Look to Texas to solve Australian housing supply

Following on from my recent articles on land-use regulations and housing affordability, I want to take readers through Texas’ deregulated and innovative urban planning system, and how this system has assisted in providing Texans with housing that is among the most affordable in the Western world despite very high population growth and easy access to credit.

There are many lessons that can be applied to Australia, particularly with respect to: (1) ensuring an adequate supply of affordable land for housing; (2) speeding-up development approval processes; and (3) ensuring housing-related infrastructure is adequately financed in order to facilitate the provision of affordable housing.

Before I commence, consider the following facts about Texan housing compared with US housing markets where land/housing supply was/is constrained by regulatory and/or physical barriers.

First, Texan housing has remained relatively affordable when measured against median household incomes:

Second, Texan house prices have experienced far lower levels of volatility than the supply-restricted states:

Third, because house prices have remained affordable, and low-cost housing has always been available to would-be buyers, Texan households never had to take on huge sums of debt in order to purchase a home, unlike their counterparts in the supply restricted states:

Finally, because of the low-cost housing in Texas, in addition to the lower rents on offer to businesses (because of lower urban land prices), the cost of living in Texas (as well as Georgia, which operates similar land-use policies) is far lower than the rest of the country. For example, Houston’s overall after-tax living costs are 9% below the nationwide average and 19% below the average for large metro areas (see below table).

What makes Texas’ housing situation unique is the way in which it:

  1. Enables a plentiful supply of affordable land for housing and operates speedy housing approval processes; and
  2. Ensures housing-related infrastucture is adequately financed and provided in order to support the provision of affordable housing.

The following extracts from two seperate papers summarise the Texan housing model well. The first paper, which comes from the Cato Institute’s Randall O’Toole, describes how land-supply is provided and infrastructure financed in Houston, Texas:

Houston is an example of a place where, with minimal government regulation, the supply curve for housing is almost perfectly elastic. Houston and surrounding areas have no zoning, so developers face minimal regulation when building on vacant land. Once built, most developers add deed restrictions to their properties in order to enhance their value for buyers who want assurance that the neighborhood will maintain a positive character. But these deed restrictions do not impede further growth, as there is plenty of land in the region without such restrictions.

In the suburbs of Houston, developers often assemble parcels of 5,000 to 10,000 acres, subdivide them into lots for houses, apartments, shops, offices, schools, parks, and other uses, and then sell the lots to builders. The developers provide the roads, water, sewer, and other infrastructure using municipal utility districts, which allow homebuyers to repay their share of the costs over 30 years. At any given moment, hundreds of thousands of home sites might be available, allowing builders to quickly respond to changing demand by building both on speculation and for custom buyers…

Houston developers allow homebuyers to pay off infrastructure costs over 30 years, impact fees or development charges require up-front payments often totaling tens of thousands of dollars. The difference is crucial for housing affordability: since development charges increase the cost of new housing, sellers of existing homes can get a windfall by raising the price of their houses by an amount equal to those charges, thus reducing the general level of housing affordability.

Increasing land and housing costs make other things more expensive as well. When housing is more expensive, for example, businesses must pay their employees more so that workers can afford to live in the region…

If lower interest rates increase demand for housing, Houston-area homebuilders respond by building more homes; [by contrast, in supply-restricted cities like the] San Francisco-area, builders respond by filing more applications, which may wait several years for approval. If government purchase of a large block of land for a park or open space restricts supply, Houston-area builders can simply go somewhere else nearby; in the San Francisco area, the nearest alternative building location is more than 50 miles away.

Notice that inelastic supply not only makes housing prices rapidly increase with small increases in demand; it also makes housing prices rapidly fall with small decreases in demand. This is exacerbated by lengthy permitting periods that can put homebuilders out of phase with the market. Thus, land-use restrictions create conditions ripe for housing bubbles.

As mentioned in the above extract, a key feature of the Texan housing system is the Municipal Utility District (MUD) financing system for housing-related infrastructure and services. Here’s a break-down of how the MUD system works:

  • Utilities are installed and maintained by the companies (electricity, telephone etc) since they receive the revenue.
  • The developer has to install the roads.
  • Large subdivisions are allocated areas for parks and schools.
  • The developer installs the sewerage and water and gets it back from the Municipal Utility District.
  • MUD is a special-purpose district that provides public utilities (such as electricity, natural gas, sewage treatment, water, and waste collection/management) to the residents of that district.
  • MUDs are formed by a vote of the area, and represented by board of directors who are voted on by the local people.
  • The MUD borrows money via the bond market to pay for building (via the developer) and operating (via the MUD) these services. The MUD bonds are then repaid via taxes on the home owners of around 1% of the home values per year.
  • Schools are also built and funded via bonds and repaid via the same taxes on the homeowner.

Note that Texas does not levy infrastructure charges up-front which, when combined with the absence of artificial regulatory constraints on land supply, enables generous-sized serviced housing blocks to be provided for only $US30,000 to $40,000, with brand-new family-sized house and land packages available for only $US150,000.

The second article, which comes from the Dallas Federal Reserve, also provides a great summary of the Texas housing system:

In the first phase of the U.S. housing market boom and bust, many large cities (primarily on the East and West coasts) saw a prolonged run-up in prices. Demand for housing, driven by low interest rates and a growing economy, combined with supply restrictions—such as zoning laws, high permitting costs and “not in my backyard” regulations—to contribute to rapid price appreciation…These price increases then fed off themselves. Rising prices—whether for gold, corn or houses—often foster a bubble mentality, contributing to speculative demand…

Atlanta [Georgia], Dallas and Houston [Texas]…weathered increased demand largely with new construction rather than price appreciation because of the ease of building new homes. While some are dismissive of this developer-friendly attitude that allows such rapid construction, the approach clearly carries significant benefits for the homebuyer…

The Houston Example:

Houston saw tremendous job and population growth over the last decade, ranking it high among the 12 largest U.S. metropolitan areas in both metrics…

Given that Houstonians had access to the same new types of mortgages as the rest of the country and that Houston has had greater population growth than other large metros, we might expect price appreciation to be stronger in Houston than elsewhere. However, the opposite has been true.

Houston’s large supply of land means that demand growth primarily results in more construction, not higher prices. Construction levels are limited by the availability of two kinds of developable land: the previously undeveloped, generally found on a metro’s outskirts, and the redeveloping, usually in a city’s interior. In both cases, Houston’s policies are relatively permissive, making the metro friendly toward development.

The most fundamental difference between Houston and other cities lies in how they provide (or in Houston’s case, do not provide) water, sewer and drainage to developments on the urban fringe. In Houston, developers can create a municipal utility district, or MUD, to provide these services on their properties and can finance these with tax-free bonds. Houston requires developers to build MUDs in such a way that they eventually could be connected to the city’s corresponding infrastructure, but they begin as self-sufficient enterprises.

In other cities, developments must be connected to the city’s water and sewer lines, confining new projects to nearby or adjacent land since the cost of building lengthy lines is prohibitive. In metro Houston, by contrast, virtually any large parcel of land can become a new suburb, especially given the metro’s expansive highway system…

Much of the land in metro Houston is not assigned a specific use. So much land is available in Houston that the cost of each incremental unit rises slowly and keeps the average cost below that of more restrictive metros. Even in the face of significant population growth, this large supply keeps land prices in Houston stable, which over time contributes to lower home prices…

Indeed, Houston and other metros such as Dallas and Atlanta that have relatively more permissive development policies have lower housing prices than more restrictive places do.

So let’s sum-up Texas’ housing achievements:

  • high quality housing that is less than half the cost of equivalent Australian homes;
  • price stability – since Texan homes never bubbled then busted, unlike the supply-restricted US states;
  • low levels of household debt – due to the low cost of Texan housing; and
  • macroeconomic stability – resulting from Texas’ price stability and low debt levels.

Remember, also, that Texas has less land, more people, higher population growth, and crams a larger proportion of its population into its five largest cities than Australia. Yet, it has still managed to achieve affordable and stable house prices.

Now let’s compare the Texan System with Australia’s housing market.

First, Australian fringe land values have escalated in price at the same time as lot sizes have shrunk in size, to the point where a typical small fringe housing block sells for more than a full house and land package in Texas:

Second, the escalation of land values has not been restricted to the fringe only, with residential land values across Australia increasing rapidly relative to the broader economy:

Third, Australia’s mortgage debt is now amongst the highest in the world, due in part to escalating land/house prices, which has required Australians to borrow big for housing [of course there is an element of chicken-and-egg between house prices and debt]:

As I have argued previously, the causes of Australia’s unaffordable housing market are predominantly structural, brought about by urban consolidation policies, including: urban growth boundaries (UGBs) erected around Australia’s cities; minimum targets for ‘brownfield’ development (‘urban infill’); up-front infrastructure charges; and increasingly slow development approval processes.

With the effective supply of land reduced under these measures, developers were incentivised to compete vigorously for the available land within the UGBs. Meanwhile, lucky pre-existing land owners were effectively granted ‘quasi-monopoly rights’: with competition and contestability within the land market reduced, they could now demand higher prices. And because the price of pre-existing housing is set, to some extent, by the cost of new housing (which now comprised significantly higher land costs), these policies contributed to the rapid land/house price inflation experienced over the past decade across Australia’s cities.

It’s not as if Australia is lacking suitable land for housing; it has just been closed to development by UGBs and other planning restrictions, and/or a lack of funding for infrastructure.

Further, whilst easier access to credit can exacerbate a housing bubble – or any bubble for that matter – something must set up the expectations of capital gain, and the systematic discounting of downside risk, which is at the centre of a bubble. And having planning policies that continually retard the ability of supply to respond quickly to demand, thereby creating a sustained pattern of rising prices, generates those expectations and discounting of risk.

Such restrictive planning policies can also generate rising housing-related revenues and political donations from developers who have to ‘buy’ access to the political system to get their needed approvals and who can then ‘game’ the system.

From where I am sitting, the Texan model of urban planning seems far superior to the dysfunctional, prescriptive mess currently presiding across Australia. Having the opportunity to purchase a new family home for $150,000 would be a dream come true for many Australians, many of whom are instead required to load-up on debt to buy smaller homes at twice the cost.

The question you, the reader, needs to ask yourself is why aren’t Australia’s policy makers undertaking study tours to learn from their counterparts in Texas, instead of throwing endless sums of taxpayer dollars into demand-side measures – like the first home buyers grants and negative gearing tax concessions – which throw the demand-supply balance further out of kilter and makes homes even less affordable?

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Comments

  1. No, the question is, why are you still living in Australia? It can’t
    be the language barrier, so under rational expectations, you would already be living in Houston, Dallas or Austin. What is it
    keeping you “down under?” Nirvana is only a one way ticket away!

    • Strategic Thinker

      What is it about this country that any form of criticism or a simple “look how they do it” is often seen as a direct impact on national pride.

      As a migrant I feel often constrained to talk about how things are done in Europe or even to simply discuss my experiences, simply because of the sensitivities that seem to be there.

      Nothing wrong with peeking over the fence and taking the best bits. It doesn’t mean Oz is less or more than other nations.

      Seems to me these sensitivities is part of what has been inhibiting Oz for a long, long time.

      • Australian attitude, whilst generally egalitarian also include an inferiority complex. We want everyone to be treated equally, so when someone does something better than us our reaction is to shun it or tear it down. Not because we think we’re better, we just don’t like other people thinking they’re better than us (tall poppy syndrome, etc.).

      • Dude. I live in Austin. It ain’t all that as far as affordability is concerned.

        Keep in mind, this data comes from the Cato Institute — a libertard think tank that’s all about deregulation. Yay.

    • +22 million

      Whenever I mention us taking on Euro standards for driving and autobahn/strada type roads I get that.

      Or how other nations treat alcohol compared to the binge drinking culture here (which is deep, ingrained and widespread)

      There is an enormous arrogance amongst certain Australians and policy makers that “we are different” and “we do EVERYTHING better”, including the whole myth around “mateship”.

      • Totally agree on all that. Sadly, we inherited the Anglo-Irish culture of extreme binge drinking, due to our roots, and not enough of the mainland drinking culture that should have come with our newer European migrants. For some reason the original binge culture has always crushed the more moderate and considered mainland European approach. And they can easily run with a drinking age of 16 where as we have a push to increase it to 21! Go figure.

      • Strategic thinker,
        Not all the denizens of Oz think this way, as you can see from the posts here.

        But it is definitely the majority thinking. At one time I would have attributed it to insularity (the tyranny of distance), but it’s much harder to understand when airfares are relatively cheap.

        Some sort of meta-insecurity is probably the reason….

      • It’s weird considering 60% or so of the current population was born overseas…

        Prince… totally agree with you on driving standards! EVERY time I drive I see a near-accident occuring. The difference with the Dutch road system, MOT and high standard of mandatory driving education is enormous.

        I guess its un-Australian to want your kids to come home safely.

      • I read that 60% have a one parent born overseas or are born overseas. So the actual % of us born abroad would be quite a bit lower than 60%.

      • Thanks for correcting that one Macca. I picked up that number somewhere.

        Nonetheless, you would expect a migrant country to be more influenced by the cultures of the people living in it.

      • Whoa there, 60% of current population are born overseas? It’s more like 25% (according to the ABS in 2006).

        Australia’s drinking culture is derived from the shout or round mentality of the convicts. The idea is if you want a drink, you can’t drink alone so you bring a mate or two. Then instead of buying drinks for yourself you take turns buying drinks for everyone.

        This website is pretty good at explaining the historical significance of drinking culture: http://convictcreations.com/culture/drinking.htm

        Actually that site is pretty good for explaining most Australian culture (or lack of, compared to Europe) and its backgrounds.

      • I don’t want to wish a recession on anyone, but given its been 20 years, I think for our own culture and way we interact with ppl it would be a good thing.

        Getting taken down a peg or two does wonders for the character.

      • Most of experts and even government Department have been keeping saying — Housing in Australia are under supply for decades. If true, where are those homeless people. How many does Australia have. Cheers

    • And that’s it. People are not as mobile as they claim to be. Even the people that move for a better life – a lot of them come back home.

      Besides what’s wrong with wanting to make your world a better place? Your home a better place? With always trying to improve your lot?

      I think as a proud Australian you should be aiming to make the world a better place for you and your children. Simple. This country is so much more capable than what it is achieving right now. Things are good relatively speaking; but there’s always room for development and improvement.

  2. So good summary. Something that has always bothered me about comparisons to Texas is that marginal un-built land is able to be developed. Does this translate to inner cities who are facing pressures due to a de facto land shortage and need to densify?

    I had a discussion recently about land in Vancouver close to the university that is undergoing a massive bubble due in part to investment from Asia. The issue is that locals are in effect priced out of the housing market. The market consists of mostly detached dwellings, limited medium-density and high-density dwellings, and many lots have been “hoarded” as underutilised or recently built with inefficient structures (so called “monster houses”) that actually reduce density.

    One possibility is to rezone the entire area for whatever fits one’s fancy but would that have the desired effect? Remember the City cannot expand outwards any more; jurisdictions with unused land are far away from the central core and difficult to commute from. The only way to increase utilization is through rezoning existing low density dwellings. Leaving community opposition aside, even if land were re-zoned as multifamily this does not prevent large inefficient dwellings from being built because of scarcity or simply holding onto a small house as an option of selling decades from now for an even higher price.

    Now ideas being bandied about are “forced” densification, that any lot being re-developed must be turned into a multifamily unit. I’m trying to see how I can adapt a more open development regime to an area with true scarcity, and in the current investment climate with a premium for “hard assets” I’m not seeing it.

    • You touch on some important points.
      It is absurd for planners and politicians to pontificate endlessly about “brownfields” and “infill” development, and “providing for most of the growth in EXISTING urban areas”; when they are NOT PREPARED to smash the NIMBY obstructions to this. It is totally absurd to “prevent sprawl” and force prices up, when the “preferred urban model” is unattainable in any case.
      The price of urban land is much higher anyway, in existing “built” areas; restricting fringe growth only drives these prices higher too, along with everywhere else. Add the NIMBY factor, with long delays in development permission processes, and it is obvious why the ONLY “city” redevelopment that EVER comes to market, is $2 million dollar condos and TINY apartments in which a hardy “single” can JUST EXIST.

      http://tvnz.co.nz/close-up/shoebox-living-and-you-get-your-rent-5-39-video-3379811

      • That has been a big problem with the push for higher densities, most local councils try to prevent it with very restrictive development controls, and difficult and expensive application processes, so the reality doesn’t match the rhetoric. For it to have any chance of success most planning restrictions would have to be swept away to allow additional stock to be readily added. Whether or not this is desirable or even worthwhile or not is a whole other question. I think you are correct in suggesting it would have to be imposed.

        One thing that bugs me at times is listening to a show like By Design on the ABC, where they have the contradictory viewpoint of calling for compact dense cities, yet want to preserve the heritage and character of the existing built environment. I just don’t see how that is possible with a population that will continue to grow for another 50 or so years, and I wish they would acknowledge that.

    • FALLACY ALERT…..!!!!!!!

      “……Remember the City cannot expand outwards any more; jurisdictions with unused land are far away from the central core and difficult to commute from…..”

      http://www.thenewcityjournal.net/ruining_our_cities_to_save_them.htm

      I quote:

      “……Writing in a publication of the 2008 9th World Congress of Metropolis, Sydney University’s John Black observed that “apart from some noticeable peaks, employment density is quite uniform across the [Sydney metropolitan] region”. According to the NSW Department of Transport, only 12 per cent of Sydney’s jobs are in the CBD and second tier centres like North Sydney, Chatswood, Parramatta, Hurstville and Penrith have less than 2 per cent each. David McCloskey, Bob Birrell and Rose Yip of Monash University (demographers, not urban planners) report the same about Melbourne. The CBD hosts around 20 per cent of jobs and the rest are scattered all over the metropolitan region.

      Platitudes like “we must locate people close to where they work”, or “we must locate jobs close to where people live”, have little basis in reality. They infringe another immovable law of economics, relating to economic rents or bid-rents. This mechanism determines how industries and firms are distributed. Put simply, a parcel of land will go to whichever use delivers the highest profits. Centrally located land (near major transport or infrastructure hubs) commands high prices, and goes to the most profitable uses. Peripheral land goes to less profitable or marginal activities.

      Over the last thirty years, economic deregulation, flexible transport, advanced communications and population growth have raised up a sector in the latter category, extracting value from cheap outer-metropolitan land and low rents. It includes industries like transport and distribution, building and construction, food, consumer products, personal services, wholesale and retail. They depend on favourable location costs and proximity to urban markets and labour pools. According to the Greater Western Sydney Economic Development Board, “prime industrial land with direct access to transport infrastructure is 75% cheaper [in GWS] than other areas of Sydney”.

      Ultimately, green planning will phase out cheap urban land, undermining this sector and destroying jobs in the process. Breakthroughs in automotive and energy technologies offer the prospect of adaptation to a distant future of expensive oil. There’s no way to adapt to rising land values….”

      • For the most recent analytical discussion of the “jobs are in the city centre” fallacy, check out 2 papers by Prof Alex Anas:
        “Discovering the Efficiency of Urban Sprawl”, and
        “Decentralization and the Stability of Travel Time”.

      • @Phil Best:
        Anas’ analysis is pretty simplistic, using almost solely Daily Average Trip Time as the definition of “best” outcome.
        I think the environmental issues and a few others probably ought to come into the equation, not just DATT.

      • WHY would anything other than DATT be the crucial data when comparing the outcomes of different options for urban form?
        Any other outcomes will be the result of things OTHER THAN URBAN FORM – like income levels, discretionary choices in motor vehicle type, etc.

      • I disagree here. There are significant upwards pressures due to perceived scarcity. We are talking about commuting patterns and community/commercial hubs that take decades to form but housing supply must react faster than this.

        I will tell you right now I can buy a very reasonably priced house in the Vancouver area for about $300K, which is not unaffordable at all. But the commute would be about 1 hr to get to the central core. We can all do tradeoffs; what I’m calling out is that large lot low density housing is crimping demand and it should be up for debate about how to handle it.

        Or does forcing higher density not align with deregulating planning regimes?

      • Oops I meant “crimping supply”. I think the discussion is so focused on what Australia calls UGBs that it risks running over the argument for a place for proper planning in dense urban cores that ensures efficient land use. There are situations of large mansions close to urban cores that place strains on transportation systems as population grows. At some point old zoning laws impede the greater good and it’s time to grow up as it were.

        (Did not mean to imply Phil that you are inherently opposed to forms of regulation.)

      • What I am consistently arguing, is that planners should focus on getting the higher density redevelopment in the most efficient locations happening, with affordable prices as the end result. The WHOLE issue stands or falls on whether they can do that. An urban growth boundary is massively damaging to the economy as well as to housing affordability. All the MORE so if they do an UGB and STILL don’t get the higher density redevelopment in the most efficient locations happening, and at affordable prices. What was the POINT otherwise?

  3. Thanks UE for the insight.
    Could you also someday do some analysis on why costs are high here in Australia as pointed out by LandDeveloper. Surely if starter Houses are going at 3 times that in Australia , then someone is gaining. Who is gaining? It is not the developers as their profit margins are very low compared to the US counterparts.

    Also if these costs are structural or if they will diminish with the bursting bubble?

  4. nimbys are a powerful force in this country. Don’t expect any loosening of development approvals any time soon. In the case of NSW, Barry got elected on a promise to tighten them. Soon, nothing will be allowed to be built anywhere.

    • so he proposed to tighten development approval process but release more land for development at a greater rate than the previous govt…

      seems a little silly

    • “Soon, nothing will be allowed to be built anywhere.”

      At some stage in the future the have nots will either take or destroy what is denied to them through the use of force.

  5. Leith – thank you for a superb article.

    I am surprised though that infrastructure is completely paid off within 30 years with the MUD system. I would have thought it more appropriate it be paid off over its life. Can you clarify this Leith?

    I do trust that within a future article, the mechanics of the MUD system are explained and would urge Texas readrs of MacroBusiness to communicate with Leith to discuss this further.

    Readers should go to the Houston Association of Realtors website at http://www.har.com just to see the price and quality of housing there. And to realise just how they are taken to the cleaners here in New Zealand and Australia.

    The Houston Association of Realtors Mnthly Report is well worth a read as well – and can be accessed by clicking Homes for Sale and “Market Report” down on the right side.

  6. Leith, I recently read an article which explains the ridiculously high debt in The Netherlands.

    As you know mortgage interest is tax deductible in The Netherlands. People employ a financial scheme which allows them to lock their repayments in funds or “insurances” while maintaining maximum mortgage debt for the lifetime of the mortgage to maximise the tax deductions.

    In reality about half of the debt shown in your chart is offset by the locked away funds.

    I’ll see if I can find the source (for Dutchies: an “Elsevier” article) online somewhere.

  7. Leith,

    I lived in Houston for three years and can confirm you are right about the substantial difference in the cost of living there, as against cities of a similar size on the east and west coasts of the USA. What your article does not capture however, are the aspects of quality of life that are harder to measure. Houston is an ugly city, where for example, residential areas are located next to major refinery complexes. The defined, mature retail streets we love in Australia rarely exist, other than oddities such as West Village and Westheimer, with the rest of Houston having to head to garish strip malls and large box shopping centers.

    That said, the damage that is being done in Australia through hyper inflated property prices, particularly once this bubble bursts and hence savages the economy, means that I too am starting to believe that the Texan approach might be better.

    • >>Houston is an ugly city, where for example, residential areas are located next to major refinery complexes. The defined, mature retail streets we love in Australia rarely exist, other than oddities such as West Village and Westheimer, with the rest of Houston having to head to garish strip malls and large box shopping centers.<<

      You could use almost the same words to describe LA – it's not the loose approval standards that make cities ugly. On the other hand German cities look decent but no strict regulation is in place. IMHO It’s rather lifestyle of the people who are living in them that makes cities ugly.

      • It is completely untrue that German cities have no strict planning. You can see the relevant legislation in translation here:

        http://www.iuscomp.org/gla/statutes/ROG.htm
        http://www.iuscomp.org/gla/statutes/BauGB.htm

        German urban planning is much, much more restrictive than Australian planning. This becomes obvious if you look at aerial photos of German cities. Munich is the most expensive city in Germany but has farmland within 6km of the city centre, the equivalent of having farms in Balmain or Brunswick. Obviously if German planning rules were as lax as the previous article suggested that incredibly valuable land would have built on a long time ago.

    • Houston has a referendum every few years to decide whether to adopt zoning or not. It is the LOW INCOME EARNERS, who buy the cheapest houses in the least desirable areas, who most overwhelmingly OPPOSE ZONING.
      Houston must have the smartest low income people in the world. Most low income voters are suckers for the very kind of politics, left-wing, interventionist, and cost-increasing; that hurt them the most.

    • im not going to argue with this notion, however I would say its easier to fix something cosmetic than something that has a fundamental problem.

    • Planning and decent supply doesn’t have to be mutually exclusive in Australia. There is so much land that you can do both…

      Leapfrog development combined with (business) incentives, infrastructure investments and a different way of funding councils will go a loooooong way.

      Plenty of land near smaller urban centres. No need to restrict ourselves to 5 cities.

      • btw, I just saw the email address of one of the people commenting in this thread filled out in the comment form.

        Looks like a priority issue which needs to be resolved…

    • David – you ever been to Yarraville and surrounds. That is not exactly the prettiest parts of Melbourne and yet prices there are bonkers!

      Also, I don’t see many mature retail streets that I love here in OZ (sure Balmain and Paddington are nice) – compared to London and Europe our typical suburban retail streets look like shanty towns.

  8. Very good work UE

    My only pricing comment is that georgraphy does have an input into cost. Houston and Dallas/Fort Worth are relatively flat so development can be much cheaper and easier. But then again so is Phoenix/Scottsdale

    Do we need all the aspects of the Texas model? Can we just create elasticity of supply by ensuring that we have say twice as many development blocks available as required so that there is competition for sales? The issue seems to not be a shortage in Australia but an extreme concentration and control of supply

    • You are right; there are numerous ways in which the price of developments can be inflated through low supply elasticity, that do not necessarily relate directly to quantities of land “released”. Inflexible, slow, predictable infrastructure provision can have the same effect. Knowing your competitors 1 km up the road, are not going to get roads, drainage, and water for another 5 years, is a huge anti competitive advantage.
      But planners need to realise that “matching the supply to demand” is just a “quota” system that can easily be cornered, and have anti-competitive and inflationary effects. When Portland enacted their urban growth boundary, it had “20 years supply of land” inside it. Price inflation in the land inside the UGB began JUST FOUR YEARS LATER.

  9. The reason that Texas and Georgia have lower prices and did not bubble is not due to a lack of UGB but because people did not prefer to live there compared to California.

    Prices of two goods that are essentially substitutes reflect the preference of people for one good over another.

    It is correlation and not causation that there are UGBs where prices bubble as it indicates better planning outcomes resulting in cities that people are more willing to live in, but it does not cause the bubble as people were free to move from California to Texas.

    I apologise in advance to those who do not care for economic theory, but it is time that this topic was dealt with more fully.

    Firstly on bubbles and shortage illusions: Bubbles have occurred in many markets across history and it is generally accepted that they are a combination of irrational exuberance and credit. I will concede that for the recent housing bubble the illusion of a housing shortage may have had a small part in helping people justify their irrational exuberance but as Rumple showed yesterday, there was never a real housing shortage and indeed many believe there is an oversupply in some markets. Democracy would dictate that if there was a real shortage due to land restrictions, the politicians would have lost their seats to someone prepared to release more housing to help boomers get their adult kids out of the house.

    More importantly, where people are free to move (such as within the US) prices and other indicators should have equalised if people received equal utility living in either Texas or California. Unemployment is lower in Texas and prices are lower (both housing and overall living costs) indicating that people prefer to live in California despite the higher costs. Because people are free to move between California and Texas, the supply curve is the supply curve for the combined cities NOT a supply curve of restricted development in California and an elastic supply curve in Texas. Therefore it is the demand curve that dictates price.

    The demand curve for California is inelastic which is what causes a tendency to bubble, a small shift right of the demand curve due to irrational exuberance in the housing market causes a large increase in prices and only a small increase in the actual quantity, but importantly the quantity does move to meet the new level of supply demanded.

    The demand curve for Texas is very shallow which is what stabilises prices so it does not experience bubbles. The large growth experienced in Texas is a result of the increasing difference in prices between the states that people do and don’t want to live in.

    If people equally preferred to live in both Texas and California and had equal job prospects then the price of housing should equalise between the two, higher prices can only be sustained in California if people prefer to live there and receive a higher level of utility from living their to justify the price.

    I believe that urban growth boundaries occur in correlation with cities that bubble because these cities have better planning outcomes and people prefer to live there. It is correlation and not causation that there are UGBs in these cities.

    We may stop bubbles in Australia if we remove UGBs, but it will only reflect that we have turned our cities into places that people don’t want to live and that would be a tragedy.

    Bubbles are driven by credit and euphoria in markets for goods that people want, the fact that Texas didn’t bubble (other than the oil that is) is actually showing us that we should not use them as a planning model.

    • If no one wanted to live in Texas why is it is the most populous and one of the fastest growing states in terms of population.

      • I explained, did you not read what I wrote?

        Price = preference; growth is a function of relative prices.

        The price of bananas went up, so I changed to apples. The growth in apple sales is not due to preference all things being equal but due to preference given relative prices.

        Texas grew because the relative price was sufficiently low to offset people’s preference to live elsewhere. A small change in the relative price where the demand curve is very shallow increases the quantity substantially but not because of preference rather despite it.

      • Is Phoenix, Arizona, an attractive place like California?
        Is ANY CITY IN AUSTRALIA as attractive as California? Or Vancouver?
        Are cities in Australia “worth more to pay to live in” than Vienna, Zurich, or Munich?
        Come ON.
        If any place in the world DISPROVES the “only attractive places to live have housing bubbles”, it is Australia.
        Sorry, Aussies, I love you, but your “love” of Australian “scenery” and “climate” and so on, is a classic case of misguided patriotism. Houston is NO WORSE to live in, than ANY Australian dust hole/sauna.

      • Again, I reiterate, increased consumption does not equal higher demand UNLESS relative prices are unchanged.

    • “We may stop bubbles in Australia if we remove UGBs, but it will only reflect that we have turned our cities into places that people don’t want to live and that would be a tragedy.”

      Miss P , maybe this is your personal taste!

      How do you explain that when talking about Australian cities , people often relate it to a sprawl, too spread out, and still considered liveable?

      Is the Australian selling point is its low density or wannabe high density?

      • No UE, it supports my point.

        People didn’t swap to apples because they prefer apples it was because the price of apples relative to bananas declined.

        Growth as an indicator of preference only works if the relative prices hold constant.

      • arent there more people coming to Texas now when California and other bubble states have imploded? so relative prices have come more into line and they are increasingly going to Texas?

      • Yes, there are still other influences. Interestingly the growth rate in Texas dropped below that of California when house prices had started falling but unemployment was still low in both states. We are now seeing an effect based on the relative unemployment rates being stronger than the house price effect.

      • Miss P, you make an interesting point, but your argument still proves that the lack of UGB’s and other restrictions in Texas allowed the prices to remain constant even during HUGE population growth.

        IF flexible supply was not available to keep the prices low, then the price of proverbial apples would have balanced upwards!

        And in relation to Australian cities – sprawl does not make cities unlivable, lack of planning does.

      • Almost. It is that the lack of planning for livable outcomes produces cities that are sufficiently undesirable that they don’t bubble. It is not an issue of supply as UGBs have sufficient supply within them and indeed there is a likely oversupply within some, e.g. Melbourne.

      • Why is it relatively unliveable? Is it because of the sprawl. If so how is Melbourne that has sprawled more but has moved couple of notches up in the liveability ranking.

        If the sprawl do not have a big weightage on liveability then why restrict?

      • Livability ranks are only a general guide to true livability, a better indicator is prices when you have other options.

        I do not believe that even Melbourne’s sprawl is anything like those cities in Texas as well.

      • @ indo re: most livable cities

        I doubt that the people doing the “most livable cities” went anywhere near Hoppers Crossing or Carrum Downs or Cranbourne when they did the assessment. I think, from reading the reports, that most of them are done from inner city hotels by fly-in fly-out, high disposable income, liberal arts reviewers. Most Liveable City concept is great for a DINK in South Yarra or Carlton, but doesn’t relate to anywhere near an urban sprawl. On that basis, I think it’s an irrelevancy.

      • I guess an interesting chart or data to disprove this theory would be to look at net interstate migration, job growth and unemployment rate compared to a cities property price index.

        A problem with the theory is the assumption on the 100% free mobility of people/labour to uproot and move interstate let alone internationally. How many people with families/steady jobs would be willing to do this realistically?

    • Miss P, I think you need to read Thomas Sowell’s The Housing Boom and Bust to understand the influence of planning issues in causing a housing bubble in parts of the US.

  10. Thanks Robert K and Miss P for bringing some commonsense into what is becoming a very tortuous and theoretical discussion.

    If you want a case study of what happened with open slather development, look at the real estate development history of Phillip Island over the past 80 years (back in the news this week for the wrong reasons).

    • OK, if you want to preserve a unique, valuable small ISLAND from urban development, FINE. But there is no excuse for unaffordable housing in a land mass the size of Australia, with as low a population, and as much surplus of primary produce (which provides extremely low returns on the land used).

      • PhilBest, talking about “a land mass the size of Australia is a bit rich. If you want to talk about land mass, then talk about the coastal fringe that is “habitable”, don’t include the 90% of inland desert. If you look at Melbourne’s urban sprawl over prime market garden land and orchard land in the last 50 years, then maybe there is a lot of “valuable” land that ought to be preserved around Melbourne.

      • The fact still remains that Australia has dozens of times as much rural land as urban, has massive surpluses of produce which it exports; and “containing” urban growth penalises export industries with far HIGHER “returns” per acre of land used – even including housing their workforces.
        The simple fact is that urban economies GDP’s are HIGHER, period, than rural economies worldwide, even though the urban economies occupy a tiny fraction of the space.

      • “maybe there is a lot of “valuable” land that ought to be preserved around Melbourne”.

        What, like the low quality land to Melbourne’s north and west? Face facts NMO, Melbourne has plenty of land available for development. But most of it has been made off-limits due to regulation. Instead, we have expensive eveless homes built on tiny blocks crammed together like sardines, with no backyards and little tree cover. All in the name of ‘land preservation’.

  11. Good article. I agree with the premise that regulation (lack of one) is the most important factor that makes housing affordable. Undeveloped land on the fringe of big cities in Texas costs just slightly over agricultural land in places 50 or 100 miles further. On the other side undeveloped land on the fringes of our cities costs up to 100 times more than agricultural land just few kilometres further (outside of development zone). This cheap land in Texas and other places with similar policies makes strong “alternative” pressure on land prices closer to city and existing house prices.
    I will somewhat disagree about extent infrastructure charges affect house prices. Upfront infrastructure charges in Sydney ( http://www.nhsc.org.au/nat_dwelling_costs/append_b.html ) for example, are $52k and other government fees (excluding GST) are $13k. That sounds very cheap when compared to existing REA fees of $21k. Bare (undeveloped) land price for greenfield development is around $150k that is up to 30 times more expensive that agricultural land just outside the zone. With other proportional costs based on this price (interest payments on funding, government fees, GST, stamp duties, REA fees, other professional fees, land tax …) this quickly goes to over $200k – just for the bare land.

    By removing all upfront infrastructure charges we could make new house prices 10% cheaper, but by reducing land price to real value (same as land outside the zone) we could make them 33% cheaper. All it takes to make houses 33% cheaper is single peace of legislation that will return ownership rights to owners and let them built home on their own land. This is not just issue of housing affordability but issue of injustice because some owners (outside of development zones) are robbed for one of the most important ownership rights – right to built home on your own land.

  12. Just re the texan situation, I seem to recall that they had a huge bubble in the early 80,s i think in Dallas, are these zoning rules in response to that bust or is it standard accross all of the State.

    • In Texas’ “huge bubble”, median multiple house prices still never went above 3.6. You and other people who talk about this bubble, confuse a bubble and a “boom”. A “boom” is where houses are built in excessive quantities without the price inflating – in fact, the high quantities supplied, keep the price low.
      The “excess stock of homes” was soon filled, by the way, and prices resumed levels of around 3.0 after “crashing” to around 2.5.
      Do the following sum. What causes more damage to an economy – 10,000 “too many new homes” at $150,000 each; or the entire stock of housing, around 2 million homes, inflating in price by $300,000 each because of urban growth constraints?

      • My understanding is that through the height of the Oil Boom in Texas, with the S&L fiasco as well, Dallas with its population of 3 million at the time put through about 111,000 residential consents in a year – aa annual consent rate of 37 / 1000 population. A truly massive volume.

        If Australia with its population of 22.5 million got up to these consent volumes – that would translate in to near 800,000 consents in one year !

        Currently Australia is running at about 7 / 1000 – New Zealand a disgraceful 2.5 / 1000

        Ireland peaked at about 20 / 1000 – Spain about 15 / 1000.

        Because the State of Georgia does not have Texas’s Mortgage Consumer Protection Legislation, there was overbuilding in the former. This meant that the Median Multiple for Atlanta “bellied out” at 2.1 during 2009 and as the excess stock was cleared was 2.3 MM in this years (data 3rd Qtr 2010 ) Demographia Survey.

        As PhilBest makes clear, overbuilding is far less of a problem than the unnecessary and indeed farcical artificially induced housing bubbles we are suffering in Australia and New Zealand.

        There is about $A2 trillion of bubble value in Australia – some $NZ300 billion of bubble value in New Zealand – which will vaporize at some stage.

        Its better to build out of these bubbles rather than bust out of them.

  13. Devilled Advocate

    Leith et al

    I think there needs to be a qualitative filter applied as one of the other posters made.

    Dallas and Houston have living standards way behind any first and second tier city in Australia – everything and I mean everything is sprawled out and there isnt (to my mind) any sense of coherence to the layout – to see 2 customers per day when I would do sales training in the US would take almost a full day….

    I would live in any city in California (other than LA) than in Texas.

    Having said that could it be that the cheap land is driving the immigration and with the business growth?

    Expensive land makes every activity associated with it expensive (eg $5 cofees in Sydney)

    If you could point to cities that have a comparable quality of living while having more fluid supply I’d be more convinced that the supply side keeps prices realistic?

    My .02

    DA

      • Exactly – why is housing in Australia MORE EXPENSIVE than in Zurich, Vienna, or Munich? Or virtually any city in Germany, Switzerland, or Austria?
        I have actually encountered people who are in the process of moving to these countries because housing in CHEAPER than in Australasia – and jobs are not hard to get.
        Inflated urban land prices ultimately result in a crashed economy. Germany, Switzerland, and Austria, are outperforming the rest of Europe because they are virtually alone in NOT having had urban land price bubbles

      • I thought I’d have a look at Zurich as I did not expect it to be on your list. Interestingly in the mid ’90s they moved to an infil, polycentric model and dedicated fringe areas for open space and farmland.

        Europe is very different as has been mentioned before. There is far greater rights given to renters. Also, by 2015 it is expected they will be a net importer of food. This ensures that farmland will increasingly become more valuable as food security will become more and more of an issue. I would imagine this would create speculation in agricultural land over urban land.

        The problem with this argument is that we are focusing on one area of planning regulation, whereas there are a massive amount of planning restrictions other than UGB’s. It depends on if the planning schemes are prescription or performance based, where topographical and natural constraints exist, where State and international borders lie, the restrictions within the urban area as well as external to the urban area.

      • It is quite possible to “dedicate fringe areas to open space and farmland” without inflating prices, as long as there is not a CONTINUOUS boundary.

        The food production issue comes back to this: food will have to increase in price literally hundreds of percent before farmland goes up in value to the point where its value will be “in balance” with urban land values and hence not worth converting farmland to urban land. But there is still vast amounts of farmland worldwide capable of producing food at current prices. So the question will be, will the people of Europe pay through the nose for food produced locally by import-protected producers, when there is cheap food able to be imported? The price of farmland is actually INTERNATIONALLY determined, as long as there is not total prohibition of trade.

        And what is Japan supposed to do, if relying on trade to feed your population, is “unfair” in some way? Were they right to start invading other countries?

        The fact that Europe is actually the world’s most “populated” continent, gives the lie to popular beliefs about “overpopulation” and poverty and under-development.

      • I’ve just read that post of yours again. There is very little in there about UGB’s. The greatest effect seems to be on security of tenure and price for renters, the availability of credit and being able to build on your land unless it is a prohibited use.

        The major difference between Germany and Australia is the first two. The law in Germany as you explained:

        “…this “means that everyone is entitled to a permission to build on his or her property as long as there is no explicit legal rule against it.

        …if the proposed building fits into the plan, permission has to be granted and if the local authorities deny it then a court will enforce it…”

        I’ll use South East Queensland as an example. In SEQ there is a performance based planning system. Theoretically, nothing is a prohibited use. You just need to justify that it meets performance criterias and strategic outcomes. The UGB could come under the definition of a prohibited use, however even if your land is located outside of the UGB, you are able to submit and EIS to the State to have it developed into urban land. This has actually occured on a number of sites in the Caboolture are and near Coomera from what I understand.

        From what I understand, even in Germany, if they prohibit development, you can’t develop, just like with an UGB. Regardless, it seems that the greatest flattning of the prices has occured as a result of the rental and lending controls. You even mention that in Texas, lending practices are more restrictive than much of the USA as well as how rental properties are by specialist companies and pension funds whom provide standardised service, competitive rents and stable tenancy (i.e. longer term rentals).

      • “In Texas, lending practices are more restrictive than much of the USA as well as how rental properties are by specialist companies and pension funds whom provide standardised service, competitive rents and stable tenancy (i.e. longer term rentals).”

        Sure, Texas’ lending standards are slightly less liberal than California, but they are hardly “restrictive” and are far more liberal than Australia’s. Check out Texas’ share of sub-prime mortgages in this Dallas Fed paper.

        Regarding your SEQ comments, explain to me how fringe land prices have more than doubled in price yet shrunk in size if supply constraints were not present? The whole supply-side issue is more than just UGBs and includes a reluctance of governments to provide infrastructure, up-front infrastructure charges, slow development approvals, etc.

        On Germany, I recommend that you read the Policy Exchange’s paper in full rather than rely on a few brief quotes from my article.

      • The entire market has more than doubled across most of SEQ in the same period, not just the fringe. The land sizes have got smaller because people are prepared to purchase them. The developers will sell the smallest land size they can as the smaller the lot, the higher the price per square metre.

        Regarding Germany, it is interesting when I read the section on Germany in the Policy Exchanges paper, especially Section 1 (5) of the
        Building Act which “lists a catalogue of ten guiding principles
        which must be considered and between which a just and
        fair balance has to be struck”, I see few differences in the document with SEQ, which also has these requirements. The planning is conducted by the local governments with the Queensland Government having very little involvement only really drawing up the Regional Plan which is comparable to the State Development Plan. (The State is getting more involvement through the ULDA however I expect this to disapear after the next election) We also have very little Federal involvement into planning policy.

        The big difference was the taxes and the incentives for councils to increase populations, including subsidies if you purchase a house.

        I have an assumption that Australian cities, unlike European cities, have developed with a very low density, therfore requiring some form of land constraint to control the spread. European cities did not require this to the same extent as they have been far more efficient with their land. Density equals cheaper PT (more people in catchment for lower running distances), cheaper garbage collection (city closer to refuse sites, less distances for each truckload), cheaper water sewerage infrastructure (less km of pipes per 100 houses), less roads required (what is the road pavement area per dwelling in Manhattan, yet it is still just as easy if not easier to get around), greater parkland opportunities per dwelling (you haven’t used up the land building the houses), cheaper transport costs (you are closer to retail, closer to areas of employment whether that be CBD or suburban, etc. I have communicated with engineers from Gold Coast and other councils who have comfirmed these things. i.e. it actually happens on the ground, not just in theory. Infact, some areas are low enough in density, they just don’t get water, sewerage, paved roads, public transport etc.

        I would be highly supportive of removing horizontal growth boundaries if we were at the same time remove verticle growth boundaries as well as ensure we do not develop on agricultural land that we require for food production in the next 50 years nor do we develop over environmentally sensitive land or national parks.

        I would also support removal of Infrastructure charges if levies were placed on households to pay for the infrastructure that is required for the lot. Currently the infrastructure charges do not pay for all of the infrastructure that new properties require, this is the reason governments are reluctant to provide infrastructure. We cannot have an outcome where we ‘lower taxes’ and ‘increase services/infrastructure’. Also, in SEQ because I know it more, you could never get away with saying development approvals are slow. Any development approval of a major project that takes more than 6 months to be in a position to build lots is usually the fault of the developer, not the assessing authority.

      • The entire market has more than doubled across most of SEQ in the same period, not just the fringe. The land sizes have got smaller because people are prepared to purchase them. The developers will sell the smallest land size they can as the smaller the lot, the higher the price per square metre.

        Yes, because land prices on the fringe DIRECTLY IMPACT ALL URBAN LAND PRICES.

        I would be highly supportive of removing horizontal growth boundaries if we were at the same time remove verticle growth boundaries as well

        Great, we agree on something.

        ensure we do not develop on agricultural land that we require for food production in the next 50 years nor do we develop over environmentally sensitive land or national parks.

        Australia has plenty of surplus land for food production. I agree with you on the environmentally sensitive land or national parks, but this does not mean that we can’t build around these areas.

        I would also support removal of Infrastructure charges if levies were placed on households to pay for the infrastructure that is required for the lot. Currently the infrastructure charges do not pay for all of the infrastructure that new properties require, this is the reason governments are reluctant to provide infrastructure. We cannot have an outcome where we ‘lower taxes’ and ‘increase services/infrastructure’.

        Why not revert to the old system that was successfully used for generations in Australia, whereby local/state governments finance infrastructure via the bond markets and recoup the cost over decades via rates? It worked well in the past and is the fairest method inter-generationally.

        Also, in SEQ because I know it more, you could never get away with saying development approvals are slow. Any development approval of a major project that takes more than 6 months to be in a position to build lots is usually the fault of the developer, not the assessing authority.

        According to the Productivity Commission, it typically takes between 14 and 172 months in SEQ to complete the land supply process. This is hardly responsive.

  14. To clarify the infrastructure issue – those who own it, should be responsible for its financing – then charges rates / fees for its use.

    Ramming the infrastructure costs dorectly in to subdividers, who then whack a margin on ot, as do the builders that follow, is simply a grossly unfair and inefficient way of financing infrastructure.

    So the Municipal Utility District model in Texas is the way to go, for what should be obvious reasons of intergenerational equity and economic efficiency. I cannot stress the word OBVIOUS enough.

    Sure – we could adapt and refine the MUD model to suit our local conditions here in New Zealand and Australia.

    Hon Bill English, Deputy New Zealand Prime Minister and Minister of Infrastructure, with Local Government Minister Rodney Hide, have recently passed in to law bond financing legislation for Local Government in New Zealand.

    I am most impressed with the generaly high quality of submissions to the New Zealand Productivity Commission Housing Affordability Inquiry. Particular note must be made of the Reserve Bank of New Zealands one.

    It is to be hoped that Christchurch will lead the way in getting these sorely needed changes in place following the earthquake events – so that it can become an affordable opportunity city as quickly as possible. Otherwise – with its current serious outwards migration, it will become a ghost city.

  15. Devilled Advocate

    Leith

    Fair call – Id have to agree that most German cities are pretty fabulous (other than German sense of humour…) in terms of quality of life, affordability etc.

    But…there is a signficant difference in the way they treat renters (perpetual leases, tenant fits out their own kitchen) and maybe thats why there isnt the societal urge to “buy real estate” with all of the attendant social issues it creates.

    Perhaps build your evidence base with more examples of countries and cities as Dallas/Houston wouldnt make anyone wax lyrical – Dusseldorf, Munich, Berlin on the other hand….

    Either way keep up the stellar work – without clinical fact based analysis from erudite Macro Baters we’d all still be sheeple.

    DA

    • Actually, if you go beyond the “California versus Texas” argument, there are numerous cities all over the USA with non-Texas climates and scenery, that also have extremely affordable houses.
      I am still gobsmacked by the fact that Aussies see their cities as comparable with LA/San Fran/Vancouver for climate and scenery, rather than with Texas. Come ON. If any place in the world disproves the theory that “bubbles only happen in the places with the loveliest climates/scenery”, it is Australia.

  16. You win the economic argument for Texan housing hands done. But the win is unidimensional.

    Planning wasn’t introduced for the specific purpose of impoverishing people. Let’s see your environmental and social impact analyses of junking the concept of urban planning. And then a balanced discussion can ensue.

    • OK, check out the paper “The Welfare Economics of Land Use Planning” by Paul Cheshire and Stephen Sheppard.

      Also a pair of papers by Alex Anas and Hyok-Joo Rhee: “Curbing Excess Sprawl with Congestion Tolls and Urban Boundaries” and “When are Urban Growth Boundaries not a Second Best to Congestion Tolls”.

      Bottom line: the COST of urban growth containment FAR EXCEEDS the alleged “benefits” even when these are valued most optimistically. If voters were given FACTS rather than myths, they would reject these economic weapons of mass destruction.

    • thats the type of response id hear in lectures from the urban planning/sustainable development lecturers and their semi-religious, ideological desire to make Sydney some sort of European utopia…

      must ram down their ‘vision’ down peoples throats at any cost. Creating scarcity where there is none is good for speculators but not for society

      • EXACTLY. I strongly suspect that environmentalism is being “used” by powerful rent-seeking interests whose motivation is capital gains, not “compact urban form” at all. Policies that actually WOULD HELP achieve compact urban form but without delivering capital gains to vested interests (especially core area property owners) simply never seem to get on the agenda. I include among those ideas; land taxes; compulsory acquisition of land; and abolition of NIMBY rights in areas earmarked for “densification”.
        I guess real environmentalists who care about the environment, mostly have “brain types” that do not understand economics or markets, hence their beliefs are easily exploited for gain by smart capitalists.
        I also believe that certain international property magnates are among the biggest funders of environmental groups. Guess why……

  17. Sorry I have not until now congratulated you, Leith, on another excellent article. You are getting further and further ahead of the pack, as the “guy most likely to write the definitive book on housing bubbles” anywhere in the world.

    There is an advantage to “paying off infrastructure” rather than loading it up-front into the price of new houses. This is, that loading it up-front INFLATES the prices of the houses, while leaving a long-term “charge” keeps the price of the houses DOWN.

    The prices of fringe development homes determine the price of ALL urban property via location advantage price premiums. LOW urban land prices throughout are an economic advantage and HIGH urban land prices throughout are an economic disadvantage, to a city.

  18. UE … have followed your articles on this subject and although you make interesting arguments, I don’t see how you transition from the current Australian position to (say) the German one without the seriously adverse consequence to household finances, banking sysytem etc of the sort the Americans are currently enjoying(!). It is in that transition where magic needs to be applied to avoid serious economic pain to the local populace. Ideas?

    • Long term approach, something near impossible in the adversarial culture of Aussie politics.

      Wind back policies such as FHOG, negative gearing etc over the course of 10 – 15 years. Also, introduce better tenant rights and more housing trust properties over the course of many years.

      It’s shocks to the system that need to be avoided. No harm in evolution though.

  19. Ok… So now we know why! Cool!

    The big big question is: How would you get there?

    As it stands – the way I see it, regardless how it would be done – it would involve a lot of pain to these “paper millionaires”. In Yes Minister speak – this would be most definitely a “courageous move”.

    So – anyone cares to tackle this subject as a next article?

    Ino

  20. Excellent. So let’s compare the Texas lot to an AU lot assuming they’re built in an AU labour market and infrastructure market.

    Take the $40k fringe Texas lot, add $60k in upfront infrastructure charges, plus another $10k in finance, holding, and fees. That takes the lot to $110k.
    Then lets take an average 250sqm home which costs $800/sqm in AU. So that means your fringe Texas home will cost $110k (land) + $200k (home) + margin = say $330k – $350k total.

    How does that compare to a fringe lot in AU?

    Remember, the above figures have NOTHING to do with urban growth boundaries – its purely equivalising wages, labour, materials, and infrastructure costs to make a like-for-like comparison.

    Land developers would love infrastructure to be funded per the Texas model. But what has been happening is that bloggers have been pointing to Texas and saying the massive price differential is because they have no UGBs. You have to normalise the “hard” costs first before you can compare the effect of UGBs (in my opinion). Hope this makes sense.

    • Rouse Hill in Sydney would probably be classified as fringe, it’s pretty much surrounded by farmland.

      A 700m2 block of land goes for about $400K, a house + land package goes for about $600K – absolutely insane prices.

      $350k seems quite cheap in comparison.

      • Good example. Rouse Hill (not one of mine) is reasonably well regarded in the development industry for the level of “community” infrastructure. In order to decentralise the workforce, someone (the developer) at these large fringe estates has to provide sufficient community infrastructure (think Medicare offices, community halls, disabiltiy services, small businesses etc) to entice businesses and services. Medicare, small business etc don’t build buildings – they lease space. So the developer has to ensure space is provided UPFRONT and all this costs $$$. The only way to recoup that is to spread that over the lot price.

        I didn’t go into that in my above calculations because I don’t know if Texas developers include community infrastructure (but at $40k lot prices, I doubt they do).

    • LandDeveloper. You have just destroyed your own argument. You claim, using Texas land costs as the starting point, that a Texas lot would cost $110k if the same fees and costs were applied as in Australia. Yet SMALLER fringe lots in Australia typically cost around $200k. So where has the extra $90k plus gone? Second, the inclusion of $60k worth of upfront infrastructure charges is exactly what I have been arguing against, along with UGBs, slow approval processes, etc. So you have confirmed my argument without knowing it.

      Finally, your claim that the house component of a typical house and land package costs $200k and is the major component of the package ($200k/$350k = 57%) is dead wrong and does not gel with the prices quoted in the UDIA chart shown in my article or this table from RPData. Also, go to any developer/home builder website and you can find family homes (3 bed, 2 bath) available for around $150k.

      • Hi UC – unfortunately you’re taking my rudimentary calculations as an exact price. They are broad costs and simply illustrate a point rather then being an exact quote. The point being, that when you normalise the costs (even very very broadly) the price differential between AU and Texas is not the hundreds of thousands of dollars being sprouted. The price differential in apples-for-apples terms is far less. This then provides a more balanced “differential” with which to argue about UGB price effects. As I have said all along, UGB’s do affect prices, but not to the extent that is quoted here by saying a house in Texas is $140,000 and the same house in AU is $400,000 (or whatever). Because that Texas home, if built in AU’s labour, materials, and infrastructure market, is closer to $300 – $350,000 (roughly).

      • What is the labour cost to build a house with associated infrastructure (roads utilities etc.) in Australia compared with Texas?

      • I can’t give you the exact figure. But as a guide, a plant operator in AU will be on $40-$80/hr (depending on type of plant), and a US plant operator will be on $15-$25/hr (very broadly speaking). If there’s a million man and machine hours in a moderate size subdivision, doesn’t take long to add up. Don’t forget deisel is more expensive, and the actual capital cost of the plant itself costs multiple times in AU than in Texas, which means it has to be charged out at much higher rate for the same productivity.

    • Really appreciate your perspective LandDeveloper, am always interested when you contribute

      Using the methodology above to an actual house – Spring Farm near Camden on the south West fringe of Sydney.
      http://www.springfarmcamden.com.au/Houses/SpringFarm1807.pdf

      This place is selling for 437k.
      – It’s 190sq so that makes it $150k for the house
      – of the 287k left, take the 60k in infrastructure and 10k in finance, etc

      The remaining 220k should be the land cost plus margin. I’m not sure what the split would be (but I assume they are taking a healthy cut – maybe 80k for land and 140k in profit?).

      Is the above realistic?

      • Not necessarily. The $800/sqm I “quoted” was just a rough but fair estimate of a typical first home buyer home – it could vary substantially up and down.

        But assuming you’re correct, what you’re failing to miss in the “land” cost, is the cost of the roads, drains, parks, retaining walls, fences, street lights, site works, transformers, sewer pipes, dewatering, remediation, rubbish bins, drinking fountains, footpaths, etc.
        The $60k “infrastructure” costs I mentioned earlier are actually the charges and levies that are paid to the utilities – they are not for the actual materials and labour to install the infrastructure and that certainly doesn’t cover all the other aspects mentioned above etc.

        So of the 220k you calculate as remaining, $100k is likely (just a rough guess) as going towards the roads and paths etc. So that leaves $120k for acquiring the land, and profit to the land developer (which is probably about 20% – so say $20 – $40k)

      • Land developer – I compared the situation in Houston with New Zealand early last year within an article “Houston: we have a housing affordability problem” – accessible via the Highlighted Articles Section of my website http://www.PerformanceUrbanPlanning.org .

        The reality is that our development costs from the raw land up in New Zealand and Australia are simply a joke.

        The numbers speak for themselves.

        The reality is that new fringe starter lots are being provided to production builders in the affordable North American markets for around the $US30,000 – stripped down lots for manufactured housing at around the $US20,000 mark.

        The problem is that as general housing inflation is triggered, it adversely affects the pricing performance of the construction sector across the board as well. One only has to see the build costs per square metre here in this part of the world in comparison with those in Texas – as I explain within the above article.

        Give us a detailed breakout of the costs of the $US140 – $US150,000 235 square metre starter home on the fringes of Houston with whats being put up on the fringes of the Australian urban markets.

        Then weep……..

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

    • Good point here. As a parallel in Vancouver, located 30km north of the US border, there is a direct step-change in prices of all goods between the two countries. The reason has much to do with wage differences; the US minimum wage is less than Canada’s and that directly affects prices.

      It’s fun as many books I buy have the US and CAD prices listed on the cover, the Canadian costs are 20-30% higher even with the exchange rate fluctuation. People complain of a scam but don’t ask about the Canadian side of the supply chain.

      One would think that Australia should have lower, not higher, land prices.

  21. UE,

    I have a lot of respect for the work you do providing the economic analysis that is devoid in the MSM. However I think you have become so committed to this concept of UGBs being the cause of housing bubbles that you are unprepared to engage in your own analysis of alternative views.

    As yet I have had no one provide me a counter arguement that dismisses the position I have put forward today.

    I would be happily proved wrong if you can stop housing bubbles, but if the solution is to create less desirable cities then I think we should keep looking.

    Lastly, I think we should consider further that if UGBs caused supply constraints, then prices would not drop in bubble cities unless the UGB restriction was removed. As far as I know UGBs are still in place and prices have fallen.

    • Hi Miss P
      That is because you have put forward a statement saying California is more desirable to live than Texas and hence the bubble.

      But you havent stated in whose perspective is California more desirable. For which you state this is because it is unaffordable.

      California is desirable Because it is unafforable Because it is desirable

      This is just going in circles.

    • “As far as I know UGBs are still in place and prices have fallen.” – Miss P

      Maybe you havent read Leiths other work which shows how supply constraints can make severe the corrections on the downside , causing recessions, exactly what we are trying to avoid.

    • You see MissP, that is where you are wrong. Supply constraints, whether they are restrictive zoning, hefty upfront infrastructure charges, slow development approval processes, or some other mechanism steepens the supply curve. This makes house prices more sensitive to changes in demand and promotes volatile boom/bust conditions. The fact that UGBs and other restrictive planning measures are present is a key reason why cities experience bubbles/busts. I have explained this phenomenom at least a dozen times in relation to the US, UK, Irish and Spanish housing markets.

      • I would have thought that in Australia, we have at last the same amount of developable land in Australia than the land area of England. Why is it having a greater influence on house prices? IMO it has more to do with desirability, availability of easy credit and security of leasing amongst many many more variables.

      • UE: In relation to Ireland, there was significant relaxation of things like UGB and planning restrictions under the previous Fianna Fail Government, about the time of the housing bubble. Now there are empty estates out in the far edges of towns all around Ireland. The Irish bubble was unrelated to UGBs, it was all about Government incentives, easy money (ECB fault), bank lending incompetence (close to fraud), Government addiction to property transfer fees (up to 24% of Gov’t revenue at one stage) and an adulating media.

      • Not true. The relaxation of planning restrictions in Ireland came years too late, and prices collapsed just as a flood of new homes hit the market. Had planning been relaxed from the outset, and supply was able to respond quickly to demand, it is highly likely that Ireland would have experienced a far smaller bubble/bust as the extra credit demand would have been partly disipated through the building of extra homes rather than price escalation. I explained the Irish situation here.

      • The Irish bubble was most certainly triggered by planning strangling supply to the attractor markets, which in turn led to looney developments way outside these areas.

        Scarcity is the trigger – finance (in all its forms) is simply the fuel.

        The impact of finance in open markets is best illustrated by comparing Georgia to Texas. Excessive finance in the former simply led to overbuilding – but importantly – not a bubble.

        Developers / builders are a speculators worst nightmare – if the former are ALLOWED to respond quickly to market demand.

      • The best academic analysis is indeed focusing on true “elasticity of supply”, which is, SHORT TERM elasticity. Some serious errors of analysis have been committed by some, who take a generous supply response over 3 years or more, to represent an “elastic” response.
        This misrepresents markets where serious PRICE escalation PRECEDED the “supply” response – in fact the supply response only came once prices reached absurd levels. This indicates a seriously distorted “supply” curve.
        Significant players in this late, high-price response, includes local government, eager to capture a share of “planning gain”.

  22. Item 1: There are lots of quoted prices for Texas in this discussion? Are they current prices, when Texas and lots of the rest of the US is going through one of their longest property slumps, after a finance induced bubble (not due to UGBs)?

    Item 2: Is part of our current housing price issue due to inflows of money from Asia buying residential property because of the other aspects of Australian society that make living here desirable?

    Item 3: UGB and other planning considerations should be looking at the energy and Carbon costs of the way cities grow. Maybe one of the reasons that the US is such a high consumer of fossil fuels is the urban sprawl and lack of public transport, lack of local (i.e. walkable) shopping.

    • Lot’s of myths there NMO. Let’s dissect them:

      There are lots of quoted prices for Texas in this discussion? Are they current prices, when Texas and lots of the rest of the US is going through one of their longest property slumps, after a finance induced bubble (not due to UGBs)?

      Texas’ prices have been stable throughout the US housing bubble/bust period, as my house price chart shows. Also check out these charts for Houston (here) and search for what you can buy for $150k here.

      Further, I have comprehensively shown that the US states with strict planning experienced large bubbles/busts whereas those without did not (see here and here).

      Item 3: UGB and other planning considerations should be looking at the energy and Carbon costs of the way cities grow. Maybe one of the reasons that the US is such a high consumer of fossil fuels is the urban sprawl and lack of public transport, lack of local (i.e. walkable) shopping.

      Planning constraints such as UGBs tend to lead to ‘leapfrog development’, where families move to far flung exurban locations where housing is more affordable. This behaviour tends to increase sprawl, travel times, and housing’s urban footprint. I explained this phenomenom here and here.

  23. Re the famous “livability” indexes that the planning classes trumpet, Owen McShane dealt with that admirably on “New Geography” 2 years ago:

    http://www.newgeography.com/content/00862-how-can-cities-with-unaffordable-housing-be-ranked-among-most-livable-cities-world

    “…..ranking is designed “to help governments and major companies place employees on international assignments”. So housing affordability is not an issue. These are the best cities for ‘top’ people – and for government officials in particular.

    So, when pondering the rankings of these cities, we should understand they have been ranked according to the preferences of a high income, highly mobile, urban elite. This probably reduces their utility as a guide to overall public policy…….

    “……Executives posted from New York to Vancouver or Sydney are unlikely to be concerned with the cost of housing because their housing will be provided free of charge, or subsidized by accommodation allowances. These rankings are not established by interviewing a random sample of residents, but are generated by a team of experts trying to assess these cities through the eyes of transferred executives setting up homes in new countries…..”

    • Ok, that makes those surveys make far more sense now, I’ve long thought them kind of meaningless or wrong, not to mention how do you rank something as subjective as livability.

      I reckon Sydney would be great if you were earning $200k+ a year, as you could live in all the nice bits. But the reality for most of it’s inhabitants isn’t so great, hugely expensive, and a pain to get around with the lack of investment in roads and public transport.

      • Yep, anywhere within 500 metres of the Harbour (or a beach) is pretty desirable. Anywhere else is the pits.

  24. Great article
    Nailed it, particularly with emphasis on infrastructure funding.

    Interesting concept with the ‘developers’ financing the infrastructure via tax-free bonds.

    In NSW developers and Government agree the infrastructure is the key to the release of affordable land, the question has always been …who pays for it.

    Developers agree to pay for the immediate infrastructure to their development, but this stops at the boundary.
    Unfortunately in Sydney Greenfield land, beyond the boundary is nothing.

    In NSW, the new O’Farrell Government acknowledges developer funded infrastructure (producer levies) only inhibits growth and ‘sterilises’ land, with the developer trying to recoup cost beyond the affordability ceiling. The residential areas within South West and North West Growth Corridors of Sydney have been delayed for years, as well as the development and further release of Employment Lands.

    Some key reports used in State Government research that may bring you up to speed with regards to Government funding public infrastructure, to achieve the efficient release of affordable land;
    Allens Consulting report 2003 “Funding Public Infrastructure”, is particularly good. http://www.allenconsult.com.au/publications/download.php?id=258&type=pdf&file=2

    The recent Federal Government Productivity Commission Research Report April 2011 on Planning and Zoning and Development Assessment also acknowledges all the issues you raise. Chapter 6 for infrastructure. http://www.pc.gov.au/__data/assets/pdf_file/0003/108840/planning-volume1.pdf

    Productivity Commission Research Report dated 2009 – Public Infrastructure Financing an International Perspective. http://www.pc.gov.au/__data/assets/pdf_file/0008/86930/public-infrastructure-financing.pdf

    The recent NSW Parliamentary e-brief dated August 2011 focuses on Infrastructure funding with the introduction of Waratah Bonds. .http://www.parliament.nsw.gov.au/prod/parlment/publications.nsf/key/InfrastructurefundingandtheRestartNSWFundBill2011

    Also e-brief dated May 2011. Comparing models with Infrastructure Ontario (IO). http://www.parliament.nsw.gov.au/prod/parlment/publications.nsf/key/InfrastructureNSW:comparingadministrativemodels

    It appears the NSW Government is favouring the Canadian model, although not sure Waratah Bonds will do the trick at the rate proposed of 4.5%.

    My fear is the bulk of the infrastructure funding will be poured into new rail links, upgrading ports and improving regional transport links ( election promises) which don’t immediately support the release of affordable land release and therefore still relying on inefficient developer funded contributions to build the infrastructure.