Builders go shoddy to offset high land costs

By Leith van Onselen

This blog has argued feverishly that exorbitant land costs are the key driver of higher housing prices in Australia.

For example, using data derived from the Australian Bureau of Statistics (ABS) and the Reserve Bank of Australia (RBA), one can show that the value of residential land relative to Australia’s GDP has roughly doubled since the mid-1990s, whereas the value of residential structures has remained roughly constant (see below chart).

Presented another way, land today accounts for roughly 70% of the total value of housing, versus only 59% in 1995 (see next chart).

This escalation of land costs has also occurred at the fringe of Australia’s cities, where land prices have surged despite average block sizes shrinking in size (see below).

As argued previously, the escalating land prices and shrinking block sizes have been caused, in part, by urban consolidation policies pursued by the state governments since the late-1990s, including: the implementation of urban growth boundaries (UGBs) around Australia’s cities; minimum density ratios; up-front infrastructure/development charges; slower approval times, and more restrictive zoning.

These policies have helped to push-up the cost of fringe land, both necessitating the move to smaller block sizes (in order to maintain some semblance of affordability) as well as forcing-up the cost of new and pre-existing homes.

Government planners and green groups would argue that the shrinkage of block size is desirable as it enables a more efficient use of ‘scarce’ land resources and will some how make households less reliant on their cars via more intensive use of public transport (even though most people don’t work in the inner core). What these groups often fail to concede is the pernicious effects that urban consolidation policies have on housing affordability as well as the perverse outcomes caused by the urban growth constraints themselves.

For example, the building of large houses on tiny blocks, with narrow footpaths and roads (because of the excessive land prices), allows little room to plant trees or veggie gardens. It also means that homes are so close together that many do not contain roof eves or verandas and have poor air flow, thereby requiring greater air conditioning in the summer. The lack of backyards and open space also encourages children to remain inside playing video games and watching TV, which of course uses more energy.

Moreover, the imposition of UGBs often leads to lower income households ‘leapfroging’ the UGB and settling in far flung exurban towns where housing is more affordable. UGBs, therefore, can act to exacerbate urban ‘sprawl’ and increase car reliance and energy usage, which has detrimental distributional impacts in particular on lower socio-economic groups.

Yesterday, it was also revealed that Australian home builders are now cutting corners and sacrificing build quality in order to save on costs and maintain profitability:

HOMEBUILDERS are opting for cheaper houses, given weaker economic conditions and problems with affordability, building supplies giant James Hardie says.

Chief executive Louis Gries says homebuilders generally are building cheaper houses to ensure they can still make a profit.

Builders were “value-engineering” and “de-featuring” houses to lower costs.

Houses are also smaller and being built with lower-cost materials.

Granite bench tops that once may have been standard are now optional.

“They pull any costs out of the home that homeowners are not aware of,” Mr Gries said on Wednesday, after announcing a return to profitability in James Hardie’s third quarter.

“Meaning it’s not easy to see if you’ve got five-eighth-inch gypsum (plasterboard) or half-inch gypsum, or if you have 24-inch spacing on studs versus 16 (inches), or you have two-by-sixes or two-by-fours (the width and depth in inches of wooden planks used in construction).”

When vacant land prices are at $200,000, and affordability cuts out at $350,000, there is not a lot of margin for home builders to make a profit. As such, they have little option but to cut corners and build a cheaper sub-standard product.

Low quality homes bunched close together (without roof eves) on narrow streets without trees (to optimise on space) is a symptom of poor planning and exorbitant land prices.

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Unconventional Economist
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    • Maybe a YouTube advertisement, showing some really shocking building from say a Master Builder to expose it for a laugh.

  1. I recently drove through Townsville in far North Queensland – with the words of UE and PB ringing in my ears I had a much more critical look at the new housing development.

    I cannot actually find the words to communicate my disgust.

    The new housing developments are tiny block, dog boxes. No back-yards, eves of the houses touching in estates where there is no room for a tree. Social and environmental disasters.

    Then have a look at google earth and the amount of land around Townsville and you see the extent of the betrayal of the people by the machine that drip releases land. I could find nothing other than an almost deliberate desire to impoverish the lives of people.


    • AJ, I could not agree more. I have been spotting these effects for years; both in on-the-ground travel and on Google Earth; and they have been worsening. Patrick Troy pointed out in his 1996 “The Perils of Urban Consolidation”, that:

      “……..The present policy has had the perverse result of increasing density of dwellings at the fringe…..”.

      And later in the book:

      “…….A high proportion of the new high density housing is now occurring on the fringes of the city. This is a direct outcome of government policy and produces the perverse doughnut effect of an annulus of high density housing ringing the lower density middle suburbs. The greater accessibility claimed for inner suburban consolidation does not occur….”

      Alain Bertaud pointed out in a study of Portland, Oregon, that this effect has the perverse consequence of increasing average commuting distances. This effect might be ameliorated if planners are allowing employment to relocate where the new density is, near the fringe; but they seldom are.

      • Troy also says that the planners belief in the aesthetic superiority of their preferred types of development are not borne out in real life experience, including in the opinions of many people who occupy that type of development. Later in the book, Troy says of certain “lower income dwelling projects”:

        “Few…are designed to take advantage of natural heating and cooling opportunities and few are well designed for access by service and delivery vehicles. Few are landscaped, most have a plenitude of paved areas, and they rarely have any kind of pleasing aspect or outlook. Most have only pocket-handkerchief-sized open spaces for clothes drying and are surrounded by high fences or walls which create an overpowering sense of enclosure…..any attractiveness….comes from their newness. Those built (earlier) already exhibit a down-at-heel air……”

        Troy also discusses the planners monocentric thinking, and states that this is contrary to the reality of where the most of the people already work, shop, and play; and where they want to do so. The overwhelming majority finds suburban amenity more than adequate, and does not regret lack of proximity to the central city.

        Troy very appropriately condemns the “self-fulfilling prophecy” misinterpretation of statistics to allege that demand for separate homes is “falling” among the young, when the reality is that they are being priced out.

  2. “…….UGBs, therefore, can act to exacerbate urban ‘sprawl’ and increase car reliance and energy usage, which has detrimental distributional impacts in particular on lower socio-economic groups…..”

    Absolutely. I only just became aware of this paper, which confirms everything I have been arguing on this point:

    Lower income earners are being forced into the worst locations, by high house prices; they end up with the longest commutes, and can only afford the least efficient cars.

    Gibbons, Overman and Resende, in “Real Earnings Disparities in Britain” (2010), point out that the way the housing market works in Britain, acts as a “multiplier” of initial income disparities, regarding social outcomes.

    This is certainly because of policies that force up the cost of urban land and attempt to concentrate employment in ways that can be served better by public transport – but low income earners get priced out of the locations served by public transport.

    Peter Hall et al pointed this out back in 1973 in their report, “The Containment of Urban England”.

    Far superior outcomes result from allowing relatively free markets to decentralise employment and urban amenities, and keep economic land rent low and highly dispersed in cities, rather than concentrated. This is why the low density, “sprawled”, affordable-housing US cities actually have highly competitive average commute-to-work times, AND far higher housing quality enjoyed by medium and lower income earners.

  3. I have also pointed out occasionally that the same policies that are designed to increase commuter rail travel mode share (as if this is an end in itself) actually undermine the potential for “walk to work” mode share.

    Ironically, the “dispersed” urban form with low land costs and as little concentration as possible of location-advantage housing cost “premiums”, works not just to keep car commutes short in time, but allows maximum scope for people who might want to buy a home close enough to work to walk there.

    Heavily centralised urban form results in “amenity”, such as walking to work, to be captured by the highest income earners who can afford the prices where the amenity is concentrated. The same applies to proximity to green space and to other urban amenities.

    Radial public transport routes tend to “converge” closer to a city centre and hence services at these locations are extremely frequent; these locations too, tend to be “priced” so that higher income CBD workers enjoy them.

    The very large subsidies involved in commuter rail services are overwhelmingly captured by higher income earners and the owners of property rendered more valuable by the “planning” that is designed to maximise the ridership. Lower income earners are forced into expensive long distance, highly congested car commutes; OR they might be able to afford to locate on a commuter rail route 60 miles or more out. Ironically, the subsidy involved in getting them the 60 miles to work every day by train, is far more than the “subsidy” to the automobile based development and roads that would have enabled them to have a short car commute – let alone a walk or a bicycle ride.

    If we were regarding commuter rail as one of a number of potential “means” TO an end, rather than an end in itself, we would flag it away altogether and run with dispersed-employment, dispersed-amenity urban form. The potential “mode share” increase for walking and cycling under THESE conditions is at least as high as for commuter rail riding under “planned centralisation”, and walking and cycling does not require massive subsidies as commuter rail does.

    AND housing could be affordable for everyone again……!

  4. Meanwhile….

    Do ursine mammals defecate in sylvan glades…

    This is history repeating itself,in the 80s and 90s, town planners in the Emerald Isle were heavily indoctrinated (sorry trained) in UK planning institutes and brought the same sorry nonsense back to engineer a shortage of building land in one of the least densely populated countries in western Europe.

    At the hight of the boom, exurbs 100+ km from Dublin were spruiked as being ‘commutable’ and ‘affordable’, all because the edge land around Dublin was subject to growth boundary restrictions.

    The primary purpose of British 1947 Town and Country planning act was an overtly political mechanism to prevent the repeat of the pre-war private sector driven building boom, which created huge amounts of mostly Tory voting home owners in Metroland.

    Metroland development, provided over 1.5 million quality houses at densities of 8-12 houses/acre across the UK for less than 2.5 times the average wage of the purchaser.

    It was easy for patrician upper middle class snobs like John Betjeman to pray for bombs to fall on the newly built houses in Slough. He never had to live in the crap conditions it’s residents came from.

    • Agreed with the other sentiments, thanks for this really interesting post. There’s a fascinating interactive display at the London Transport Museum in Covent Gardens relating to the development of Metrolands – it shows how the progressive roll-out of the electric train across London led to the concept of commuting in the UK and the sudden expansion of suburbs with huge new estates.

      Even back then many people considered it a blight but the houses were incredibly modern and affordable.

      • And the amount of land brought into “supply” by railway lines is in long ribbons, meaning that the relationship between the “distance sprawled” and the diluting of economic land rent in the urban economy, is nowhere near as beneficial as “automobile based development”. And the land alongside the railway lines (and its attendant capital gains) is always “captured” by vested interests.

        Anthony Downs describes this effect in terms of “pie-shaped wedges of land” between radial rail routes, suddenly coming into the urban economy’s “supply”. And of course the land in the narrowest part of the wedges is very close to the existing city centre. So the pressures to develop it are very high. But once this process has started, the viability of the rail based transport system is kissed good-bye.

        The Model T Ford and its equivalents in the UK are probably responsible for far more “affordability” of housing than the rail-based development, important as that is. Competition between developers means that the capture of capital gains on the land is minimal, compared to what happens with rail based development.

        Provided, of course, that the vested interests do not succeed in using “planning” as a Trojan Horse to get their capital gains back……

  5. ‘The lack of backyards and open space also encourages children to remain inside playing video games and watching TV, which of course uses more energy.’

    Yet every bleeding heart reasearcher out there scratches their head wondering why obesity, especially amongst children, is skyrocketing! Firstly, they have no backyard to use their own energy in and those fabulous public open spaces that accompany most instant lakes estates are useless when both parents are out trying to pay for a grossly overvalued home. Comical if it wasn’t reality.

    As for building standards they’ve been awful and getting worse for the last 15 years. We might be living in tents by 2030.

    I remember a builder friend trying to import entire houseloads of materials from China. He was thwarted by the fact none of it met Australian standards and I was surprised he actually cared. That was boom time and it’d be interesting to see how many have gone down that path since the well has dried.

    • Agree particularly on the point about shoddy materials.

      Eight or so years ago friends of mine had a house built by a ‘big name’ builder (on their own block, not on an estate) and the ‘variations’ they got charged with cost them a fortune even before a sod was turned.

      The end product was really below par – tiles started lifting in their laundry only months after they moved in. The taps were so shoddy they had to be replaced; after eighteen months the slab started to lift and crack at one spot in the house and it dropped away at another point; a couple of windows cracked because of the pressure of movement. The worst problem was a retaining wall built at the side of the house that started to subside and threatened to fall over after about three years occupancy. It cost them quite a few thousand to get that back up to par; the builder refused point blank to acknowledge it wasn’t built properly so it all came out of the owner’s pocket.

    • Yet every bleeding heart reasearcher out there scratches their head wondering why obesity, especially amongst children, is skyrocketing! Firstly, they have no backyard to use their own energy in and those fabulous public open spaces that accompany most instant lakes estates are useless when both parents are out trying to pay for a grossly overvalued home. Comical if it wasn’t reality.

      I read an interesting study on this topic a while back, which unfortunately I can’t find now. However, the gist of it was that the difference in activity levels between children today and children in the past are not significantly different (well, recent past – obviously when the were tilling the fields and digging up coal it was a bit different).

      From memory, their conclusion was that increasing obesity levels in children, much like adults, were almost entirely due to poor eating habits. In particular, eating too much (ie: portion size), and eating very calorie-dense foods.

      • Mining BoganMEMBER

        My anecdotal evidence from coaching junior sports is first the diet puts the pounds on otherwise healthy kids, then the inertia follows from all the rubbish things extra weight and sugar overdose does to the body.

        I’m with you, it’s not the lack of exercise doing it. It’s the poor diet.

    • Jimbo,

      I think too the modern family unit where mum works has also had an impact, especially on the pre school age kids, to drive kids inside. In generations past mums were at home to keep an eye on kids in the yard and the parks. The necessity of that 2nd salary and modern female attitudes to work and career all come into play. How things have changed.

  6. I’m not so sure that smaller land blocks is really a product of excessive land price rather than just a consumer choice.

    I visited a number of new starter homes in North Dallas on the weekend and all had noticeably downsized lot sizes, from where they were 10 years ago. Even at the higher end over 700K the yards were small.

    I think the days of Aussie backyard cricket are long dead, today’s children have a much more structured play time with organized activities replacing Mum’s command to “just go outside and play” also the concept of a backyard garden is certainly not an economic choice (if Aussie land prices are factored in these would be the most expensive vegetables ever consumed, they’d make beef look cheap.

    I think the land downsizing is just a life-style trend where both consumer and developer know what’s wanted.

    • Yeah right, I’m sure Aussie consumers are “choosing” to pay $200k to live on a postage stamp sized lot. Check out the RP Data table shown above and the cost per square metre and tell me again whether this is down to consumer choice.

      • @UE,
        With all due respect that’s not what I said, I said that the consumer and developer were mutually agreeing on a product (house + lot) that met their needs. I specifically mentioned Texas RE because the lot prices are all under $50K with maybe $75K for a real big lot, so $/sqm is not the factor forcing down Dallas lot sizes. For a $250K starter home the extra $25K is about 10% so a bigger lot size is the same cost difference as a high-end appliance package. Yet people are choosing the smaller lots.

        I looked at one new House in Rowlett (Near Dallas) right on Lake Ray Robert as in lake front property. The lot alone is 200K, so that is probably the upper limit for city fringe land prices in Dallas.

        I believe Phil has provided details of the minuscule lot sizes that are deemed acceptable in London. It all comes down to choice.

        Don’t get me wrong I’d hate to pay $250K for a tiny lot in far west Sydney, but price is a separate and different issue to product.

        • Bob. You took your Dallas example and then tried to argue that Aussies were choosing postage stamp lot sizes, rather than it being forced upon them through extortionate land costs. That was the source of my criticism, not the Dallas example, which is entirely valid.

          By the way, I love the Dallas data – “lot prices are all under $50K with maybe $75K for a real big lot”. Now compare that to the extortionate prices offered in Australia, even in ‘back waters’ like Adelaide (no offence to people living there – I love that city).

          Any idea what the rate per square metre is in Dallas? I would love to compare it to Australia.

          • I think it’s fair to say that in general, families don’t require big yards any more, regardless of land prices.

            If you want to look at this another way, it used to be the case that families couldn’t afford entertainment more expensive that throwing a ball around the back yard, so that space was essential. These days, family activities tend to be either conducted elsewhere (e.g., organised sport), or done indoors (video games, Internet, and TV), so the backyard is optional, and comes with maintenance costs (lawn mowing, landscaping) that a lot of people would prefer not to have.

          • @UE,
            Big developers dont really like to talk about lot prices separate from house + lot package, so it is difficult to figure out the real lot prices. Also absolutely everything is priced as upgrades, so lots all sell for some premium say 10K to 15K above a base price and then the whole package sells at a discount or a premium depending on the market conditions.

            If you are really interested I can get the current prices from a commercial RE developer I’m working with on a redevelopment project. I should be able to get the farm land costs and infrastructure development costs all split out.

            The project, I’m working on, involves buying some old section 8 (welfare) apartments and turning them into $600K to $800K single family homes. The actual lot prices will be around $200K. This is in an old established neighborhood.

          • Bob. If you can do that, you will become my personal hero ;). It would be awesome to get a breakdown of what a commercial real estate developer in Texas pays for land, infrastructure, etc.

            I guess I could also work out lot costs by checking-out the Houston Association of Realtors site and searching for lots there, and then working-out the cost per sqf/sqm. A few back-of-the envelope calculations last year suggested large lots (~800sqm) were going for around $50K in Houston (probably similar in Dallas-Fort Worth). Bloody cheap compared to anywhere in Australia, even back waters like Adelaide or Hobart.

          • PhilH – possible but not convinced. We’d love to buy a decent block but simply can’t afford to. For example, at an ACT development Spring Bank Rise, a 605sq/m block is $345k vs a 387sq/m block at $249k – land price only. We love to have a decent back yard, set up a bbq area etc but the reality is somewhat different. The choice to buy a postage stamp is not one we want, it’s been made us if we choose to.

          • Bit of both I suspect. Some people would like a bigger block but can’t afford it, some could afford it but don’t want to spend the time on maintenance – rather be out mountain biking or rock climbing or whatever.

    • Well, sure, I can understand this being a matter of genuine choice in Dallas.

      Some people in the USA diet and exercise to be skinny, too.

      This does not mean that people in North Korea are skinny “by choice”.

      The fact that some people in Dallas actually choose smaller lots does not mean that people in cities where land has been forced up in price by a factor of some tens or even hundreds per square foot, are “choosing” smaller lots quite the same way as the people in Dallas might be.

    • I’m not so sure that smaller land blocks is really a product of excessive land price

      also the concept of a backyard garden is certainly not an economic choice (if Aussie land prices are factored in

      China-Bob, I have noticed that your posts are normally quite coherent.

  7. “When vacant land prices are at $200,000, and affordability cuts out at $350,000, there is not a lot of margin for home builders to make a profit”

    If you can’t build a McMansion for WAY under $150k you’re in the wrong business.

    Pre-fab SIPS homes start around $20k in materials.

  8. So I assume there is a dramatic increase in complaints against builders coming?

    Or is this extrapolating from a few experiences?

    Or is it consumers making better choices from a financial point of view?

    Or is it improvement in understanding of overall efficiency in getting to a building with the same economic life. What’s the point of having 6″ between framing if it is 99% as strong with 18″ but 1mm thicker gyprock saving labour and timbers costs?

  9. Builder will take shortcuts when they are under pressure, and they will continue to be under pressure until we get real price growth, or cost reductions.

    Eventually (if not already) we will see wage adjustment, smaller margins in building material supplies, and possibly lower priced lots – maybe.

    • But when does it become fraud and/or lead to a NZ style ‘leaky building’ litigation? For most people, their house is their biggest purchase and they should have the surety they are purchasing a soundly constructed dwelling made from materials that have not been “substituted”. This could turn nasty.

      • The poor b—-y builders and the poor b—-y developers are really the meat in the sandwich. Merely “staying in business” has obliged them to become hostages to the planning-enabled land racket.

        Hugh Pavletich in NZ is a rare example of one who walked away from the industry and went lobbying.