Kohler sees the light on expensive land

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By Leith van Onselen

After campaigning for years against Australia’s exorbitant land costs, it’s good to see Alan Kohler acknowledge the issue today in Business Spectator, arguing that Australia’s high cost of urban land is choking the economy:

The high price of land in Australia is one of the reasons businesses like Holden and Qantas are uncompetitive and the combination of several recent developments is making the situation much worse.

Australian house prices are already among the highest in the world, both in absolute terms and relative to income, and are now starting to rise rapidly again, especially in Sydney.

Yet new developments in planning laws by Conservative state governments in NSW and Victoria are drastically restricting supply, and at the same time demand is escalating because apartments have become a financial commodity being sold by investment spruikers and the business is rapidly becoming globalised, with powerful demand coming from China especially.

It is a combination of factors that will tend to make Australia even less competitive as housing costs rise and put upward pressure on wages, and put huge intergenerational pressures on families as first home buyers are priced out of the market.

…in Melbourne the state government has given local councils the right to impose restrictive new planning zones that prevent high density housing in the suburbs, and therefore contain the apartments to diminishing areas close to the city…

In Sydney, the planning reforms of the O’Farrell government’s White Paper on the subject have been watered down by the NSW Upper House and now deferred completely, following lobbying by community action groups…

Bans on new suburban apartment blocks by local communities plus rapidly growing demand from ‘financialisation’ and globalisation means that the apartment market is becoming disconnected from the general housing market. But the distorted prices are infecting the whole…

The inevitable result is higher prices and less affordable housing, putting more upward pressure on wages and making Australian industry even less competitive than it currently is.

Spot on, and exactly what I have been arguing for years. However, the problem is not confined to the apartment market, where supply is being choked by planning. The fringe land market is also being restricted via growth boundaries, upfront development charges, and cumbersome structured planning processes, which have forced-up the cost of lots, inflating land values across the entire urban area in the process and also making apartment development and sub-division more expensive.

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We also shouldn’t forget that high land prices adversely impacts the construction sector, whose output has barely increased over the past 30 years, despite the massive increase in the Australian population. In addition to higher input costs (e.g. rents and wages), the productive economy also suffers via less access to finance, which is instead channeled into housing as buyers chase prices higher.

Economic theory and international evidence also shows that unresponsive (inelastic) land supply tends to increase volatility by making prices more sensitive to changes in demand. As such, the policy of supply repression heightens the probability that the housing market and economy could experience a painful correction in the event that Australia experienced an economic shock.

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Leith van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

Comments

  1. GunnamattaMEMBER

    ‘The high price of land in Australia is one of the reasons businesses like Holden and Qantas are uncompetitive and the combination of several recent developments is making the situation much worse.’

    Land costs are a big factor in Australia’s hopelessly uncompetitive external facing economic position.

    We are creaming the economic future

    • Too right, Gunna.

      Access to inexpensive land ought to be central to government economic plans and a key national advantage.

      Our financialized, debt-soaked rentier economy is entirely self-inflicted. The tax bases are garbage. Zoning is in quadriplegia. We impoverish our young.

      Want to see the future? It looks like this: http://www.bloomberg.com/news/2013-12-04/spain-credit-falls-to-05-shadow-after-price-collapse-mortgages.html

      And all it will take is revert to mean.

      Don’t Buy Now!

      • Thanks for the link, David. I noticed this rather depressing quote:
        “The irresponsible buyer who bought at the top of the market is paying less than the prudent buyer who’s in the market now”

        Is that scenario a possibility in Aus following a correction? I’m assuming this imbalance is to do with the cost of borrowing. What does that mean for all us patient families, waiting and saving and waiting some more?

    • With a little sense we could solve two big productivity problems in Aus.
      Swap awful taxes for Land Tax the more the better. Freeze out speculators and lower prices so Australians and Australian Business can afford land again.
      And at the same time this could easily lower the tax burden on manufacturing without lowering revenue.
      Of course the Rentiers might take a beating but their negative sum business model does Australia no favours, we owe them none.

      • Well said glissom. Why is this so hard to convey to people? I try to explain it to people but they just do not want to listen…

    • This is the key point, emotionless, dry as a bone economics:

      “The inevitable result is higher prices and less affordable housing, putting more upward pressure on wages and making Australian industry even less competitive than it currently is.”

    • $472 SQM for land in Melbourne in 2012, I must have bagged a bargain buying my land at just $25.00 a sq meter..and less than an hours drive to the CDB in the car on rushhour or by Vline.

  2. General Disarray

    Is there any modelling available on the impact high housing costs have on the discretionary spending sector and flow on to unemployment?

    • A good model for the situation, one that accurately models the impact, could be found in the tale of Humpty Dumpty.

    • I wish there was modelling on that. I only know of a few pieces of writing on the subject. No official or academic stuff. But it is obvious. It is ridiculous that there is so little official or academic attention to it.

      The effect “compounds” as money circulates, too.

      The people I am aware of who have written incisively about it, are Ryan Avent and Tory Gattis.

      • Mainstream economics don’t write about it because in their models bubbles aren’t really a thing, and a housing boom is a positive thing.

        For hetrodox economists the effect is obvious and maybe not studied in detail. Most trying to address the cause rather than analyse the destruction in detail.

        Try Steven Keen, sounds like the kind of analysis he would have done or would be interested in doing.

      • Prof Alan W. Evans said in his submission to the Barker Review of Housing Supply in the UK:

        “….mainstream economists are trained to regard national economies as aspatial points and to ignore space, distance, location, and land as unimportant…..”

        And in his 2004 book “Economics, Real Estate and the Supply of Land”:

        “….few economists have any interest whatsoever in planning. Their whole training leads them to ignore matters related to land and location, so they tend to consider only those factors conventionally considered “economic” – investment, training, labour relations, management, etc…..”

      • ““….mainstream economists are trained to regard national economies as aspatial points and to ignore space, distance, location, and land as unimportant…..”

        Wow… WOW!

        What a brilliant insight.

        When we factor in (the cost of) energy, as well as the importance of critical mass in regards to creativity…. as well as the utlisation of space for arbitrage, this immediately seems to me a folly to ignore.

    • The logic is that the sale of a house (where prices are growing in excess of inflation) indicates a discretionary attachment to the utility of the housing from the perspective of the vendor, and the funds that flow from the bank to the seller boost discretionary spending in terms of the net (in excess of retired debt) proceeds of the sale in that iteration of the flow in money from the hands of the vendor to the guy they buy stuff off.

  3. Manufacturers leaving left right and centre. The Capex Cliff. I will never tell a lie Prime Minister unable to increase Government spending because…

    You would think the time of the reckoning must be fast approaching. A reckoning that I suspect can only now be delayed by a wall of Chinese money buying up massive slices of Australian Real Estate.

    • I am watching Seattle and Boeing with interest.

      If only Australia had States like North Carolina, that Holden could threaten to move to, instead of potentially being lost to the national economy completely.

      • Phil,

        My bet is that the new 777 model will be assembled by Boeing in Japan, with the fuselage shipped from the US and with wings made in Japan. As I understand the new 777 model will have a conventional Aluminium fuselage with carbon composite wings similar to those on the 787.

        I can see that a decision to assemble in Japan makes sense on a number of fronts. As well as possibly being the lowest cost option too. The 787 wings are already made in Japan and shipped to the US for assembly, so sending a fuselage on the return trip will probably make economic sense.

  4. Sounds like AK woke up on the right side of bed after having an epitome.
    That, or AK is sleep-talking/channeling Integral Theory unbeknowst to AK.

    • That, or he just realised how much of his own money he has to pony up to get his kids into a house or unit (or some other direct personal impact that has made him notice something is seriously out of whack here)

      Given our distance from everywhere, we need all the competitive advantages we can get, and low land prices ought to be one of them.

      Another thing that doesn’t get mentioned much, but I think there is an association between access to cheap real estate, and vibrant art, music, & creative scenes. I think real estate booms and the associated gentrification, generally destroy one of the important conditions that allow them to happen.

      • I think you are right – interestingly that is the absolute opposite of what the urban elitist types assume. Their “vibrant” downtowns are more like exclusionary domains for the wealthy.

        There is a very interesting chapter by Prof. Philip Morrison in “The Handbook of Creative Cities”, entitled ‘The Distributional Consequences of the Creative City”, which absolutely nails the issue.

        Creative but as-yet lower income people often end up making their own “scene” where the accommodation is affordable.

  5. It is good to see mainstream pundits slowly coming around, and I agree that personal acquaintance with reality (in their own family, etc) has a lot to do with it.

    But it is a pity they always focus on anti-density measures. It is freedom to develop beyond the fringe that is crucial. Without this, “allowing density” merely increases the gains made by the owners of the land.

    There is nowhere in the world that “allowing more density” has resulted in housing affordability. Someone needs to point this out to people like Kohler. Vancouver thinks they are going to achieve affordability this way, and nothing they have done to date has scratched the surface of their bubble. This includes some pretty fast-track permission processes and draconian set-asides of NIMBY rights too, BTW.

    Singapore goes the furthest, with pretty much no property rights at all; yet housing median multiples are still 6 – 7. Every city with freedom at the fringe has median multiples of around 3, and the space per person is many times greater.

  6. Isn’t the compact city/micro apartment/shared public workspaces idea our only option for a sustainable future?
    Maybe we shouldn’t be be allowed to own our own homes. Perhaps more like Germany, albeit with reduced rental apartment sizes in perpetuity.
    Doesn’t anyone believe in climate change?

    • Isn’t the compact city/micro apartment/shared public workspaces idea our only option for a sustainable future?

      No. You have been lied to. The green elites with their smart growth have decided to spread a profitable (for them) and happy lie rather than tell the truth.

      The truth is that rich people packed into apartments tend to consume a lot of energy and burn a lot of carbon. Rich people in the country or urban sprawl will use less energy and have less environmental impact. Extremely poor people use even less energy. Which choice would like to make?

      • “You have been lied to”

        Well this about to end. Honest Tony is now in charge.

        “The truth is that rich people packed into apartments tend to consume a lot of energy and burn a lot of carbon. Rich people in the country or urban sprawl will use less energy and have less environmental impact.”

        Like to see some data on this. It is possible that when you have people in the country or urban sprawl jump into their F150 (instead of their 1.4l Hyundai Excel) to go anywhere that the data gets skewed towards the latte sippers waiting for their taxpayer funded inner city tram so they can return to their energy hungry high rise apartment.

    • Personally I like units. I find them cheaper to heat and cool, and frankly I’m just used to living in them. The problem is in outer Melbourne (I don’t know about other areas) they’re almost as expensive to buy as houses. I don’t know if it’s because investors tend to favour units, or there is an increased demand for small properties in general, but I simply can’t afford quarter of a million for a run down unit in the outer burbs.

      As for land ownership, there are so many government concessions and tax advantages to owning your own home that government policies would have to change significantly before there would be a shift away from home ownership.

    • Smart growth has not been evidenced to be more sustainable.

      High rise apartments:
      • usually do not have recycling or even adequate provision of recycling (so many only have 1 waste chute);

      • can’t make the most effective use of natural light;

      • don’t have backyards in which to grow food in or compost facilities;

      • usually use more electricity as hallways do not usually have natural light, require elevators and do not allow residents to dry clothing on balconies (if there is one).

      Leith has shown at length that the supposed benefits of smart growth policies are illusory. I suggest you go through the archive and educate yourself.

      • There are simply dozens of ways in which low density living can be made more sustainable than high density living. Environmentalists back in the 1970’s were actually all in favour of low density living and despised the city. Somewhere they completely lost their way.

        The famous Newman and Kenworthy thesis about the correlation between density and energy use has been criticised by numerous other academics.

        Here is the list I have collected so far:

        Ray Brindle (1994) “Lies, Damned Lies and Automobile Dependence”
        Michael Breheny (1995) “The Compact City and Transport Energy Consumption”
        Ray Brindle (1996) “Transport and Urban Form: The Not-So-Vital Link”
        Michael Breheny and Ian Gordon (1997) “Densities in the Sustainable City”
        Ian Gordon (1997) “Densities, Urban Form and Travel Behaviour”
        Alan W. Evans (1998) “Dr Pangloss Finds His Profession: Sustainability, Transport and Land Use Planning in Britain”
        Michael Wegener (1998) “Sustainable urban spatial structures: do we need to rebuild our cities?”
        Patrick Troy (1998) “The Perils of Urban Consolidation”
        Orit Mindali et al (2004) “Urban density and energy consumption: a new look at old statistics”
        Michael Neuman (2005) “The Compact City Fallacy”
        Ian Gordon (2008) “Density and the Built Environment”
        Paul Mees (2010) “Density and Transport Mode Choice in Australian, Canadian and US Cities”
        Steve Melia et al (2011) “The Paradox of Intensification”
        Alan W. Evans (2012) “Planning, Density, Fuel Use and Emissions: a Survey”
        Marcial H. Echenique et al, (2012) “Growing Cities Sustainably: Does Urban Form Really Matter?”

        Here is a beaut radio debate between Peter Newman and Patrick Troy:

        http://www.sos.org.au/new_newsletters/March_2006_troy.htm

        Australia has Patrick Troy and Ray Brindle and several other people who are perfectly capable of enlightening everyone about what a crock this whole growth containment thing is, but who will get all the speaking engagements and media coverage depends on whose “findings” suit the FIRE racket.

        The basic bottom line: the mechanism for “causation” in the correlation observed by Newman and Kenworthy is not “efficiency”, but who has discretionary income left over after housing costs to spend on discretionary travel, having kids, having two cars, etc etc. Every affordable-housing (median multiple circa 3) city is low density. Every high density city is “unaffordable” (median multiple 6+).

        Running a correlation exercise between density and energy consumption, merely picks up this reality, even if the authors of the study do not realise it.

        Many cities become “unaffordable housing” cities while still being lower density, when UGB’s are imposed; but it takes a generation or so for the well-situated incumbents to be rolled over in favour of the new housing peons. Ironically, one of the first unintended consequences is that only rich people can afford the centrally located apartments where the planners think they are “encouraging” everybody to live (if you want to see terrific value CBD apartments, look at Houston). Then every study of energy consumption in those particular cities, reveals that the rich people in the apartments are not living particularly “sustainably” in comparison to anyone else……! This of course because they are rich, not because they are living at high density and have little discretionary income, as is the case in UK cities and European and Asian cities. You have to wait a couple of generations to get everybody living at high density and most people deprived of discretionary income, so as to get the N&K thesis “confirmed”.

  7. I say it is too late for AK get religion, the damage has been done, the pie is already baking in the oven, its game over for most Aussie manufacturing, @#$% what he thinks now it’s too late.

    Back in 2009, when I first started looking at Aussie export businesses there was a feeling that RE had run its course and that maybe productive industries were the investments of the future. This was not a difficult sell because RE prices had stagnated (in Sydney) and the risk of a correction was real. Today there is ZERO money available in Sydney for speculative export oriented ventures. Every last dollar is wrapped up in Sydney RE. At least that’s the feedback I get from potential investors.

    I can’t see any chance of a change in attitudes until a lot of Sydney RE investors get seriously burned, I’m talking personal bankruptcy style burned. Unfortunately when you look at the economic factors that would cause such a large correction, it is highly improbable (under these conditions) that any money would be available for risky new manufacturing enterprises. C’est la vie.

    It’s a pity that such a great country has to suffer such third world style leadership. (and I’m not just talking politics)

      • Leaders picked by the electorate.
        Australia deserves everything it has coming to it.

        He doesn’t mean the ones we vote in.

        “It’s a pity that such a great country has to suffer such third world style leadership. (and I’m not just talking politics)”

        As bad as a political leaders are, the non-elected ‘captains of industry’ are much worse. Our corporate leadership would be fourth world.

    • Yes CB I agree with you..it is too late to save the Australian manufacturing game now…Like many here I cannot believe the Sydney RE madness that has been 2013…just as a little aside story, my friends family (who I’ve mentioned on this site before) that lost their CNC plastic tooling workshop due to the Chinese competition had their factory for lease for over 2 years (Bankstown Sydney) finally got a new tenant 3 months ago….guess what they do?
      They have just settled in and installed their machines (they had to downsize from larger premises)…. They make components for Toyota…..

    • Exactly right CB, Kohler needed to use his considerable influence for good before it was too late. He must have just sold all of his property.

      We have created a massive problem in this country. We have just had a massive mining boom and all we have to show for it are a budget deficit and high housing prices. Where were the economists and politicians calling for tax reform – hardly any of Ken Henry’s recommendations had any support. Once again, it is too late for Kohler to change sides – I view him , Gotti and Co as part of the problem…

    • It’s a pity that such a great country has to suffer such third world style leadership. (and I’m not just talking politics)
      We get the leaders we ask for.

      What makes the country great if not its leaders and the people that allow them to stay ?

    • My view is this has more to do with the ‘resource curse’ than the RE market.

      The RE market is a symptom of a leadership that doesn’t need the people to be educated or productive because it had resources to sell.

      And i’m not bagging out the resources industry, what i’m saying is that the money from them has essentially corrupted the value we might once have put on a collective productivity and human worth.

      On the bright side we have sold all our resource assets (80% foreign owned) and are in the process of selling all our prime RE and agricultural land, so our ‘curse’ might wind up quicker than we think.

  8. Strange Economics

    Spot on on Melbourne –
    all the councils within 12 km of the city have now approved rules preventing apartments –
    In Glen Eira “a maximum of 2 house dwellings per lot” prevents apartments in 80% of the suburb. (Except busy main roads, – perhaps because apartment dwellers like traffic noise?), This will keep house prices to 800K minimum, and price FHBs completely out of the inner city house market.