The housing production line

As regular readers would know, the debate continues about the role of planning regulations on housing supply and the resulting price implications.  Yesterday our favourite Unconventional Economist elaborated his views in an exploration of town planning and the UK housing market, so I feel it is an opportune time to elaborate the opposing argument – why the supply side has not been factor in determining the price level of Australian housing.

First, I need to outline exactly how I understand the subtle argument about how zoning and approvals processes can lead to unresponsive housing supply due to time lags, consequently increasing price volatility.  This is clearly a far different proposition to the ‘chronic undersupply’ arguments of many housing ‘experts’.

I understand the unresponsive supply mechanism could work to create price impacts as follows.

  1. If planning regimes restricted the ability to develop housing at a rate commensurate with demand in a given period, through zoning or lengthy development approvals, this would effectively act as a short term quota.
  2. If rational buyers expect this shortfall to be somewhat prolonged (say 3-5 years) they may be willing to bid up prices in expectation of capturing abnormal rental gains during that time.
  3. Speculative buyers enter the market based on the new price path, creating a feedback of higher demand.  This amplifies the house price appreciation justified by the short term planning restrictions.
  4. Developers overcompensate for these price feedbacks by bringing on too many homes after the price spiral has run its course (by taking on higher risks such as reducing the number of pre-sales).

To me the mechanism appears sound.  But remember, it relies on three crucial factors – irrational buyers bidding up home prices beyond what is justified by any short term lag in supply, developers making the same misjudgements about genuine demand, and most critically, planning instruments and approvals processes acting as a short term quota.

While I don’t disagree that buyers and developers can be irrational, I argue that the final critical assumption cannot be demonstrated to be widespread in Australia (although particular locations may see these short term effects from time to time).

Costly and time-consuming development approvals are often argued to be equivalent to delays in the ability to supply new housing (or land supply in the case of residential land subdivisions).  But this lead time is no different from the lead time involved in any complex manufacturing task.  Just because it may take two years to manufacture a Boeing 747 does not automatically lead to the conclusion that supply will be restricted in the mean time.

The process for approving development applications (where they are required) can be imagined to be much like a simplified Boeing 747 production line.  There are planes sitting in the production line at various stages of completion as well as a stock of completed planes (although in reality planes are usually sold before they are produced – in much the same way the developers pre-sell apartments off the plan prior to construction).   Only if the stock of completed planes falls to zero does it mean that the supply has not been adequate to respond to demand, effectively creating a short term quota on production  until such time as the production line can adapt to increase output levels.

The property industry has a term for this production line of development approvals – the supply pipeline.  Large developers usually research the supply pipeline in their markets prior to buying development sites, and prior to beginning the approvals process themselves.  It helps give an idea of the type and quantity of developments they are likely to compete with, which helps better position their product in the marketplace.

For the unresponsive supply side argument to hold, we would need evidence that the stock of approved residential land and apartment sites was insufficient to cope with the spikes in demand, particularly over the past decade.

The best data I can find is for Queensland, where the Office of Economic and Statistical Research (OESR) reports regularly on the residential development pipeline. The OESR compiles a selection of reports about the stock of dwellings of different types at various stages of the approvals pipeline.

The table below, from this report, shows the completed stock of approved residential land subdivisions at the end of the supply pipeline for South East Queensland.  The important thing to note is that this stock has been growing since 2002, with a peak in 2007, meaning that the various councils in SEQ approved far more land subdivisions than the market could absorb.  Remember, this is already approved land subdivisions only.

A second important point to note is just how quickly council can ramp up the volume of approvals when necessary, as seen between 2002 and 2005, and again in 2007.

The same pattern holds for the stock of approved infill attached dwellings in the available data since 2008, as shown in the table below (from here).

What are we to make of this evidence?

First, I would argue that town planning controls, in the form of zoning restrictions, urban growth boundaries, have had almost no impact on the price of housing in SEQ over the past decade, and unless there is evidence to the contrary, the same is likely to apply to other capital cities and metropolitan areas.

Second, I would argue that such evidence would not only need to be found in the development approvals data, but in the data for rents in the areas where supply restrictions are suspected.  After all, land prices are simply capitalised rents.

Third, I would argue that the benefits from urban growth boundaries, zoning, and other planning rules mostly outweigh the costs.  And indeed, these costs are borne by existing owners of developable land, not developers or new home buyers.

Fourth, while planning controls do have benefits, I would be very keen to see more certainty around the planning rules to take away any advantages gained by speculating on future changes to planning rules.

Tips, suggestions, comments and requests to [email protected]

Comments

  1. there is also an arguement that the councils don’t want to release 10% more development availability sites as the reduction of value on existing properties would reduce the rate collections.
    ie. 100% x $100 = $100
    but 110% x $91. = $100
    … but the extra council services (waste collection etc) means loss to council, hence they don’t release land

    • I would have thought it would be in the councils ‘revenue’ interests to have as many dwellings as possible.

      1 house on a 700sq block = $700,000 or around $2,500 a year in rates.

      4 units on a 700sq block = $400,000 each or $1.6ml. This would bring into the council coffers around $1,500 a property or $6,000 a year.

      The only council cost that doubles is rubbish collection. Park maintenance and other services are already established.

      Surely they would make more money off this? or has the rubbish collection industry got that expensive it holds local councils to ransom over potential subdivision?

      Also, some streets would need new water/sewer pipes & power line capacity if more dwellings went in. Who wears the cost of this? The water company, power company, or the local council?

      • Re your last paragraph – the developer pays. The developer pays “headworks” charges to the utility providers on a per lot basis (the caluclation is little more complicated, but it is sufficient to call it a per lot charge).

  2. Very interesting but it doesnt necessarily follow that supply is not a problem simply because there are undeveloped approvals – a bank of approvals.

    Your description of the supply pipeline as being like the pipelineto build a jet was interesting. Should developming land really require analogy to complex manufacturing?

    • This would mean that the Boeing pipeline is not actually the physical pipeline in the factory, but all the ‘commitments’ that the various Airlines have made to Boeing on purchase.

      American Airlines commit to Boeing that they will purchase 100 x 787 Dreamliners – but only a handful are in physical production…

      • So do you think if Boeing got a nice fat order, they would deliberately stifle production, or perhaps ramp it up (double shifts etc) to meet demand?

  3. Its very much a simple case of “following the numbers” to ascertain where the problems are in the supply chain.

    If housing markets exceed 3 Median Multiple and you are not getting acceptable new starter stock on the fringes at 2.5 Median Multiple with Development Ratios 20% serviced lot, 80% house construction – you know you have a problem.

    Note the Affordable Housing Market Definition on the front page of my website at http://www.PerformanceUrbanPlanning.org. Then use the Demographia Survey Schedules for household incomes to ascertain what price new acceptable starter stock should be going in for on the fringes of specific markets.

    It sure is a mystery to me why people have difficulty understanding these simple measures.

    It is very clear that the problems in supplying affordable new housing in Australia and New Zealand are caused by strangling fringe land supply and inappropriately financing infrastructure. This in turn has degraded the pricing / productivity performance of the construction industries in both countries.

    Read “Houston: We have a housing affordability problem” accessible within the Highlighted Articles Section on the front page of my weebsite, to see the pricing in Texas.

    The evidence is staring us in the face.

  4. What are the average total costs of the supply pipeline ? Per lot or per development project

    Including

    * council fees
    * time spent by developer staff managing the pipeline process and researching the status of a particular LGA pipeline
    * costs of consultants to assist developers with the process
    * state govt fees

    What is the effective barrier to entry to new developers in terms of
    working out how the pipeline works.

    While some planning has benefits at what point do the benefits exceed the cost.

    Planners and well intentioned observers have a tendency to see improvement in terms of more and more finely tuned regulations covering more and more issues. All of which increase the paperwork, management time and cost.

    • IF “supply” is wide open i.e. no limits on the freedom of land owners anywhere to develop it for urban use, then “fees” will tend to capitalise into the price of the eventual development.

      If there are quasi monopoly and speculative effects distorting the supply curve, so that the price is inflated by a greater amount than the fees, then the fees are “absorbed” within the amount of price inflation generated by the distortions to supply.

  5. I continue to be baffled by Cameron Murray’s inability to see real life evidence along with the correct interpretation of theory.

    He says: “……the benefits from urban growth boundaries, zoning, and other planning rules mostly outweigh the costs. And indeed, these costs are borne by existing owners of developable land, not developers or new home buyers…..”

    The “COSTS” are borne by existing owners of developable land, not developers or new home buyers….?????????

    Come again???????

    A piece of farmland, thanks to planning and regulatory processes, is suddenly worth dozens or even hundreds of times more than it is worth as farmland….i.e. “planning gain”…..this is a “COST” to the owner of the developable land……??????? And is NOT a cost to the eventual home buyer????????

    What Cameron is effectively disagreeing with, is the longstanding principle of “planning gain” – he is saying it is an illusion. In Britain for decades now, the owners of developable land, speculators, developers, consultants, neighbours, local government, lawyers, community pressure groups, etc spend YEARS negotiating with each other for “their share” of the “planning gain” that will occur when the plan is changed or permission granted. And Cameron would assure us, I suppose, that the amount of “planning gain” is determined entirely by the level of “demand” – as if supply curves cannot ever have different slopes on them.

    So in Britain, the amount of housing SPACE per person has been steadily dropping for decades, while the price of land has been steadily rising. What a curious phenomenon – the amount of SPACE falling, when the rising price can only be explained by “rising demand”…….

    • Phil,

      We are not going to agree today, so I will address just a couple of your points.

      You will need to explain exactly how costs associated with planning approvals are borne by home buyers. Are you saying developers have market power so that they can pass through any cost? You will need pretty strong evidence for this.

      I agree that planning gains exist. I expressly noted that some land owners try to game changes to the planning rules.

      But planning gains are not a cost. You are looking at things backwards – the price of the farmland is only low because housing development is NOT allowed.

      The planning gain exists because the level of demand (value) for one use is far different from the level of demand for a different use. That is all.

      Phil, I have no idea which economics you studied, but supply and demand curves as we traditionally view them exist under very specific conditions (in the short run with fixed capital).

      You also appear to disagree that land prices are capitalised rent. So what are they? Remember, all land is a monopoly on that specific location, but that doesn’t necessarily imply that the supply of land for various uses at a broad geographical level is monopolised (since difference locations are in competition).

      The case in Britian seems odd, because my understanding is that the Town and Country Act expressly allows for the planning gains to be taxed – hence the drawn out arguments over sharing this gain.

      Where is the sqm/person data for Britain you refer to?

      Finally, you seem very mistaken about how the value of farmland is derived – from the “LOWEST value crop for which there is demand”. Isn’t the lowest value crop simply growing weeds (since tehre is always a lower value use)? In which case no land would have value?

      • You should have posted this response AFTER all the posts of mine that you refer to, so we don’t confuse other followers of the thread.

        I will deal with one point here:

        “…..you will need to explain exactly how costs associated with planning approvals are borne by home buyers. Are you saying developers have market power so that they can pass through any cost?….”

        ANY regulatory cost imposition puts up the price of the item regulated, whether vehicles, trampolines, bicycles, lawnmowers, or whatever. All suppliers are subjected to similar costs, and the effect of competition does not apply to the potential minimisation of these costs. The effect will of course be to reduce the quantity traded because the new equilibrium price will be further back along the demand curve.

        A regulatory cost imposition is quite different in its effects to a distortion in the quantity of supply. If vehicles, trampolines, bicycles, lawnmowers or whatever, were subjected to “quota” regulation by government, the price would go up because of this too. If there are regulatory cost impostions as well as “quotas”, and the regulatory cost imposition is less than the amount of price inflation caused by the quota, the total price inflation will be the latter, not the latter plus the former.

        The NZ government did do a “quota” system for new vehicles back in the 1980’s, and although the “quantity” of quotas auctioned was generous relative to historical supply and demand quantities, they still caused a bidding war that eventually resulted in the successful bidders going out of business because the prices at which they could find buyers for the cars was not high enough to cover their costs. Exactly the same happens with quota systems for urban land – eventually a lot of people go bust, not just the developers. And when this happens in the property market over many years, it is obviously far worse for the whole economy than if it happened for 1 year in the car market. (The NZ govt got the point and adopted further liberalisations pretty quickly – which is what needs to happen with urban land).

      • Cameron said: “…the price of the farmland is only low because housing development is NOT allowed”.

        Okay, so using that logic, if we abandoned all UGBs and eliminated zoning, thereby bringing ALL RURAL LAND into the development sphere, all of this land say within a 20km radius of the fringe of ALL of Australia’s major cities would suddenly skyrocket in value towards current fringe urban values. As a result, Australia’s residential land values would immediately rise from 2.2 times GDP to, say, 3.0 times GDP or beyond.

        Clearly, this situation is not possible. Why? Because the amount of available rural land is many times larger than the current urban footprint, meaning that any large-scale increase in the amount of rural land re-zoned for urban uses will crush urban land values whilst having only minimal impact on rural values.

        If you don’t believe me on these points, look to Texas and Georgia (and many other middle American cities) which do not restrict land supply through regulation and therefore have maintained relatively stable and affordable land/housing values.

        • “Okay, so using that logic, if we abandoned all UGBs and eliminated zoning, thereby bringing ALL RURAL LAND into the development sphere, all of this land say within a 20km radius of the fringe of ALL of Australia’s major cities would suddenly skyrocket in value towards current fringe urban values.”

          Yes. This is exactly what happens when governments do that. That is why developers landbank in these areas to capture such planning gains.

          “As a result, Australia’s residential land values would immediately rise from 2.2 times GDP to, say, 3.0 times GDP or beyond.”

          Of course you can’t simply aggregate values like that – otherwise you would aggregate all the current land with residential development approval (which I have noted is about 130,000lots in SEQ at the moment – or about 11% of the total number of existing homes)

          At the bare minimum you need to wait until a home is constructed these sites.

          • “This is exactly what happens when governments do that. That is why developers landbank in these areas to capture such planning gains.”

            They only land-bank because the artificial constraints on land-supply reduce the level of competition (or contestibility) for land and enable profits to be made. Abolish growth boundaries and eliminate zoning and the opportunities to profit from land-banking will disappear, since land suitable for development will always be available somewhere else. It’s called competition.

          • Leith asked:

            “…“Okay, so using that logic, if we abandoned all UGBs and eliminated zoning, thereby bringing ALL RURAL LAND into the development sphere, all of this land say within a 20km radius of the fringe of ALL of Australia’s major cities would suddenly skyrocket in value towards current fringe urban values.”

            Cameron answered:
            “….Yes. This is exactly what happens when governments do that. That is why developers landbank in these areas to capture such planning gains….”

            Leith already answered this one; but REALLY, Cameron, this does show you to be terribly confused about the difference between “free markets” and “free enterprise”; and “mercantilism”. People like Leith, and Hugh Pavletich, and myself, have been observing all along that it is “free market urban fringe supply” cities in which “land banking” and “planning gain” does NOT occur. Such “land banking” as does occur, is NOT linked with the anticipation of capital gains at all, but with developers desiring continuity of operation.
            Under these conditions, developers know that no matter how large an oligopoly they form, there will always be scope for a maverick developer to bring low cost sections and homes onto the market. An oligopoly would have to “corner” SO MUCH land to literally control prices, that they could NEVER make the exercise PAY.
            The reason for this, that Cameron may not have grasped yet, is that mature cities have LONG peripheries, and “20 years supply” of developable land might only represent a 1 km wide strip of land beyond the fringe. A 2km wide strip might represent 50 years supply. A 3km wide strip might represent 100 years supply. Therefore, “distance from the existing fringe” is NEVER a problem for the maverick developer who is prepared to bring fair priced sections and homes onto the market.

  6. Cameron says:

    “…..land prices are simply capitalised rents…..”

    Sure, and have you heard the term “monopoly rent”? Or “quasi monopoly rent”?

    I admit that this is an area of theory in which many economists are currently floundering. But their credibility is surely not high in the light of recent economic history.

    • Cameron asks above, (in the wrong place)

      “…..You also appear to disagree that land prices are capitalised rent. So what are they?….”

      I did not disagree that land prices are capitalised rents, I said that it is quite possible that some part of that rent CAN be “monopoly” or “quasi monopoly”. The latter term is the best anyone has been able to come up with, given that we are not talking about a single owner of land in an entire city.

      Take 2 hypothetical cities of identical size, with identical populations, GDP’s, and income distributions. One city introduced urban growth boundaries recently and all its urban land is now double the price of the other. Where is the theory of land rent that can rationalise this without resort to a “quasi monopoly” element (or some other term if you can come up with a better one)?

      Historically, if there are not distortions in the supply of land, it is noticeable how land rents fall into surprisingly uniform patterns anywhere in the world. This is why median multiple house prices tend to reach an equilibrium at about 3.0 – whether a hovel in a third world city or a McMansion in the USA. When the relationship between incomes/GDP and land rents are massively distorted away from historical norms, economic theory simply has to admit some component to its structure, OTHER than the classical “all land rent is derived from incomes”.

      This is the crux of the failure of the whole economics profession regarding the crises afflicting almost every country in the world today. I am delighted to engage in discussion at a level where we can bring this point out.

  7. If Boeing and Airbus collaborated, they could easily force up the price of large airliners until such time as other manufacturers were able to enter the market for large airliners. There would probably be anti-trust actions long before this.
    Many alleged “monopolies” in history existed because they kept prices low and fair, not because there were barriers to entry to their market which would have enabled them to price-gouge. (Read Ayn Rand, “Capitalism: the Unknown Ideal” for a real eye-opener on this).
    It is perverse in the extreme, that urban land supply can be subjected to worse price gouging manipulations, with the “anti trust” mob turning a blind eye.

  8. The evidence from Portland, Oregon, is that after they established their “20 years growth” urban growth boundary, JUST FOUR YEARS LATER, prices began to inflate.

    This is because a high proportion of farmland owners within the boundary are emotionally attached to their land and would not sell anyway – unless, perhaps, the price they are paid is extraordinarily high. Add to this, that developers projects often take several years, and they usually like to have secured the “next site” for development long before they have finished the current one. Therefore, it is not hard to see that “16 years supply” is about the point at which artificial scarcity starts to cause bidding wars between developers at the very least.

    Before long, expectations of price inflation has got speculators involved, and existing land owners playing the racket for all it is worth.

  9. Here is another analogy. The plentiful nature of water ensures that the price charged for it (if priced) will always be low. But you can bet that if and when the process of securing extra supplies of water was “quota-ed”, the price of water would inflate – and there would be an immediate public outcry. The only thinkg lacking in the “urban land” racket, is the public outcry.

    Land is de facto as plentiful as water – the price of farmland worldwide falls within fairly narrow boundaries, determined by the “economic rents” available through producing the LOWEST value crop for which there is demand, on them. “Marginal” land IS worth nothing, but might be brought into use due to government subsidies of farming.

    Plentiful farmland beyond urban fringes, when “supply” is genuinely competitive, keeps the price of developed fringe land low, just as the availability of plenty more water keeps the price of water low.

    Cameron, perhaps you need to re-look at THAT situation, which obtains in many cities in the USA still, in terms of it being a “DISTORTION in the market” as defined under YOUR theoretical framework. Because you simply cannot explain it away as “irrelevant”.

    Under your theoretical framework, maybe a genuinely competitive fringe land supply that keeps prices flat, is a “distortion” that gives the cities concerned an “unfair” advantage. Because it is certain that they DO have an advantage. They are going to “bury” the rest of the world economically over the next 2 decades thanks to this advantage.

    • Cameron argues above, when he really should have put it down here somehere:

      “…..But planning gains are not a cost. You are looking at things backwards – the price of the farmland is only low because housing development is NOT allowed.

      The planning gain exists because the level of demand (value) for one use is far different from the level of demand for a different use. That is all…..”

      Planning gains certainly ARE a cost from the point of view of a group of first home buyers who COULD buy a farm and have it developed and save themselves six figures EACH for their new homes, if regulators did not prevent them.

      Cameron also said, several comments above, in response to my comment immediately above:

      “…..Finally, you seem very mistaken about how the value of farmland is derived – from the “LOWEST value crop for which there is demand”. Isn’t the lowest value crop simply growing weeds (since there is always a lower value use)? In which case no land would have value?…….”

      I said “the lowest value crop for which there is DEMAND…..”!!!!! That clearly excludes weeds…..!!!!

      A farmer wanting to grow Jerusalem artichokes after a famous medical journal has found they will cure cancer, will NOT have to pay a price to buy a farm off someone who grows potatoes on it, that is a whole lot higher “because he is going to grow a more valuable crop on it”. Not at all. The potato grower will sell his land at the price that prevails on the market – which may not even be the price derived from the growing of potatoes, if there is a lower value crop for which there is still plenty of land available after the demand for potatoes has been satisfied.

      If a housing developer is buying the land, rather than a grower of Jerusalem artichokes – same diff. BUT IF the government strictly restricted the land that could be converted to the growing of Jerusalem artichokes, to a specific amount of land at a specific location, THEN the potato growers at that location would rub their hands together in glee and get $$$$$$ signs in their eyes……wouldn’t they…..?????

      • Can you give me a real life example of where the price of farmland is determined by the lowest value crop and not the highest?

        For example, on the flat plains beside the Condamine river cotton is the highest value crop to grow. Almost everyone grows cotton (although corn and a few other crops do get a run in the crop rotation cycle). But there are many hundreds of other lesser value crops that could be grown, and have a ready market. So could I buy a farm out there and grow some low value crop and still make money? Or would I be outbid by someone willing to continue growing cotton, for which the returns are much higher?

        “A farmer wanting to grow Jerusalem artichokes after a famous medical journal has found they will cure cancer, will NOT have to pay a price to buy a farm off someone who grows potatoes on it, that is a whole lot higher “because he is going to grow a more valuable crop on it””

        Unless there are many artichoke growers who outbid each other to take the price higher than determined by the previous best use of potato growing. And why wouldn’t there be many artichoke growers under your scenario? And why wouldn’t the potato grower himself start growing the artichokes?

        If I understand your logic Phil, you also believe that natural barriers to land use – waterways, mountains, poor soil, etc – also have price impacts at the national level. Correct? And planning is just creating more narrow artificial barriers?

        So if the Sydney harbour did not exist, prices in Sydney would be lower? (ignoring the price preium for water views).

        And if Australia was actually twice as large, prices would be lower? Or if we had half as many people? Why doesn’t this work on a city level? Or a street level (there is limited supply of land in my street, yet prices seem to follow the broader trend).

        BTW, there is plenty of academic research pointing the finger solely are credit as the cause of not only housing bubbles, but other asset bubbles. How do you explain price bubbles in other asset markets?

        • “Can you give me a real life example of where the price of farmland is determined by the lowest value crop and not the highest?”

          Anywhere the lowest value crop is still being grown. Some low value crops end up not being grown at all, because they have become unpopular with consumers. If there is still a small minority of consumers who do still want that crop, of course they end up having to pay a higher price for the item because it is now a “specialty”.

          It would be possible, as world supply and demand changes, for cotton to no longer be the highest value crop able to be grown in a particular location. Growers generally change their crop types in response to market signals. This is something where things are in a constant state of flux, especially because there are still vast amounts of the available land on planet earth with serious political problems that result in their being under-utilised.
          Sure, under my hypothetical example, Jerusalem artichokes would become a popular crop, but at some stage, the pressure on land for lower value crops would make those crops creep up in price to the point that it was worth growing them again. Look at what converting land to “biofuel” production, did to the price of lower value crops. (This did not matter for higher income mankind, but it sure did matter for lower income mankind). But even then, the rent from agricultural land has not been driven up to a point that would make urban fringe sections on a free market, inflate much more in price than from, say, $30,000 to $30,200. This is because the amounts of land required for sections, is so small relative to the units of farmland whose prices we are talking about, and the fair costs of development are still the most significant part of the “developed” price.

        • “….Phil, you also believe that natural barriers to land use – waterways, mountains, poor soil, etc – also have price impacts at the national level. Correct? And planning is just creating more narrow artificial barriers?
          So if the Sydney harbour did not exist, prices in Sydney would be lower?….”

          I believe that even in these cases, the presence of vast rural hinterlands allow for affordable housing to be provided. The geographic constraints will have localised effects, more because of the difficulty of providing cost-effective transport networks in those areas, than the difficulty of building houses and providing other infrastructure. Local “amenity” value will be the subject of “differential rent” to a greater extent than in a “flat-plain” city.

          “…..if Australia was actually twice as large, prices would be lower? Or if we had half as many people?….”

          Not at all. It hardly matters how underpopulated a nation is, if the urban planners ration and “quota” urban development, they will create unaffordability and housing bubbles. Australia and NZ are outstanding triumphs of this irrationalism.

          At the other end of the scale, we have THIS academic telling the authorities on the islands of Trinidad and Tobago, that their development permission processes are responsible for urban land price inflation……

          http://info.worldbank.org/etools/docs/library/115504/toronto99/assets/t-pamuk-mod06.pdf

          Until an island has literally only 20 years supply of developable land left, what farmland exists, should allow for conversion to urban fringe sections at around the magic $30,000; because the price of food that can be imported from elsewhere will keep the price of farmland even on a small island, down to the level that would be determined by classical Ricardian rent theory.

        • “…BTW, there is plenty of academic research pointing the finger solely are credit as the cause of not only housing bubbles, but other asset bubbles. How do you explain price bubbles in other asset markets?”

          The academic research that points the finger solely at credit as the cause of housing bubbles, is research coming from people whose incompetence is primarily responsible for the mess we are in.

          I agree that monetary policy is often responsible for bubbles in other asset classes. There are several different cases to consider. One is a bubble in a commodity like gold, of which supply is naturally limited. Even so, the shifts in price of such commodities, stimulates prospecting and “production”, and in some cases, “substitution”. There are very few examples of successful “cornering” of supply for long. Even the OPEC nations know not to push their luck too far; as Sheikh Yamani famously said, “one day, we will leave oil in the ground, the oil age will come to an end, not for lack of oil, just as the stone age came to an end, not for lack of stones”.

          The other important case, is the familiar cycles of boom and bust in paper instruments such as shares and bonds. These have little effect on the “main street” economy. They are akin to the gambling industry. Actors choose to participate in the gambling process, using “easy credit”, and these actors win or lose; without having the slightest effect on the actual business, premises, plant, employees, production, sales, production costs, overhead costs, etc etc; of the businesses in whose shares they are gambling.

          But a bubble in urban land affects EVERYTHING. There is nothing “voluntary” about it. This, plus the fact that these bubbles are far bigger in value than the famous bubbles in share markets, makes these bubbles far more destructive. Economists are still being far too hubristic about these bubbles as “just another cycle we can fix with QE”. They can’t.

  10. I would say based on current median income, that the fair historical price for land would be $100 per sq.

    Average house used to be 3 x the average wage. The average wage is $65,000. The land portion of a new house used to be 1/3 land. Meaning that $65,000 on the land, and $130,000 on the house. $65,000 divided by 700 sqm block puts the land price just under the $100 sqm.

    Current new estates on Melbourne’s fridges have land prices around $500 to $600 sqm.

    This means that potentially the price of land has gone up 6x in real terms in the last 10-15 years.

    In the same time, the price of total dwellings may have only gone up 4x

    Its clear where the bubble is.

        • And these taxes , levies , charges go into providing other services. How is it possible for the developer at the city fringes be able to provide a product that is three times the median wage when structurally there are costs that keep house prices high?

          Will these costs ever comedown not at the detriment of other services?

  11. I do enjoy your analysis, Rumplestatskin, but I have to ask – have you tried to convert a piece of land into a residential dwelling(s) recently?

    “Costly and time-consuming development approvals are often argued to be equivalent to delays in the ability to supply new housing (or land supply in the case of residential land subdivisions). But this lead time is no different from the lead time involved in any complex manufacturing task.”

    Actually it’s vastly different, because the process of getting development approvals involves a great deal of uncertainty in regards to how much time it will take (and if it will come through at all). Even if approval to develop land is granted, another development application process is required to put a house on the land, which can take from three months to three years.

    I’m not sure what things are like in SEQ, but where I am, one considers oneself lucky if the approval process take not much longer than the construction process. It can take much longer and it’s not unheard of to wait years to get approval for a basic dwelling or subdividing a large block into two. Much of what appears to be in the supply pipeline will not become a residential dwelling within five years.

    • Marcia,

      I haven’t been involved in DA’s since 2006, but in Brisbane at least, the average time for approvals has dropped considerably since that time.

      My point is that the time and risk of a single DA or BA does not automatically aggregate to delays at the market level since there are many other projects ahead in the pipeline to meet demand.

      The other point is that the risk involved with the cost and time of a DA should be factored into the hurdle rate (minimum return acceptable for that level of risk) for that particular site, and subsequently, the purchase price of the site.

      All production has risk. The development industry in general factors this into their estimated returns.

  12. Cameron, thanks for taking the other side (even though I might not be agreement with this).

    Firstly, I would intuitively think that comparisons between the two (planes/ land)in terms of existing supply capacity and potential future supply capacity that can be brought forward in terms of responding to increased demand varies significantly. For lack of a better word call it ‘Elasticity’. Building a new plane factory is hardly a walk in park, as compared to releasing new develop-able land with reasonable capitalization of modest increase in infrastructure charges that would be born.

    Secondly, If I were to play devil’s advocate, I will take absence of increase in rents for areas affected, as just being an evidence that ‘loose availability of credit’ has allowed this ‘perceived shortage’ to manifest itself in ‘capitalized rents’ aka prices as you suggest. Attribute it to ‘get in now before its late’ or ‘housing never goes down’ social factors, where there is clearly no shortage of incentives (tax breaks, grants etc) to follow this path.

    Lastly, (picking a leaf from one of your recent articles), I think Leith has written extensively about the real increase in land prices over the last decade. If equivalent quality of Land was being fed into market at a pace commensurate with forecasted demand without any delays, why would the ‘lowest cost option’ (analogous to you hedonic adjustment article)be so significantly inflated today. Is the new released land any more productive than new land been released say 5 years ago, that would account for this increase in prices. Credit loosening alone surely cannot by itself account for all of the stratospheric rise in prices. (I kinda compare this with there being ample credit availability in excess US reserves being held by depository/ lending institutions. So there is no shortage in availability of Credit, its the demand that is lacking. So any supply side responses, unless they bulldozed over a few states, are in vain).

    Cheers

    • Good comment Vinny. I will try and address each of your points briefly.

      1. Not sure what you mean. The analogy is that there is a pipeline, and just because the production time of each plane is long, does not mean there is a restriction on supply of planes in total any point in time.

      2. This point seems to be confusing the demand for housing, which may be high because of a perceived shortage. But how do you combat a perceived shortage (rather than an actual shortage)? Maybe with perceived supply.

      3. The market for land IS the market for housing. If the highest and best use of a parcel of land is housing development, that land is worth the price of the completed housing minus the costs to get to that point. If those costs increase while the house price stays constant, the price of the raw land should decrease.

      “Credit loosening alone surely cannot by itself account for all of the stratospheric rise in prices.”

      Why not? Sure, some price increases are justified by rent increases, and some by the low interest rate environment, as I have said before http://ckmurray.blogspot.com/2011/07/housing-markets-once-off-adjustment.html

      • Thanks Cameron.

        1. Maybe I will rephrase in light of another example. Mining trucks (think CAT 797’s). Before the onset of most recent boom, ample capacity existed to bring them onto market within indicative time-frames, at demand that existed currently. Also due to “efficiency” measures, plants are operated on just-in-time basis (makes sense economically for capital intensive goods like this, but there always is a trade off between efficiency and stability (or reduced volatility)). Now existing miners, not only that but a host of new hopeful miners, want these trucks, and they want them NOW, not later when these pipeline delays indicate they may become available. Factually there was no shortage due to long-lead times if demand fluctuated within a narrow band. Result.. there is no such shortage of trucks even today, thousands more are being delivered, but just at very high prices! I don’t want to go off tangent here, but just highlighting miners are best placed to assess these risks and get compensated for it well. But a social good such as available land could be managed better to avoid the volatility.

        2. Wether feasible economically or not, If we are to counter bubbles and avoid the malaise they place on society, our best weapon remains to counter this perceived housing demand (shortage) with more responsive ACTUAL supply time-lines to prevent such expectations from arising in first place. If general public believed that govt. initiatives would make ample supply available within reasonable time frames (of course subject to natural land availability constraints), then I guess the threat of perceived shortage developing could be countered to some extent.

        3.I agree with you here. Floor in asset prices is determined by marginal use, whereas ceilings are a manifestation of it’s most productive use (I use productive loosely)

        Yes those interest rate arguments are very sound. But I believe as with many other complex things, there is more than one variable affecting the state of flux. I remain skeptical of the exorbitant rise in real land prices over the past 15 years, if only for the reason that what will be our best response to a sustained decline in real prices, if it were to happen? Undo the deregulation in financial markets, because another leg down in structural adjustment will leave us at par with other developed nations ZIRP.

        Cheers,

          • Ok simply put an initial shortage of CAT 797 will cause prices to rise which doesnt subside even if the actual demand starts to be met. This is because the market has priced-it into its downstream goods and services?

            However if the truck was fungible and if there was a second manufacturer of similar trucks that came into the market at some point, then we would see prices heading down?

            Maybe the issue is not about if one pipeline can meet demand but if there are additional pipelines that the competition can use to drive down the price of whatever is being delivered in the pipeline (assuming that “whatever” is unlimited).

      • “‘Credit loosening alone surely cannot by itself account for all of the stratospheric rise in prices.’ Why not? Sure, some price increases are justified by rent increases, and some by the low interest rate environment, as I have said before.”

        Easy credit is a phenomenom that afflicted virtually all western housing markets almost simultaneously. Yet many markets – for example half of those in the US – never bubbled. In fact, states like Texas and Georgia also experienced extreme population growth during this period, yet their land/house prices remained highly affordable throughout. Why? The answer, as I have explained many times before, is the way in which these markets allowed a plentiful supply of land for housing via deregulated land-use policies.

      • Vinny asked:

        “……“Credit loosening alone surely cannot by itself account for all of the stratospheric rise in prices.”

        Cameron replied:

        “Why not?….”

        No academic paper has yet been able to attribute house price bubbles entirely to easy credit. This is because there are numerous markets in the USA that enjoyed the same easy credit as the rest of the USA, without experiencing price rises.

        On the other hand, it has been possible for some academics to explain the rises in price driven by easy credit, IF FIRST, the effect of “easy credit” is made ENDOGENOUS to “SUPPLY” INELASTICITY.

  13. Where I disagree with you Rumple is the following assumption of your entry:

    “For the unresponsive supply side argument to hold, we would need evidence that the stock of approved residential land and apartment sites was insufficient to cope with the spikes in demand, particularly over the past decade.”

    While the stock in the pipeline may have been sufficient to meet demand, property developers have assumed over the past decade that it wasn’t, and that’s the key.

    The property industry has been campaigning with the stories that there is a massive undersupply issue in Australia, immigration is high, we’re going to be short 200,000 homes within five years. This has been the accepted scenario by the property industry and the mainstream media. So the property industry just wanted to keep building, as quickly as they could, because prices continued to rise, and they believed there was a chronic undersupply of housing.

    It’s only now that price growth has stalled, and now started to fall, that the industry maybe questioning its approach. And as Unconventional Economist has pointed out, it’s hurting in some places, and going to hurt in some places shortly, eg. Melbourne.

    • That would imply that it is a psychological problem and not a supply one. I think it is that (perceived supply/marketing) along with loose credit standards is the main cause of the house bubble rather than actual supply.

      • They’re interlinked. If there were no supply constraints, the market would respond immediately to demand, avoiding strong price increases.

        By avoiding these increases, the narrative of a chronic housing shortage would never be told, as no explanation for the behaviour of the market is required.

  14. I am trying hard to find the specific reference Cameron requested, that states that the floor space per person in Britain has been falling for decades. I have not yet been able to find it, but the papers I have been looking in, are all stuff that Cameron very badly needs to read…..!

    EG:

    Cheshire and Sheppard (2001): “The Welfare Economics of Land Use Planning”

    Cheshire and Sheppard (2005) “The Introduction of Price Signals into Land Use Planning: A Proposal”

    Cheshire (2009) “Urban Containment, Housing Affordability and Price Stability: Irreconcilable Goals”

    Gibbons, Overman, and Resende (2011): “Real Earnings Disparities in Britain”

      • But the OECD stats seem to suggest that not only does the UK have more rooms per person in their dwellings than the EU average, but that the number of room per person increased during the 1990s and remained stable through the 2000s.

        http://epp.eurostat.ec.europa.eu/portal/page/portal/income_social_inclusion_living_conditions/data/database

        Yes, the average room size in the UK is below the OECD average, at 18.5sqm, but this is higher than many mediiteranean countries. Also, given that most of the housing stock in Europe is quite old, these measure are as much a product of history as anything.

        I can’t yet find the trend in room size over time.

      • Thanks, Leith.

        Cameron should still read the papers I listed…!

        The issue of floor space per person gets quite complicated in a country that has had Britain’s distortions for so long.

        Firstly, the sheer cost of housing discourages people from raising a family until women are close to being past child-bearing age, which has contributed to forcing Britain’s “household size” down, without which the average “floor space” figures would be a lot worse.

        Secondly, the inflated price of land affects different income groups differently. As some of the LSE papers I list, discuss. Gradually, the proportion of the population who CAN afford to buy the space they PREFER, reduces – and the reduction is according to income. Maybe in 1990, only the top 10% of income earners could afford to buy the amount of floor space they PREFERRED, and maybe in 2010, it is down to the top 5%. But even so, because the total “per person” amount of rationed land is reducing, the fact that SOME of the population CAN STILL “buy their way out of claustrophobia”, causes the reduction in space to fall disproportionately on the lowest income groups. The amount of floor space per person for THESE people has fallen spectacularly, with actual “overcrowding” health issues as the result.

        Lastly, because some areas of Britain have been suffering a population loss, the amount of floor space per person in these areas has risen, which pushes up the national average artificially. But the point I was making to Cameron stands all the more confirmed, because it is the parts of Britain with the HIGHEST DEMAND, eg London, that the floor space per person is SHRINKING THE FASTEST.

        • I wish I could remember where I read all this stuff – perhaps it was the massive Barker Review papers.

        • I’m getting through the papers Phil. Patience.

          As you know, the authors and insitutions supporting them have fairly strong agendas to push.

          Me, I am a mere honest former developer.

          Would you care to interpret Table 6.2 from Cheshire and Sheppard (2001): “The Welfare Economics of Land Use Planning” for me?

          I have major problems with their model, not least of which is that equation 4.5 equates rent to be prices, thus ignoring the very feature of a price bubble.

          Also, I don’t quite get the endogeneity assumption in N in equation 4.6 onwards, the use of the term w as a geographic share of are devoted to urban use, and the complete disconnect between land area and dwelling area in their model.

          Also – “the parts of Britain with the HIGHEST DEMAND, eg London, that the floor space per person is SHRINKING THE FASTEST.”

          Two points – this doesn’t necessarily imply economy wide house price gains (because if people are migrating into town, they are usually migrating from elswhere, decreasing demand in those areas), and I the OEC evidence is suggesting that sqm/person has grown for many years.

          • I believe that if you emailed the authors of those papers, they would respond to your queries.

            It is ironic that you refer to “agendas to push”, when the constituency AGAINST reform in Britain, is the ultimate in “machine politics”. And have you ever suspected a financial connection between certain very famous international property magnates, and “Smart growth” advocates and environmental pressure groups? No? Welcome to planet earth, my dear innocent Cameron.

            I quite understand your confusion with these authors equating rent and prices, given all we have said about the disconnect in Australia between rents and prices. This is because, in Britain, after more cycles of house price boom and bust than anywhere else in the world, the “supply” sector has shrunk and the actual SHORTAGE of housing has long since become the sole factor in determining rents, rather than the cyclical “capital gains expectation” factor with investors, that tends to depress rents in “early cycle” bubble nations like Australia.
            You say, “…..this doesn’t necessarily imply economy wide house price gains, because if people are migrating into town, they are usually migrating from elswhere, decreasing demand in those areas…..”
            The irony is that in Britain, thanks to the overall condition of “rationing” of urban land supply, even the areas suffering net out-migration, loss of industry, and long term unemployment; have NOT been enabled to “bounce back” through urban land prices falling to attractive levels. Which is what is happening in “rust belt USA” – check out Pittsburgh some time. Britain has relentless artificial shortages of urban land, varying only in “severity of shortage”. NOWHERE, is there “sufficiency” and “affordability” to be found.
            The biggest stupidity of all, is that British governments have for years been trying to prop up failing regions with subsidies, when all they needed to do was abolish the growth boundaries and LET URBAN LAND PRICES FALL to the levels they SHOULD be.

          • Careful Cam. It’s a bit rich to claim that these organisations have strong agendas to push when you are a self-labelled environmental economist. The same claim could easily be made with respect to your clear preference for urban consolidation. Let’s stick to the facts and evidence.

          • UE,

            I used to work for a national residential property developer assessing site acquistions. I was very much in the ‘anti-planning controls’ crowd for some time.

            But the reality is that the rules and processes are usually known in advance and factored into feasibility studies. Getting the rules changed in your favour goes straight to the bottom line.

            Developers have no choice but to buy sites at the market price (set by the competition for development sites) and sell as many lots as quickly as possible. They are price takers on both sides – that’s why it is so risky, and why lobbying for planning changes is worthwhile.

            Remember, removing zoning over a large area around the city does not encourage land owners to immediately sell.

          • I’m not sure how increasing the amount of possible lots under the planning scheme, by basically eliminating planning, is going to achieve competition on the sale of land. Why do people with land currently able to be developed to residential lots not sell to developers or develop themselves? Where is the incentive? And how will this change if you simply put more landowners in this situation?

            There are hundreds of thousands of lots able to be developed under current schemes, so why isn’t that sufficient? What difference would it make to double it?

            In fact, governments for the past decade have been doing exactly what you suggest – opening up more fringe land for development by including them in the urban footprints (eg the SEQ Regional Plan). Clearly is has had little effect, if any, on prices.

          • Again Cameron, numerous housing markets abroad – Texas and Georgia just two notable examples – disprove your thesis. Your arguments only hold UNDER AUSTRALIA’S CURRENT URBAN PLANNING SYSTEM.

            “There are hundreds of thousands of lots able to be developed under current schemes, so why isn’t that sufficient”.

            Here we go, the old “we have 15 years supply argument”. The fact is, much of this land will be held by land bankers (only possible under strict planning or physical constraints), home owners holding out for higher prices (due to lack of competition), or farmers that are attached to their land for emotional reasons and wouldn’t sell anyway. But there are likely to be many land holders located outside of the UGB that would sell if they were allowed. It is they that would force prices down.

            “In fact, governments for the past decade have been doing exactly what you suggest – opening up more fringe land for development by including them in the urban footprints (eg the SEQ Regional Plan). Clearly is has had little effect, if any, on price”

            Rubbish. Prices would likely have risen much further without this extra supply – look at Sydney’s land prices for confirmation of what might have happened – especially given SEQ’s above average population growth and rising incomes.

    • It’s entertaining, but there’s lots of armchair economists using google to “prove” a point. No matter how disappointing this will be to some bloggers, the reality on the ground is that land restrictions play a part, but it is a minor part. Credit availability is the problem, not land use restrictions (which have been largely consistant for decades).

      • Hi LandDeveloper

        Could you please let us know if there are structural costs that stop developers from providing a product at the city fringes that is 3 three times the median wages. Assuming there is no competition from the demand side to bid up the price of fringe housing.

        The question indirectly put is there enough margin in your profits that you can cut to come out with such a product?

        • Hi indo. Are you able to confirm what the median wage is? Not even the ABS know what the median wage is, so how can a metric be used based on an unknown?

          I hope this doesn’t come across rude, I am trying to highlight that the median multiple that is espoused as gospel is completely arbitrary as no-one actually knows what the median wage is. Sure people have tried to calculate it using iterpolation, but unless its produced by the ABS, I’d rather not trust someone elses calculation skills.

          Research underway by AHURI should hopefully clear this up. They are adpoting a residual income approach (which I prefer) to measure affordability. Their positioining paper suggests that outer Melbourne is reasonably affordable on a moderate income of $50k.

          • Fair enough. Will you be able to provide a product that is 3 times the moderate income of 50K?

            I have taken the furthest western suburb here in Melbourne and looked at the price of a unit there

            http://www.realestate.com.au/property-house-vic-hillside-107950891

            Its 340 K. I am not sure how someone on 50K can afford that.

            But I am more interested to understand is if the developers have enough margins to cut to bring out an affordable product? if not then who is benefiting from the high house prices?

          • Hi indo. The point is that the 3 X multiple measure isn’t necessarily the best measure to gauge affordibility – rather, a residual income approach is perhaps a better model. The research by AHURI isn’t done yet, but it’s worth keeping an eye on it.

          • Land Developer. The ABS produces average pre-tax Full-Time earnings every quarter. While this is an imperfect substitute for medians, it is fine for conducting time series comparisons of housing costs.

            As for your claim that Melbourne fringe housing is reasonably affordable for someone earning $50k, are you serious? How can you claim that a modest $330k home on a postage stamp sized block is affordable for someone on $50k. Sorry, but this claim does not pass the laugh test.

          • Hi UE – the $50k “laugh teset” is not my claim. It’s AHURI’s proposition. Refer their positioning paper No139 before you dismiss it.

      • Hey, land developer;

        What is your suggestion for credit restrictions that would keep housing affordable?

        Bear in mind that credit restrictions that reduce the opportunity of home ownership, invariably get attention from sticky-beak politicians wanting to “assist home ownership” – and those credit restrictions that do NOT reduce home ownership, tend to not work in terms of price limitation. South Korea is the classic case of a nation with credit restrictions that MOST people would regard as “tight” – especially if you were a first home buyer trying to cope with the deposit requirements – In fact, they USE credit restrictions as their main tool to try and prevent house price bubbles. Yet they have had severe house price unaffordability and cyclical volatility. Thanks to their “supply” side restrictions.
        It is clear that these restrictions are terribly destructive and yet nigh on impossible to “reform” once they are implimented. They could hardly have been better devised as an economic weapon of mass destruction by agents of an enemy power.
        The other side of this, is that cities, States and nations that do NOT succumb to “Smart Growth” lunacy, will OWN the economic future of the world in not too many more decades. Get in to the USA’s heartland or southern States while you can.

        • Hi Phil – just to be clear, my argument / experience is that the loose credit conditions caused the bubble. Now that they’re tightening up borrowing conditions, prices are falling. The land use policies haven’t changed (substantively) in decades; there has alwasy been an arduous process to go through to bring land to the market. Therefore, my point is that the bubble of the 2000’s is largely caused by the loose credit conditions, and not by planning policy (the latter being a relatively minor influence).
          I’m not advocating credit restrictions per se, rather I am saying from on-the-ground experience, the very loose credit environment drove the price boom. A more moderate credit environment (as being experienced now) is probably more appropriate to avoid ridiculous price growth.

          • “the land-use policies haven’t changed substantively in decades”.

            Wrong. Urban growth boundaries are a relatively new phenomenom as are up-front infrastructure charges and the reluctance of governments to provide/finance infrastructure.

          • Sorry UE – this is where you’re wrong. Growth corridors, UGB’s or whatever guise they take have been around decades. The names change, a few little protocols change, but the principles of master planning and land release programmes have been round for as long as I have been developing.

          • Does anyone have some actual facts on this. If they’ve changed towards being more restrictive, what were the actual changes?

            Whilst there has been plenty of talk about urban consolidation over the last 10-15 years, what have been the actual policy changes. I vaguely remember reading about there only being a few thousand blocks worth zoned for Sydney some years ago, but there has been a response from the state govt to rezone a great deal more land in the last few years.

          • UE, LD and hamish, the topic of changes to town planning rules over time might require another detailed blog post. Stay tuned.

      • LandDeveloper. Please explain to us all how credit availability affects the price of fringe land in an unregulated market? Also, please explain how Texas and Georgia (amongst many other large housing markets in the US) never experienced land price escalation despite the presense of far easier credit than Australia as well as higher population growth?

        This armchair economist awaits your response.

        • Hi UE – something that is overlooked in these arguments is the cost of production. Production costs in AU are significantly higher than Texas. Texas has subsidised (often free) infrastructure, competition from utilities to provide services, incentives from local authorities for development, favourable ground conditions (a 1m deep trench is cheaper than an 8m deep trench, a clay site is more expensive to work than a sandy site), cheap labour, cheap deisel, cheap materials. A $1 cost saving translates to at least $1.10 to $1.20 saving in the end price (because infrastructure charges, consultant fees, marketing costs etc, are typically linked to a percentage of cost – lower cost, lower fees, lower end price). So if I save $60k to $70k per lot in production costs (which is what Texas has over AU – broadly speaking), then I can drop $80k off the finished product and still maintain a margin. If my house construction costs are a fifth of AU on a per m2 basis, then that translates into a massive cost saving. So comparing Texas fringe land prices to AU is not appropriate unless you normalise the production costs (which make up the bulk of the end price). Hope that makes sense (long day, so it might be a bit jumbled).

          • Thanks for your response. But surely the fact that 800 square metre serviced blocks in Texas sell for $US 30-40k versus $200k plus in Oz for 450 square metre blocks blows your claims out of the water. If the cost was double in Australia, they might hold some water. But we are talking more than a five-fold increase.

            Further, your response completely contradicts your claim that the escalation of land costs has been caused by easier credit. It’s structural pure and simple.

          • Hi UE – yep, production costs in AU can comfortably be 5 times the cost in the US. Take a simple example – US power is delivered at 110V, AU is 240V. Transformer costs are exponential as the amperes and step-ups increase. Multiply that transformer (and the associated cable) cost over a 10,000 lot subdivision. Same for fibre-optics which we import at many times the cost that US developers get it. Hardies supplies their “siding” in the US at substantially lower costs than in AU. Texas developments typically don’t require dewatering – ever seen how much a dewatering pump costs when run 24/7 for months on end?

            You simply can’t compare a house in Texas and AU without normalising the production costs.

            I don’t follow your last comment. Production costs in AU are already “normalised” so I don’t see how this debunks my easy credit assertion. But I’m happy to be corrected.

          • Come on Land Developer. So you are claiming that the more than doubling of fringe land costs over the past decade (despite shrinking block sizes) has been caused by these so-called cost escalations? Please enlighten me why land was so much cheaper pre-2000?

          • I think to compare fringe land prices we should also take into account that charges in Australia while upfront and one-off, maybe paid annually and of a higher rate in US

  15. I find it very interesting that those cities that have UGBs frequent the top of the most livable cities lists and those cities in the US that don’t have UGBs and didn’t experience a bubble are nowhere to be seen on the lists.

    I think this indicates that there is something much deeper linking cities with good planning, sufficient infrastructure and restricted (and in my opinion unnecessary) sprawl and the positive outcomes and desirable cities it creates. Rightly or wrongly, people are prepared to pay more to live in these well planned cities indicating that people would rather the outcome that UGBs and planning creates. While Texan cities had strong growth of people driven by price, it doesn’t mean they wanted to live there and certainly many people chose to pay much higher prices to live in bubbling cities.

    Indeed, if there is any effect from UGBs it is merely the perception of a supply shortage not the reality that has influenced prices which should be countered not be removing UGBs so we can create cities people don’t won’t to live in (and therefore they won’t pay a premium to live there) but by countering the illusion of restricted supply and still ensuring people want to live in these cities.

    Cameron, thank you for continuing to look into this topic as it would be a tragedy if Australia removed desirable planning policies to reduce house prices, which would work only because people would reduce what they are prepared to pay indicating a drop in the utiltiy get from their city.

    • Interesting points, but its very important to note that most people in the US dont live in cities. Why is this important? Because there is an excellent quality of life to be had in the greater metro areas of the big US cities, including Houston etc etc.

      This is one reason why Houston, Dallas etc never feature in “best cities” – because as just cities, they are ordinary. As greater metropolitans, they are MUCH better.

      The cities that do well in the US on livability tend to be the “old classics” and smaller cities at the heart of less-populous areas (Seattle comes to mind here).

      Australia is a lot different because vast majority live IN cities. Australia should learn from the greater metropolitan examples in the US and encourage planned sprawl AS WELL AS moves OUT of the city (including employment) to create small satellite towns and cities. This is how to achieve good quality of life for many people. Increased density will decrease quality of life, not increase it.

      It will also solve the issue of cheap fringe housing because it will become less relevant. Population will be less concentrated in the cities.

      • By “cities” you mean the dense CORE.

        Yes, there has been heaps of really illuminating stuff written on the “New Geography” site about this.

        Really all we are arguing about here, is that the cost of a house in the SUBURBS in a “growth constrained” city is many times higher than the cost of a house in the suburbs in a non growth constrained city.

        The lack of much population increase at all in the dense cores of cities, is pretty much a “given”. Cities with urban growth constraints actually drive the price of apartments in the dense core out of reach of even more people, than what would be the case without the growth constraints. This is one of the biggest ironies of “Smart Growth”. If we really wanted to turn city cores back into high density AND “affordable” locations, we would need to turn them back into slums, not “renew” them into upper crust condo communities for executives and yuppies.

      • I agree that we would be better attracting people to satelite or regional cities so long as it was a combination of BOTH employment and housing. My problem is with fringe expansion for people that work in the CBD. PhilBest and UE have often stated that people don’t predominantely work in the CBD so we shouldn’t restrict development, but this is mixing concepts. UGBs should be relevant to the employment centres. While the majority of people may not work just in the square mile of the CBD, the city is dependent on that centralisation. The problem is places like North Lakes and beyond that are built with the intention of servicing the Brisbane CBD and other employment centres within about 10kms of the CBD.

        • Agree. The point to me is that a fringe location say 20-30ks out of the centre (eg Melb), with a target market of CBD workers, and an entry price of $300k up, is not a viable proposition long term. There are 3 alternatives:

          1) Build much better transport links. Very expensive mostly, takes too long.
          2) Dont build these, increase urbanisation in the centre instead. As Phil says, these can be new slums and will drive people OUT of the central areas.
          3) Move employment OUT.

          To me 3 is the way to go if you want to build quality of life for people.

    • Miss P
      Havent you read about Austin , Texas?

      Also why is that those countries that are actively pursuing an immigration policy are top of the liveable list (mostly)?

      • Austin – no UGB, high growth, low price. The price must be lower for people to want to live there. That was my point.

        You would have to give me a list of these countries so I could consider them before I either agree or rebut.

        I think market bubbles are a natural occurrence and they are driven by a mixture of euphoria and credit, which was Rumple’s point. The fact that Georgia and Austin didn’t bubble is due to the fact that they are less livable. Over history we have had bubbles in just about every type of market (seriously, we had a tulip bubble), we just don’t get bubbles in things we don’t get sufficient utility from.

        • Austin is considered to be a major center for high tech.[83] Thousands of graduates each year from the engineering and computer science programs at The University of Texas at Austin provide a steady source of employees that help to fuel Austin’s technology and defense industry sectors. The metro Austin area has much lower housing costs than Silicon Valley, but much higher housing costs than many parts of rural Texas. As a result of the high concentration of high-tech companies in the region, Austin was strongly affected by the dot-com boom in the late 1990s and subsequent bust.[83] Austin’s largest employers include the Austin Independent School District, the City of Austin, Dell, the U.S. Federal Government, Freescale Semiconductor (spun off from Motorola in 2004), IBM, St. David’s Healthcare Partnership, Seton Family of Hospitals, the State of Texas, Texas State University–San Marcos, and The University of Texas.[83] Other high-tech companies with operations in Austin include Nvidia, 3M, Apple Inc., Hewlett-Packard, Google, AMD, Applied Materials, Cirrus Logic, Cisco Systems, eBay/PayPal, Bioware, Blizzard Entertainment, Hoover’s, Intel Corporation, National Instruments, Samsung Group, Buffalo Technology, Silicon Laboratories, Oracle Corporation, Hostgator, and United Devices. In 2010, Facebook accepted a grant to build a downtown office that could bring as many as 200 jobs to the city.[84] The proliferation of technology companies has led to the region’s nickname, “the Silicon Hills”, and spurred development that greatly expanded the city. The concentration of high-tech companies has led the former American Airlines flight between Austin and San Jose, California to be dubbed the “nerd bird.”[85]
          Austin is also emerging as a hub for pharmaceutical and biotechnology companies; the city is home to about 85 of them.[83] The city was ranked by the Milken Institute as the No.12 biotech and life science center in the United States.[86]
          Whole Foods Market (often called just “Whole Foods”) is an upscale, national grocery store chain specializing in fresh and packaged food products—many having an organic-/local-/”natural”-theme. It was founded and is headquartered in Austin.[87]
          In addition to national and global corporations, Austin features a strong network of independent, unique, locally-owned firms and organizations

          BEAT THAT MELBOURNE!

          • And yet people would rather pay more to live in Portland and work at a Whole Foods. That’s my point exactly, even job prospects aren’t enticing people there. Despite lower unemployment, cheaper housing and living costs, people aren’t moving there and equalising out the economy across the state. There is nothing stopping people moving there, but the fact that they have not to the point that unemployment and housing costs have equalised across thee country indicates that there is some reason they don’t want to live there. I know why I wouldn’t want to live there…

          • Its more about if people did move there is there an economy good enough to support high paying jobs.

            And your argument applies to Australia as well . If it were so liveable why arent high paying professionals moving to Australia from countries that are 20 or 30 in the list.

          • Australia is one of those weird developed economies , where if you are microelectronics engineer , you will be pretty much unemployed. Not just this but there are many high paying tech professionals who would find themselves unemployable.

            Yes liveable, what is liveability when it comes at a cost of having a CAD that explodes and on a population boom where Australia struggles to attract talent.

          • indo, you can’t compare moving within a country where there are few barriers to entry (other than moving costs) and moving to Australia where between visa costs, international moving costs and most importantly restrictive immigration policies. There are plenty of qualified people who would like to move to Australia who can’t for most industries, otherwise the industries we struggle to attract qualified personnel in are generally experiencing a world-wide shortage.

            Your two last posts seem to be contradictory, either we can, or can’t attract skilled professionals for whom there is sufficient employment opportunities, or as I said that it depends on immigration policies and individual professions being in global shortage. If I have missed your point, please clarify.

          • Even when moving states people consider a number of factors ranging from access to social support , proximity to friends and families and sometime these factors outweigh the monetary benefits from uprooting oneself.

            Inspite of this Texas is experiencing good migration

            http://www.economist.com/blogs/freeexchange/2010/06/migration

            My vex is that anyone employed in cutting edge science and high tech industries would generally find themselves unemployable here in Australia. When the country has eroded its manufacturing industry ,its services industries have very little export focus, with the mining boom functioning as a saviour, what is the point of stating the country is liveable and preserving it at the cost of escalating cost of living and declining productivity.

            I used seek.com to gauge industry vacancies in several high tech fields. It is not very encouraging.

          • indo, we seem to have got to the point where it is not my position on this topic that we are debating but rather exposing your distaste for other aspects of our economy. I have no arguement with you about cutting edge science, manufacturing and high tech industries as we hollow out our country and its welfare for mining, but that debate is for another page.

            All I can say is that perhaps if that is your situation you should move to Austin, unless like me you would rather live in an urbanised slum in Brisbane and cut-off your own arm than live there…

        • MissP said: “The fact that Georgia and Austin didn’t bubble is due to the fact that they are less livable.” Yet these are some of the fastest growing regions in the US, suggesting they are desirable places to live. Also, how do you reconcile the fact that Las Vegas bubbled? Is Vegas a “desirable place to live”?

          • UE, I would say that price is a rough measure for desirability whereas growth is not. If portland has a very steep demand curve and Austin has a very shallow demand curve, you can get a large growth in Austin where the price is still much lower than portland. The growth rate would be a function of the relative price between the two, not the preference of on over the other all things being equal. While I might not personally find Vegas desirable, on agregate across the population it must be.

            Keep in mind that you will surely find some city on the desirable cities list that didn’t bubble because these lists are indicative and flawed rather than actual measures of desirablility. Desirability is likely much better measured by price in a country with freedom to move.

            As I said to indo, if the growth was indicating desirability prices and unemployment would have equalised. If you like an apple and a banana equally, do you pay more for a banana?

          • “if the growth was indicating desirability prices and unemployment would have equalised”. Not true. This condition would only hold if both region’s supply situations were the same and prices were set by demand alone.

          • No, given there is free movement of labour and sufficient housing between the two locations, the should equalize regardless of initial supply in each place. It is the same as the theory of international factor movements in an open economy.

        • If it’s about intangibles like live-ability or desirability, why have cities such as Canberra, Adelaide, Alice Springs, Darwin, or even Wollongong or Newcastle got bubble prices. At the risk of offending many residents, none of those places is particularly highly regarded, but are expensive to buy into, Canberra & Darwin especially.

  16. The connection between “Smart Growth” and “livability” rankings, is similar to the connection between “gated communities” and “livability” rankings. Check out Randal Pozdena, “The New Segregation”; and Thomas Sowell, “Green Disparate Impact”.
    Give it time. The “Smart Growth” cities are committing economic suicide. It will gradually be necessary for more and more people at higher and higher levels of society, to move to undesirable places to live, just to get a job and be able to make ends meet once they have done so.

    • And why should anybody flatter themselves that any Australian city is SOOOO lovely to live in, it is worth paying more for property than to live in Zurich or Vienna or Munich? Come ON.

  17. its awesome to see an opinion presented from the other point of view, and to read such a civilised discussion from all of those involved.
    Personally, this is what i find so fantastic about MB, It gives a layman like me the ability to learn and understand on one hand, and on the other provide robust debate and discussion for those here that are professionals in the field….and honestly, I believe its the reason you all have been able to Macrobate the nation.

    Still waiting for the shirts and cups to come BTW 😉

  18. Another friendly recommendation for you, Cameron: Mason Gaffney, 1964:
    “Containment Policies for Urban Sprawl”

    http://www.masongaffney.org/publications/E3Containment_policies.CV.pdf

    I love his connection between “Mercantilism” and what he calls “negative” containment policies. I am also convinced by his argument that land taxes would limit sprawl by “positive”, free market operation.

    I wonder why environmentalism has not siezed on this concept? 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.
    By the way, Ian Abley of “AudaCity” in Britain, is big on this line of argument. One of Ian’s ideas is, he wants to start an “illegal settlement” somewhere in Britain, on legally bought farmland, and defy the authorities to tear it down, when a few dozen young families have been enabled to house themselves in modern conditions for less than 100,000 pounds each.

  19. Strategic Thinker

    Good article Rumple and some interesting discussion in the comments.

    To add my two cents, I find the argument that planning restricts fringe land supply and therefore causes housing prices across the board to increase to be counter-intuitive. I tend to find that those pushing this argument are looking for unfettered fringe development regardless of the cost to Government (to provide the infrastructure) or society in general. Also, the argument on supply focuses solely on fringe land, rather than supply of housing regardless of location (this is my principal gripe with Demographia).

    My reasons for this are as follows (includes some crude number crunching based on REISA published sales data and new dwelling production rates for Metro Adelaide

    • Strategic Thinker

      For some reason my response didn’t go through entirely!

      My reasons for this are as follows (includes some crude number crunching based on REISA published sales data and new dwelling production rates for Metro Adelaide – assuming each new dwelling constitutes a sale):

      1. The majority of housing sales in Metro Adelaide are for existing homes – 44.6% of sales in 2009-10 were for new homes, declining to 42.2% in 2010-11.

      2. The majority of new dwellings in Metro Adelaide are constructed in existing areas – ie from infill, redevelopment sites, apartments, etc. Only 41.9% of new dwellings were built on the fringe in 2009-10, rising to 46.9% in 2010-11.

      3. New fringe housing as a percentage of total sales volumes are small – 18.7% in 2009-10 and 19.8% in 2010-11.

      Now I might have my figures arse about, and I’m relying on simply cross referencing two different sets of figures, but I think the above broadly tells the story. The question that arises to my mind then is this: how does fringe land, being such a small percentage of sales (less than 20%), supposedly impact upon housing affordability across the board as is claimed? Is it more likely that buyers bidding up the price of houses in established areas, covering 80% of sales, are the real cause? And how much of those sales are attributed to investors who, as Unconventional Economist has noted in the past, in the main buy established homes (noting established houses account for more than 50% of sales)?

      While I acknowledge that restricted supply may cause some upward pressure on prices, I’m not sure we are living in a world where there is in fact this restricted supply of housing based on planning! There is significant capacity for new housing under existing zoning in existing areas of Metro Adelaide (enough to accommodate all of Metro Adelaide’s growth for many years), as well as significant programmed housing lot releases on the fringe.

      At its peak growth rate, Metro Adelaide requires about 4-4500 additional dwellings from the fringe – about 50%. There is current zoned capacity for more than 30,000 dwellings on the northern fringes of Adelaide alone (based on very conservative yield estimates) and rezoning plans are underway to rezone considerably more, perhaps triple the current capacity (I haven’t looked to other fringe markets in Adelaide).

      There were a little over 15,000 house sales recorded in 2010-11, down about 2000 sales from 2009-10.

      • As I have been arguing with Rumpel, price inflation begins when “supply” is rationed to somewhere not far below “20 years”. This is about “quotas” and markets being “cornered”, in real life; not about beautiful matches between “demand” and “supply”, on paper, in the planning bureaucrats offices.

  20. >After all, land prices are simply capitalised rents

    in the main perhaps, but if you take land as something you don’t sell or trade (as perhaps the Aboriginal population did) then perhaps not.

    I’m the second generation owner of the land I live on and I’m hoping to pass it on to a third.

    I’m not an itinerant.