More Planning Madness

An interesting article appeared today in the Fairfax press about the extortionate cost of land on the fringe of Australia’s capital cities.

The value of land sold…rose 5.2 per cent to a median lot price of $186,629 over the year to September, or 2.8 per cent in the quarter alone.

“Land price appreciation is a key cause of Australia’s housing affordability problem, with higher prices cascading through the residential market to push up the price of both new and existing houses,” said HIA Senior Economist Andrew Harvey.

[This appreciation has been] driven by complicated planning processes, a tax policy that encourages buyers to hold multiple homes, and the slow release of suitable land by real estate developers and governments…

In Melbourne alone, the median residential lot price rose 15.1 per cent in the year to September and 5.5 per cent in the quarter to $189,950….

In Sydney the median residential lot value fell 2.2 per cent in the quarter to $269,000, unchanged from a year earlier…

In Brisbane, land values declined for the fourth consecutive quarter, shrinking 8.7 per cent over the year to September to $199,000…

“When the median price of a block of land in Sydney is $269,000 it’s easy to see why affordability is spiralling out of control,” said RPData senior research analyst.

“When you add on top of the land cost: professional fees, government charges and the actual cost of constructing a home it’s no surprise that many Australian’s are forced to remain in the rental market, paying off others’ mortgages,” said Mr Kusher.

“Undoubtedly something needs to be done to address affordability constraints and governments at all levels need to realise that it is a serious problem,” he said.

Mr Kusher said there is a disconnect in the market when a full-time working adult earning $68,120 per annum would have to pay between $145,000 in Hobart to $269,000 in Sydney for land to build a house on.

“People looking to purchase the land on which to build a house are paying between two and four times their annual wage just to secure the land,” Mr Kusher said.

As I have said previously (here and here), the sharp appreciation of Australia’s land prices has been caused, to a large extent, by restrictive land-use policies utilised by Australia’s governments. Through growth control policies like zoning and urban growth boundaries, Australia’s Governments have effectively told the market where development can and cannot occur. In turn, they have restricted the level of competition in the land market and helped raise its price, pushing-up the end cost of new and pre-existing housing. Up-front development fees and charges have also contributed to the price escalation.

Owners of land on which development is permitted have become the big winners under Australia’s restrictive urban planning structure. Naturally and rationally they have restricted supply and raised their asking prices, in the full knowledge that they will not be undercut by land holders outside of the zoned areas. Long time owners of investment properties have also benefited immensely from the house price appreciation associated with these policies.

Meanwhile, the big losers under Australia’s restrictive urban planning system are the unlucky owners of land outside of the zoned areas, who can expect little more than agricultural value when they sell, as well as would-be first-time buyers, who are either required to enslave themselves in debt in order to enter the housing market, or are locked-out of home ownership altogether.

Just in case you missed the ridiculously high prices of blocks of fringe land in Australia’s capital cities, here they are again:

  • National Medium: $186,629;
  • Melbourne: $189,950;
  • Sydney: $269,000;
  • Brisbane: $199,000;
  • Hobart: $145,000.

Feeling ripped-off yet? Well let’s now compare these land prices to brand new house and land packages in Houston (Texas) whose land market is fully competitive and contestable, due to lack of Government interference. Large residential blocks typically sell in Houston for around $30,000 (versus $150,000 plus in Australia), which obviously keeps the cost of housing significantly lower. As a result, home buyers can purchase brand new homes like these for a fraction of the cost of comparable homes in Australia:

That’s right, a Texan homebuyer can buy a brand new large house in Houston for the same price as a vacant block of land in Hobart. And unlike Hobart, Houston is a fast growing major metro area of around 6 million residents with above average incomes. Texas is also home to more Fortune 500 companies than anywhere else in the United States, most of which are located in Houston. This is no sleepy backwater.

I can assure you that I haven’t cherry-picked my Houston home examples to suit my argument. You can search for yourself here at the Houston Association of Realtors website. There are dozens of nice new homes in the sub $150,000 category.

If you are a first-time buyer in Australia, or a recent highly-indebted homeowner, you rightfully should be angry, since it is governments’ constant poking of demand and strangling of supply that has allowed this crazy situation to develop.

Unfortunately, however, Australia’s housing monster has become so large that there is now no turning back. Australia’s governments have simply become too addicted to property-related taxes and too many highly-indebted Australians stand to lose from a return to more sane pricing. Let’s also not forget that the Baby Boomers, who own around half the housing stock and have around two-thirds of their wealth tied up in housing, would find their retirement ‘nest eggs’ substantially reduced from any major housing correction. So we are left with a situation where governments and policy makers pretend to care, but say one thing and do the opposite.

But Australia’s housing market cannot defy gravity forever and will ultimately correct. And when the day of reckoning finally arrives, and the post-mortem is conducted, then maybe we will achieve meaningful changes to Australia’s destructive urban planning policies and ridiculous taxation arrangements (such as negative gearing), as well as more responsible lending arrangements.

Though I wouldn’t hold your breath….

Cheers Leith

Comments

  1. Birch Creek Trader

    Well said Leith, and I think you've pointed it out before, but the hugely overpriced land extends past the capital cities, and even small towns and rural communities have exorbinant land pricing.
    This is ridiculous, considering the vast quantities of vacant, un-utilised land available outside the capitals.
    It also shoots down any suggestion that "Australia is different" because of the position of our capital cities on the coastline.

  2. Leith, there is much that makes sense in what you say, e.g., about negative gearing, but I do not agree with your affection for the `Texas solution'. There are many aspects of planning that ought to be fixed/sped up/jettisoned but the basic idea of not sprawling everywhere is IMHO sound. Uncontrolled sprawl makes service delivery, e.g., including public transport, much harder. How well can you get around Houston without a car? How well can you get into and out of Melbourne or Sydney with one? I'm not invoking peak oil scenarios, I'm saying that getting into our major cities NOW is a pain! Why not stop the developers' restricting supply with a `use it or lose it' approach?

  3. I admit it, I was wrong! Property is not going to boom! I mistakenly thought property was in a cycle but it is just a credit bubble. Unfortunately, I bought my investment properties in Sydney 2007 at the peak and have been struggling ever since. Makes me want to impale myself on my imitation light sabre!
    Oh well, im sorry property bears for being such a twat all these years LOL !
    Yours sincerely, Shadow

  4. Anon: You cannot restrict supply without driving up prices. It is patently obvious that railways and trams will not be built to the outer suburbs no matter how much urban sprawl is demonised. The real choice is expensive housing dependent on cars and buses and much cheaper housing dependent on cars and buses.

  5. To me, the inability of our economy to provide affordable housing for the population appears to be a consequence one of the great policy failures in this country. I think the issues are well documented and analysed on this (and other) blogs.

    The question is: what are we going to do about it?

    At the state level, it seems to me that both major parties have allegiance firstly to the real estate lobby and secondly to home-owners in their electorate, with renters a distant third.

    Some seats, especially in inner-city areas, have huge numbers of rental properties. Perhaps a new political party needs to be created to tackle housing policy? (although this issue requires action at state and federal levels). If a seat were won I can imagine some change may become possible in a hung parliament situation.

    Thoughts?

  6. LOL, I actually started buying Sydney property in 2005, and again in 2007, 2008 and 2009. As you know, Sydney prices have been booming nicely since I started buying. Yes I do remember the silly GHPC bears telling me in 2007 that Sydney was at the peak, but then prices went up 10% in 2007 and another 20-30% in 2009-2010, so maybe 2007 wasn't the peak after all? Hahahaha! BTW, thanks to The Claw for the heads up on the defunct CC forum about my impersonator here (well they do say imitation is the sincerest form of flattery). Oh, and hi to 'Dank castle', keep up the good work there Dank, your in-depth analysis of Australian economics and finance matters is mind blowing. If it wasn't for your sage teachings, those other few remaining CCers would be totally lost… you're a legend! Cheers, The Real Shadow. 🙂

  7. An excellent piece – pass it around!

    Well, the bubble will burst but only to yield-based values – rents. Though it's possible to have the market forever based on restricted supply values, with forever costly rents. At least to the degree that your domestic property market doesn't have to compete with international alternatives.

    You can finally develop into an economy where most people don't end up owning a home, and instead pass the bulk of their hard-earned money over to the landlord.

    And you are right that serious political pressure to rectify the situation does not exist. It's all screwed up now.

    But the "good" thing is that it assists in population control. Notice how we have developed a society that makes it ever harder for people to have kids? Policies like "smart growth" are doing a wonderful job of rendering us (Australia and New Zealand) sterile.

  8. Zoning … I think its intended to do "the right thing". I recall when I went to live in Japan I was struck that in Tokyo and its outskirts one could find small fields filled with market garden stuff (like eschallots) right beside people's homes and some small businesses (like car mechanic shops). I used to think of this as strange and misplaced.

    Then someone decided to "rezone" my home neighborhood as res B and suddenly a number of potentially nice old weather board places were demolished (instead of restored) and some quick n dirty brick veneer n fibro joints were smacked up. Then (less than 10 years later) it was rezoned back to rea A

    WTF

    I'm willing to bet someone was getting something extra out of that.

    Now my neighborhood has changed and I don't feel its for the better.

  9. obakesan – konbanwa!
    Yes I lived in Japan for one year in the 90s and observed the same thing. I loved it! Many urban areas in Japan are quite ugly, but their vitality and mix of uses and experiences compensates! I've often thought that the ideal urban environment is one that combines the vibrancy, interest and mix of uses of Japan with the aesthetic qualities of nicer western cities (some places like Kyoto have this already). My solution is a zoning system that mandates certain landscaping requirements, and involves more Council investment and energies directed to the public realm (streetscapes) rather than wasting time and money on petty bureaucratic land use planning at the micro level which causes all round grief for little gain, and negatively affects housing costs.

  10. Andrew Atkin
    Yes, and it makes the property cycle spiral even higher! Young Aussies and kiwis struggle to afford to have kids, population growth drops so the govt has to increase immigration to get pop and economic growth moving, and to pay for the ageing boomers. The immigrants are then typically richer than the young natives, as they are usually highly skilled and relatively wealthy or wealthy business poeple, so prices are pushed higher.
    Cheers
    Matt