A couple of months ago I wrote a newsletter for Peach Home Loans clients on the price of housing. Ever since being put on the ‘drip’ of Hugh Paveletich’s daily broadcast emails I’ve been intrigued by the argument that the massive rise in housing prices has been driven by government regulation. The strongest argument for this is the price of housing in Texas where they use very different means of land regulation to here.
But then there’s all the demand side aspects that the deregulationists play down. The deregulationists also have odd bedfellows – like save our suburbs – who are keen on regulating to prevent the ‘densification of suburbs’.
In any event I wrote the sides of the debate up for Peach clients with an eye on its significance for property investment. Then Peter Browne editor of Australian Policy Online asked me to tidy it up for publication on his website and so I also sent it to The Age which published it today. So because Troppo is my site of record as it were, I’ve reproduced it below the fold. It’s quite an interesting economic subject and I’d be interested in Troppodillians input.
Why are house prices so high? And what can we do about it?
Opinions differ between those who argue that high prices are the result of government policies strangling the supply of land and those who argue that increasing demand has played an important role.
What Ill call the supply siders are led by New Zealand property developer turned international free market political activist Hugh Paveletich and his American partner Wendell Cox. Together they run the website Demographia.com a remarkably influential website they started just a few years ago.
Remarkably Sydney , Adelaide , Hobart, Perth and Melbourne made it onto Demographias list of least affordable cities in the Anglosphere. Thats part of the strength of their case. Its hard to believe that those cities have a greater demand on their housing services than other larger cities around the world.
What lends striking credence to Demographias case is that cities of similar sizes have very different price levels and guess what? The cheaper cities tend to regulate land differently. Take Austin Texas and Perth WA . Both cities are rapidly growing, and both have populations of 1.5 million. Perth s homebuyers have gone from paying 3.7 times their average annual earnings to around 8 over five years. Meanwhile in Austin prices have actually fallen from 3.3 to 3.1 of average earnings.
The difference, Demographia contends, lies in Perth s stringent land zoning regulations that monitor and restrain growth on the fringe. And the same conclusion is drawn for all 159 cities surveyed constraints on land supply for residential development has driven up house prices.
If Demographia is correct, then all those first home buyers have something to get angry about its politicians that are making that first home so difficult to buy. And investors? Well Demographias message for them can be boiled down into one word risk! If Demographia are right and they get their way and politicians ease up on land release on the outer fringe then maybe our house prices will plummet from over 6 times average annual earnings back to around 3 where Demographia says they belong. Red ink would be running in the streets at least from investors.
So whats all this mean if youre a property investor? Well like lots of other inputs into your thinking, this is just something to be kept in mind. The implications could be huge. But I doubt theyll be all that great. I have little doubt that if Sydney or any of our capitals converted to Texas s style of land tenure house prices would fall perhaps a fair way. They dont regulate land release on the fringe like we do. And they have fewer restrictions on redeveloping your block about which more in a moment.
At least one right leaning think tank the Institute of Public Affairs has geared up for a campaign for greater deregulation of land use. They and the Housing Industry Association are sponsoring the Great Australian Dream campaign to secure greater land release. John Howard is now on the bandwagon but its not his area its the states (strange how rarely he misses an opportunity to pass the buck).
All this activity will have some impact indeed it already has. And it will help people struggling to get into new houses on the fringe. But somehow I doubt that therell be a torrent of new land released. And most cities house prices are slowly heading up, not down. And even if they did release lots of land I doubt it would have a huge effect where prices are highest.
Macquarie Banks Rory Robertson thinks Demographias work is one dimensional. He argues that Dermographia fails to factor in the significant and interactive roles played by interest rates effectively halving from where they were fifteen years ago, negative gearing, the halving of capital gains tax, immigration, economic growth and the growth of wealth in the great centres of globalisation like Sydney.
Robertson points out that in Demographias list of affordable cities all are North American, all inland, most have comparatively low populations and many have been declining like Detroit. It is not news that most people would prefer to live in New York or Sydney than in Buffalo or Dubbo. The choice for Robertson is between dull or sexy.
Still I found Demographias comparisons between Austin and Perth and Houston and Sydney more pertinent. Yes, Perth and Sydney are on the water and so cant expand as efficiently as inland cities which can do it around all 360 degrees from the city centre. But can that really explain why Houston s houses cost around 3 times annual earnings while Sydney s are around three times that?
And how much would the release of more land on the city fringe reduce inner city house prices? Demographia is silent on what those real estate agents will tell you its all about location location location. The divide is not just between desirable and less desirable cities, but within cities themselves. The desire to live closer to the centre is based on infrastructure as well as life style choices, but inner city aspirations, the lure of location, is also responsible for driving up prices. First home buyers often buy on the fringe and then when they become wealthier and/or become empty nesters, often trade up to be nearer to the city. And as Robertson points out, any survey of median prices fails to distinguish between the value of inner city property and that on the fringe.
The American literature tells us that an important driving force of property prices is the difficulty of getting redevelopment permissions in inner city areas. This is an Achilles heel for Demographia. Because it is a political campaign as much as a research outfit, Demographia is keen to acquire allies in its fight. It seems supportive of the suburban lobby groups campaigning against redevelopment. Groups like Save-our-Suburbs often argue that they are resisting forced densification, which occurs in the inner suburbs as part and parcel of the smart growth philosophy which has inspired restrictions on land release at the city fringe.
But a major force for densification (Id guess its more important than any policy of smart growth) is increased demand for housing in inner city locations. The Save-our-Suburbs crew seem to me to be almost the antithesis of Demographias free market philosophy.
And theyll be supporting all those restrictions on redeveloping your block if you own a house in Hamilton in Vaucluse or Toorak. So my expectation is that property prices of well located and serviced suburbs will continue to rise. Indeed now probably isnt such a bad time to buy at least good property for the long haul.
But do keep an eye out for the issues that Demographia raises both as a citizen and (if you are) as someone who owns or is interested in real property. And watch out for land on the urban fringe. If you buy in, remember that some of its value comes from an artificial scarcity which could be undermined with the onward march of free market ideas (where theyre convenient for their advocates that is).