In the long debate over housing supply, I have been on the lonely side of the argument. Many readers would not know that my past career involved assessing site acquisitions and development feasibilities for residential and industrial developments. I was quite intimately involved in planning applications and housing supply decisions.
I took away an important lesson about housing supply from this experience. That lesson is that the rate of sales of new homes is what holds back housing supply, and the incentives are stacked in favour of not selling or developing rather than reducing prices.
So why do I need to reveal all this?
Because Matt Cowgill’s recent post on potatoes and housing supply, while internally correct and useful in to many real life situations, is the same model so often misapplied to the housing market to reveal the price impacts of town planning regulations.
Matt’s argument is straightforward. He uses the potato market as an analogy to housing. If there are many types of potato, and you reduce the supply of one type of potato, you reduce the supply of potatoes in total. And if potatoes are a staple with no substitutes (except between types), you have a price impact from the shortage.
So why doesn’t this logic apply to housing supply? It could, but you need to explain how town planning rules, which have become, if anything, far more lenient in the past decade in terms of allowable residential densities, can act like a quota restriction on the supply of housing as a whole. What makes town planning regulations equivalent to a sudden potato shortage?
To build a more appropriate potato analogy, imagine a shopping centre with many stores offering potatoes – a Coles, Woollies, a couple of fruit and veggie stores, and maybe even an ADLI. Now the shopping centre ‘town plan’ says that the potato density at Coles will be capped because the shops neighbouring Coles are sick of potato shoppers crowding outside their stores. Coles can sell no more potatoes each day than it currently does. Demand for potatoes is increasing. Does this Coles potato density restriction, perhaps called a potato-greenbelt, impact that total supply of potatoes to the shopping centre?
I argue it doesn’t.
So what is my evidence that the other potato sellers remain unrestricted? In the housing world, we have the evidence on many hundreds of thousands of approved new dwellings, many more potential new dwelling in areas already zoned, and many millions of new dwelling through infill and increased density of existing residential lots.
Even in Hong Kong, a place where the supply of land for housing seems obviously more critical than Australia, studies show government sales to land developers do not increase the supply of new homes.
Further, price fluctuations during housing booms tend to be larger in city fringe areas where the potential supply of new dwellings is highest. If the supply side was a factor in the past decade’s pattern of housing prices, these outer-urban fringe areas should have had the smallest price changes.
I don’t want to dismiss completely the possibility that housing supply can be altered by regulatory arrangements. However, to argue this is the case, you would need evidence that rents have been increasing in proportion to household incomes, that the square meters of housing per capita is falling, and that the quality of homes is diminishing. None of these factors exist as far as I can tell.
My observations have been that we had a speculative price boom in the early 2000s, then a short rental squeeze around 2009 as population growth spiked, and now both prices and rents are receding. During that whole period, the quality of homes and the area per person increased.
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I made 3 comments on Matt Cowgill’s thread, expanding on his analogy.
http://www.macrobusiness.com.au/2013/02/housing-policy-its-all-connected/#comment-212470
http://www.macrobusiness.com.au/2013/02/housing-policy-its-all-connected/#comment-212476
http://www.macrobusiness.com.au/2013/02/housing-policy-its-all-connected/#comment-212526
Cameron, your blind spot concerns the way the market economics for the “land” itself behaves. The original “Ricardian” assumption made by so many economists who lack specialist land economics training, falls over because Ricardo was only ever talking about the “total supply of land for all uses”, and assuming that land could be freely converted from one use to another. Obviously a quota system for land for growing potatoes, or for building houses, violates this assumption. Of course Ricardo could not have anticipated modern Greenie ideology.
Here is my extension of Matt Cowgill’s analogy.
Imagine the amount of land on which potatoes are to be grown, is rationed. The amount of land is increased by some percentage occasionally to allow for some demand growth but most of the additional supply required for the growing population, is expected to be met by “increased efficiency” in the use of the existing land.
(To make this exercise relevant to housing, there needs to be no “substitute” for potatoes, just as there is no substitute for land when it comes to housing. Oh well, I suppose people can sleep in their cars, like what is happening in Christchurch NZ now).
Would the land on which potatoes are to be grown, become subject to bidding wars between growers every time some of it was up for sale, and would the price of potatoes rise because of this? Imagine, too, if speculators saw the rising price of this land for growing potatoes, and got involved in the land market too, making it behave like shares or bullion, driving it an order of magnitude higher in price. Then ironically, might not most of the potatoes actually grown, be the regular ones, only selling for the price that Kipflers used to? Less Kipflers and Desirees actually grown and sold, at astronomical prices; and some proportion of the people now unable to afford any potatoes at all, even regular ones? Maybe more young people will stay with their parents and share their potatoes. Maybe potato gruel might come to be a new source of nutrition for some hard-up people.
Then imagine there was a public outcry against the potato growers – not the regulators and the profiteering land owners. This is what blaming “greedy housing developers” is like today. They have to engage in gladiatorial bidding wars to the death, for the available land supply, just to stay in business – or fold, because they have nowhere to build.
I find it extraordinary that, as Mason Gaffney pointed out in his 1964 essay, “Containment Policies for Urban Sprawl”, oligopolies that drive the price of any common items up are always subject to scrutiny and action from the authorities, yet the biggest cartel of the lot, in urban land supply, can operate in full view without any adverse comment. And he was writing decades before it became a major problem – except of course, in the UK, where it was in full force already.
There is no example anywhere in the world, where “allowing increased residential densities” has increased housing affordability as long as the supply of land beyond the fringe remains off-limits to the urban economy.
In the absence of such limits, there are plenty of examples of cities in the USA where housing remains affordable regardless of how much larger the sections have become. A small increase in affordability under these conditions would be possible if there were also no limits on residential densities. But land prices in unconstrained-growth cities are so low that there is very little cost to be saved by using 5% of an acre instead of 50% of an acre. The half an acre might be as little as $50,000, and much of the cost of this, is the cost of development and services and infrastructure. The actual “raw land” component is down around $5,000. So the cost saved by reducing the size of the section down to almost nothing, is less than $5000. Actually, some earthworks and development costs will be avoided, so let’s be generous and say that $10,000 might be saved.
The problem in unaffordable housing markets, is that the “raw land” cost component, net of the cost of the structure and net of the cost of development/services etc, is $500,000 plus per acre instead of $10,000.
This reality is concealed by the fact that the cost of development is significant and the cost of structures is even more significant. It does mean, though, that unaffordable markets end up with new housing options TWICE the price, on 1/10 of an acre section, as the equivalent house in an affordable market, on HALF an acre.
Here is the basic flaw with the idea that “X years supply of land has been zoned” on greenfields beyond the existing urban fringe.
The zoned amount is NOT the amount that NORMALLY WOULD COME TO MARKET ANYWAY IN THE NEXT “X” YEARS. It is the TOTAL quantity of land within the zone. To REALLY have “X years of supply”, it would be necessary to include in the zone, enough land that the quantity that IS “X years supply” WOULD come up for sale anyway in a normal rural market, at normal rural prices. This would mean a zone with about ten to twenty times as much land as “X years supply for urban growth”.
The land comprising “X years supply” by the planners standards, is being used for something already and no owner of it has any inducement to sell it at the value that it is worth IN ITS PRESENT USE. But having become aware that they are part of a newly created oligopoly holding of the next “X years supply of land for urban growth”, they cease to think in terms of rural land values at all, and start thinking like investors/speculators. None of them will be satisfied with a 10% capital gain, or even 20%. Expectations of gains become a reason to HOLD land and NOT sell it. So the planners “X years supply” becomes a LOT LESS than “X years supply” purely because of typical investor psychology. The planners have REDUCED the likelihood that any one land owner within the zone will in fact sell the land within the “X” years at all.
The fact that no-one involved in modern urban planning advocacy has ever shown any evidence of having thought of this, is just a sign of how grossly unqualified they are to be dictating outcomes at all in the first place. This stuff was far better understood decades ago, when the original experts who devised the UK Town and Country Planning System included compulsory acquisition of land in the proposed system. Compulsory acquisition of land, or taxes that are a nearly-as-powerful inducement to sell, are essential. But then “property rights” is used as an argument against these things. This is a perversion of the principle: the owners of land OUTSIDE the zone have already been denied THEIR property rights to do what they like with their land, not to mention the rights of young people to be allowed to get an affordable patch for their first home. Compulsory acquisition of land at the value that applies outside the zone, merely redresses the imbalance between the two sets of property owners, and prevents inequitable wealth transfers from permeating the entire property market.
Then, of course, we could simply not “restrict” urban fringe growth in the first place…….
A good set of posts, Phil, well solutioned with “…taxes that are a nearly-as-powerful inducement to sell, are essential.” Tax any land designated for future residential development to the degree that land-banking is defeated, and supply will emerge.
Sounds like an argument for a form of value capture tax, which is just as applicable to rezoning of infill development areas as fringe land.
Also sounds like an argument to go back to the Whitlam days, when land was purchased and formed the basis of State Government land banks that are only recently expired or close to expiration.
You make an excellent point that governments compulsorily acquiring land for development can merely turn into the monopoly exploiter, and maximise revenue rather than housing affordability.
The bubbles in some US cities were caused not by urban planning, but by Federal or State government ownership of most of the surrounding land.
At least government can be blamed all the more clearly in these cases, than when the issue is too complex for the general public to understand, and developers are the meat in the sandwich and getting blamed.
Phil love your comments. You deserve your own regular post.
Isn’t this one of the key parts of the problem?
“Even in Hong Kong, a place where the supply of land for housing seems obviously more critical than Australia, studies show government sales to land developers do not increase the supply of new homes.”
Time to cut out private land developers and go back government development measures based on a taxpayer owned land bank if you will?
All it takes is an Act of Parliament, a bit like when Venezuela suddenly decides it wants its oil back.
And who’s gonna be sorry that some dirtbag company which locked up 50 years of land around the urban fringe to squeeze unearned economic rent out of the rest of us just got punk’d? Ans: nobody.
I have a genuine question about why housing markets do not respond as though “supply” has been increased sufficient to bring prices down, when “increased density” is allowed. Theoretically, if “double the density” is suddenly allowed, “supply” has just been increased by the same amount as the entire existing area of housing has in it – which is exponentially more than what is needed for decades of new growth.
We need theories to reflect reality. The reality is that there is NO EVIDENCE ANYWHERE that “supply increase” via “allowable density”, affects the systemic affordability of housing AT ALL.
The best efforts by economists like Glaeser et al, have found that every additional quarter acre of section size mandated, increases “the cost of housing” in the market concerned by 4%. FOUR PERCENT……!!!!!! Violins, quick…!!!
This 4% is undiscernible in affordable, median multiple 3 cities, which have a median multiple of around 3 regardless of how much “large lot” zoning they have.
It is noticeable in cities where there are fringe growth constraints AS WELL AS minimum lot size mandates; IN THIS CASE, 2 acre minimum lot suburbs have prices that are 32% higher than otherwise. For example, in Silicon Valley, 2-acre-minimum-lot suburban homes are around $800,000 instead of, say, $500,000 had they been allowed to be built on smaller lots.
But in cities with no fringe growth constraints, the 2-acre-lot houses would be about $160,000 instead of $140,000 had they been on smaller lots. The effect is not even the 4% per quarter acre that Glaeser et al found in their study of a growth-contained city. This is from an already low base price. This is, as I explained above, because of the extremely significant role that the “RAW” land cost plays in the total cost.
Soooo where is the real problem with “affordability”, originating?
The increased supply through higher density is an argument that us planners need to be careful of. While density may have been increased when the land was zoned to a higher use, there are usually other restrictions such as limitations of height, and floorspace ratios that effect the viability of developing each lot. I work in an area where green policies at the State and Federal levels have made housing on the fringe next to impossible, and the NIMBYs see anything over three storeys as over-development. Here are some back of the envelope calculations to show what I mean:
2000m² block with a six storey limit.
Open space / access of 25% of site area.
Total GFA of 9,000m².
Construction cost of $3,000 (Cordell) per m² GFA.
Total construction cost of approx $27m.
15% of GFA lost through circulation.
Avg dwelling size of 110m², yield of 69 dwellings.
Construction cost per dwelling approx $338k.
Throw in site acquisition costs, design / engineer fees, developer contributions, taxes, marketing, holding costs etc. and you have a two bedroom dwelling being sold for $500k.
“I work in an area where green policies at the State and Federal levels have made housing on the fringe next to impossible, and the NIMBYs see anything over three storeys as over-development”.
Thanks fwoark. Cameron take note – the supply side matters!.
The greenies’ hypocrisy on this issue is mind boggling. They want affordable housing, but then tacitly support high immigration, limits to sprawl and oppose high density development. Go figure.
I don’t think NIMBYism is a greenie phenomenon or a result of Fed/State laws. For example, BarryO’s seat or in general, Kuring-gai council area has some of biggest, fiercest NIMBYs in the world, but you will be hard pressed to find a greenie among the conservative/Liberal voters.
It’s the people *cough* baby boomers *cough* who are NIMBYs, not a particular ideology. Greenies are just a convenient scapegoats.
By greenies, I mean those who create green policies such as the Improve and Maintain test, and the biodiversity offset policies. If you want to find the largest supply constraint to fringe housing in NSW, then look into the offset polices that were introduced under the previous State Government.
Since the preponderance of large-scale DA decisions have been taken out of the hands of elected officials in NSW, the influence Nimby’s have on DA’s has been reduced significantly.
‘large-scale DA decisions have been taken out of the hands of elected officials in NSW’
Could you expand upon this at all please? I sometimes wonder who votes for these green policies to which you refer.
NZ cities are absolutely infested with “intensification”, there are hundreds of suburbs where there would hardly be a single original quarter acre section remaining. They have all had townhouses plonked down on them.
Rather than being NIMBY’s, it seems more Kiwis have a beady eye on cashing out the new “value” of their own back yard.
Road congestion has increased exponentially, and at the same time, housing affordability has deteriorated considerably.
fwoark, got it. But I think it is incorrect to mix up the two terms, NIMBYs & Greenies. They are a different species altogether. NIMBYs oppose densification in their own suburbs. Greenies want to think of the trees & bees before you plonk a housing estate anywhere.
‘large-scale DA decisions have been taken out of the hands of elected officials in NSW’
You can only blame the well-connected developers for that. They have corrupted and vitiated the whole planning process. There is a tremendous amount of suspicion (with good reason – See Eddie Obeid, Tony Kelly, Medich saga) that elected officials on either side are puppets of the developers.
Mav, I disagree to a certain extent. These elected officials generally don’t have the faintest idea about development and are easily swayed by the vocal locals, who obviously vote them in.
I was in a local Council meeting the other night where a new Councillor refused to support the upzoning of a site in a new set of planning controls (a Church site in fact) simply because there were local residents in the room that thought the area was becoming over developed. There weren’t even any specific objections to the actual site and with a few words this thing was thrown out.
Bear in mind this was an upzoning to four storeys, with four storeys almost everywhere around it. I’m no fan of Council planners either and have daily battles with them, but you have to feel for them when their work can be dismissed by some muppet with no comprehension of what is actually going on and with, quite literally, no basis…
Yep, that is there too. Which is why NSW’s new planning green paper seems like a good idea – get community participation at the suburb level and agree on a plan, rather than give the loud mouths a voice for each individual site. We can all learn from Germany/Texas model.
I am. Of sure that I understand your argument- construction cost of $3,000 per sqm is resulting in a 110Sqm dwelling costing about $338,000. Yes, that is too much for a crappy 2-bedder in a 6-storey block, but it is all driven by construction cost not floor space ratios. The NIMBY/Green policies don’t seem to come into it… Am I missing the point?!
I responded comprehensively to Cameron Murray’s broader thesis, on THIS thread:
http://www.macrobusiness.com.au/2013/01/demographia-confusion/
See especially, my five comments late in the thread starting with this one:
http://www.macrobusiness.com.au/2013/01/demographia-confusion/#comment-209301
The issues he raises in his last couple of paragraphs on this current thread, re analysis of how housing markets behave under the conditions of distortion of the supply of land, are complex. I am confident that I dealt with these points at the earlier occasion that I link to in this comment.
His point about “the area per person” of HOUSING, is substantially reversed if it is the size of the SECTION rather than the size of the home that is considered. We would expect, in this day and age of falling prices of complex manufactured items, that the price of buildings would also be falling in real terms due to technology and market efficiencies. The whole issue with “housing affordability” is one of urban LAND prices.
Thanks Phil
I won’t say you’ve fixed my confusion on this housing issue….but lots of food for thought. My simple (simplistic?) response would be ‘It’s primarily a RAT interest rate problem’
Being an old Ag man I was busy here writing about the issue of maintaining prime Ag land close to cities. It was of some importance when I was at Uni in the late 60′s but has dropped off everyone’s radar since.
However my thoughts sort of turned into drivel as I wrote. It’s a big topic as it gets into the valuation of things under an essentially long cycle negative RAT rate environment. Maybe I’ll have another go at it one day in respect of land prices!!
Just thought I’d still mention the issue!
You obviously think about these things.
Thanks, Flawse; by the way, what do you mean by RAT interest rate? Does R.A.T. stand for something? I can’t find it in a dictionary of financial acronyms or anywhere.
I suspect you are referring to the phenomenon where it is more financially worthwhile to borrow money now and pay it back, than attempt to save it? Of course this problem is temporarily far worse in the case of property during a volatile price rise cycle. Reversion to long term trend in the property market does eliminate the temporary effect, but the paradigm re the incentive to borrow rather than save, might remain.
On the preservation of ag land, when you have 1% of your land in urban use, and 40% of it in ag use, mostly for export, what is the problem with allowing your urban area to grow by, say, another 0.1% per annum instead of 0.05% per annum? Hasn’t efficiency in agriculture achieved increased yields that would run far ahead of this sort of “encroachment”?
In the book, “Land Use and living Space”, Robin Best presents statistics re the UK – even there, with 8% of the land urbanised, and a much higher level of “population per available land mass”, agricultural efficiency has moved the country from being barely self-sufficient in food (WW2), to having surpluses for export and returning large amounts of farmland to “nature reserve”. Far more, in fact, than what cities have been allowed to grow.
If you read Richard Florida, “The World is Spiky”, you learn that all of the income growth in the global economy has occurred in urban economies for the last 60 years, while even with rising agricultural productivity, the income of that sector has gone down fourfold in REAL terms. This can be seen in the percentage of household income needed to pay for a given staple food item, for example.
What this has meant for rural land values, is that they have steadily dropped relative to urban incomes. This means that urban income earners can (if they are allowed to) consume more and more land on the urban fringe (in increased section sizes) at the same “proportion of their income”. This is why US cities can have a house price median multiple of 3 for decades; in fact it could DROP substantially as raw land costs less and less per acre relative to incomes, and as the production of houses becomes more and more efficient. But people do not “bank” these advantages as “lower housing costs” and have median multiples dropping through 2.5, 2.0, and so on (which is what would happen if they simply kept to the same house and section sizes and standards). They splash out on more space and more lavish homes.
There seems to be something psychological about humans comfortableness with a certain proportion of their income going on “housing”, or their house price being around 3 times their annual income. In every case where median multiples have risen, the reverse is happening – there is psychological distress, and attributes of housing, especially section size, being “traded off” in an attempt to restore “affordability”.
Each attribute of housing has its own supply and demand curve, and its own equilibrium price, and people make trade-offs at different rates in each attribute. It does not surprise me at all that house size has tended not to fall in Australia – not yet. Building sector efficiencies have kept the cost of the actual house reasonable relative to incomes.
But given long enough, as in the UK, a relentless increase in economic land rent for decades, sucks so much out of household’s “housing” budget before they even start to consider how much to pay for other attributes of housing, that they end up making forced trade-offs even in house size – and location efficiency, and age, and condition, and fitments, and neighbourhood quality, and all the rest of it. And other household budget items are squeezed – transport, education, health, entertainment, hobbies, child-bearing.
The glaring error made by Newman and Kenworthy – and everyone else in “planning” who relies on the correlation between urban density and “carbon footprint” – is that they assume that “efficiency” is the “causative” factor, when in fact the mechanism is “squeezed household budgets”…..!!!!!!!
The TRUE causation runs thus: “forced density – unaffordable housing – squeezed household budgets – reduced household consumption”. The reason that “sprawled” US cities have a high carbon footprint, is NOT “inefficiency” – it is discretionary income. These cities economies are far more “productive” economically than the UK’s cities, which destroys any idea that inefficiency is a problem. Average trip to work times are actually LOWER, and this is in spite of these cities much higher proportion of 2-parent households with children, who must compromise on “location” relative to TWO jobs, and one or more schools. The cities with MORE “singles” (because they can’t AFFORD to shack up and have kids) have the WORST average trip-to-work times in spite of the “advantage” of all those people who only need to locate relative to ONE JOB.
This perverse outcome is because of
1) congestion, and 2) the “pricing out” effect in property markets.
Thanks Phil
Re Ag land I have a severe bias. I just hate the sight of good soils disappearing under concrete. Thanks for the % stats. I’ll have to think up some smart answer!!!
RAT rates…sorry It’s been one of my continual rants.
Real After Tax rates.
There is some assumption in our economic thinking that we should work on Real Interest rates. In fact that is not what either household or private sector decisions are based on. We base all our decisions on the actual outcome after tax. I generally propose the company tax rate as a number if we insist on one. For households we should be talking the Marginal tax rate. More attention to the matter might come up with a better number.
Yes, as per your note above, both the tax laws and the monetary policy favour borrowers and credit creation. That’s how we got here.
Phil
My other thought on urban planning that I posted once on one of Rumple’s threads….
(Note I know SFA about urban planning. These are just observations from thinking about things over a long time)
Rumples argued that, in the simplest form, the most efficient plan for a city or urban environment was shops in the middle and housing radiating out.
This may well be true.
However if your economy is aimed at production rather than consumption factories require larger areas which tend to be, and should be, around the periphery of population centres. This creates a much more decentralised model and I’d have thought Carbon, infrastructure efficient as well! You’d tend to gt a lot more ‘satellite’ cities that required far less people movement.
Your larger section sizes come into their own in a productive rather than consumptive environment. It might also preserve some of my soils from being covered in concrete. We’d have a vege patch!
Anyway if you’ve got time I’d appreciate your thoughts on urban structure in response to production vs consumption based economies.
Thanks, Flawse, I get it about after tax interest rates. I sure agree with you. The Productivity Commission in NZ, discussing whether owner-occupied housing was “not taxed enough” in their findings about Housing Affordability, pointed out that the fact that there is tax on interest, does represent a de facto tax on mortgaged homes.
They also pointed out that Council rates are a tax, and that there is GST on new homes. Their conclusion was that owner occupied homes do not need any extra taxes to “level the taxation playing field”.
On urban form, I am dead against “radial” on principle. It focuses both economic land rent and congestion. There is a brilliant theoretical paper by the great William Wheaton, “Commuting, Ricardian Rent and House Price Appreciation in Cities with Dispersed Employment and Mixed Land Use”.
Dispersion spreads economic rent the thinnest, “prices out” the LOWEST possible number of households and businesses from enjoying location advantages, and disperses rather than focuses traffic congestion.
Both the production based economy AND the consumption based economy are better off with “dispersed” form. Shopping malls are just as good a fit with dispersion as factories are.
The only sectors that can sustain centralisation, with its focusing of economic land rent, are very low land use, high income sectors, like finance. It would be nice for every city to have Wall Street there, but for planners to try and make every city conform to the way London and NYC work, is like expecting playing “Second Life” to actually work out in real life.
I have often argued in other forums that “dispersed” urban form is a perfect fit with “walkability” objectives, at absolutely nil public cost; whereas “transit oriented” planning (and subsidies) come at massive public cost and are actually inimical to “walkability”. The logical consequence of this kind of planning, is people priced out of the “walkable” locations where the employment is deliberately centralised – but they CAN catch a massively subsidised train 50 miles from somewhere that housing is “least unaffordable”!
“That lesson is that the rate of sales of new homes is what holds back housing supply, and the incentives are stacked in favour of not selling or developing rather than reducing prices.”
Cameron, thanks for your work on this.
re your above statement
1.what is your definition of the “rate of sales of new homes”.
2.How do you calculate it? What is the current rate?
3.Do you say the incentive is for developers landbank?
4.What steps could be taken to motivate developers to drop their prices
5.Do you see evidence of anti-competetive/pricefixing/collusive behaviour amongst the big developers?
Bob Day famously tells “planners” who say “there is 10 years supply” of sections, that “yes, there is 10 years supply at the average price of $250,000 at which they are currently; let’s make the price $500,000, and then there might be 20 years supply of sections and even less need to do anything about the land supply”.
1. How many you can sell per month at the current price
2. You guess it from the number of competitors and the general market conditions. Then you try pre-sales to see how long it takes to reach you hurdles
3. If I can’t sell land for housing, at the current price I have two options. First, build a house and rent. That’s usually a bad idea, depending on various corporate and tax structures. Second, I can decrease the price to sell the land. But then I’ve decreased the value of the whole area and my remaining stock. It’s usually better to wait.
4. If we are talking about housing supply, the price doesn’t really matter. The quantity of new homes built does. That means there are literally millions of land owners with development potential we need to motivate. I have a few ideas but they wil take a while to describe in detail.
5. No collusion is necessary. I mean, there are literally hundreds of thousands of land owners trying to develop at any point in time. Every land owner has a monopoly on their own location. Some developers just have a larger location.
What is missing in this discussion, is “the developers break-even price” because of what they had to pay for the raw land in the first place.
All the “solutions” involve bankrupting every developer who has an existing stock of grossly overpriced land.
This makes these people yet another one of the vested interests against reform.
A few more honourable developers like Hugh Pavletich, who simply walk away from the industry and go lobbying for reform, would be encouraging re the level of common sense and morality in society today.
PhilB, I agree with many points you make but “less is more” buddy. Your points are drowning in verbiage.
Mods any chance we can word limit PhilB per post to encourage conciseness and clarity. 140 characters?
Apologies, Patrician. Cameron Murray and I go way back. You may not be aware of all the arguments we have been over and over and over, that I am “pre-empting” with my lengthy comments.
No collusion is necessary.
Herding acheives the same outcome however.
I mean, there are literally hundreds of thousands of land owners trying to develop at any point in time. Every land owner has a monopoly on their own location.
??
I don’t really understand this… it makes Peter Fraser gasp at something profound….
But don’t all producers have a monopoly over their own product?
What prevents inertia from the clearance price is the frequency is which everyone else clears.
What I say to the Georgists/Marxists, is, “IF ONLY” the only “monopoly rent” problem we have with land, WAS the “monopoly” each owner has over their OWN site.
I am sold on the efficacy of land taxes; I certainly think taxes on income and sales and interest should be wound back to some extent in favour of land taxes. I recommend Fred Foldvary’s writings.
But this is just in the interests of a wide range of fiscal efficiencies and equities; we don’t need purist dogma about “monopoly rent” being captured by EVERY land owner regardless of whether the land market is “free” or not. We just lose our audience when we talk like that.
The “monopoly rent” we DO need to focus on, is the economic land rent that is pure zero-sum or even negative-sum wealth transfer, and not associated with increased incomes or urban economy size at all. As I say to Cameron just below on this thread (now edited slightly for clarity):
Location advantage, saving transport costs or enabling higher productivity due to agglomeration efficiency, commands “positive sum rent”. No-one is worse off for its existence; income levels, including of the workforce, have grown along with the level of land rent (and in fact are the cause of it). What I am condemning is zero-sum (or even negative sum) rent. The smooth rise in the economic land rent curve in an affordable city, represents the rise of positive sum economic rent, as the land enjoys greater income-generating and transport-cost-saving potential the closer to the city centre it gets. The sudden “step up” at a regulatory boundary does NOT represent greater income-generating and transport-cost-saving potential, or any other form of positive-sum rent. It is a straight-out unearned wealth transfer. I would argue that it is “negative sum” rather than zero sum rent, because it actually HINDERS productivity growth.
Phil,
A few points, you still have not made it clear exactly how zoning has somehow decreased, rather than dramatically increased, the potential land available for residential development in the past decade or so. Exactly which documents are we talking about? How are they different from my explanation of restricting Coles’ supply of potatoes, but not Woollies?
Every town planning document I have read since 2000 has allowed much greater density every time.
And if you really believe that this is restricting supply, you have to also believe that current land owners believe that the plans will never change in the future even as the limits are reached. Which for me is an odd thing.
“…you still have not made it clear exactly how zoning has somehow decreased, rather than dramatically increased, the potential land available for residential development in the past decade or so. Exactly which documents are we talking about?“
The Productivity Commission documents some of these plans.
I was asking you a genuine question about that phenomenon here:
http://www.macrobusiness.com.au/2013/02/potato-houses-and-model-assumptions/#comment-212673
I began:
“I have a genuine question about why housing markets do not respond as though “supply” has been increased sufficient to bring prices down, when “increased density” is allowed. Theoretically, if “double the density” is suddenly allowed, “supply” has just been increased by the same amount as the entire existing area of housing has in it – which is exponentially more than what is needed for decades of new growth.
We need theories to reflect reality. The reality is that there is NO EVIDENCE ANYWHERE that “supply increase” via “allowable density”, affects the systemic affordability of housing AT ALL…..”
Do read the whole comment.
It all comes down to the actual quantity of LAND “supplied”, not the number of units allowed to be built on the land “supplied”. I am merely going by real life observation. Economic theory is so diverse that something can be found in the literature to justify almost any argument on this issue. I am going with the bits of theory that gel with real life observation.
The crux of the issue is whether there is a smooth “land rent” curve from the surrounding countryside, gradually rising from there to the city centre (with bumps at nodes of agglomeration economy). OR is there a thumping great “STEP UP” in economic land rent, at the location of a regulatory boundary? (The LSE experts call this a “discontinuity”). I fail to see that any further evidence is required, to prove that the regulatory boundary is responsible for the unaffordable housing within the regulatory boundary. This evidence based test fits EVERY single case of “affordable” versus “unaffordable” cities…….!!!!!!
I also have no difficulty explaining what is the real life mechanism by which this “step up” in price occurs. The problem is that the “land market” is not functioning as one amorphous whole. There are two levels – one in which developers are selling to house buyers, and one in which developers are buying sites from land vendors. In the latter, developers are competing with each other. They are squeezed into a high-risk “game”, where they have to out-bid each other for sites, and yet still sell at prices at which the eventual buyer can “stand”.
It is absolutely IMPOSSIBLE for this to end tidily and free of tears…..!!!!!!
Bread would “sell at the price that buyers could stand” too if supply of land for growing wheat was quota’d. This would not mean that “the price that buyers could stand” is the “normal” price that would apply anyway if the supply of land was not quota’d. The same applies to housing. Bubble prices are NOT a “norm” just because “they are what buyers can stand”.
As long as wheat growers know that more wheat growers can enter their market, even on more marginal land, it makes it unnecessary for any of them to bid up the price of good wheat growing land to any more than what the actual productive advantage of that land demands. This is “positive sum rent”.
Location advantage, saving transport costs or enabling higher productivity due to agglomeration efficiency, commands “positive sum rent”. No-one is worse off for its existence; income levels, including of the workforce, have grown along with the level of land rent.
What I am talking about is zero-sum (or even negative sum) rent. The smooth rise in the economic land rent curve in an affordable city, represents the rise of positive sum economic rent, as the land enjoys greater income-generating and transport-cost-saving potential the closer to the city centre it gets. The sudden “step up” at a regulatory boundary does NOT represent greater income-generating and transport-cost-saving potential, or any other form of positive-sum rent. It is a straight-out unearned wealth transfer. I would argue that it is “negative sum” rather than zero sum rent, because it actually HINDERS productivity growth.
When you say,
“…..if you really believe that this is restricting supply, you have to also believe that current land owners believe that the plans will never change in the future even as the limits are reached. Which for me is an odd thing……”
No, all the current land owners need to believe is that the plan will not change to include TRULY enough land: i.e. include vendors of a quantity of “x” years supply of land who were going to sell anyway at rural prices during those “x” years. This is so much land that the plan would not contain growth at all anyway.
The economists who say that fringe growth containment and housing affordability are mutually exclusive goals, are correct. there is an LSE paper with that in its title.
Do note that the “discontinuity” in the economic land rent curve at the regulatory boundary, is not a distinct “step” – the asking prices immediately outside it are always already rising out of kilter with the slope of a normal undistorted curve. This effect is sometimes called “urban echo values”. Of course land markets are anticipating a future plan change. The effect is obviously heightening price expectations just outside the boundary more than it is dampening them inside it……!
The studies that find an average of something like “10 times increase” in land values across the boundary, need to also work out what the “echo value” is immediately outside it. This is quite usually “3 times”, making the land inside the boundary not just 10 times too expensive, but 30 times too expensive.
By the way, the distances beyond the existing fringe that are involved in a planned “growth boundary”, are not great at all. The transport cost savings that capitalise into economic land rent, are extremely gradual in a normal, undistorted land rent curve. The low cost of driving to and from genuine rural-price land beyond the existing fringe, is what keeps land prices so low in unconstrained markets.
Higher taxes on petrol and/or mileage charges would change the slope of the curve and cause “leapfrog” development to not occur quite so far away. It would still not cause unaffordable housing as long as there was no literal boundary. BTW, the potential lowest cost of running a car a given distance has been falling in real terms for decades, which has increased the potential amount of supply of land via leapfrog development.
“It all comes down to the actual quantity of LAND “supplied”, not the number of units allowed to be built on the land “supplied”.”
Why? So Hong Kong and Japan can never have affordable housing by your reckoning?
I would absolutely agree that a small intensely populated nation can hit a land use point where it is no longer possible for them to get affordable housing AT ALL without nationalising land. At this point, they will enter a long relative economic decline, and demographics and migration patterns will alter as relative incomes fall and social pressures rise.
Hong Kong is now part of China, and its problems are no different to all the Chinese cities with gross levels of economic land rent. The problem certainly is, “who controls the supply of land”. There is no shortage of land inland from HK, and there is no shortage of land in China per se. They are only “highly populated” compared to Australia; they are awash with spare land in comparison to Japan, the Netherlands, or even Germany.
Japan could get affordable housing via liberal land supply – in fact their long slump has brought house price levels which now can be categorised as affordable. But this is not due to liberalisation of land supply, it is possibly a combination of unwinding a bubble, and a demographic collapse.
But Japan’s property price bubble COULD have been averted by a liberal supply of fringe land. Even with 120 million population, they have several times as much non-urban land as urban.
What they lack is “food security”. Few nations genuinely have this problem. If Japan did allow anyone who wanted to, to have as large a section as they wanted for their home, this would be perfectly “affordable” because even in Japan, rural land prices are kept low by the fact that food can be imported.
As long as food can be imported, a nation can convert farmland into urban land and have affordable housing. At some point, there might be so little land left non-urbanised, that it is no longer possible to keep the prices affordable, because all the remaining supply becomes subject to the old developer/land banker/speculator bidding war.
IF a nation wants to maintain its economic competitiveness and avoid all the other negative social consequences of urban land price inflation; and it genuinely IS short of land (or does choose to preserve farmland for food security), like the Netherlands, it needs to adopt tough and unpopular measures like compulsory acquisition of fringe land for development. This is why the Netherlands has actually had less of a distortionary urban land market problem than the UK.
However, the Netherlands does seem to have succumbed more recently to serious price-bubble-level inflation. They really are up against it given their nation’s land area and population and their desire to maintain food security. It is odd though that there is so much political faith in trans-national governance; eg the EU, the UN; and yet “food security” remains an excuse to constrain urban growth. If they are going to become one in a glorious brotherhood of man with the French, Italians, Spaniards, etc, why can’t they just regard THEIR food producers as “food security”? Why not just let “sprawl” cover the Netherlands?
I agree with you that we had speculative price boom in 2000s. Supply/demand factors played significantly less important role than two main drivers: psychology and easy credit.
Urban planing restrictions affected housing not because these restrictions actually limited supply but more by changing human behaviour. Just the idea that urban planing creates a shortage had much bigger affect onto house prices than actual restrictions.
What people are underestimating is human behaviour. “Greed and fear” are far more important than real policies, real supply or demand. If people believe that urban planing restrictions will reduce supply (even if they don’t) price will sky rocket.
This can be easily seen in places where urban planing restrictions were officially introduced but they didn’t actually limited supply because restrictions were put far out with almost “infinite” supply still inside the zones. In places like these prices sky-rocketed because people “feared” or “hoped” that restrictions will limit supply.
NSW Central Coast is an example. In early 2000 prices doubled in just few years because people thought that all the “prime coastal” land will be gone soon. In almost ten years since, tens of thousands of homes were built, prices actually fell while available land supply is still large enough to satisfy all demand (even speculative) for many years to come.
Here is the basic flaw with the idea that “X years supply of land has been zoned” on greenfields beyond the existing urban fringe.
The zoned amount is NOT the amount that NORMALLY WOULD COME TO MARKET ANYWAY IN THE NEXT “X” YEARS. It is the TOTAL quantity of land within the zone. To REALLY have “X years of supply”, it would be necessary to include in the zone, enough land that the quantity that IS “X years supply” WOULD come up for sale anyway in a normal rural market, at normal rural prices. This would mean a zone with about ten to twenty times as much land as “X years supply for urban growth”.
The land comprising “X years supply” by the planners standards, is being used for something already and no owner of it has any inducement to sell it at the value that it is worth IN ITS PRESENT USE, any earlier than he would have if he just waited to retire or change career or something.
But having become aware that they are part of a newly created oligopoly holding of the next “X years supply of land for urban growth”, they cease to think in terms of rural land values at all, and start thinking like investors/speculators. None of them will be satisfied with a 10% capital gain, or even 20%. Expectations of gains become a reason to HOLD land and NOT sell it.
So the planners “X years supply” becomes a LOT LESS than “X years supply” purely because of typical investor psychology. The planners have REDUCED the likelihood that any one land owner within the zone will in fact sell the land within the “X” years at all. At least not without an immediate payment of an amount that the seller believes to be even greater than the present value of what the land might become worth in the future…..!
I agree that the “elasticity of supply” might have been “not as high as Texas”, in Australia under normal conditions going back decades – nevertheless, it was high enough to avoid the speculative mania “nuclear reaction” from starting under the conditions of demand that applied at the time. And the actual population growth rate and the city footprint growth rate was FAR HIGHER a few decades ago than what it has been under these recent conditions of “easy credit”.
Furthermore, there has been past episodes of ridiculously easy credit and government subsidies of home ownership that did not force the prices up. Boomers sometimes enjoyed the best of all worlds, low prices, small mortgages, AND low/subsidised interest payments.
Check out the XL spreadsheets of Australian annual population growth HERE:
http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/3105.0.65.0012008?OpenDocument
There were boom years through the 1950′s and 60′s where the annual population growth rate was around 10% per year in several important regions. There has been another boom around the 1980′s where the growth rate was around 5% per year. The current “boom” is around 2.5%.
Of course “births” mean 2 things. One is young parents seeking family homes NOW. The second is increased demand for housing 20-30 years later as those kids seek their own houses.
Increase via immigration means “more homes needed NOW”.
It is still evident that the elasticity of supply of housing in Australia has coped successfully with high real growth in past decades, without price bubbles being triggered.
I say only someone living on another planet would fail to recognise that the whole ideological attitude of the local governments controlling the supply of housing, has changed 180 degrees between about the 1970′s and now. It used to be an honourable objective to get all families of all income levels out of slums into decent family homes, and an honourable objective to give your succeeding generation a fairer go than you had, not pull the ladder up after yourselves.
To continue using the potatoes as an analogy : they are not the same potatoes. The potatoes at Woolworths are higher quality and cost more, while the potatoes at Aldi are much smaller. If you’re want to cook whole baked potatoes, you’re stuck with Coles.
The real estate market is segmented. The owner/occupier buyer have preferences and prejudice, and they only buy on the urban fringe as a last resort. The investors by contrast buys where the perceived return is highest, so an increase in price makes the area even more desirable!! (nobody looks at rental yield..) Thus a limit on green field development allow the investors to price out the owner occupiers.
In regard to HK, the entire market is controlled by a few big property groups, and they engage openly in anti-competitive behaviour. Those groups, rather than the HK government, controls the number of apartments being built and sold.
This article particularly the comment thread scares me.
Why? Because even amongst educated people with a better understanding than most people about these issues I fail to see any consensus on what to do. In Australia especially for younger generations I feel this really is the biggest issue yet no one politically has even mentioned it.
While there is no consensus on what we can do the problem will just get worse and worse. It will always be in the “too hard basket”. In other words I should of bought even more land when I had the chance.
I think you made the right decision AK
http://www.theaustralian.com.au/business/property/mirvac-shares-slump-on-weak-conditions/story-fn9656lz-1226572685976
AK, if you are not aware of Garth Turner’s “Greater Fool” blog (in Canada), you may derive considerable satisfaction from reading it regularly.