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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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.