SA Property Council has no shame

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By Leith van Onselen

Over the weekend, it was revealed that the South Australian Property Council is lobbying the State Government to provide low interest home loans and cover relocation costs to attract displaced workers from the Eurozone into South Australia. From Adelaide Now:

UNEMPLOYED skilled workers in economically ravaged countries should be offered low-interest home loans and some relocation costs to attract them to South Australia, the Property Council says.

In its State Budget submission, the council also wants the State Government to increase the conversion rate of international students to permanent residents and target skilled unemployed Europeans in countries in economic crisis…

Thousands of South Australians are continuing to leave for other states, although the rate of departure is slowing.

In a pre-Budget submission, Property Council of Australia (SA) executive director Nathan Paine said the state faced a “skills deficit” when economic conditions improve if it did not grow its population…

The SA Government should run a campaign in those countries to encourage migration to SA, with incentives including low-interest home loans and lower relocation costs, he said…

Premier Jay Weatherill said the ideas were “all valuable” and would be considered in the Budget process. He said they were consistent with a government aim to make SA “more outward looking”.

The Property Council’s proposal has the stamp of self interest all over it, and is clearly designed to bolster property values on behalf of its members.

If the Property Council was truly interested in attracting foreign and inter-state migrants into South Australia, whilst stemming the flow of emigration, it would seek to lower the state’s excessive land prices, which are a key road block to affordable housing and a big disincentive for anyone wanting to live there.

As shown by the below RP Data table, average Adelaide vacant lots are the smallest in the nation and the third most expensive on a rate per square metre basis, having risen by 250% in the decade to 2012. This cost escalation comes despite Adelaide being an economic backwater and experiencing relatively moderate population growth:

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One of the reasons behind this land cost escalation is the State Government’s increasingly restrictive planning system. In 2002, the Government implemented an urban growth boundary (since renamed the ‘urban footprint’), which not only contributed to the steep rise in land values, but has led to ‘leap frog’ development in far flung towns, like Mt Barker, thus increasing sprawl. A 2005 paper from Policy Exchange explains the outcome:

In the words of Kieron Barnes, senior planning officer at Adelaide Hills council, “The South Australia Labor government created an urban growth boundary around Adelaide three years ago [2002] with the intention to stop the sprawl and to consolidate the city. But you could have guessed what happened then: People decided to move behind the growth boundary to places like Mt Barker from which they then commute to work in Adelaide [map of Mt Barker in relation to Adelaide shown below]. I was actually lucky to have bought my house there just before the growth boundary was put in place because after it was introduced land prices in Mt Barker soared.” How did the state planners respond? “Well, now they have created more growth boundaries around the smaller cities as well to stop this kind of leapfrogging.”

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Talking about his own personal house preference, he admits that he likes having a large house and does not mind commuting to work by car. Asked whether that was not actually contradicting planners’ beliefs in consolidation and promoting public transport, he smiles: “It’s difficult for planners not to behave hypocritically when it comes to personal choices. Many I know live in big houses on large parcels of land with two cars that are not necessarily environmentally or economically efficient.”

The State Government has also set a target for 70% of new housing to be provided within the pre-existing urban area, as well as operating a cumbersome development approvals system, whereby Productivity Commission estimates that it takes between 2 to 13 years to complete the land supply process.

As noted above, if the Property Council was not acting out of self interest, and truly sought to make South Australia a more desirable place to live, it would lobby for reforms to reduce land prices and improve housing affordability, instead of seeking to pump demand (and house prices) even further.

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Comments

  1. Let’s hope the SA gov’t doesn’t fall for it. It just seems too fanciful and out there for it to be a real chance. However, this is consistent with LVO’s previous post in that the calls for direct government support of house prices will grow louder. At least you have to give the Property Council a little credit for proposing something different. My guess is that the government will ignore this suggestion but offer a boosted FHB grant as a ‘compromise’ measure.
    However, being in SA, it’s hard to imagine them pumping FHB grants just yet. We already have $23k for new builds, scheduled to wind up on 30 June. So surely it would have to come across as pannicky if they were to increase it again so soon afterwards.

    • What difference does $23000 or $15000 grant make when the land and house prices are so high? I don’t see any difference. In 2001 the FHB grant was the same as today, but the home prices doubled since then. It is the home (land) prices which are highly unaffordable for FHBs.

      • In this case, I don’t think it is making much difference in SA. $8000 of the $15000 is a new-build grant that’s available to anyone. In Adelaide, new block sizes are tiny and houses are so close that it almost seems inhumane. I used to live in Canberra and out in Gungahlin, I used to think that the new estates there were packed in like sardines. But I actually think new estates in Adelaide have smaller blocks and it looks even more like sardine city. That doesn’t help the value proposition for FHBs.

        The interesting thing in SA is that the established FHB grant has been reduced to $5000 and is due to be cut completely on 1 July 2014. That’s completely inconsistent with calls for further boosted grants, so we’ll see what happens. At $5000, it can hardly be much of an incentive for people as it is.

        • I took a turn into Freeling to check it out on the way back from Kapunda last weekend.

          I couldn’t understand it, why would you live in a sardine tin that is in the middle of nowhere?

  2. thomickersMEMBER

    on the issue of borrowing large sums of money…its the repayment of principle which gets you!

  3. Premier Jay Weatherill said the ideas were “all valuable” and would be considered in the Budget process. He said they were consistent with a government aim to make SA “more outward looking”.

    Thousands of South Australians are continuing to leave for other states

    Sounds like South Australians already are “outward looking”.

  4. Thanks for this interesting analysis, Leith.

    As a former Adelaide resident I have a few observations on the above. Firstly, Mt Barker turned into a horrible dormitory suburb years ago (I once heard an Aldgate local describe it as ‘Elizabeth in the hills’) and this was despite the stated aim of the State Government to keep development out because of the need to preserve water catchments. Bottom line (as discussed above) the land was much cheaper than metro fringe areas so the place boomed… the developments that resulted were really inappropriate too, houses on their own 1 acre blocks on the fringes of Mt Barker – like a really low density suburb. Anyway, the construction of the Heysen tunnels in 1999 made a growth boom in the hills inevitable in my opinion.

    Secondly, the property council should consider that these unemployed skilled people should probably have some sort of employment to go to BEFORE they move them over. Highest unemployment on the mainland doesn’t engender confidence in that area, you could be setting these poor migrants up to fail?

  5. So how is spruiking over priced property through allowing large amounts of debt at a cheaper price going to be in any way appealing to foreign nationals who have recently been through the ordeal of their respective governments doing exactly the same thing?

    Im not a marketing expert here but you would think that some customer research should perhaps be on the cards….?

    • Ha-ha, it is really laughable how they believe someone from broken Europe will come here to pump the house prices of our rent seekers after the Europeans have been broke by the same perverse property/banking system.

    • true but we are different and unique here. no signs of the property market crashing here yet unlike the rest of the world. unlike the europeans we have holes we can dig up. also lots of hot inflows from mainland chinese investors and an inept government that will do everything in its power to keep the housing/finance/real estate complex ponzi going indefinitely

      • You could be right, jay. It took a little while, but sustained low interest rates have now got house prices heading up again. Notwithstanding the odd bad news day, people feel confident enough to load up again. Further interest rate cuts will probably have a similar 6 month lag to flow through. Right now, governments don’t need to pull the emergency FHB grant lever just yet – the perception of stable low interest rates are having their desired effect. As you say, the politicians have a lot of winning cards up their sleeve that they can play when they need to. I still think that Leith’s ‘slow melt’ theory has legs. But right now, I think we’re on a bit of a ‘slow boil’ trajectory within the longer term slow melt.

  6. I think they should make Wyalla a special manufacturing zone re tax and land costs and build a desal plant there and get it growing rather than Adelaide.

    • I reckon the SA Government should be fired, especially the planning minister, who yesterday professed his love for expensive housing with the following rubbish:

      “Whatever the policy of individual industry groups may be regarding the urban growth boundary, the government position is clear. We do not speak for industry. Urban sprawl cannot continue… Subdivision of green fields sites will occur only when required to maintain an adequate stock of rezoned land and only when structure plans and infrastructure requirements have been addressed. A priority is quality urban regeneration.”

      The minister obviously thinks an adequate stock of greenfield land means the smallest blocks in the country and the 3rd highest land prices.

  7. Pass this on to the powers that be.

    “Supply” can be abundant but quota’d, leading to bidding wars for it. Urban planners “releasing 10 years supply of land”” is just throwing fuel on a fire. The only way to put the fire out completely is to abolish the barriers to conversion of rural land to urban anywhere.

    When Portland established its “20 year UGB”, the price of land began to inflate just 4 years later. Here is the basic flaw with the idea that “X years supply of land has been zoned” on greenfields beyond the existing urban fringe.

    The zoned amount is NOT the amount that NORMALLY WOULD COME TO MARKET ANYWAY on the normal rural land market, within that zone, IN THE NEXT “X” YEARS. It is the TOTAL quantity of land within the zone. To REALLY have “X years of supply”, it would be necessary to include in the zone, enough land that the quantity that IS “X years supply” WOULD come up for sale anyway in a normal rural market, at normal rural prices. This would mean a zone with about ten to twenty times as much land as “X years supply for urban growth”.

    The land comprising “X years supply” by the planners standards, is being used for something already and no owner of it has any inducement to sell it at the value that it is worth IN ITS PRESENT USE. But having become aware that they are part of a newly created oligopoly holding of the next “X years supply of land for urban growth”, they cease to think in terms of rural land values at all, and start thinking like investors/speculators. None of them will be satisfied with a 10% capital gain, or even 20%. Expectations of gains become a reason to HOLD land and NOT sell it. So the planners “X years supply” becomes a LOT LESS than “X years supply” purely because of typical investor psychology. The planners have REDUCED the likelihood that any one land owner within the zone will in fact sell the land within the “X” years at all.

    Then developers not only have to door-knock and persuade “attached” owners of land to part with it, they need to offer greater than the present value of what the owner thinks the price of the land MIGHT yet inflate to……!

    This is why there is no middle ground, “moderately unaffordable housing” cities. Containing urban growth and rationing the land supply is not like a “flow control valve” over house prices as planners like to think it is, it is like an “on” switch for a nuclear chain reaction.

    There is a noticeable difference in the “housing affordability” data from Demographia and others – cities with median multiples of “3” tend to actually have much larger, newer houses and much more land per household. In contrast, the cities with median multiples of “6” and over tend to have much smaller houses and even smaller amounts of land per household, and housing tends to be much older. The difference is this.

    A median multiple of around “3” represents an amount of expenditure that households are comfortable with, so that as incomes rise relative to the cost of raw land, and relative to the cost of construction, and technology improves, households tend to consume more land and attributes of housing. The value of the land tends to be about 30% of the value of the “housing”, even as the size of the lot grows, typically as large as 1/2 acre on average now.

    But the median multiple of “6” represents “the most people can stretch to paying”. It will be found that economic land rent is rising and households are paying more and more for a square foot of land; and households are sacrificing not just land consumption but other attributes of housing, so as to house themselves at all within “what they can afford”. Typically the value of the land represents 70% of the value of the “housing”, even as the section sizes shrink, typically to 1/16 of an acre on average in the UK now.

    Of course the increase in economic LAND rent is exponential, when you “net” this out. The difference is always due to regulatory distortions (there might be an island nation-state that has literally run out of land, but this is certainly not the explanation in, say, Australia).

    Developers in these “planned” growth-constrained markets are the meat in the sandwich – it is not them who are the beneficiaries of the quota system in urban land; it is the original vendors of the land.

    The developers are placed in a very high risk situation. They have to out-bid each other for the quota’d quantities of land, and still sell finished housing at a price the market can stand.

    Developers working under these conditions do work backwards from “what they think they can get for the finished product”, and this is reflected in “what they are prepared to bid for the quota’d land supply”. However, we would not regard it as acceptable for bread or milk, to run a quota scheme that allows the prices to settle at “what people can pay” rather than “what suppliers freely in competition with each other can bring the product to market at”.

    What keeps the price of bread and milk and everything else, being set not by “what people are prepared to pay”, but by “what suppliers freely in competition with each other can bring the product to market at”, is the lack of anti-competitive barriers to anyone converting land from other uses, to dairy farming or wheat growing; and to supplying raw product to supply chain intermediaries; and to processing and producing finished product.

    This market freedom does NOT result in a massive “oversupply” of bread or milk or cars or TV’s; nor does “freedom to convert land from other uses to urban uses” (just as easily as converting it from growing one crop to another) result in massive over-supply of new houses.

    In the unusual cases of housing bubbles that involve both price and overbuilding, the mechanism always involves the active participation of government chasing “planning gain” or similar.

  8. Why do they want the unemployed skilled workers? Wouldn’t the employed skilled workers from these countries be better. I might think you would want the best, Instead of inviting someone who might have been on the dole for who knows how long.