House prices

As readers of an earlier post will know, I’ve become interested in the arguments that suggest that greater deregulation of land usage could improve land usage and in the process lower house prices to the great benefit of those trying to buy their way into the market.

Here’s the resulting column. It’s rather less assertive than Michael Duffy’s column on a similar theme.

Brisbane house prices

Brisbane and Houston don’t have a lot in common right now. Let’s just say that Houston is windy one day, cataclysmic the next. But here’s another big difference between the two cities. House prices.

Though some studies give the mantle to Melbourne or even Canberra, one measure released last month had Brisbane as Australia’s second most expensive city behind Sydney of course.

Most of us like higher house prices, because most of us have a stake in our own home. We feel wealthier but are we? Of course as prices rise the amount you’ll get for selling your home rises. But you still need a home. And it will cost more too! (In fact the cost of turning over equivalent houses actually rises because stamp duty increases by at least as much as price increases but usually more as stamp duty is ‘progressive’, with rates going up as prices rise.)

Of course if you scale down your housing needs say you’re an ’empty nester’ and your kids have moved out, you can move to cheaper digs. Voila: extra cash!

But pity those in the opposite position typically gen X and Y’ers scrounging and scraping for a deposit worrying about prices racing away from them. They’re not so happy.

The Prime Minister says he’s relaxed and comfortable, his views captured by that old song “It’s a not so bad, it’s a nice place. Ah-shuddupa-you-face”.

As he points out, home ownership rates are still at 70 percent roughly where they’ve been for ages. But looking behind that figure two things are going on. Young people are taking much longer to get into their first home, but because our population is ageing there are relatively fewer younger people about!

From 1990 to 2001, the share of people under 24 who’d bought their first home fell by a third from 15 to 10 percent. Some are giving up the fight and the benefits that come with it from the social benefits of stronger communities to the economic benefits of higher savings as people repay their mortgage.

Understand who wins and loses and you begin to understand the underlying politics. Understand more still if we can see how people’s economic commonsense sometimes leads them astray.

Home-owners (including investors) are a majority. They’re also ‘insiders’ with an interest (or a perceived interest) in rising prices. And politicians help them out.

With ‘negative gearing’ and capital gains tax concessions, investors really do win though less than they think. Their main gain has come as prices adjusted to new tax breaks. Now they wear the risk that prices will fall back if the tax breaks are ever removed.

And though most homeowners feel rising prices make them wealthier, for many the best that can be said is that they’ve got a hedge against the house-price inflation raging around them.

And has it ever struck you as odd that Australia’s most decentralised capital city in Australia’s most decentralised state has such high residential land prices?

An American consultancy Demographia has analysed housing affordability across what you could call the Pacific Anglosphere USA, New Zealand, Canada and Australia. They produce some amazing comparisons.

For instance expressed in local currencies, the median household incomes for Houston Texas and Brisbane during 2004 were almost identical at around $50,000 US and Australian dollars respectively.

However median house prices were US$138,000 in Houston and A$300,000 in Brisbane. And Houston’s population is around twice the whole of South East Queensland’s, or it will be when people return home after Hurricane Rita.

Demographia argues that ‘smart growth’ zoning policies are to blame. Houston doesn’t have them, letting land develop without zoning. In ‘smart growth’ cities like Brisbane government planners use zoning to increase population densities in well serviced inner city areas in an attempt to reduce infrastructure costs.

[NB – on reading this column NZ anti-‘smart growth’ activist Hugh Pavlich, has written to me stating that “our research indicates that increased density increases infrastructure costs. Partly because upping capacity and upgrades costs so much in built up areas. In fact, quietly lowering the density over time, should help the aging infrastructure to cope better and longer. “]

Rationing space like this is not so good for outsiders trying to buy in. But constraining urban sprawl plays well politically and it supports house prices for the majority of voters in state and council elections.

Certainly previous attempts at urban engineering have led to spectacular social, economic and aesthetic disasters, not least the high rise housing commission flats that blight Australia’s larger cities.

People justify ‘artificial land scarcity’ as a defence against urban sprawl. Fair enough. But South East Queensland seems to be arranging the worst of all worlds for itself. With a relatively small population and snarling, sprawling suburbia 100 kilometres to its North and its South, Brisbane has the eleventh worst housing affordability in Demographia’s Pacific Anglosphere.

And what’s being done about it? The recently released regional and infrastructure plans for South East Queensland withheld eighty percent of the region’s land from housing including the hinterland of the Sunshine and Gold Coast.

If you own your own home that should make you more relaxed and comfortable. And it will help keep Government infrastructure costs down. So everyone’s a winner.

Well everyone except those ‘outsiders’ still saving for a deposit that is.

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25 Responses to House prices

  1. Joel Parsons says:

    Congratulations Nicholas! This would have to be one of the best posts I have seen on Troppo yet.

    Artificial land scarcity is a big contributor to driving up property prices in Australian capital cities and the story isn’t getting told enough.

    Just one point however, falling home ownership for twentysomethings might also reflect simply that we take longer to settle down than fifteen years ago. We study longer, travel longer and take longer to start permanent relationships, so we don’t think about home ownership till much later in life. I will not even be finished my University studies when I am 24, and don’t really look forward till home ownership until I am at least 30, and know where I want to settle down.

  2. Thx Joel.

    I appreciate your point, and wish I’d added an aside to that effect. After all, I was a late settler downer. I expect there’s a correlation with length of time in institutions too (educational or ‘corrective!)

  3. Hugh Pavletich says:

    And I add my congratulations too Nicholas! Its just great to see that you are taking such an interest in this issue of critical importance.

    Lets just say that the Demographia International Housing Affordability Survey 2005, http://www.demographia.com , of the 88 largest urban areas in Australia, Canada, USA and NZ, using the median multiple approach, is a start. It provides us with a long overdue benchmark for “best practice” internationally. It illustrates clearly, just how much we fall short currently in Australia and New Zealand. We can and must do better.

    The Survey – in an expanded form – is to be repeated annually.

    We know that the Australian residential production sector is one of the most highly efficient in the western world ( McKinseys Research ) – so the problem is land, associated costs and the supply strangulation.

    Our untested research indicates that the major urban areas of Australia and New Zealand were at a medium multiple of 3, with Sydney 4, back in the late 1970’s. So we know we are cabable of reaching these affordability levels again, if we want to.

    I would be most interested to learn from you and your readers, their ideas on regulatory ways local authorities could be required, not to monkey around with land supply. Is the Oregon Measure 37 type of regulatory move applicable here for example? Any other ideas ?

    Best regards
    Hugh Pavletich
    Christchurch
    New Zealand

  4. Paul Maginn says:

    Nicholas,

    Your (and others) musings on house prices and land supply resonate with my own predicament – I’m looking to get a foot on the housing ladder but am fidning it difficult to do so as median house prices here in Adelaide have increased quite dramatically in the last 12-24 months. Morevoer, your pieces is timely in the sense that I am organising a major public lecture here in Adelaide on whether or not urban consolidation is the planning plague of housing affordability. The lecture features Bob Day (National President of the Housing Industry Association) who is very much in your and Hugh’s camp on this issue and 2 local gov’t speakers – Cate Atkinson (Playford Council) and Helen Dyer (West Torrens City Council). Details of the lecture can be found at http://www.unisa.edu.au/nbe/lecture/planning.asp.

  5. Nicholas;

    In my time as a staffer for David Tollner I researched a wrote a short ditty on house prices. What is most interesting, in my opinion, is that if you look at new dwelling approvals as a percentage of population, today it’s about half of the post-war rate. Fewer new dwellings are available per person than previously.

    What I left out of the report was my personal view that low interest rates and negative gearing are huge drivers for property purchases, and that the whole market looks a lot like a pyramid scheme. So long as people coming into the market are prepared to pay a price – any price – to get into property, the market will continue to rise. When people stop buying at that “any price” the pyramid will stop growing and prices will begin to fall. This seems to be happening already, but eventually those falls will be deep enough to put a lot of people own property with negative net value. It’ll be ugly.

    My little paper is still online:
    http://www.pc.gov.au/inquiry/housing/subs/sub087.pdf

  6. derrida derider says:

    I once had a friendly argument with a local ACT politician about local land release policies. He contended that these should be deliberately geared “to produce a steady increase in land prices” and opposed land taxes because “they can depress land prices”.

    He seemed incapable of grasping why the former might be a bad, not a good, thing and why the latter was the reason land taxes can be both efficient and equitable (at least he’d got beyond the popular view that land taxes must *raise* prices). But after a while I decided it was the politics of the matter which caused his obtuseness. As HL Mencken said, it is hard to make a man understand a proposition when his income depends on his not understanding it.

    If it is silly for Bribane to artificially restrict land releases, it is doubly absurd in the ACT where land is the one thing that is really plentiful. As for infrastructure and transport costs, surely the answer is to price things properly and then let people make their own decisions about lifestyle – economists are quite right in saying that an awful lot of ‘social’ problems are actually problems of mispricing.

  7. John Humphreys says:

    One note on increase house prices meaning increased wealth… there is one area where this matters, and that is using housing equity for other purposes. This is a real benefit.

    FYI — I think we should get rid of zoning/planning laws, which would dramatically reduce property prices. Luckily for me (as a dual home-owner), nobody will ever listen to me.

  8. Yep, Canberra having (according to some figuring) the second most expensive house prices in Australia is truly amazing.

    But this issue does seem to be getting a bit of a dust up. Michael Duffy took it for a walk round the block recently. And the RACQ responded to my column with strong endorsement (and argued for a consumption tax while quoting me – to warm the cockles of my heart – yes folks, my heart has cockles – apparently). So maybe things are changing.

    Anyway it’s up to you Gen X and Y’ers now. Get out there and fight for a bit of fairness for your generation.

    And yes, I agree Jaques, you can extract more wealth from your house with an equity loan.

    Equity loan anyone?

  9. Stephen Bounds says:

    Some observations on the above:

    Nicholas: your article is much better than Michael Duffy’s, which I found spectacularly unconvincing.

    derrida derider: while I certainly can’t defend all of the ACT’s land policies, I suspect the current approach is attempting to prevent the catastrophic slump in prices seen in 1997. Broadly speaking, I would think that that house prices *should* rise steadily (in line with inflation at least), and a small rise in addition to this would compensate for the gradual increasing desirability of a house in older areas as facilities there improve.

    Hugh, Nicholas & more generally: Why are low house & land prices in a capital city necessarily a desirable outcome? Surely part of the mechanism of supply and demand states that houses located in a city should be more expensive than those outside it. If people are priced out of the city proper, then we will see them living in satellite towns like Geelong, Wollongong, etc. and commuting via train or possibly car. Why is this a worse outcome than endless urban sprawl?

    Oh … and as a Gen Y reader, I should note that any political party brave enough to scrap the capital gains tax is likely to get my vote automatically (not that I’m holding my breath). I blame investors far more than land release policies for the sharp rise in prices.

  10. Steven, it’s fine if inner city house prices rise. Just not fine if they do it ‘artificially’ because land release is artificially reduced.

    And I like the idea of ‘satellites’ especially with fast trains. Then again it seemed like a nice idea to Bracks and the economics now look pretty shakey.

    But nothing I said was intended to suggest anything other than that we shouldn’t ration land for housing – at least without a good reason.

  11. sien says:

    Great stuff. Fascinating links regarding housing prices as multiples of income.

    On a related note there was an article posted over at Catalaxy about how people in the US are not going bankrupt because of spending on luxuries but rather because the percentage of income that is being spent on housing has massively increased.

    The URL is:
    http://badanalysis.com/catallaxy/?p=1202

  12. John Humphreys says:

    Stephen, why do you find CGT particularly objectionable? Why not also tax on other forms of investment returns such as dividends and interest?

  13. I think Stephen has left out the word ‘concession’ – and favours scrapping the CGT concession. Maybe he’ll tell us.

  14. Hugh Pavletich says:

    May I follow up on Stephen Bounds comments regarding land supply.

    Its very important to realise Stephen that if the price of land is artificially jacked up – there are consequences, in economic, social and environmental terms. And without exception – they are all bad. One could write a book on the “consequences” – and it would be a very large one indeed.

    Just one example here in New Zealand. Home ownership rates here are slipping dramatically – slipping by around a massive 10% over a 20 year period since 1989. Check the literature on the NZ Centre for Housing Research. The same will happen in Australia before long – unless there is something done about artificial land scarcities.

    In broad terms though, over the medium to long term, urban areas that lack sound governance and allow their median multiples to get above 3, are simply not internationally competitive. So firms that are exposed to international competition have no choice other than to relocate to urban areas internationally that are competitive.

    This land supply strangulation is in essense a game of power and protection. Planners striving for more control and their cheerleaders from the property sector supporting them, to generate easy profits and protection from competition. The public – and especially the poor, young and disadvantaged, pay the biggest price.

    Best regards,
    Hugh Pavletich

  15. Paul Watson says:

    The Prime Minister’s relaxed and comfortable view, about home ownership rates still being around 70 percent, is a canard. Home ownership rates in Australia have fallen to 66%

  16. blank says:

    Aren’t there really two arguments going on here?

    1. Are houses prices and thus rents higher than they could/should be?

    2. Will home ownership give a better long term financial result than renting and investing in other areas?

  17. Stephen Bounds says:

    (Er, yes — I intended to refer to the distortion created by concessions on capital gains tax.)

    Nicholas: I suppose the question then becomes — what is a “good” reason for rationing land? Clearly local and state government feel it provides better outcomes for the city. We can’t just complain about our personal economic pain with high housing prices because otherwise we should also get rid of all environmental controls, planning regulations, etc. Either government has a role in shaping the way a city looks, or it doesn’t.

    Hugh: I take your point about keeping the ratio of median income/median house prices to a manageable level, but I don’t necessarily agree that the magic number is, or will remain at, 3.

    For example, income is only one measure of household access to resources. A 3:1 ratio might be necessary in America where the user-pays principle reigns supreme, but a 5:1 or 6:1 ratio might be perfectly equitable in a city with free public transport and free medical care.

  18. John Humphreys says:

    Stephen… the Liberal Democratic Party currently has a policy of alligning all rates of income tax (personal, company, FBT, CGT) and removing all concessions. I’ll count on your vote then… :)

  19. Hugh Pavletich says:

    Stephen: We see the median multiple measure being of critical importance – as a useful and easily understood gauge of housing affordability. And that the multiple of 3 is achievable, if our planners would ensure artificial land scarcities are not created.

    In fact, I think the Australian urban areas, with your countrys highly effecient residential production sector ( refer my earlier comments on this matter ) could beat the American “best practice” level of around 2.7 – and probably achieve around the 2.4 mark.

    Artificially jacking up land / property prices, leads to poorer quality developments and lower environmental standards – to say nothing of the social problems it creates as well.

    Think in terms of the excess money being paid for housing lots currently as “dead money”. It would be far better if a considerably less was paid for lots and peoples limited financial resources went towards better quality housing and environmental improvements.

  20. Paul Merrill says:

    I agree with the general argument but feel that the combination of an aging population and insufficient superannuation could upset house prices in the medium term, say the next 20 years.

    Process is thus, baby boomers retiring decide that they don’t have enough money to live on and can’t or don’t want to continue working, so they decide to sell the house and move to a cheaper place to live, perhaps in the country or cheaper places along the coast.

    Result, market becomes flooded with boomers trying to dump their houses and since there are fewer X’ers and Y’s, “supply and demand” kicks in, and those houses in the outskirts of capital cities start falling in price, with the inner city sustaining their prices better. Net result is that a large number of middle class voters get really pissed when their house prices start falling by 10, 20 or even 30%.

    Longer term, as the baby boomers die, there is an oversupply of houses and the salary/house multiplier falls from 8 to 3, comparing Brisbane to Houston.

    Government solution, big time immigration, which will change the ethic mix of Australia forever (p.s., not being a racists at all here, I have no problem with more immigration, it’s what has happened in the world over the last 10,000 years as people have migrated from one country to the next). If there is no immigration, then Australia become a backwater, aka another New Zealand.

  21. Hugh Pavletich says:

    With respect Paul – you are viewing our urban areas in static terms. All building structures have a finite life and will mostly be demolished within say 80 to 120 years. Then they will be replaced with much improved structures – that better meet peoples needs at that time.

    Instead of worrying ourselves unnecessarily ( and unproductively ) about problems that might – just might – occur 25, 50, 100 years hence – surely we should be solving todays problems – today. Such as changing the regulatory environment – to ensure our housing is more affordable, as it was 30 years ago.

    If we solve todays problems today – we are indeed providing future generations with a sounder platform to deal with the unknowable issues they will be need to deal with.

  22. Stephen Bounds says:

    Hugh: I don’t mean to harp on this point, but you still haven’t explained how you decide on the ratio where land prices become “excessive”.

    Is it simply a matter of saying our ratio is higher than that of Country X’s, hence our prices are excessive? Or do you determine this by another method, eg. when above X% of income is spent on loan repayments?

  23. Hugh Pavletich says:

    Stephen – thank you for your question. You are not “harping on’ at all. I will attempt to explain it, without hopefully going on for ever.

    During the late 70’s in Australia and New Zealand, the percentage of land cost was about 20% for new housing. It has now shot through to anything between 40 – 70%. refer to the Australia Housing Industry Assn ( HIA ) 2004 Housing Affordability Report and the DTZ NZ Housing Cost Report late 2004 done for the NZ Centre for Housing Research. Both are available on the web. Meantime, in inflation adjusted terms, actual residential housing costs have remained pretty much static.

    There is a long overdue need for sound research on the price differences across our Australian and NZ urban peripheral boundaries – so that we can see clearly the differences between raw ( prior to subdivision costs ) residential and rural. I am sure that we will find that these price differences will be massive.

    Once these are clearly identified and coupled with the median multiple approach as illustrated within the Demographia Survey – we then have the necessary information available, to discuss regulatory steps that can be employed to “smooth out” these price differences.

    There is no need for these artificial raw residential land scarcities to occur. Just some 0.13% of the Australian land area is urbanised – some 0.78% NZ, 3.0% US.

    To give you some idea just how bad the situation is in Britain – The Guardian late last year reported of a case in the South East – where a 90 hectare farm had a value of 500,000 pound that on rezoning through to raw residential, shot through to a whopping 250 million pound ! Guess who pays for this nonsense ? The end home owner of course.

    No wonder the average new house size in Britian has shrunk to 80 sq metres – from 120 sq metres in 1920. an appalling state of affairs.

    Now contrast all this with new housing in the southern and central parts of the United States, where sections / lots can easily be purchased for $30,000 and below – and starter home developments WITH LAND are put in place at $800 per sq metre. A new 100 sq metre home works out at $US80,000 – a 200 sq metre new home at $US160,000 for example.

    Bob Day, National President of the Australian HIA visited Houston July this year – and within his recent speech “A Tale of Two Cities” ( accessible within the housing affordability section of his website Nation Build http://www.nationbuild.com ), he explains (a) the differences between the Sydney and Houston markets and (b) how they go about financing the infrastructure in Houston.

    All Im saying really is – if we managed to achieve the affordability multiples of around 3 say 30 years ago – and the southern and central states of the US are still doing it – whu cant we learn from history and also, what these American examples are doing at the moment ?

    None of this is “rocket science”. Its just a matter of dispassionately generating relevent research. Unfortunately, too many researchers associated with the property sector, fail to focus on the essential work required. I do hope others help out with this – particularly with the current peripheral urban land pricing issue.

  24. Stephen Bounds says:

    Hugh,

    Thank you for that link to Bob Day’s speech which I found very interesting and thought-provoking.

    My brain still rebels at the thought of a city left to develop in a laissez-faire fashion, but I’m beginning to think this is engrained thought patterns more than anything else.

    The one part of the speech which really hit home with me was the ludicrousness of a planning system that arbitrarily determines whether land is zoned as agricultural (selling for say $10/m2) or residential (and selling at 1000% premiums or more). The potential for corruption (or at least political favouritism) is undoubtedly rife on the fringes of a city under zoning control.

    I need to go away and have a think about all the issues raised here.

  25. Hugh Pavletich says:

    Thank you Stephen.

    This game of political power and market protection ( the unholy alliance ) – at the expense of the consumers – has gone on long enough.

    It will take people who care enough – to solve it though – regardless of their political persuasions.

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