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.