The Great Australian Land Racket

Another interesting day on the blog front. Yesterday’s article, Planning Gone Mad, certainly stirred up a hornets’ nest of comments and emails from readers. These ranged from highly supportive to outright opposition and claims that I have pandered to right wing interests. Nothing could be further from the truth. In all honesty, I couldn’t give a toss about politics. My interests in this area are in achieving affordable housing and inter-generational equity by tempering speculative demand – such as limiting negative gearing, improving lending standards, and reducing our banks’ offshore borrowings – and improving the responsiveness of housing supply.

Readers should note that unresponsive housing supply is a different issue to the ‘undersupply’ of homes or ‘housing shortages’ commonly mentioned by mainstream commentators. The former relates to the speed and cost at which new (generally fringe) housing supply is built, whereas the latter refers to the physical quantity of homes available for the population.

In my view, Australia does not have a housing shortage. But housing supply is certainly unresponsive and overly expensive on the urban fringe of Australia’s cities and towns. As a result, the critical ‘inflation vent’ provided by cheap fringe housing in places like Texas and Atlanta (despite very high population growth) is missing from the Australian housing market. As such, there is no supply mechanism available to quickly dampen house price inflation before it turns into a speculative bubble (and later bust).

It’s hard to argue that Australia has a physical shortage of housing stock, given that:

  1. the growth in the number of homes over the past 25 years has outpaced population growth; and 
  2. the average number of people per dwelling in Australia has fallen for most of the past 50 years.  

At the same time, based on the exorbitant price of fringe housing in Australia, such as the $325,000 plus Wallan homes discussed yesterday, it’s similarly hard to argue that land prices are not being inflated way above the value that would exist in a deregulated environment.

In the same way, few people would argue that United States cities like Las Vegas and Pheonix are under supplied, particularly given the large tracts of homes now lying vacant. However, unlike Atlanta and Texas (both of which have similar topography), both of these markets experienced massive speculative housing bubbles and busts induced, in part, by unresponsive housing supply (see here and here for primers on the supply-side conditions pertaining to these markets).

Restrictive urban planning encourages land-banking, scarcity and speculation:

An article appearing last year in the Age, entitled Huge land bank puts squeeze on buyers, provides a nice overview of some of the restrictive land use practices plaguing Melbourne. You can assume that similar practices are being employed elsewhere in Australia, although I can’t confirm for certain. Here are some of the key bits:

PRIVATE developers and the state government’s property agency are sitting on a multibillion-dollar land bank, adding to Victoria’s housing affordability crisis.

Private developers and land holders have almost 70,000 house blocks – worth an estimated $12.6 billion – that the state government has zoned for residential development and approved structure planning…

Yet new home buyers in growth suburbs have increasingly less choice, with just 1400 vacant lots currently available to the market in growth areas, a historical low…

Government developer VicUrban is sitting on a further stockpile of 25,000 housing lots listed for development across Melbourne, but selling just over 700 lots a year, or 3 per cent of its stock…

The drip feed of new house blocks comes as Melbourne land prices soar to new heights, out of step with declining prices in other Australian capital cities…

…the figures show that in the City of Whittlesea alone there are 23,000 residential house blocks ready to be built on. There were fewer than 400 lots on the market…

Matthew Quinn, managing director of Australia’s largest residential developer, Stockland, recently explained the company would continue to keep about a quarter of its land holdings in a long-term bank to ensure maximum capital growth….

”We release land in a staged manner to meet demand because it would not benefit anybody to flood the market”…He said the price of land was at record highs because of record offshore and domestic migration to Victoria, grants to first home buyers and continuing under-supply of land available to developers.

Meanwhile, VicUrban values its thousands of hectares of city land at a conservative $462 million, but it could be worth billions when sold as individual housing lots to consumers. One of VicUrban’s key responsibilities is to provide affordable housing for Victorians on its thousands of hectares of urban land – but it has now been accused of damaging affordability by hoarding available suburban land in development locations across Melbourne.

The government developer said it released its land on a commercial basis and declined to say how much land was released to the housing market at one time.

So there you have it. The Victorian Government, through zoning, has told the market where development will and will not occur. Owners of land on which development is permitted (i.e. the developers and other land holders) naturally and rationally restrict supply and raise their asking prices, in the full knowledge that they will not be undercut by land holders outside of the zoned areas. Meanwhile, owners of land outside of the zoned areas can expect little more than agricultural value when they sell. Add easy credit into the mix and the end result is that the land component of housing prices has exploded, fueling a speculative bubble.

It’s hard to argue that these issues are not at play in Australia, particularly given the explosion of land values across all of the states (see below chart from  AusHousingCrash):

The data shows that the 2010 Victorian land bubble (3.19x GSP) is currently the largest in the country. It is also the second highest of all time, behind the 2004 NSW land bubble (3.32x GSP). At a national level, land to GDP is the highest it has ever been at 2.81x GDP.

Notice how land value/GSP ratios began rising in 1997 – just as the non-bank lenders entered the mortgage market en masse and led the reduction of mortgage lending standards? The reduction of lending standards, supported by the banks’ heavy offshore borrowings and tax-based investment (e.g. negative gearing), was the demand trigger for the Great Australian Housing Bubble.  But the supply-side restrictions – including zoning rules, urban growth boundaries, up-front infrastructure charges, and impact fees – ensured that the increased demand fed into rapidly rising prices, in turn encouraging mass speculation by investors and ‘panic buying’ by first home buyers.

Readers seeking a detailed literature review on housing supply-side constraints are encouraged to read this report by Glaeser and Gyourko.

Cheers Leith

Comments

  1. Economic Delusion

    >In all honesty, I couldn't give a toss about politics. My interests in this area are in achieving affordable housing and inter-generational equity by tempering speculative demand – such as limiting negative gearing, improving lending standards, and reducing our banks' offshore borrowings – and improving the responsiveness of housing supply

    Fair comments leith. But as you would be well know, and as you and I state on our blogs regularly, government supported housing speculation is the slow death of the economy.

    The government support for "investment" in unproductive assets means that resources are wasted, and potential economic inputs that could provide productive gains for the country sit idle while the populace suffers from Dutch Disease.

    I support your non-political stance, but you are well aware that this issue is far bigger than just housing. It is about how our government is failing to use its economic tools to provide sustainable improvements in the lives of all citizens.

    It is failing miserably on housing and on many other fronts, so like it or not your 5000 hits a day mean you are now a well regarded part of the democratic process.

    Aahh, the pressure of being a successful blogger !!

  2. Actually i think this site, Delusional Economics, Financial Follies and Houses and Holes are all successful sites providing the insights and comments to those who find the MSM articles are either paid for, Government manipulated or don't portray the true picture.

    Well done all

    Mike

  3. Typical VicUrban

    Not developing on a level playing field. I wonders if they also pay land taxes, Council rates and other Government outgoings that would erode their bottom line?

    With regards to Stockland, obviously the first 3 qtrs have paid for the land and infrastructure, the last qtr is cream. Reduced land area means reduced outgoings. Works against them in a declining market.

    Mike

  4. Leith,

    Of course I really like your blog.

    Someone on the last post made a very good suggestion. Compare Avg Salary/House prices to get a good view. I actually agree. I think the other thing you have to factor in with the salary is the cost of living as well. Trust me when you pay $3.50 for a 500ml Coke in Australia and $1.50 in the US thats a big difference. I think if you could put those stats together that would be a great comparison. Also a list of taxes and other costs to purchasing a house in Melbourne compared to Houston. Here is a few things I looked up.
    Houston Avg Salary: $61,851
    http://www.salarylist.com/jobs-salary-in-city-houston-state-texas-list.htm
    Houston Avg House price: $163k
    http://www.homeinsight.com/home-value/tx/houston.asp
    Melbourne Avg Salary: $65,000
    Melbourne Avg House: $470,000
    http://money.ninemsn.com.au/article.aspx?id=8169647

    Cost of living between the two

    http://www.numbeo.com/cost-of-living/compare_cities.jsp?country1=United+States&country2=Australia&city1=Houston%2C+TX&city2=Melbourne

    Being American I tell you this if you bought a property 50 miles outside of Houston. The average housing price would drop dramatically but I am only doing a comparson with Houston. Also if you factor in taxes that would be a nother figure. When I first moved to Australia the goods were expensive but housing was very affordable. I remember buying a 3×1 with 900 sq meter block for 189,000 in an up and coming area. Now that place is worth 600k plus. I believe there is an oversupply. The problem with Australia is that housing is a fade right now. Just like it was in the US in middle of the 2000's but Australia fad with property is slowly fading away. People now are starting to realize there is risk to owning so much debt while interest rates increase. I am looking foward to the correction. I just hate to see families on the streets but they can only blame themselves for getting sucked up into the Property fad. The govt is the man one that P!$$ me off as they are the ones who have kept it going. Just my 2 cents.

    LBS

  5. Thanks for this blog. I hope some politicians read it. I ask all readers to post links to it when commenting at news.com.au and other media sites.

  6. Thanks for more terrific insights recently, Leith.

    A few quick comments:

    * I appreciate that land-banking has gone on for decades, but surely those developers who are sitting on enormous parcels of land must be thinking: "Jeepers, prices are heading south here. I'd better get my stock to market before the next guy"… I'm as skeptical as the next conspiracy theorist, but a Prisoner's Dilemma-esque hypothetical tells me that it would take an OPEC-style cartel to band all those owners together, constrict the flow of stock and avoid the risk of a flood of new stock hitting the market and depressing prices.

    Perhaps this is where slow planning approval processes etc really "block the pipes"? Having said that, by definition, land-bankers [rhyming slang, per chance?] have had ample time to get their approvals but chose not to (for obvious reasons), so I've got no sympathy for them…

    * How's this for an idea… Imagine if residential-zoned property was subject to a "use it or lose it" policy, in the same way that the renewal of leases over tenements containing proven mineral resources can be?

    Sure, let people bank land for a period of "x" years, but do so with the caveat that they must release blocks at a minimum rate, rather than sitting back and speculating on land prices rises ever-higher.

    * I think that the importance of Tax Policies & Govt Revenues can't be underestimated in this situation… My understanding is that (in NSW, in particular) the fees and infrastructure levies which local governments charge new sub-divisions are a huge source of Govt revenue – with those costs obviously being passed on to the consumer in the end.

    Surely a better solution would be for councils to raise funds across ALL rate-paying properties, rather than increasing the burden on those who are "new to town"?

    Having said that, I guess the same motives and vested interests kick in as with State Govts and their addiction to Stamp Duty… Why wean yourself off the teat of bad policy when doing so might offend a bunch of constituents who have been unreasonably benefiting for years past?!

  7. OK, so how about examples of where the existence of limited supply does not lead to price bubbles, such as in parts of Europe? What have governments done in these regions? Could Australia adopt similar measures? I'll do a bit of digging on these models over the weekend, however has Hugh has pointed out the data are sparse and unorganized. Still, we should be able to garner some high level indications on what restrictions are put in place to reduce speculation. I believe it involves significant taxes on sales of unoccupied or rental units and thorough audits of loopholes such as using family members to claim residency. In addition protections for tenants mean that it's normal for families to live in a rented property for their entire lives without being evicted, making the desire to own less prominent. In other words, housing is about providing a place to live; when it is not being used for this, prepare to be penalized.

    And as I mentioned on the previous thread, one must really visit cities without land use restrictions and ask one's self if that is the type of urban development Australia wants. There is an endgame to allowing a freer land use model, that may not be necessary with other control measures on speculation.

  8. PS Thanks Leith for this avenue to discuss these items. Unaffordable housing is a great sadness of our time and it's worth calling out what's really going on.

  9. It's hard to argue that Australia has a physical shortage of housing stock, given that:

    1. the growth in the number of homes over the past 25 years has outpaced population growth; and
    2. the average number of people per dwelling in Australia has fallen for most of the past 50 years.

    Point #2 would require more housing, not less.

  10. Leith van Onselen

    Once again, some kick-ass comments by all. Thankfully, being a Saturday, I don't have to work so can answer some comments.

    First to Jesse. Great points. The only example I know of in Europe where land use policies are similar to Texas (i.e. deregulated) is Germany. Their homes are apparently 1/3 larger than the UK (similar population density) and their house prices have basically tracked CPI for years. True, their population is relatively flat, but so is Tasmania's and South Australia's. I'll do some digging on the German situation.

    Sam. Awesome points all round. I reckon the issues that you have raised are worthy of an entire post. I particularly like the prisoner's dilemma idea. Maybe developers will look to dump stock on the way down at the worst possible time, thus exacerbating any correction!

    LBS – I couldn't agree more with your sentiment. Australians are ripped-off in nearly every way; be it buying a home, coke, beer, consumer goods, going to the movies, hotels, etc. I last visited the USA when the AUD was trading around 75 US cents. And things were still dirt cheap compared to Aus.

    Mike – thanks for the kind words. I'm glad you like our blogs. The internet is certainly the great leveller.

  11. Here is an interesting article from 1995 on the Texas housing boom. http://www.dallasfed.org/research/swe/1995/swe9503a.pdf

    I haven't analysed this much but it could be Texas was out of sync with the rest of the country and hence its house price performance in the 2000s was muted due to past booms. Food for thought.

    And to perhaps put some time constants on the market mechanisms in different jurisdictions, it would be interesting to compare development times. That is, how much more quickly can a city like Dallas bring product online compared to Melbourne? Maybe someone reading here can answer.

  12. keep a stiff upper lip and keep the facts as you see them comming

    well done and top points for hard work.

    I really do grasp the time and effort you commit to this

    do it myself on other areas 🙂

  13. Maybe it's just me but I do feel things are starting to change just a bit. Lately I hear more and more successful young people stating they will not buy property until the housing market has cooled down and reverted to normal pricing levels.

    I think Aussie government fails in its silence. Government seems to be so reactive over here… no vision, no plan, no action. I honestly couldn't tell what they are doing in regard to the economy and I am usually on top of these things…
    I'm afraid it won't be long until things come crushing down. Manufacturing has had four months of recession already (on par with the one in Greece according to The Australian).

    On a different note… This blog is such a wonderful example of how the internet opens up the playing field and allows for a better balance in information between the corporate/government world (government is firmly on the corporate side here) and The People. Roll on the NBN (but that's another discussion).

    Congrats on the fantastic blog, but also congrats to all posters on both sides of the discussion. very insightful and fair discussion going on.

  14. I have emailed the authors of the Demographia surveys several times on their severely flawed analysis and comparison of housing affordability across countries. India and China have the most ABSURD real estate bubbles in the history of this world. Most of Asia, Australia and Europe are huge bubbles compared to the USA. Hugh and others behind Demographia fail to even define what a "home" is, but keep wanting to blindly expect this "home" to cost no more than 3 times the median income. In India's metros, even a small apartment costs 50-100 times the median income. A single family home on a very small piece of land costs 200-500 times the median income. It is absurd that apartments in India and China's metros cost USD 500,000.00 and small single family homes cost USD 1 million or more, but that is the reality. It is so unaffordable for most people in India and China that there cannot be any real demand despite the huge populations in those countries. In the USA, even in the so called bubble metros, median home prices are extremely affordable compared to most of the rest of the world.

    Hugh, I am glad that you finally realized this about China, and am waiting for you to discover the even greater absurdity that is India.

    Since Hugh and others that blindly quote 3 times median income as the affordability multiple of a median home never define what the median home itself is, let me offer my definition of that. In my opinion, a median home is one that provides 150 sqft of living space per person in a family. So that would be a 600 sqft apartment for a family of four. This should be applied across every country to calculate affordability multiples. It is ridiculuous to compare a 4-BR 2000sqft home with central AC/heat/atached garage/great infrastructure house with a 600 sqft apartment, and expect both to be priced at the same 3 times the local median income. And the irony is that the 4-BR palace in most USA metros is just at 3 times the local median income and is actually far cheaper than the 600-sqft apartment in the metros of India and China.

  15. Leith,

    awesome work as always thank you.

    Also thank you for your time and not commercialising (or that awful word monetisation) the site with ads!

    I am pleased to see that your starting to look at the real underlying driver of the subjective notion of value by looking at land.

    It is very interesting to see the massive growth in housing valuation in Australia within certain zones of of cities and with very small changes in the type of housing stock (Apart from the housing renovation plagues!). The housing stock really is for the most part the same as when it was built – the change has been in how we 'value' the stock of housing or more correctly the land on which the house sits on.

    I think the land zoning in Australia is no accident in fact I am sure it was well thought out an planned by vested interest… that wanted to increase values and control land supply. What I think they were not aware of was how successful this control would be come and high over leveraged the country has become.

    So much so that a correction here would be more painful than the 1890 crash. Interestingly Melbourne land prices were the most expensive in the world at that point!

    2011 will is the continuation of what started in 2008… treading water so those that can can get out and those that believe the Housing Emperor Looks great indebted robes will be caught in Negative Equity for a very very long time.

    Australia treats mortgage debt and importantly credit card debt differently to any other country on earth… you own it till you die and the idea of being a bankrupt… no way Australians would put their last dollar into mortgage repayments so they own their debt (err I mean house!).

    Please keep your great work coming, cheers, C.

  16. Leith van Onselen

    All. Thanks for your comments once again. Keep them coming.

    Rob – I don't understand why you keep mentioning China and India is the housing affordability discussion. These markets have very little in common with the Anglosphere on which Demographia reports. Also, it is incredibly difficult to find accurate data on these economies.

    That said, I understand that Demographia will include Hong Kong in this year's report, due out on 24 January. I personally cannot wait to read it. It is, in my opinion, the Gold Standard of housing affordability studies.

  17. Leith,

    You have taken on some powerful vested interests with this recent series of posts. Good on you for doing it.

    I think that the biggest obstacle to any reform is that most existing home owners and all new owners with high mortgages (out of necessity) will support artificially high land prices. Ironically the developers et al will find they have a huge political support base for their rigged system and the price gouging it facilitates. The old NIMBY problem.

    IMHO it will require a systemic failure in one or more of the pillars of the FIRE sector in order to open the way for a major restructuring of this system. The good news, for youngsters frozen out by unaffordability, is that systemic failure appears to be in the pipeline.

    The Achilles heel of this whole system is the existing housing stock. The developers, governments et al cannot control supply in this segment of the market. Demographics together with the incompetence and flawed business models of some (all?) Australian banks should do the job quite nicely in the not too distant future.

    Cheers,

    James

  18. A LITTLE HISTORY OF THE DEMOGRAPHIA SURVEY…..

    Leith – thank you for your kind comments.

    For those of us who have been on the planet as long as I have, it was well known back in the 1960's and 1970's, that one shouldn't pay any more than 3 times gross annual household income for a home with a mortgage load of 2.5 times gross annual income.

    Bear in mind that through that era and earlier, it was considered socially unacceptable for the mother to get external work. Blokes were expected to provide all the family income and those that didn't were considered "losers".

    This probably sounds quaint now – but my blood boils when I see grossly overworked young mothers, forced out to work today, simply because the political and commercial elites have conned them unnecessarliy, in to having to be mortgage slaves.

    The housing affordability issue is a complete nonsense.

    And the core reason for it, is because Governments at the States and Local level have lost control of their costs and cannot cope with normal growth. This is why I go on like a scratched record for the need to get reasonable and realistic performance thinking in to the Local Government culture.

    So thats how the first Demographia Survey came out early 2005, when I got my American colleague Wendell Cox to come on board mid 2004. The 7th Annual Survey is to be released Monday 24 January.

    None of this is "rocket science" – and there is nothing at all difficult about the solutions.

    The solutions will only happen though when (a) people stop being dopey paying bubble prices and (b) politicians are forced by those who pay their wages, to do what needs to be done.

    Leith van Onselen is doing a terrific job in assisting in this regard. It is my hope that other young Aussies and Kiwis come on board with Leith and make sure these necesasary changes happen. We should be the best place to live on the planet – without having to waste our time dealing with this dumb issue.

    Hugh Pavletich FDIA
    Co author – Annual Demographia International Housing Affordability Survey
    http://www.PerformanceUrbanPlanning.org
    Christchurch
    New Zealand

  19. Leith van Onselen

    Thanks James. I couldn't agree more. We won't see any change to negative gearing rules, macroprudential rules applied to the banks, or artificial supply-side barriers lifted until there is a major meltdown and a post-mortem is conducted.

    I discussed many of the system changes required back in July in Bringing it Home

  20. Leith van Onselen

    We should all be grateful to Hugh and Wendell Cox for going to the effort of producing the Annual Demographia International Housing Affordability Survey. Without it, many of us would be completely in the dark about just how expensive housing has become in Australia and New Zealand.

    You can always measure the quality of this kind of report from the amount of squealing and denial displayed from vested interests – particularly the banking cartel, the Government and the real estate spruikers. They are always at pains to express how: Australia is different; how our average household disposable incomes are (magically) $100k; and how our housing is no more expensive than other comparable nations.

    All I can say is thank goodness for guys like Hugh and the internet.

  21. don't forget the "socialist" (but who don't care about high house prices) planners and the councils in the vested interests Leith – I'm sure Hugh is posted as a darts target in a few Council departments!!!!

    I agree that it will take a crisis to (maybe) change things (unfortunately)
    Matt

  22. Anon at 7.59pm

    On a lighter note, you are right. Indeed there was a photo of me in one Council Office cafetaria that was used as a dartboard!

    I live in Christchurch NZ, where we have the loopiest Council in Australasia – bar none. You might like to go to the Highlighted Articles Section on my website and read "Christchurch: A bureaucratically buggered city", in case you are wondering why they haven't spoken to me for years!

    The NZ Supreme Court North Shore Leaky Homes decision released just before Christmas, promises to ensure that 2011 will be the "year from hell" for Local Government in New Zealand. And the "year from heaven" for me…..it needs to be said.

    It essentially says that if Councils issue a Compliance Certificate and the structure doesnt comply or perform – bingo – the Councils wear it. And the Leaky Homes issue involves anything between 45 – 90,000 houses or $NZ11 – $NZ22 billion. Anything up to 4 years building production at the current low annual volume of 15,000 new residential units.

    Playtime is over for these clowns. The Australian Local Authorities need to study this decision as well.

    Hugh Pavletich

  23. Leith,

    I keep reading on alot of these blogs about getting rid of negative gearing. I disagree with that completely. Take a look at what happened in the late 80s in Australia. I think negative gearing is a good thing if it is not overused like it is today. Like I said before we are just in a property fad right now and it is coming to a head. There is always these stock/property/gold/etc fads that come and go. Once the property fad is gone then negative gearing will be look upon as a good thing. Plus with all the f$%king taxes in Australia you need something to give you a break. Now they want to tax carbon and drive energy prices through the roof plus it will drive goods through the roof as well.

    LBS

  24. Leith,

    I live in the St.Louis region, same area that Wendell Cox from Demographia lives in. I am not a realtor. I am just an honest simple homeowner with a regular job.

    Why do I keep bringing up India and China? I find it mind-boggling that folks like Wendell, Hugh and you have such a limited perspective when it comes to defining housing affordability. An analogy would be that a serious plague is killing hundreds of millions of people in Asia, and you guys are so worried about people catching common cold in the United States and Australia ("Anglosphere" according to you). You must either have little idea of the global economy that we are in now, or have a really vested interest in seeing only the "Anglosphere" self-destruct itself to death.

    I keep asking the same question and dare Hugh, Wendell and you to answer. How can you even come up with housing affordability numbers without first defining what a median home itself is? Please first define the type of home that a family of four should be able to afford. An analogy to your flawed logic in blindly using 3 times median income as the multiple for the price of a median home is this : A set of economists define "vehicle" affordability across different cities of the world. They do not ever define what the vehicle is, but for the United States, they expect it to be a helicopter. They expect that the helicopter is 3 times the median annual income, and complain bitterly that vehicle prices are unaffordable in the United States if helicopters cost 5 times the median income. Meanwhile, the main vehicle in Asia, Africa and Europe is the motorcycle, and of course, that motorcycle costs 100 times the local median income in those parts of the world. And of course, that motorcycle is far more expensive in US dollar terms than even the helicopter in the United States. Of course, that does not matter to these economists…ironic, indeed. They think only the United States has a vehicle price bubble.

    While India and China are amassing massive amounts of wealth via government sponsored, corrupt real estate appreciation, the developed world (Anglosphere) has been self-destructing the wealth of its citizens. Americans have lost over 10 trillion dollars in housing wealth this past decade. Indians and Chinese homeowners are now millionaires and billionaires and will start buying up all the ridiculously cheap property in the USA. "Anglosphere" will descend not just to 3rd world status, but to 4th world status, thanks to misguided analysts like the ones from Demographia.

    Having said that, Hugh did finally acknowledge in mid-2010 that the Chinese bubble was the mother of all bubbles. I thanked him for that, and pointed out that India is the grandmother of all bubbles. I will post later on the economic impact of these absurd bubbles in India and China and their impact on the rest of the world.

  25. Leith van Onselen

    Rob – I have written at length on China. Look at the articles under the "China Bubble" tag. When it bursts, it will badly harm Australia, Canada and New Zealand (3 countries in the Dem survey). That said, I still don't understand the relevance of your comments to the robustness of the Dem surveys. Hugh and Wendell likely use the 3 times incomes multiple benchmark because this is historically what homes have cost in these Anglo countries.

    LBS – we will have to agree to disagree on negative gearing. I think I made a very convincing case against it in my two articles about it written on this blog (see these articles). In particular, I debunked the claim that the quarantining of negative gearing between 1985 and 1987 caused rents to rise.

  26. Hugh,

    You wrote:
    "It essentially says that if Councils issue a Compliance Certificate and the structure doesnt comply or perform – bingo – the Councils wear it."

    Cue: Julie Andrews, "The hills are alive with the sound of music……."

    Cheers (and thank you for your great work),

    James

  27. James @ 9.23am

    And thank you. Politics is always a lagger, where change only happens, when it is forced to happen. As a wit said to me many years ago "they couldn't run a bath".

    AnonNL above made an important point, stating that he is hearing from a lot of young people now that they will stay out of the market until market pricing is restored. They are being very wise, protecting their own long term financial security and interests.

    I am getting reports from Real Estate Agents here in New Zealand, that "buyers are being horrible", lowballing everything. Increasing numbers of them have no intention of paying bubble prices for anything and making donations they cant afford to the Banks with grossly excessive mortgages.

    There are no medals for being a dopey bubble bunny. Just ask your mates in California, Nevada, Arizona, Florida and Ireland about the consequences of paying bubble prices for housing.

    I must say I am most impressed too with the quality of the comments to Leiths Seeking Alpha article "The Truth about the US housing market". He is certainly resonating with the Americans as well.

    Hugh Pavletich
    Co author – Annual Demographia International Housing Affordability Survey
    http://www.PerformanceUrbanPlanning.org
    Christchurch
    New Zealand

  28. Leith van Onselen

    Thanks Hugh. For those that are interested, here is a link to the Seeking Alpha article that Hugh referred to: The Truth about the US Housing Market. It is the same article posted here last week. It has received over 200 comments so far, which are well worth checking out.

  29. Rob,

    India and China are totally different markets and are very hard to take into account when looking at housing affordability.

    The wealth in those countries is concentrated in a very small (percentage wise) minority. This minority is capable of buying the 200x median income houses you refer to. However, the overwhelming majority of people are very, very poor and have to live in "informal settlement camps" (a wonderful euphemism from South Africa). You can imagine that this distorts the median income vs. housing prices quite a bit, hence making it very hard to compare those markets to the Anglo/European markets.
    When MacDonalds opened their first branch in China 20 years ago a BigMac meal cost a month's pay… yet MacDonalds didn't go out of business. The only thing this data shows is how unfairly the wealth in those countries is distributed, nothing more.

    In the Netherlands financial institutions' definition (hence to be treated with a fair dose of sceptisism) of affordable housing is/was 4.5x gross annual income…. and this was BEFORE the GFC. Now compare that to the 7.5 – 9x in Oz.

  30. You are contradicting yourself in your analysis here, Leith — one moment there is no physical shortage of housing, the next there are supply constraint problems causign housing inflation? Hello?

    I think it's mostly to do with easy credit as noted, and a few other peculiarities like negative gearing in Oz. Certainly no focused attempt by the govt to make housing affordable for owner-occupiers, rather they are happy for speculative landlorders to battle it out with young hopefuls in the marketplace, except the speculative landlorders get lots of tax breaks the young hopefuls don't.

  31. Leith van Onselen

    No contradiction. Housing shortages are a totally different situation to unresponsive supply and expensive fringe housing. Do you believe that Las Vegas, Phoenix, California, Florida, etc have a housing shortage? Probably not given so many homes are sitting vacant. Yet these areas operated highly restrictive land use practices that pushed-up the cost of new supply, helping to create (along with easy credit) the housing bubble so pervasive in these states.

    There is a big difference between market demand (based on normal demand conditions) and speculative demand. You are way more likely to get speculative demand when artificial supply barriers are in place, since cheap new supply cannot be brought quickly to market to dampen price rises. Nothing gets the speculator's juices flowing more than perceived scarcity and the belief that prices will continue to rise.

    Another interesting fact to note is that Australia has 2.56 people per occupied dwelling versus 3.0 in Texas. It's hard to argue that Australia has a genuine housing shortage based on this statistic.

    Finally, if there was a housing shortage, wouldn't inflation-adjusted rents have skyrocketed?

  32. Leith, I'm going to agree with the last anonymous comment. How could land oversupply occur without responsive supply? Indeed, without over-responsive supply!

    Also, your rationale for supply side influences from previous posts, while interesting and clearly explaining your reasoning, is flawed. Over any time period, the supply curve for land is vertical. Always. This has been long established, and one main reason Georgeists propose a land tax – it is the only taxation that does not result in a deadweight loss

    (Although I would argue that the twin swords of supply and demand curves only apply in the short term under conditions of fixed capital, and for goods consumed in a short time period. Thus in the case of housing in the medium term there is no reason for the demand curve to be downward sloping, nor for the supply curve to be upward sloping.)

    Unless there truly is some kind of quota mechanism embodied in town plans, these rules cannot impact the market price level. When developers lodge more applications, councils approve more. Any time delays are simply costs like any other.

    Most of my arguments as to why planning controls do not impact supply, why the idea of supply side constraints is a myth, and why this myth serves only land bankers, are here.

  33. Leith van Onselen

    Cam. We'll have to agree to disagree. There is loads of literature out there on the effect of restrictive urban planning on house prices. We also had a beautiful controlled experiment in the USA where liberal states like Texas and Georgia, despite massive population growth, experienced no bubble. Meanwhile, those with artificial supply-side barriers bubbled then crashed big time. The evidence is clear from where I sit.

    Both the demand drivers and supply-side drivers matter when it comes to housing affordability and housing bubbles. You cannot simply focus on one side of the equation.

  34. Leith van Onselen

    Exactly aushousing crash. When the market for land is no longer contestable, speculators can 'corner the market'. This allows them to ration supply and drive land costs up. But holding vacant land isn't free. So when demand drops, they then have to discount back toward true market value in order to stay solvent. This behaviour makes land (house) prices more volatile – it helps to drive prices higher during the upswing but also helps to crash prices during the down swing. This is what I mean when I say 'unresponsive supply'. If the land market was functioning properly, supply would rise and fall with demand, thereby helping to moderate price swings.

    Thanks for the land values chart by the way.

  35. Leith and other readers,

    From Jonathon Chancellor's "Title Deeds" in the Domain Houses section of the SMH:

    Tahmoor (Southern Highlands region NSW south west of Sydney)
    Bought in 2004 for $14.5m Sold for $4.5m

    Birchgrove, Sydney (6 luxury waterfront apartments)
    Expected to realise $48m in sales Sold for $26.3m total

    Harbord (northern beach suburb of Sydney)
    Bought in 2007 $4.8m Sold for $3.9m

    Gordon (northshore suburb Sydney)
    Bought in 2006 $4.438m Sold for $3.88m

    Hedges Ave, Surfers Paradise QLD (prime beachfront)
    Bought in 2008 $9.5m Sold for $5.0m

    Darlington (inner city Sydney 2 apartments in the same building)
    Bought in 2001 for $450,000 Sold for $551,000
    Bought in 2001 for $750,000 Sold for $725,000

    Bear in mind that upsetting advertisers is not generally in the interests of newspapers. RE Agent advertising is an important revenue stream for the SMH.

    IMO this is a sign that the residential RE Agents are switching "sides". If you cannot get the buyer up then you have to bring the vendor's price expectations down in order to close a sale. It's called "conditioning".

  36. Leith, I'm glad you made the point about cornering the market. I think that's what we're looking at in the article you quoted. I just don't think deregulating the planning system is the answer.

    I would portray the problem of the real estate market as a ponzi. By increasing the supply of land through deregulation you may well lower the entry point to the game. This is not going to kill the game. The Dutch were perfectly capable of starting the mother of all bubbles with tulips. The entry point to that market was the ability to grow a plant.

    Plus, I still think you are seeing the act of zoning and planning as little more than an economic tool to control the market. It does do more than that. It's not without its own hilarious book of failures (google "Cranbourne" and "methane")but I'll move into some contentious territory here and say it stops us from becoming Dallas and Houston. I'll take a city that can give me a decent latte any day. Yes I sound like an inner city snob but I'll ask you to respect my cultural differences. Picking on my tight jeans and wayfarer knock-offs = hate crime.

    Again, I'm not an economist but I'd be interested to know more about strategies to prevent markets being cornered. I'm not aware of an instance where flooding the market worked. If it exists you're probably more aware of it than I, so post away.

  37. Leith van Onselen

    Fair point Anon. There is one case I know of where flooding the market worked to prevent a bubble – Atlanta Georgia. The additional financial fuel created by sub-prime mortgages simply led to overproduction, but no significant run-up in prices. Hence, supply adjusted quickly to dampen the extra demand.

  38. Leith said:
    "Finally, if there was a housing shortage, wouldn't inflation-adjusted rents have skyrocketed?"

    This is exactly what happened in Sydney.
    Rent of an ordinary 1970's Sydney house was 1/3 an ordinary income. Now that same house rents for 1/2 an ordinary income.
    An increase from 2/6 to 3/6 is an increase of 2 to 3. That is a 50% increase in one of life's largest expenses. That's huge Leith.
    Note: Charlatans can easily produce a graph showing no increase in rents by using statistics that substitute decent houses near workplaces with pokey units far from workplaces. Check the data for any specific house and the rise in rent is huge.

    David V

  39. Leith said:
    "Another interesting fact to note is that Australia has 2.56 people per occupied dwelling versus 3.0 in Texas. It's hard to argue that Australia has a genuine housing shortage based on this statistic."

    This statement is rubbish for many reasons. I'll give you just one.
    Imagine that the shortage in Australia drove prices so high that only childless working couples could afford housing. All the young families with children moved to Texas where there was no shortage and cheaper housing. As a result of this Texas has many more large families than Australia, hence the difference in people per dwelling.

  40. Leith van Onselen

    David V. Texas' median age is currently 33 versus 38 for Australia. So yes, Texas is a bit younger. However, back in 1995 Australia's median age was also 33, yet we had only 2.7 people per occupied dwelling – far below Texas' level currently (3.0).

    Still think my statement is rubbish?

  41. Leith van Onselen

    David V @ 9.06pm. Australia is not just Sydney. In all other capitals, real rents have remained flat over the past 30+ years. Here's the chart for your enjoyment (click to view)

  42. Nice chart Leith, it shows Brisbane rent has fallen. Can you please give me the address of the house and the actual rent in dollars. I would like to confirm that the chart is not suffering from the hedonic adjustment fraud that is sadly so prevalent these days.
    p.s. Do you admit there is a housing shortage in Sydney?

  43. AnonNL,

    You argument about India and China is no different from that of the authors of Demographia and their ilk. Wealth disparity exists in every country, including in America. That does not distort median income or median home price. It is folks like you that distort the median income and home price by conveniently NOT including 99% of the "poor" population from the median number calculation when it comes to India and China. Your argument contradicts the whole reason median numbers are calculated. If you include only 1% of the rich in your median income or home price calculation, should you not be consistent and do the same for the developed world? Something tells me the reason for your (and Hugh's, Leith's, Wendell's) inconsistency is something a lot more devious. It is the self-destruction of the developed world.

  44. I have dared and challenged Leith and others to first define what they think is a "home" that should be considered affordable for a family of four. I have defined it as a 600-sqft (150 sqft per person) apartment that should be used as the measure throughout the world.
    If this well-defined "home" is then more than 3 times the local median income, then yes, we can say that the home price is a bubble. But when Leith, Hugh and Wendell fail to even define what this "home" is, every point they make is baseless

  45. The median size of a "home" in the United States in the 1970s was 1200 sqft. In the mid-2000s, it was 2400 sqft. Basically, homes are now twice as large. Does not matter to the blind authors and followers of Demographia. Their mantra is 3 times median income for a home, regardless of how big the home has become or what luxury features it has. Go figure !!!

  46. Rob,

    The whole POINT is that everywhere in economic history, people have cut their cloth to suit their incomes. THAT is why it is possible to have consistently 3X median income house prices, with houses getting bigger all the time as incomes rise.

    What is so hard to understand about this?

  47. The studies of Paul Cheshire and Stephen Sheppard (from the London School of Economics) on housing in Britain, help to understand where all this is leading. Britain has been doing the urban planning thing for 50 years. The PRICE volatility of their housing cycle has got worse and worse, the "supply" response has got more and more inelastic, the amount of floor space per person has got less and less (now the lowest in the OECD), and the long term trend in "affordability" has steadily worsened.

    Meanwhile, the EFFIENCY of urban form has got lower and lower due to the sheer cost of land drowning out almost all other factors re "location" decisions of households, businesses, and developers. Fringe growth restraint urban planning is a LOSE-LOSE game; there actually are no benefits in emissions or resource consumption reductions. The only people who benefit, are the very wealthiest, who get to hog all the best locations, at unnaturally low densities, with the proles and their snotty-nosed brats "priced out" of the neighbourhoods.

    Cheshire and Sheppard calculate that the "inequality" effect of all this, is WORSE than the original income disparities themselves.

    Britain is 12% urbanised. The amount of land they have in "green belts" is ALSO 12%. Run the figures on Australia and it will be much, much more absurd than this. Texas is an entirely fair comparison.

  48. The papers of Alan Evans and Oliver Marc Hartwich are extremely useful in comparing different European nations approaches to urban regulation. Germany and Switzerland are an object lesson. Oliver Marc Hartwich now works in Sydney at the CIS. You are lucky to have his vast knowledge and expertise right there in Australia.

  49. Many commentators around the world confuse a "housing boom" with a "housing bubble". Loose credit CAN lead to either, depending on the regulatory environment. Atlanta, Georgia, had a housing boom. This always keeps prices LOW, and in the aftermath, prices go lower still.

    A "bubble" involves PRICES rising due to inelastic supply response. Do the maths. What is worse for an economy: 10,000 "too many" new houses at $120,000 each (and the cheapest older houses in the worst parts of the town being $30,000 each); OR the entire stock of millions of houses being over-priced by $200,000 to $1,000,000 each (and the cheapest older houses in the worst parts of town being $320,000 each)?

    This is a no-brainer.

  50. Leith,

    Hopes that the government is going to do anything to solve this dilemma is wishful thinking, when state governments have a golden trough to feed from called "land taxes". It is a huge conflict of interest that the entity that decides where and when land is released for supply is also the beneficiary of taxes levied upon that land.

    If land release is slowed and prices rise, then so does proportional land tax.

    Look at how state govt revenue fell during the 2008 property slowdown (calculated from the WA Treasury Budget data):

    Income from land taxes constituted 47% of government tax revenue in the 2007-08 budget, at $3 billion. But this income dropped by 37.6% in the 2008-09 budget, some $1.2 billion, as the real estate market froze, transfers halved and prices fell.

    Estimates for land tax in the forward budgets are modest, with total land tax not even expected to recover 85% of the 2007-08 figure by 2012-13.

    I'm sure other states are similar. Add to this the fact that little property data is freely available, and it's easy for government and the associated private interests to obfuscate all these issues discussed on these blogs from the public and the non-thinking MSM.

  51. Leith, Cameron, I made the anonymous posting about the oversupply-undersupply paradox back up there, it's just too much hassle to log on under my google blogger name!!! Seems to fail, doesn't recognise passwords, so easier to be anon! ; )

    I agree with Cameron here, but you are right to some extent Leith about market sentiment and speculator urges and animal spirits etc in bidding up prices — although it's based on 'beliefs' about high immigration rates or international students or backpackers, that the economy is booming (mostly due to lax credit and lending to businesses and individuals in the boom cycle), that housing never loses value, that it always doubles every 7 years (unlincensed financial advice from your local 'economic expert' real estate agent), it's safer than shares, everyone else is doing it and are making money so it must be a good thing (just like the dot com bubble), negative gearing will bail you out, if I don't do this I will miss out, etc etc.

    …but those reasons have nothing to do with restrictive planning practices, just market sentiment and irrational exuberance — and tax breaks like negative gearing. The oversupply in Las Vegas and many exurban areas of California and the pricing that went with it was due to irrational exuberance and spec building and an erroneous belief that tenant demand exceeded supply.

    If anything, councils and state govts started cyniclly cashing in on the wave of easy credit and willingness of purchasers to pay more and more to cost-shift infrastructure development from consolidated revenue to developers and hence purchasers, thus making new housing even more expensive and 'user pays' — this is now backfiring as the economy collapses, new house sales decline, and the Federal Govt are suddenly offering to pay council and state infrastructure charges ouut of Federal tax revenues!!! Instead of state consolidated revenue!!! So the 'user pays' approach has just shifted up to the C'wealth tax system from the states and away from the consumer — what a joke!

    Cheers,

    Sean Reynolds
    http://www.housingaffordability.blogspot.com

  52. "Is the cost payable by developer/landowner (future reference assumes the developer is the landowner) or subsidised by the State and the cost spread over the population who then enjoys the benefit of cheaper land?"

    Let's probe this idea.

    1. This assumes that if government charges are reduced or eliminated, land prices will fall. However, there are people willing and able to pay today's prices, so it's naive to assume that property developers will pass on the savings to buyers. It's far likelier that they'll use some (or all) of the difference to increase their margins.

    2. Even if developers do pass on some of the savings to buyers, the idea that "the population will enjoy the benefit of cheaper land" as a result is inherently flawed. Land prices are driven by a lot more than prices in greenfields developments. Existing properties – where most people live – are priced according to the availability of transport and amenities, which will be unaffected by changes at the fringe. Consequently only a small minority will "enjoy the benefit of cheaper land"; the rest will keep paying what they're paying now.

    3. Which brings me to my last point: the money for infrastructure has to come from somewhere. If the state government chooses to remove or reduce developers' charges, it will have to either increase taxes or cut services to meet the resulting costs, and given the limitations on state revenue these days, it'll probably be the latter. "Mike" makes no mention of "the population who then enjoys the benefit of longer hospital waiting times" or "the population who then enjoys the benefit of poorer roads" or "the population who then enjoys the benefit of less effective law enforcement".

    To put it in economic terms: developer charges send a price signal to people who want a new house in the outer suburbs. Without them, there would be a large, unfunded externality on every house built, and that externality would be a de facto subsidy to developers. Now consider the equivalent way of achieving the same result: paying developers to build houses in greenfields projects. Is that just as palatable?

  53. Planning authorities and councils insisting on Master Planned estates and high infrastructure fees are the root cause of the housing affordability crisis. My family has a 60 ha property that that no longer is viable for farming and could be subdivided to provide low cost housing but is prevented from doing it because of these planning laws. It is time people were allowed to live where they want to! If you buy a cheap property with minimal services then that is your decision. The government should not mandate a higher level of service than many people want or require or can afford. Allow small private subdivisions again and the housing problem will disappear.

  54. It is really up to the young people who are locked out of the housing market to make sure that they are heard – politicians only give service to squeaky wheels

    It is not in the interest of elected councils to reduce the infrastructure costs of housing developments because these costs would need to be passed on to other rate payers a politically unpopular mode so they woulds rather slug the developer and he passes it on to the purchaser.

    In the past head works infrastructure was funded by local councils and we should return to this mode. Otherwise the young are paying twice, that is paying off existing loans through their rates and paying up front for head works.