Lessons from California’s housing bubble

"People who talk about a bubble are blowing smoke,” said real estate economist Michael Carney. It was February 2005 and Carney was confident that house prices in California wouldn’t fall. But by the end of the year the market turned. And between August 2007 and August 2008, California house prices fell by more than 40%.

Carney wasn’t alone in his confidence. Even as the bubble came close to bursting many commentators insisted that California’s growing population and undersupply of houses guaranteed that prices would stay high. In late 2005 the Reason Foundation’s Leonard Gilroy argued that California’s tough land use and environmental controls were throttling the market and driving up prices. "While the state projects an average annual need of approximately 220,000 new housing units," he wrote, "housing production has lagged far behind, with an average of 170,000 new residential construction permits issued each year since 1999."

Even economists who were convinced that the state’s soaring house prices were unsustainable agreed that there was a serious undersupply of housing. In 2004 UCLA’s Paul Ong explained why housing supply was not responding to increases in demand:

… in part because the construction industry has adopted a strategy of building new units only after they have secured buyers. The relative unresponsiveness of supply in the face of increasing demand has pushed real estate prices to record highs and decreased the number of households that can afford to purchase a home.

Industry figures scoffed at claims that there was a housing bubble citing the high level of unmet demand. In June 2005 Alan Nevin, the California Building Industry Association’s chief economist, said that "Currently, the standing unsold inventory in California housing tracts is effectively zero and should remain that way".

Nevin was half right. The state’s stock of unsold houses had been falling since the early 1990s. By early 2005 the California Association Of Realtors reported that the unsold inventory index had dropped to 1.8 months. This meant that, at the then current rate of sales, the stock of houses on the market could be sold in less than 2 months. According to the San Francisco Chronicle’s Kathleen Pender, "An index of 5.5 to 6 months means supply and demand are in rough equilibrium." Clearly it was a sellers’ market.

Another reason commentators were unconcerned about a bursting bubble was the low rate of foreclosures. In an article titled ‘There is no Housing Bubble in the USA‘ economist James F Smith argued that national foreclosure rates were too low to affect future demand. And by the first quarter of 2005 foreclosure rates in California were lower than at any time since 1979.

According to a survey by ING Direct, most buyers entering the market in 2005 thought prices were still on the way up. According Amey Stone at Business Week, "Of 1,000 people surveyed, all of whom had closed on a new mortgage or refinanced an existing mortgage in the prior six months, 73 percent said they were not concerned that a downturn in the housing market would lead to lower home values in the next year. In 2004, 67% said they were not concerned."

But towards the end of 2005 buyers abandoned the market and sales volumes fell. According to CAR’s deputy chief economist, Robert Kleinhenz the "market turned when affordability constrained sales" (ppt). Without buyers, the market cooled, unsold inventory rose sharply and foreclosures followed. Suddenly, the boom was over.

While the end of the boom might have been a surprise to some new home owners, it was not a surprise to economists. What was surprising was the speed of the price decline that followed. In 2004, before the market peaked, UCLA’s Christopher Thornberg wrote:

… when this episode ends we shall see yet again a sustained period of low housing turnover and housing appreciation that grows, but at a pace that is slower than the pace of inflation, allowing the fundamentals to catch up; in short real estate bubbles do not die, they simply fade away.

The idea of a protracted adjustment in prices had been a popular among commentators. In the March 2004 edition of Money magazine, Jon Birger wrote that "An outright decline is unlikely because the vast majority of homeowners would rather let their homes go unsold for months than lower their asking price." And that may have been true. But not everyone in the market had a choice.

Both banks and home builders found themselves with properties they needed to sell quickly. Neither had the capacity to become property managers. According to the Wall Street Journal’s Jeff Opdyke, builders were willing to do whatever was necessary to get their homes to sell. "Among other things, they are offering buyers cash discounts of as much as 20 percent, throwing in a pool and agreeing to finish basements, garages and other spaces at a cost of several thousand dollars – incentives much richer than builders were offering as recently as six months ago, when the downturn didn’t look as bleak."

No doubt the sub-prime mortgage market bears a large share of the responsibility for California’s rapid fall in house prices. After the market turned, sub-prime borrowers could no longer sell their way out of trouble. The high rate of foreclosures may have helped to deflate the bubble quickly rather than slowly. But it does not explain why the bubble formed. As Kelly Cunningham, chief economist at the San Diego Institute for Policy Research, said earlier this month, "We’re coming back to reality, probably where prices should have been if things had gone along at a more normal pace."

Most Australian commentators insist that Australia has no housing bubble to burst. They say that while houses may be overvalued, rapid falls are unlikely. Earlier this month James Dunn of the Australian spoke to Liam O’Hara, senior economist at Australian Property Monitors. O’Hara explained why the US experience wouldn’t be repeated here:

The main reason, he says, is that whereas the US has a heavily oversupplied housing market, Australia’s is still undersupplied. "Australia has been undersupplying housing demand for some time, and that’s helping to maintain prices," he says. "If that undersupply weren’t the case, I suspect that we’d be seeing some more major movements in the market."

It may be that house prices in Australian cities will plateau in nominal terms or decline slowly in real terms. But the experience in California suggests that an undersupply of housing is no protection against rapidly declining prices. It seems odd that this has become such a popular theory in Australia. Even the Reserve Bank’s Ric Battellino is saying that "US house prices stopped rising essentially because the supply of houses overtook demand."

Even as the US bubble reached bursting point, commentators there insisted that there was no problem because there was no evidence of oversupply. As James Smith, chief economist for the Society of Industrial and Office REALTORS, wrote in 2004, "One indicator of a bubble is a rapid increase in the supply of the asset in question. [But] housing inventories have been at very low levels for over five years suggesting there is no excess supply of houses."

The argument seems perverse. According to Nicholas Gruen, it takes "a shortage of houses on the market and high demand to produce a ‘bubble’ or high prices." While US cities like Los Angeles experienced high demand along with limited supply, other cities like Dallas and Houston experienced both high demand and readily available new housing stock. By matching supply with demand, these Texan cities seems to have avoided a bubble. When demand fell away, so did building activity.

If easy credit combined with constraints on supply drive housing bubbles, then surely Australians have good reason to be worried.

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60 Responses to Lessons from California’s housing bubble

  1. rog says:

    Ordinarily supply and demand determine prices but when inflation is higher than real interest rates and money is easy to get speculative investment becomes a driver.

  2. NPOV says:

    But isn’t part of the problem in the US all the ARMs and in general the very large numbers of people that were living in houses they couldn’t really afford? It’s not hard to see that when you have such a situation, rapid deflation becomes possible, as increasing foreclosures simultaneously rapidly increases the supply of housing while reducing demand because lenders are no longer prepared to lend to such customers.
    In Australia it doesn’t seem likely that there will be much fall in demand for housing, as any decrease in the number of people able to afford houses because lenders are being more choosy is being largely offset by high levels of immigration of skilled workers, and the supply is certainly not likely to grow suddenly, as there’s no reason to believe very high foreclosure rates are likely here.
    Having said that all that, the property market is a pretty fickle thing, and if there are drops of 20, 30, 40% in some areas, it certainly wouldn’t shock me. An average drop of 40% across Australia as a whole seems pretty close to unthinkable though.

  3. rog says:

    The bubble burst when interest rates were raised to combat inflated prices – mortgage stress became an election issue. There is still demand – but prices are still too high.

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  5. STT says:

    It seems to me that one of the important factors in the US housing collapse is the ease with which people can simply walk away from their homes if they fall into negative equity. If you do this in Australia, you still have to pay the balance of the loan unless you declare bankruptcy. As I understand it (and I would appreciate any comments on whether I am correct in this) it is a lot easier to declare bankruptcy in the US than in Australia, so you have more people walking away from homes, knowing that they will face relatively few financial consequences.

  6. Dallas Beaufort says:

    Everybody loved property prices as they annually climbed above the inflation rate. These overvalued increases were created by labor/democrat local and state governments control rationing of politically suitable housing land under the guise of sustainable development and saving the environment and thereby winning elections with these windfall profits.. So the feds kept inflation within bounds even when state labor were corrupting the market as the sharks feed. And now, who wants affordable /social housing in their backyard?

  7. MikeM says:

    Re (5): A large proportion of US housing loans are nonrecourse. If you walk away, you are not liable for the shortfall between outstanding loan balance and proceeds from mortgagee sale.

    The California market is far from uniform. Oakland has the 10-th highest foreclosure rate in the US, much of it attributable to resetting of resettable interest rate sub-prime loans. http://www.insidebayarea.com/ci_10920461

    However this may not be a major factor in other parts of the state.

  8. pedro says:

    Bankruptcy is easy to declare here if you are bankrupt, but the social/economic consequences are an incentive against doing so. That said, I read some years ago that bankruptcy was becoming more socially acceptable.

    Our interest rates have been significantly higher than the US for an extended period, so our credit has not been quite so easy.

    There are 2 types of housing demand, upgrade demand and growing population demand. Upgrade demand can fall off very quickly and will impact on certain sections of the market. Moving to a higher prestige house loses it appeal when the job seems less safe or interest rates are heading up.

    The silly thinking continues though. A Brisbane developer announced on the weekend his confidence that people would pay $500K for a small (less than 50sqm) one bed apartment in fairly crappy suburb in his big urban renewal multi-unit multi-use project. He made a lot of money on a big development during the boom and I predict he’s now poor again without even knowing it yet.

  9. derrida derider says:

    “These [house price] … increases were created by labor/democrat local and state governments control rationing of politically suitable housing land under the guise of sustainable development”

    1) There’s been plenty of poor planning by some governments but little of it has anything to do with “sustainable development”. Hopelessly poor urban infrastructure has been much more important in driving up prices in those places where people can actually get to work from.

    2) The price rises also had little to do with state-goverment regulatory restriction of land releases (except perhaps in the ACT). This report from the Productivity Commission pretty well demolished that assertion.

  10. pedro says:

    “Hopelessly poor urban infrastructure has been much more important in driving up prices in those places where people can actually get to work from.” I only know about Brisbane, and that sounds logical, but is there any evidence for it?

    In Brisbane there are lots of reasons to live close to the CBD, especially if you are among the relatively few who work in the CBD. Mainly because the lifestyle is pretty good, most of the good schools are close in. I think that it probably takes a long time for really good infrastructure to develop seeing most of it is provided by the private sector.

  11. Dallas Beaufort says:

    derrida derida “Most governments have sought to limit the outward expansion of their capital cities,in order to reduce infrastructure costs and protect the environment. In doing so, the scarcity value of land in those cities will inevitably rise. Unless there are offsetting increases in housing density, affordability will be adversely affected. Indeed, there is evidence that constraints on the supply of land at the urban fringe have added to price pressures, particularly in Sydney”. (First Home Ownership – Australian Government Productivity Commission Inquiry Report No. 28, 31 March 2004)

  12. NPOV says:

    Of course government-restriction of land supply is going to increase land values, but I don’t think that’s any reason to assume that releasing significantly more land will actually making housing more affordable in the long run – unrestricted urban sprawl has all sorts of costs, that must ultimately be paid for, that reduces the amount of income home-buyers have to spend.

    At any rate, housing prices in fringe areas are generally already pretty low – it’s the middle and inner suburbs that are now priced out of the range of most first-time home buyers, even ones that are prepared to live in quite modest properties on small blocks of land. Better infrastructure (including schools) is obviously a big reason that people prefer to live closer to city centres, but it’s certainly not the only reason, even for those that don’t work near the CBD – inner suburbs generally offer a much greater range of entertainment/eating/ shopping/life-style choices than outer suburbs – so as long as Australian capital cities maintain the very low population densities they do (and they really are very low by international standards), especially combined with the high immigration rates, affordability will be an issue.

  13. rog says:

    Each US state has its own foreclosure rules and some states are tipped more heavily in favour of the borrower – rights of the consumer – more incentive for lenders to offload the mortgage.

  14. JM says:

    STT: “… it is a lot easier to declare bankruptcy in the US than in Australia”

    It’s not so much bankruptcy as non-recourse mortgages. About 25 states (inc large ones like California and Texas) has laws that mandate non-recourse on mortgages. In other words, the borrower can surrender the house and walk away owing nothing further.

    The reasoning (apparently) is that lenders should have good prudential practices and be on the hook for making bad loans rather than the borrowers.

    The actual conditions vary from state to state, and in some the lender can choose to pursue the borrower, but there are trade offs and most lenders apparently just take the house and wear the loss.

    There’s also a small incentive in this structure for the borrower to default when they fall into negative equity. It takes about 3-6 months to foreclose and during that time they can choose to continue to live in the house without making payments of any kind.

    They aren’t bankrupted, but it does play havoc with their credit.

  15. melaleuca says:

    “Constraints on the supply of land at the urban fringe have contributed to housing
    price pressures, particularly in Sydney.
    However, because recent price increases have been due mainly to the surge in
    demand in established areas, improvements to land release policies or planning
    approval processes could not have greatly alleviated them.
    Land release requires long lead times and needs to be informed”

    http://www.pc.gov.au/__data/assets/pdf_file/0016/56302/housing.pdf

  16. The price of housing hasn’t gone up everywhere. Prior to the current financial freefall near new 3,4,5 bedroom houses in Hopper’s Crossing stayed steady or fell in price over the last 4 years. I know Hoppers isn’t Northcote, Brunswick, St Kilda or Williamstown but just because there isn’t a tram there doesn’t mean it’s unlivable.

    I’m not convinced that land release has had much effect on afordability. The land component of new houses is much a smaller percentage than labour or materials.

  17. NPOV says:

    FXH – of course Hoppers Crossing isn’t “unlivable”. But, to rehash a joke Sydneysiders like to make about Melbourne, if the best you can say about a place is that it’s “livable” then you’re not likely to see huge demand. My wife finds Doncaster ‘lifeless’ enough, and we’d be both more than happy to spend $700K on a house in a suburb like Northcote or St Kilda (if you could actually get anything for that), but wouldn’t move to Hoppers Crossing if they were giving houses away.
    I’m sure we’re not the only ones.

  18. conrad says:

    “However, because recent price increases have been due mainly to the surge in
    demand in established areas, improvements to land release policies or planning
    approval processes could not have greatly alleviated them.”

    How about changing all the weird and wonderful height restrictions? Living in a suburb where the development of a 6 story unit block was just rejected (despite it being next to a railway station), there certainly are planning policies that force the price of established areas up.

  19. NPOV says:

    conrad, I generally agree that height restrictions need to be loosened, but it needs voter support. Governments in general haven’t even bothered to sell the advantages of encouraging denser development. Further, you could argue it would be better to encourage developers to take maximum advantage of current restrictions (e.g. in an area with 3-storey restriction, apply a discount on council rates to properties with all 3 storeys), then once 3 storeys becomes close to the norm, it’s much easier to push for an increase in the maximum permitted height.

  20. Patrick says:

    NPOV – you oughta start looking – there are nice enough (although would need work over next five years) three bedroom places going in eg Caulfield for sub-$800k already. But you might get less equity out of your own place than you would have hoped :)

    But FXH is broadly right – housing is not ‘unaffordable’ and hasn’t been in my lifetime. No more so than watches – just because you can’t buy a Rolex or Patek-Phillipe doesn’t make a Swatch unaffordable. Ditto with respect to Toorak mansions or Balwyn piles and Hoppers Crossing AV Jennings insta-boxes.

    All that said I do support bashing local councils and their f*ckwitted enforcement of planning and height restrictions.

  21. STT says:

    JM,

    Thanks for that information on non-recourse mortgages, that’s exactly what I wanted to know.

    Cheers,

    STT

  22. NPOV says:

    Patrick, actually, something of a fixer-upper is pretty much what we are looking for, though not with any great urgency at this point. But $800K (+stamp duty) for such a property would leave us with no money to do the actual fixing up (I don’t think we could tolerate spending 5 years living amongst ongoing renovations). But we’re exceptionally lucky in being able to afford a figure in that range at all. The vast majority of people who want the advantages of inner-suburb living are completely priced out of the market – even if they’re happy to rent. While this is equally true in popular international (and very densely populated) cities like Paris or New York, there doesn’t seem to be a good reason that it needs to be the case in Melbourne. If the all suburbs within 8-9km of the CBD could somehow collectively double their population density in the next 10 years, and immigration policy was moderated somewhat, we might be able to return to a situation where the supply of inner-suburb housing comes close to matching demand.

  23. Patrick says:

    yes but I desparately hope we don’t get there since I want to buy a quarter-acre+ house within 10km of the CBD at some point. Maybe that should apply to the 5km radius which would already be pretty significant.

  24. derrida derider says:

    “If the all suburbs within 8-9km of the CBD could somehow collectively double their population density in the next 10 years” then, absent conversion of those suburbs into a new Hong Kong (involving absolutely massive demolition and reconstruction of infrastructure and the building of huge skyscrapers), no-one in their right mind would choose to live there. The economics don’t work out.

    Urban sprawl is expensive but so is urban infill. Basically there’s just too many people in the world.

  25. NPOV says:

    Except the population density of Hong Kong Island (where all the skyscrapers are) is nearly 16000/km2, vs something close to 3000/km2 for inner Melbourne.

    FWIW, I don’t seriously believe it would be possible to double the population density of inner Melbourne in such a short time frame and still be left with a place anyone would want to live in, but it might be do-able over 20 years. For a start, according to http://en.wikipedia.org/wiki/Demographics_of_Melbourne#Population_history.2C_density_and_growth_statistics, it appears that the current density is substantially less than it was in 1951 – but has essentially remained unchanged since 1980.

  26. NPOV says:

    BTW, a look at the population history of Manhattan reveals that its population density must have doubled within the space of about 10-20 years several times – indeed between 1820 and 1830, it’s population density went from roughly 3000/km2 to over 5000/km2 (a very rough estimate, and it may well be that the total built-up area increased somewhat in this time). So if it could happen in 1820’s New York, perhaps its not so crazy to think it could be possible in 21st century Melbourne.

  27. I think Patrick is right.

    In Melbourne everyone wants a quarter-acre+ house within 5ks of CBD with established garden, tram 100 metres away in next street, solar panels, rainwater tank plus grey water system, with driveway, stained glass windows and tiled verandah all for around $400K.

  28. NPOV says:

    FXH, actually for $400K you can get most of that – just not the 5km from the city and tram 100 metres away bits. But for $400K you’d be lucky to find anything within, say, 8km of the city, assuming you need more than just a 1BR studio.
    I think the preference for quarter-acre blocks, large gardens and driveways is often overstated – I suspect new home builders offer them essentially as a sort of recompense for living in drab housing developments in the middle of nowhere.

    Apparently this is what I can get in Hoppers Crossing for 640-80K:

    http://www.realestate.com.au/cgi-bin/rsearch?a=o&id=105135539&f=0&p=10&t=res&ty=&fmt=&header=&cc=&c=98147966&s=vic&tm=1226371038

    …and yet the following in Richmond (also for 680K) interests me a great deal more:

    http://www.realestate.com.au/cgi-bin/rsearch?a=o&id=105206611&f=10&p=10&t=res&ty=&fmt=&header=&cc=&c=52237261&s=vic&tm=1226371157

  29. pedro says:

    Anyone who wants to get excited about the cost benefits of inner-city highrise is welcome to contact my wife.
    She would like to sell you a 2 bed CBD apartment with river views, over the freeway, for a bit over $600k in the current poor market. That price is pretty near break even for the developer. That unit is 76sqm, including the huge 13sqm balcony. I’m not sure if that price includes a car park, but it probably has 5sqm metre basement storecloset. Sure the building has a pool and small gym, but that’s not a lot of home for the dough. Oh, and the land cost per apartment was $5600, so the cost is very much the build and development costs and not the land component. Good luck trying to fit a few kids in there.

    When you look at those numbers urban infill by high density is not such a good story. Plus when you ramp up the density you also have to factor in the cost of duplicating or expanding existing services. The sewer pipes won’t have been specced on Hong Kong density assumptions. Building new suburbs is likely to be a lot cheaper as a way to get people family sized homes. The cafes and shops turn up eventually.

  30. Patrick says:

    yea, NPOV, fine, but the Hoppers house is old and ugly, whilst the Richmond one is quite new with a much much nicer kitchen, so I don’t think you are really comparing apples with apples at all!!

  31. NPOV says:

    pedro, it’s not about the cost benefits – indeed, I fully expect life will be more expensive living closer to the city. Nor am I interested in high-rise living, or believe that there is huge need for it in order to boost the density of inner suburbs.

    But I don’t understand your logic – that because high-density living is currently expensive it would be mistake to build more high-density housing? I would’ve thought exactly the opposite – high-density living is currently expensive because there’s not enough supply to satisfy the demand. Build more higher-density housing, and prices should come down (at least, relative to incomes).

    Again, nobody’s talking about converting Melbourne (or any Australian city) in Hong Kong. Urban Melbourne is already about 70% less dense than it was in the 1950s, so clearly there’s plenty of scope for increasing it again.

  32. NPOV says:

    Actually Patrick, it’s the location that puts me off the Richmond one – wedged right between the train line and freeway, and not particularly close to the best bits of Richmond, or even a grocery store. I’d much rather buy something run down in a better part of the suburb.

  33. conrad says:

    Not that I want to derail the thread more, but if you want to move to Richmond, you should look at the crime statistics first — it’s basically crime central (especially near the stations), so if you want to live there, make sure your house has some pretty decent protection — fully lockable rolling screens like you get in many places in Europe are good, as is one of those super tough front doors (my friends have both of these, and someone still tried to break in).

    I think the problem is that it’s basically a major station where junkies get off and then find out they need to steal something to buy their next hit.

  34. NPOV says:

    Well, sure, higher crime rates are one of the big arguments against higher population densities. But even in Richmond the biggest threats to my life and health, and that of my loved ones, is unlikely to come from random criminals.
    For instance, if we could live somewhere that halved the amount of driving we typically did, that would almost certainly compensate of any increased risks from higher crime.

    I’ll also say, simply having my house broken into and possessions stolen honestly doesn’t phase me that much – it happened to our childhood home at least 3 times in the space of about 10 years, and that was in Balwyn.

  35. Patrick says:

    Ill also say, simply having my house broken into and possessions stolen honestly doesnt phase me that much – it happened to our childhood home at least 3 times in the space of about 10 years, and that was in Balwyn.

    Uh-huh. Until you’re home when it happens, or return home when it does, or even worse one of your kids does…

    And wtf anyway, I don’t think I have ever heard anyone say anything like that before (no wonder you are a closet socialist!).

  36. NPOV says:

    Obviously any crime that puts your life at threat is a completely different ballgame. And while I don’t have the stats at hand, I’m pretty confident that even in Richmond, the probability of being killed or permanently injured is still extremely low, vs, say the probability of the same occurring in a car accident.

    Why exactly should having my (insured, replaceable) possessions stolen phase me hugely? It’s a nuisance to be sure, but I’ve never seen anybody’s life turned upside down simply because someone’s nicked off with your BluRay player and your wife’s favourite necklace.

  37. NPOV says:

    Seems I might be wrong there – from what I can see, the homicide rate in Richmond for 2006-2007 was 9 per 100000, but the Metropolitan road toll was 158 – working out to roughly 4.5 deaths per 100000 for urban areas (assuming 3.5 million population). Which genuinely surprises me.
    In contrast my current suburb’s homicide rate is 2 per 100000.

    Which is definitely pause for thought. Maybe pushing for higher density isn’t such a good idea.

  38. NPOV says:

    Further, it does seem that there’s evidence that the cost of providing government services only goes up once density reaches around 640/sq.km.
    What isn’t so clear is the degree to which this pays for itself due the fact that more dense areas generally spur higher levels of economic growth.

    Still…it may well be that urban sprawl is the lesser evil after all, at least as long as humans insist on continuing to reproduce in such numbers.

  39. pedro says:

    NPOV, I’m not against high-density if that is what people want. The point I was trying to make is that high-density housing is probably higher cost to produce and you end up living in a closet. Competition cannot sustainably drive prices below the cost of production.

    I’m sure you are correct that urbanisation spurs economic growth, but I doubt there is a constant correlation to increasing density of urban areas.

    Visiting London this year with the family and staying with my sister, I really quite liked the density trade-off in Battersea Rise where she lives. Trips to the park were good because there were plenty of other kids and parents. However, my home is in an area of 16 and 32 perch blocks with parks and a forest and plenty of kids so the neighbourhood is great for bringing up a family. We even had halloween as a big deal with kids and lollies everywhere. Very nice and friendly.

  40. NPOV says:

    Well “living in a closet” is a very subjective judgement. Personally I find most new homes built these days excessively large – way too much maintenance, plus the expensive of heating/lighting them etc.
    The reality is that people are prepared to pay a lot of money for relatively small houses, if they’re well located. I don’t think the cost of production comes into it significantly.

  41. pedro says:

    You’ve not been in a 50sqm or 70sqm apartment then NPOV?

    There’s a big difference with a McMansion and plenty of room in the middle for a sensible sized house. My house is about 220sqm with nice sized rooms, but no mansion obviously. We’re plenty happy. That would cost maybe $700k to develop as highrise any where. You can buy a suburban house that size for much less as long as you don’t want to live close to the CBD or on the water. My point is only that highrise homes are expensive to produce and therefore not necessarily an answer to housing woes in the wide open spaces of australia.

    Now, my home is on two 16perch lots, but I need demolition consent to pull down our old bungalow if I was to build to new homes on the 2 lots. Luckily I’m outside a character area so it is a bit easier to achieve, but our house has got some merit issues and so my retirement plan will probably need a bit of work.

    Smaller apartment blocks are a better chance for affordable housing in the city, but of course many of the old close-in suburbs here in Brisbane have heritage and character protections, so you can’t do it.

  42. NPOV says:

    And I’d be willing to accept that heritage and character protections as they exist currently are unfairly blocking the potential for increasing the supply of housing in inner suburbs. Certainly and heritage/character protection that forbids adding further storeys to existing buildings seem to me completely unjustifiable.
    I don’t know about Brisbane, but one of the problems with many of Melbourne’s inner suburbs is that there’s subtantial amounts of single-storey terrace/row housing, which, in cities in Europe, would be double or triple storey housing.
    Now, there’s definitely a risk that without some amount of legislation covering permissible extensions, a lot of potential storey additions to 19th century housing could result in some very ugly developments indeed – but there must be quite a few good developers/architects out there willing and capable of giving it a shot that are being frustrated by current planning requirements.

    Now, having said all that, after doing some admittedly brief reading on the issues with increasing population density, I’m now not so sure that’s the best direction to take after all – far better is probably to encourage less dense medium-distance suburbs (say, 10-15km from the CBD) to gradually increase in density. Actually, you can already see it happening, especially around here, where a lot of single-dwelling properties get demolished and replaced with a pair of units/townhouses, especially on or near the main shopping areas.
    One can only hope that after a sufficient period of increasing density, such suburbs have a hope of offering the lifestyle choices of inner suburbs, especially if combined with sensible infrastructure development.

  43. melaleuca says:

    “And Id be willing to accept that heritage and character protections as they exist currently are unfairly blocking the potential for increasing the supply of housing in inner suburbs.”

    True. My idea is that developers should have a much greater right to demolish and develop but they should be required to pay compensation to neighbours who have a legitimate claim to loss of amenity or property value due to the development. This seems to be to be the fairest and most economically advantageous solution.

  44. JM says:

    NPOV: “heritage/character protection that forbids adding further storeys to existing building”

    I can speak to this a bit. Heritage overlays do *not* prevent this at all.

    All they do is they require that the developer apply for and obtain a permit (which can require consideration of character etc). Generally speaking, that assessment will not prohibit the addition of rooms or extra stories that are at the back of the property and/or don’t alter the nature of the street.

    I think this is called “external amenity” (forgive me, it’s been about 5 years since I was last involved in this stuff). It impinges directly on the “legitimate claim to loss of amenity or property value” mentioned by melaleuca.

    I have a period property in which I have expended considerable amounts of money – more than the original purchase price – to restore. And yet, the majority of its premium value comes from the surrounding historical area rather than anything intrinsic in itself.

    That’s why I fought (and lost) against a modern development next door. I have sworn valuations showing that I suffered a decline in value of around 10-15% in the middle of a boom as a result of that development.

    As did other neighbours, which is why we now have a heritage overlay in this street. “legitimate” enough I think. Talk quietly to a real estate agent, some of them are candid enough to admit that modern development in old areas is “parasitic development” where the value of the new development is outweighed by the destruction of value in the existing properties.

    Further, it’s important to understand that the heritage overlay provisions in Melbourne establish (actually this is more part of the implementation than the provisions themselves) 3 categories of property in overlays.

    1. Protected. National Trust listing style stuff. You can’t knock it down.

    2. Contributing. We’d really rather you didn’t knock it down so you have to apply for a demolition permit.

    3. Non-contributing. We kinda wish you don’t knock it down, but provided you get a planning permit for the replacement, be our guests.

    Very few properties are protected, a few are contributing, most are non-contributing. That’s what happened to me. Mine is contributing, the place next door was non-contributing and the developer had no more trouble than the cost of acquiring a planning permit (which funnily enough overrode elements of the building code, but that’s another story).

    Melaleuca: “developers should have a much greater right to demolish and develop ”

    How could they have any more than they already have? In Melbourne, in the absense of an overlay they have:

    * as of right demolition permission (no permit required)
    * as of right building permission (no planning permit required, only adherence to the building code).

    In addition quite a few things like garages, swimming pools, utility sheds, etc, etc do not require planning permits even in overlays.

    “Open slather” is the best description of the normal situation, and it gets to be pretty close in overlays as well.

  45. JM says:

    Sorry, a further comment on another issue.

    NPOV: “a lot of single-dwelling properties get demolished and replaced with a pair of units/townhouses ”

    This is a bit of a canard. The existing properties are usually 3-4 bedrooms and tend to house around 4 people. Town houses tend to house 2 people, so there is no net change in population density (there is research and stats to back this up somewhere but I can’t lay my hands on it just now).

    You don’t really get much of an increase in population density until you replace single dwellings with multi-story flats and that’s not really an achievable goal politically.

  46. NPOV says:

    JM, thanks for the info on the overlay stuff – I do wonder why then you virtually never see a single-storey C19th building anywhere in inner melbourne have extra storeys added. Is it really just far too expensive to do in such a way that it stays “within character”?

    As for single-dwelling properties being replaced with two townhouse/units – around here at least, I suspect you’re right to a dregree – there’s a lot of new floor space (two double-storey townhouses on a property where a single-storey house with a large backyard used to stand) without there necessarily being a lot of new bedrooms and hence extra occupants. However I suspect a lot of the properties being replaced tended to house retired couples and even the occasional single, and many of the new townhouses are actually 3BR (a search on realestate.com showed at all townhouses for sale in our area are in fact 3BR) – so I’d be surprised if there was no increase in density.

  47. conrad says:

    JM: Open slather is the best description of the normal situation, and it gets to be pretty close in overlays as well.

    JM — there is is a huge difference between knocking something down and building something ugly of a relatively limited size there (which you can do) versus knocking something down and building something big (which you can’t do). Try taking a trip down Beach Road in Melbourne (say Mordiallic to Brighton), for example. Notice how there are essentially no developments over 3 storeys but quite a few ugly places? That isn’t because you couldn’t make money having big develpments there. So the restriction is mainly on size, not ugliness.

    JM: “The existing properties are usually 3-4 bedrooms and tend to house around 4 people. Town houses tend to house 2 people, so there is no net change in population density”.

    That certainly isn’t the case where I live (Bayside in Melbourne). It’s common (or at least was before the recent troubles) for once large blocks (around 800 sqm) with one house and backyard on them (3-4 people), to get either subdivided, where the garden becomes the new home (giving 6-7 people), or have 3-4 of those skinny two-level townhouses built on them. The townhouses contain similar numbers of people as the houses, because they are 2 storey, unlike the houses, which were generally one. This would at least double the people density.

  48. NPOV says:

    Well I have to say JM is most likely right regarding my own suburb, which actually lost population between 2001 and 2006. Further, there is new housing recently completed and some soon to be completed on previously undeveloped land on the outer fringe, so it’s very hard to see how there could have been much increase in density anywhere in the suburb.

  49. NPOV says:

    Specifically, the average number of persons per household fell from 2.85 to 2.79 for our suburb as a whole. But it’s almost certain, looking at other stats, that this is largely because there’s a lot of “nest emptying” going on, as the only age bracket whose numbers increased was the 65+ one.

  50. pedro says:

    I have not looked at the Stats, but my area would have an increasing density because it is full of young families after doing the demographic round-about. Swapping a big house for 2 town houses will increase density where there is a demand for 1 and 2 person households, and probably won’t happen in a street like mine where the premium demand is now for family homes.

    My experience is that you can’t control ugliness. Inner-Brisbane character areas get repro homes when new places are built, and they are ugly as often as not. My area is demolition control but not character control, so new houses tend to be pretty nice, and much more sensible, modern houses. Mind you, there are areas where the new houses are uniformly ugly or plain, but that tends to be through developer controls or because the housing is lower cost. Developers often use covenants to control quality and design in the estates. I’m yet to see that work well, but I guess plenty of people like the look of McMansions or they wouldn’t exist.

    I hate the idea that my neighbour’s taste defines my use of my land.

  51. NPOV says:

    “I hate the idea that my neighbours taste defines my use of my land”

    It seems there are two choices: either you make it relatively easy to sue a developer if you can demonstrate that what they have built has significantly devalued your own property, or you make use of existing democratic processes to allow communities to collectively decide on what minimum standards should exist for properties in the area. Both options have upsides and downsides.
    But I don’t think any local government has been elected on the grounds of drastically reducing planning restrictions.

  52. pedro says:

    Agree with the last point. But people don’t necessarily vote for good ideas. The suing for lost value is a bad idea though, because:
    1 valuation is a crap “science”.
    2 valuations move around so the apparent loss today might be a profit tomorrow.

    The land has the long term value and a house is a depreciating asset, so the first block of flats might seem to reduce the value, but the land value could easily rise because of the potential redevelopment profit. People don’t buy houses to pull down if they’re not going to increase the value by doing so.

  53. NPOV says:

    I’m not so sure houses are always depreciating assetz. If there’s growing demand for genuine period properties, of which there is by necessity static (or most likely gradually falling) supply, there’s definitely some form of appreciation, even thought it’s clearly no sustainable indefinitely. But neither is the value of land, if for instance population starts falling.

    “People dont buy houses to pull down if theyre not going to increase the value by doing so”

    But that’s the problem – if one or two individual developers decide they’ll personally profit by pulling down some period properties to replace them with blocks of flats that, by sheer virtue of the fact that they can house more people, are worth more profit to them, it’s still quite conceivable that the resulting effect is that the value of all other properties on the street decline somewhat. And you might say valuation is a crap science (we’ve been through the argument as to whether real-estate agents are a particularly skilled profession), but ultimately it’s the market that does the real valuation – and certainly if you can show that there’s a very strong correlation between the development of blocks of flats out of keeping with the character of the area and a subsequent drop in price of the “character” housing then surely you have a strong case for suing those developers. Of course nobody wants to see the actual suing happen, rather the idea is that the threat of it occurring is enough to ensure developers don’t build in such a manner that the attractiveness of the neighbourhood is significantly lessened.
    But personally I’m skeptical that such a threat would be particularly effective – and I’d much rather leave the determination of building standards in the hands of local governments answerable to the voters in the neighbourhoods in question. No, voters don’t alway vote for good ideas, but I’d suggest it’s pretty rare they consistently vote for policies that are strongly against their own interest (unless perhaps they’re working-class Republican voters!).

  54. JM says:

    Just a comment about planning and the discussion here re. value (yeah I know I think I started it but still ….)

    Apparently in planning you are not supposed to argue on the basis of value, but rather amenity. I surmise that this is because

    a.) planning is about land use, and is not supposed to be an industry policy or there to facilitate profits

    b.) if you start arguing about value you open the door to philisophical disputes about the freedom to develop etc

    Personally, I think the amenity argument – don’t wreck the area I’m living in – makes sense from a political perspective because people do care about where they live and choose their houses at least partly with that in mind.

    Additionally, I don’t think anyone in their right mind would willingly live in an area without some agreed planning criteria. I say this for two reasons

    1.) the area in which I live was almost totally without planning (or at least effective planning as the council basically just paid the minimum amount of lip service) for around 20 years. The legal fights and general dust-ups that resulted are the stuff of legend. Decent planning policy has calmed everyone down and given a lot of certainty to both developers and residents.

    2.) I hear that Dallas was completely without planning controls through the 80’s and 90’s which lasted until some large company (forget who) ended up with a junk yard opening up next door to their brand spanking new headquarters.

    It’s also worth pointing out that not everyone likes McMansions or has a preference for the “utility and good sense” of modern housing. There is a market for historical and character housing (although many developers are quite disparaging of those people probably because they aren’t likely customers) so there is an argument that the certainty provided by modest regulation allows that market to function.

  55. NPOV says:

    I was reading through the list of councillors up for election in our local area last night. Virtually all 12 of them promised tighter planning restrictions.
    In fact, there seemed to be strong anti-development bias across the board.
    I can’t say I feel that’s a particularly healthy state of affairs.

  56. pedro says:

    NPOV, my take on it is that everyone is in favour of sensible development somewhere else, and stasis in their neighbourhoods.

    Houses are depreciating assets as a rule, but not as an absolute.

    As a rule you can’t sue for that type of economic loss as a ground of public policy and also I expect the duty of care does not exist. And imagine trying to define that duty. It is easy to talk about the ugly block of flats devaluing your property. What about the car on blocks, or the crummy old caravan moldering away. What about the house the blocks your view over what for decades was a vacant allotment. What about the student house.

    Plus, I don’t think there is any answer to my point that any valuation effect is likely to be transitory and finally, the idea that X should pay Y compensation for doing something lawful is kind of hard to reconcile with normal expectations of life in a rule-of-law society.

    Frankly it is a very hard area. As you note NPOV, voters are rarely prodevelopment because they worry more about the potential effect on themselves than on the greater good and, like any central planning, town planning is very hard to do well.

  57. NPOV says:

    Well as I understand it most new developments require displaying some sort of board advertising the intent to procede with such, giving local residents the opportunity to object etc. If this process works well enough, then it’s hard to understand the need for highly stringent planning restrictions other than basic requirements like structural integrity and “appropriateness for general viewing” (such as the censorship board might judge).

    Yes it’s a hard area – but I suspect all up, the status quo actually isn’t all that bad. Certainly anyone who believes the solution is absolute property rights were the owner of a piece of land can do whatever they like with it is, as I was apparently accused of recently, definitely off in cloud cuckoo land. Any solution that’s never going to able to gain voter support is no solution at all.

  58. pedro says:

    The restrictions are the rules by which proposed developments are assessed. One apparently crazy aspect is that planning decisions can be appealed to a court. Also, all applications need a notice board, but not applications are subject to public comment.

    I’m not sure absolute property rights would not have as good an outcome as planning restrictions, if not better, but they are a fanciful idea. The overall benefit of much policy gets lost in the annecdotes about problems.

  59. NPOV says:

    Well I have to ask – do you believe people should be able to make as much noise as they like on their own property? To release as much noxious-smelling (but not necessarily health-threatening) pollution as they like?

    There are surely plenty of places in the world that come pretty close to the ideal of people being able to do whatever they like on their own land. I don’t know of any I’d like to live in, however.

  60. JM says:

    Pedro.

    Planning decisions of council are appealable in the first instance only to VCAT, not a court. VCAT do a “de novo” (if I’ve spelt that right) review ie. they look at the issue more or less from scratch on the merits.

    If you lose at VCAT you can then appeal to the Supreme Court but only on a point of law, not the facts or merits (as those have already been decided by VCAT).

    That’s actually fairly restrictive, and very few people do it (apart from developers who lose at VCAT less frequently and have a higher monetary incentive).

    You’re right that many applications are not subject to public comment (and therefore don’t require posting a public notice). In fact many of the things people like to do (garages, extensions not visible from the street etc) fall into this category.

    Speaking personally, I think absolute property rights would be appalling. It’s tantamount to saying that my neighbours have no interest in the neighbourhood at all. That’s not a point of view we as a society find palatable – we encourage people to volunteer in their communities, to support the development of public space, charitable organisations and also to stand for council.

    How can you expect people to get involved if they end up with absolutely no influence over issues of importance to them?

    There’s a balance of interests here, and planning is just a mechanism – however imperfect – to achieve that.

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