belly up, and you can be sure there’s plenty of powerful people ensuring that never happens.

    People who are in debt have to work, and if you want a family you need a house so you get into debt. To put that another way, whoever controls housing also controls people.

  19. Dr Fred Lenin

    When government comes in the door common sense flies out of the window,government does not produce. It consumes . De regulation and defunding is the answer to all our problems ,without other peoples money they are nothing ,socialism in a nutshell.

  20. jupes

    Roads can be over 2 million $ per kilometre.

    FMD

    How is that not a scam?

  21. testpattern

    Only at catallaxy. Fancy writing about Australia housing without even mentioning indigenous housing and associated health issues. Lift your game.

  22. Norman Church

    “Only at catallaxy. Fancy writing about Australia housing without even mentioning indigenous housing and associated health issues. Lift your game.”

    Quelle horreur, Testes! Fancy not mentioning housing for LGBTI homeless persons. Or refugees. Or [insert latest subject of progressive virtue signalling].

    This is a fun game. I feel smug and morally superior already.

  23. H B Bear

    Norman, you need to understand that Testes received great spiritual insight into the Aboriginal Industry since receiving a magic blowjob during the Dreamtime.

  24. struth

    People who are in debt have to work, and if you want a family you need a house so you get into debt. To put that another way, whoever controls housing also controls people.

    Slaves, you could almost say!

    Except for our royal race that testes would like us to mention, because theirs are paid fo r by us as well.

    and then they wreck them.
    And then we rebuild them.
    And then they wreck them.
    And then we rebuild them.
    And then they wreck them.
    And then we rebuild them.

    Was that enough “mentioning” testicles?

    You morally vacant racist.

  25. Sydney Boy

    I’m with BoN. Get out of Sydney and Melbourne (and Brisbane). House prices in Perth are lower than what they were 4 years ago. House prices are many times more affordable in other cities. New 4 bedroom in Armidale, NSW for $399k (Barnaby’s home turf!). Or Holsworthy, Sydney for $888k.

  26. Sydney Boy

    As for Testes comment, the article is about houses people buy and sell, not about houses certain people get given for free.

  27. Rae

    It’ll be interesting to see if improved broadband services in places like that town can make them more attractive to Sydney home owners. With good connectivity there’s no reason why a lot of people couldn’t work or run an on-line business in country towns for customers anywhere in the world.

    Sydneysiders have little interest in selling up and moving to places like Glen Innes. They are instead interested in and moving to coastal areas of NSW, such as Forster/Tuncurry and Harrington Waters on the Mid-North Coast. There they can buy brand new brick veneer homes with 4 bedrooms, 2 bathrooms, media room and double garage for about $550,000. That still leaves them with about $600,000 to invest.

  28. mundi

    H B Bear: What I meant simply was, zoning regulation is just drop in the bucket. Everything is regulated in Australia, from the amount of water a toilet my use to flush your poo, to the perfect angle that your drive way must be to the road.

    The main difference in the better parts of america is: You can build what you want. Want a goat track as your road? Fine. Want a gold plated road. Good for you. Want power or water? Work it out with whatever company runs the power and water in the area, they have free reign to do whatever as long as its safe.

  29. mundi

    Bruce of newcastle has the right idea….

    If you do own $1mil in property…. just sell it and buy someone in the sticks, then life off the interest/earnings.

    Of course I suspect the reason why so few do this is that they never own there houses, they are always moving from one to the next. The average mortgage in Australia doesn’t last 2 years. The average mortgate in NSW is $544,000….

  30. Rae

    The main difference in the better parts of america is: You can build what you want. Want a goat track as your road? Fine. Want a gold plated road. Good for you. Want power or water? Work it out with whatever company runs the power and water in the area, they have free reign to do whatever as long as its safe.

    Sure. What’s this all about then.

    It seems to me that building in the United States of America is no less regulated than it is here. They just call them codes instead of regulations.

  31. testpattern

    Alan, this will sink like Ben Elton’s Live from Planet Earth and be forgotten just as quickly. So why not use your analytic skill to make a timely contribution to the current debate on indigenous housing, where you have a better chance of making an impact, or at least being read and circulated on social media? The housing issues in the North are different to those in the southern cities, the big miners no longer build, opting for FIFO instead. eg the Pilbara Pelago Apartments project has been criticised by the recent Langoulant report. What the report fails to say is that Pelago provides accommodation to a wide range of health and education professionals who wouldn’t have been attracted to move or stay there otherwise. The very people needed to remediate problems associated with poor indigenous housing, now under even greater threat with the Scullion plan to stop Commonwealth funding. Just an example of the interrelated issues associated with developing the north. I’m sure you’re up to the challenge. Yours hopefully TP.

    https://thewest.com.au/news/pilbara/pilbara-projects-under-the-scope-bc-5738971601001

  32. Perth Trader

    Buy or lease a house in a Asian country and forget about Aust., ….problem solved.

  33. rickw

    Roads can be over 2 million $ per kilometre.

    FMD

    How is that not a scam?

    The other eye catching one was $15k for connection to services. Digging a single trench and putting some 90mm pipes and some 25mm copper costs that much??!!

  34. EvilElvis

    Only at catallaxy. Fancy writing about Australia housing without even mentioning indigenous housing and associated health issues. Lift your game.

    You don’t respect fucking anything given to you, whitey, so there’s no need to mention anything.p

  35. EvilElvis

    $2 million per km, FMD, we do a km for a million or less in testes backyard with all his associated wants and needs…

Comments are closed.