This chart is quite revealing. Troppo readers either gloating over their high house prices, or groaning in anticipation of trying to ever buy one, are wondering what’s driven house prices up. In the last few years an international deregulationist movement based around the website demographia has been promoting the idea that ‘smart growth’ ideas for cities have been driving house prices up. This is the policy of resisting ‘urban sprawl’ by constraining the amount of land on the periphery of cities available for housing and encouraging ‘densification’ closer in.
I think the evidence for this view is pretty strong. The most persuasive evidence it seems to me is the comparison between American cities that ration access to land on the periphery and generally impose stronger restrictions on land development – LA, New York, Boston – compared with the ‘unzoned’ cities like Houston. Houston has about the same population as Sydney and the same average nominal income at around $50,000 (US in Houston’s case and $A in the case of Sydney). Yet (again measured in their respective currencies) Houston’s house prices are around 250K and Sydney’s are more than double that. Sydney has a water frontage ‘distorting’ its shape from a rough cicle, but it seems way to much to account for the difference.
Anyway, based on these ideas I had a go at these issues here. Still it’s been nagging at me. I know that land substitutes for other land all the way from the periphery to the centre. But surely – I think to myself, much cheaper prices on the periphery won’t reduce prices in the centre all that much.
Now Rory Robertson of Macquarie Bank has done a little research resulting the graph above. It looks like a fairly hefty blow to the Demographia view of the world. It shows that the lion’s share of the house price growth has occurred not as (I think) the Demographia view of the world requires it, more or less across the board as rising prices on the periphery arising from land starvation drive up prices everywhere. Rather the growth is, as in the hopeful breast of the property investor, driven by the growing attractiveness of land in the centre.
Where this valuation comes from is an interesting question in itself. As cities get larger the relative benefits from being closer rise presumably with rising congestion. Then again there’s also a movement to ‘edge cities’ connected by freeways. But another theme in all this it seems to me is the increasing proportion of our wealth devoted to positional goods. The appropriate policy response is probably a tax on positional goods (because one person’s good position is another person’s worse position – negative externalities should be taxed).
The other thing that is emerging is that there is more speculative excess in the areas that have gone up, so some of the effect may be emphemeral. But I expect a fair bit is not.
I also think it might be time to go invest in Sydney real estate again. I’m thinking about buying into some development which is having difficulty getting buyers off the plan but which will complete in a year or more (when rates should be falling and Sydney’s excess demand for rental housing makes itself felt again. Any ideas?