Family First humiliates housing policy

ScreenHunter_01 Jan. 27 23.41

By Leith van Onselen

Back in September, just prior to the Federal Election, I explained why I believed that Family First had the best housing policy in Australia.

Thankfully, Family First’s chairman and former home builder, Bob Day, was elected as Senator for South Australia and will assume his seat on 1 July 2014.

Already, Bob Day has began making waves on housing policy, delivering an eye-opening submission to the current Senate standing committee on affordable housing. Below are some key extracts from Bob Day’s submission, which raise similar concerns about Australia’s constipated land supply system as I have raised many times on this site:

For more than 100 years the average Australian family was able to buy its first home on one wage. The median house price was around three times the median income allowing young home buyers easy entry into the housing market.

ScreenHunter_1036 Jan. 30 06.40
As can be seen from the graph, the median house price is now, in real terms ie relative to income, more than nine times what it was between 1900 and 2000. At nine times median household income a family will fork out approximately $600,000 more on mortgage payments than they would have had house prices remained at three times the median income. That’s $600,000 they are not able to spend on other things – clothes, cars, furniture, appliances, travel, movies, restaurants, the theatre, children’s education, charities and many other discretionary purchase options.

The economic consequences of this change have been devastating. The capital structure of our economy has been distorted to the tune of hundreds of billions of dollars and for those on middle and low incomes the prospect of ever becoming homeowners has now all but vanished. Housing starts have plummeted and so have all the jobs associated with it – civil construction, house construction, transport, appliances, soft furnishings, you name it. Not to mention billions of dollars in lost GST revenue to the States. And while the slump in business conditions over the past years have been blamed on everything from the GFC to the high Australian dollar the real culprit has been the massive redirection of capital into high mortgages. And looking to the Reserve Bank to fix the problem through monetary policy ie lowering interest rates, isn’t going to work.

The distortion in the housing market, this misallocation of resources resulting from the supply- demand imbalance is enormous by any measure and affects every other area of the economy. New home owners pay a much higher percentage of their income on house payments than they should. Similarly, renters are paying increased rental costs reflective of the higher capital and financing costs in turn paid by landlords.
The economic consequences of all that has happened over these past few years have been as profound as they have been damaging. The housing industry has been decimated as have industries supplying that sector. The capital structure of our economy has been distorted and getting it back into alignment is going to take some time. But it is a realignment that is necessary. A terrible mistake was made and it needs to be corrected.

HIGH HOUSE PRICES: AUSTRALIA’S URBAN DISASTER

…1995 to 2005 was a decade in which the traditional relativity between average household incomes and median house prices was shattered, putting home ownership beyond the reach of a vast number of Australian families. Where historically the median Australian house price had been three times median household incomes, by 2005 it had risen to  more than six times that level in all Australian capital cities, and housing affordability went into serious decline.

Home ownership has long been a feature of Australian life. The level of home ownership rose sharply in the postwar period from 53 per cent in 1947 to 70 per cent in 1995…

In recent years however, a disturbing trend has emerged in the level of home ownership among young families. It is in substantial decline. We have witnessed, quarter by quarter, the erosion of housing affordability from 1995 onwards.

As the impact of rising house prices began to bite in the latter part of his tenure, Prime Minister John Howard often responded saying, “I don’t have people complaining to me about the increase in the value of their homes.” And this was true. Existing home owners were, for the most part, content with their new-found wealth as they reaped capital gains beyond their imagination and interest rates remained at historical lows. They used the equity they had in their homes to borrow big and their ambitious acquisition of investment properties caused, in the words of the Productivity Commission, “overshooting” in the housing market…

While existing home owners were big winners, first home buyers suffered. Home ownership was fast becoming the privilege of the few rather than the rightful expectation of the many, and the province of older Australians at the expense of the young. At the close of the Howard era affordability for first home buyers was the worst on record…

It is undeniable that demand factors played a role in stimulating the housing market and those factors were, for the most part, in the hands of the federal government. However, the real culprit, the real source of the problem, was the refusal of state governments and their land management agencies to provide an adequate and affordable supply of land for new housing stock to meet the demand.

The regulatory seeds of the housing affordability crisis were sown in the 1970s. Until then land was abundant and affordable, and the development of new suburbs was largely left to the private sector. These leafy pre-1970 suburbs with large allotments and wide streets are enduring testimony to the private sector’s ability and to the traditional approach to urban development.

Into this environment strode state and territory governments of all persuasions as they introduced agencies to manage urban growth. The aim of these government agencies seemed noble enough – to ensure a plentiful supply of land to meet future housing needs.

In South Australia for example, the South Australian Land Commission’s primary aim, embedded in the Land Commission Act of 1973, was “the provision of land to those members of the community who do not have large financial resources”. The Act further made it clear that the Commission “shall not conduct its business with a view to making a profit”. In 1981 these noble motives were deleted from the legislation as the Land Commission was reconstituted as the South Australian Urban Land Trust under a new Act.

But worse was to come. As land supply began to dwindle in the mid-1990s – the result of government planning regulation and zoning, a rationing effect came into play and land prices started to rise.  These rises were more dramatic than most thought possible, and at a time when first home buyers most needed help, the noble intentions that were used to justify the formation of these land agencies simply vanished and another set of aims was imposed.

In South Australia, the relevant authority, by this time known as the Land Management Corporation, had a mandate to “maximize financial returns to government”.  Note the blatant shift of emphasis from the original mandate – from the interests of the buyer –  “those members of the community who do not have large financial resources” to the interests of the seller, the Land Management Corporation; from “maintaining land affordability” to “maximizing returns to government”.

In 2007/2008 the Land Management Corporation recorded a profit of $121m. This from a Government agency established with a mandate to “not conduct its business with a view to making a profit.”

Since its inception in 1973, the South Australian State Government’s land agency has seen land prices rise from $15,000 per block (in current dollars) to $160,000 per block, more than a tenfold increase. By comparison, the cost of building a 135 square metre house increased from $97,000 in current dollars to just $102,000 over the same period, virtually no increase at all. Think about that for a moment – a ten-fold increase for a commodity (land) controlled by government (with a so- called “price containment” policy), compared with virtually no increase at all for a commodity (the house) controlled by the private sector (with no price containment policy). One can only conclude that had the private sector been allowed to manage land supply, like it has managed housing supply, we’d be enjoying land prices significantly lower than they are today.

This massive escalation in the price of land carries with it a multitude of detrimental impacts. Establishing affordable rental accommodation for those in greatest need becomes even more difficult for social and public housing authorities as they seek to purchase land and houses in a greatly inflated market. Road widening and major infrastructure projects experience cost blow-outs as land acquisition costs skyrocket, and establishing schools, community centres, health services and business facilities becomes difficult, and at times impossible. The whole community suffers as a result of increased tax, transaction, finance and establishment costs.

It is important to remember that the “scarcity” that drove up land prices is wholly contrived – it is a matter of political choice, not geographic reality. It is the product of restrictions imposed through planning regulation and zoning.

While state governments embraced the opportunity to garner windfall profits by stifling the release of land, they were also responding to a wider ideological agenda driven by a powerful planning community that sought to curb the size of our cities. “Urban consolidation” became the new mantra…

Urban planners, by promoting urban consolidation and at the same time demonising urban sprawl, have inflicted enormous damage on the economy and society. Billions of dollars have been wasted and enormous pain inflicted on the community as a result. And all they ever say in defence of their ideology is, “It depends what you want our cities to look like.” Well, they’d look a whole lot better without the traffic congestion, air pollution, destruction of biodiversity and those high-density infill projects which destroy the character of some of our most beautiful suburbs – delightful suburbs which were developed before urban planners were even invented and were constructed by people advancing their own interests, rather than pursuing some social engineering agenda…

MPs receive donations from property developers keen to maintain the scarcity of the product (land), which results in higher property prices.  The MPs then publicly support urban planners who rail against the so-called evils of urban sprawl, none of which stands up to scrutiny.  The resulting urban growth boundaries, which force people into high density housing developments in the inner suburbs, are a classic example of the Baptists and the Bootleggers phenomenon at work.

The problem is, it is young home buyers, hit with the spiralling costs of home ownership who end up paying…

One need only look at the scenes below to recognise that the detractors of urban sprawl have it wrong with respect to bio-diversity [in-fill on left vs “sprawl” on right]…

ScreenHunter_1037 Jan. 30 06.55

The wholesale adoption of urban consolidation policy by those in the planning and legislative fraternities led to a rash of planning regulation responses that further stifled supply. Urban growth boundaries, zoning restrictions and a host of other planning and building instruments became the order of the day as governments, shire councils and their planning operatives sought to throw a corset around the body of our cities.

This policy of urban consolidation dramatically slowed land supply at a time when the market was demanding it. As happens when the supply of any valued commodity is constricted, the price went up. The land rush was on and land prices increased by astounding multiples…

The first, and major, step in restoring housing affordability lies in governments stepping aside from the land management role and  allowing the natural forces of supply and demand to return to the market.   It is only as adequate supply returns to the market that land prices will fall.  Urban growth boundaries must be removed and the abandonment of the insane notion of “x” years supply of land available.  The home buying public will decide how many years’ supply of land there is, not the government.  The removal of urban growth boundaries and other restraints on land use is equally important for landowners.  These boundaries and planning restraints effectively ‘nationalise’ their land preventing those with land outside the boundaries from obtaining a fair value for it.  It further inflates the value of land within the boundaries resulting in wasteful lobbying to have land rezoned.  Corruption of public officials in dealing with zoning changes is not uncommon.

Another factor that contributed to land price hikes during this period years was the way “up-front” infrastructure costs, fees, taxes and charges were applied by state and local governments. In some capital cities, these charges added more than $100,000 to the price of a finished allotment.  The question of infrastructure costs of growing cities – in particular who should pay for new infrastructure on the urban fringe is often raised.   The answer is obvious – home buyers. But this is the wrong question. The question is not “who should pay?” but “when should they pay?”

Local government believes home buyers should pay ‘up front’ for the cost of their infrastructure. Others, like myself, believe home buyers should not have to pay for their infrastructure “before” they use it but should be allowed to pay for it “as” they use it as was the case in previous generations. It is simply not equitable to expect young homebuyers – those least able to afford it, to pay for the cost of infrastructure before they’ve used it when existing home owners who live in established suburbs (many of whom do not even have mortgages) were not asked to pay for their infrastructure before they used it but were able to pay for it “as they used it” through their rates. First home buyers on the urban fringe are now subsidizing, through their electricity, water, sewer and council rates, the massive repair and upgrading of existing, older infrastructure in the inner suburbs in order to accommodate wealthier ‘in- fill’ homebuyers.

Leaving aside the fact that infrastructure developed to accommodate 1,000 to 2,000 people per square kilometre simply cannot now withstand housing densities double that number, the cost of upgrading existing inner suburban infrastructure is significantly greater than the cost of providing brand new infrastructure on the urban fringe…

One of the more pernicious aspects of high land prices ie high mortgages, is the forced misallocation of capital and family income into mortgage payments instead of higher standards of living, assets, goods, travel, children’s education, appliances or even foregone income to spend more time at home…

In creating the conditions for home ownership to become the privilege of the few rather the rightful expectation of the many, state governments have produced intergenerational inequity and breached the moral contract between generations…

To fix the problem for good and ensure that future generations do not suffer the same fate we need to do five things:

1. Where they have been applied, urban growth boundaries or zoning restrictions on the urban fringes of our cities need to be removed.  Residential development on the urban fringe needs to be made a “permitted use.”  In other words, there should be no zoning restrictions in turning rural fringe land into residential land.

2. Small players need to be encouraged back into the market by abolishing compulsory ‘Master Planning.’  If large developers wish to initiate Master Planned Communities, that’s fine, but don’t make them compulsory.

3. Allow the development of basic serviced allotments ie water, sewer, electricity, stormwater, bitumen road, street lighting and street signage.  Additional services and amenities (lakes, entrance walls, childcare centres, bike trails, etc can be optional extras if the developer wishes to provide them and the buyers are willing to pay for them).

4. Privatise planning approvals.  Any qualified Town Planner should be able to certify that a development application complies with a Local Government’s Development Plan.

5. No up-front infrastructure charges.  All services should be allowed to be paid for through the rates system ie pay ‘as’ you use, not ‘before’ you use.

Given the vast social and economic benefits that flow from homeownership, restoring housing affordability should once again become one of our nation’s most important priorities.

Regardless of whether you agree fully with Bob Day’s submission, it is reassuring to have someone entering parliament that genuinely cares about housing policy and the issue of housing affordability. I wish him well.

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Leith van Onselen

Comments

  1. While in general agreement re Mr Day’s comments. I have to say again, cause and effect is being confused. The root cause of the whole mess is teh structure of the economy itself. We rely on debt and asset sales to fund ourselves so that, pretty much, all employment we have is related to government and then servicing each other. Government centres itself in the capital cities and the elite certainly don’t want to go to some regional centre where there are none of the luxury facilities there are in Sydney. As DR Smithy would argue ‘ who wants to live amongst a stupid bunch of country bumpkins anyway?’
    Then we create a whole lot of jobs around servicing ourslerves in the big cities.
    The sort of restructuring talked about in these pages and by Mr Day is really only papering over the massive fracture that is our economy. A more productive economy would be far more decentralised making all the infrastructure and land cost so much less.
    Having said that nobody is much intersted. Glen, Parko et al live in the cities. None of those who really rule us i.e.elite public servants, Bnakers and lawyers have tjhe faintest idea of anything that happens outside Sydney and Melbourne. University professors occupy their city rareified air. There is no such thing as the external account so we don’t actually need to produce anything.
    Nothing will change

    • As DR Smithy would argue ‘ who wants to live amongst a stupid bunch of country bumpkins anyway?’

      Seriously ?

      Are you really that insecure you need to lie about someone you disagree with just to get some attention ?

      • He probably got the person who said it, wrong. I’d take your word for it that it wasn’t you.

    • smithy is right here flawse, I’m pretty sure he actually advocates sprawl/moving out of the center where there is the capacity to commute in reliably.

      • If so I do a[pologise…the impression I have got from him is that everyone west of the range is some sort of rural half-wit.

    • Regional cities don’t do themselves any favours by

      i) Restricting the supply of land, when they comparitively have more of it.

      I mean seriously, I can understand how high housing prices manfiest themselves in capital cities… but regional cities? A new build in a city like Collie even (Collie !!!) costs over 5 times wages.

      So your neck of the woods, Tamowrth, Armidale, Warwick, Bundaberg?

      Are they trying to compete with capital city dwellers by expanding the arbitrage gap? it seems their trying to maintain price growth parity

      ii) They continue to vote the national party, in a coalition whose policies that destroys market efficiency.

      make housing $110,000 for a 3×1 weatherboard home, have NBN, and make some commerical space as cheap as possible, and watch peope attempting to innovate rush that such a area.

      Then you will be immune to martin places’ price settings or the opinions of university professors.

      • Agree RP We all have a tendency to shoot opurselves in teh foot in this country. But Nothing is going to happen in regions until the economy is sorted….and that probably isn’t going to happen iun my lifetime…just bring in more migrants and park them in Sydney and melbourne, build shops and infrastructure to get them all to the city centre (sort of)

    • migtronixMEMBER

      Oh on the attitude to the locals you’re right flawse, but strictly speaking drsmithy doesn’t mind the locale.

      • Oh on the attitude to the locals you’re right flawse, […]

        No, he’s not.

        Moreover, I’ve explained my background (small Central Qld town) and that I don’t, nor have any desire to, live in Sydney, on multiple occasions.

        I have zero issues with country people because I am one. I live in Brisbane because a) I have family there and b) it’s the smallest place I can find meaningful work in my field.

    • “The first, and major, step in restoring housing affordability lies in governments stepping aside from the land management role and allowing the natural forces of supply and demand to return to the market.”

      Never going to happen while developers are allowed to landbank.

  2. I don’t agree with the FF ideology, but this is a fantastic piece of work by a politician.. The whole of highly paid bureaucracy in the Treasury and the RBA couldn’t have come up with a better diagnosis and a plan to rebalanced the economy away from mining and the FIRE sector.

    • I completely agree with ff ideology and this piece is a logical extension of their values as much as constipated supply flows from the greens and bank friendly policies flow from lab/lib. Keep up the good work Mr Day.

    • I completely agree with the FF ideology. To be honest families in general who love and care for their children have the most exposure to the country’s future if they want the better for their kids. It’s amazing when I talk to families the issues they care about compared to people without children. For example “it may not affect me that behaviour on television, but I don’t want my kids influenced by that” or “I want to be able to have grandchildren someday living near me, they will need a house” or “I want the life I enjoyed to be preserved for future generations because I see things getting worse all round and I don’t want that for my kids”. I’m young but I still see these people and think they care more than me – I will complain but in the end as long as I have a plan to get through the pain I won’t protest or start a political party.

      • You don’t need to have kids to be concerned for them – just a desire for a better society and to leave the place with as least damage as possible for future generations.

        Often people who have no kids have a less specific concern for a particular group of kids and have regard for the general welfare of children.

        Parents can be very narrowly focused when it comes to the fruit of their loins.

        But this is a minor quibble and a big thumbs up for Senator Day.

      • “Often people who have no kids have a less specific concern for a particular group of kids and have regard for the general welfare of children.”

        +1 i agree with pfh007

  3. Great work from Bob Day. I am hopeful that he can get together with Scott Ludlam and other Senators to put pressure on the Abbot government to effect change. What is the best way to get this message out in the MSM to educate our young to keep out of the market for the time being until housing becomes more affordable?

    • Sheltie, the greens are anti family and pro urban containment. Doubt there will be much agreement there.

      • General Disarray

        The Greens aren’t anti-family. They just don’t discriminate against people that might not fit the traditional family mould.

      • By being pro containment they are anti-family. Most families I know leave the city and migrate to the suburbs when they start having children. I know in my work quite a number of people have done that ancedotally.

        City property is great for adults, not so great for families and children no mater how the planners try and sell it. I see people move from the city to the Central Coast here in Sydney – can’t imagine a bigger change than that (i.e past the UGB to get affordable land). Government is trying to persuade forming families in general to accept less than their generation got – that’s all I see when I see these new housing developments. Smaller roads, less trees, cheap housing that won’t last 20 years – and it all costs more in real terms than they had to pay to live closer to the city.

      • Green’s Senator Scott Ludlam is a very smart man, and I believe in the interests of housing affordability he can convince his colleague’s to soften their stance on Urban consolidation and land reform. Scott has been doing some excellent work on the homelessness and housing affordability issues for years with little support. He will get more support now with Day and other Senators speaking up more. He will certainly be pushing for negative gearing and capital gains tax reform.

        http://scott-ludlam.greensmps.org.au/content/media-releases/housing-affordability-australia-%E2%80%98world-class-outrage%E2%80%99

        http://scott-ludlam.greensmps.org.au/content/media-releases/shocking-figures-homelessness-highlight-need-national-agreement

      • By being pro containment they are anti-family.

        This sort of absolutism is stupid and unproductive.

        The Greens aren’t against families living in houses in suburbia.

        What they’re against is uncontained urban sprawl because they perceive it has a negative environmental impact.

        Their folley is in not fully grasping how greedy people will land bank, speculate, etc to drive up prices even when there are physically enough houses for people to live in.

        Indeed, I expect the Greens would be quite happy to see a large number of smaller, decentralised population centres – so long as they were all linked by high-speed rail and not multi-lane highways.

      • Your points are good about the Greens, Smithy, they are just economically ignorant. Ironically, economic ignorance seems to result again and again in political history, in more harm being done via unintended consequences, rather than any intended good being done.

        “…..I expect the Greens would be quite happy to see a large number of smaller, decentralised population centres – so long as they were all linked by high-speed rail and not multi-lane highways…..”

        Yes, but that would be ignorant of them too. They don’t understand “whole systems”. Canal-based transport actually beats rails on the specifics that anti-car ideologues are focused on. However, there is a reason rails superseded canals, and a reason roads superseded rails, in terms of “systems” undergoing Kondratieff cycles. Most new rail based “investments” now will cost more per person km of travel, and emit more CO2, than the existing trend for private cars. And forcibly curtailing the mobility of cars on roads has drastic unintended consequences for economic land rent costs and for curtailment of economic activity, productivity growth and income growth.

        Rail based corridor-shaped urban systems compared to amorphous “go anywhere from anywhere” urban systems, are like computers using magnetic tape, compared to modern silicon wafers.

  4. Kudos to Sen Day for his efforts ….but this his supply side reforms are only half the story.

    Bob does not mention or recommend any reform to the demand side policy failure that has played a major part in producing our current disaster.

    6. NG for new builds only

    7. Return pop growth rate to 1%

    8. 80% Max LVR

    9. Stop cutting the OCR

    10. Require copy of purchasers passport/FIRB approval be attached to registration of sale of all existing dwellings + FIRB audit of last 1000 sales in Sydney

    • Agree The Patrician.
      Investors are running amok with no relief in sight.
      While tax system heavily advantages “investors”, potential FHBs might as well give up.
      Agree:
      6. NG for new builds only
      7. Return pop growth rate to 1%
      8. 80% Max LVR
      9. Stop cutting the OCR
      10. Require copy of purchasers passport/FIRB approval be attached to registration of sale of all existing dwellings + FIRB audit of last 1000 sales in Sydney
      One more: 11. Fund appropriate infrastructure via additional land tax to cope with our world-beating immigration rate

    • I think he can leave the demand side to others.

      Just saying “We need to reduce demand” sounds bad as it implies that people want something and they should be stopped. That will always be a hard sell out of the box.

      Certainly demand side measures can bring quick relief but they require lots of political capital and balls and that alone means they have poor prospects having regard to our political and policy pygmies.

      Talking about demand measures will always distract because there are plenty of people who make a buck out of high demand or have a lot invested in high demand. They will fight and kick and scream and everyone forgets about supply.

      You only have to look at many of the recent threads to see how ugly the ‘demand’ arguments get – that one about Chinese buyers was particularly unpleasant. And to what advantage?

      Ramping up supply fast is simply the best approach as it will extinguish almost all the excessive demand ‘issues’ we currently face.

      Supply is about freedom and letting people get on with their lives. Demand is about control and restriction and stopping people.

      Most importantly, increasing supply is something that a LNP govt will run with and considering how many LNP governments there are at the moment – this is critical.

      The only people who are opposed to ramping up supply are the environ-planning crowd who hate sprawl and want to force everyone with limited means to live in a flat or public housing.

      They are a tiny minority especially once all those people who hate change to their suburbs realise that allowing cities and regional towns to grow freely means they get to keep their inner urban ‘village’ lifestyle.

      Focus on the solutions that will have greatest support and the greatest chance of happening.

      Those solutions are all about supply.

      Importantly, Once supply is fixed putting in changes that affect demand will be much easier.

      Once NG has been rendered redundant by slow capital appreciation due to rapid supply responses no one will care if it gets limited to new builds etc.

      • Pfh you know I am not just saying “We need to reduce demand”.

        There are 2 major elements to the problem. I can’t see why we can’t work on both causes at the same time. Surely it is prudent to reduce pop growth to 200,000 per year until the problem is fixed?

        p.s. “NG for new-builds only” is about supply. Why not use the current excess demand to increase supply? 2 birds, one stone. (Not to mention the revenue and employment benefits)

      • Yes – I know that you are fully on board re the supply issues.

        I am not suggesting that the demand issues are not issues.

        I am just concerned that the debate about them can be distracting and provoke a lot of passion and there quite a few who relish the dust in the air that is created as they know it tends to paralyse action on all fronts.

        Nothing a property bull hates more than talk about supply.

        They often become instant ‘enviro’ warriors and planning enthusiasts.

  5. roylefamilyMEMBER

    I’m no social conservative but I agree with this.

    The joke that high mortgages are the new contraceptive is becoming no laughing matter. Young women used to be afraid of getting pregnant, now, as they approach 40, they are afraid of not getting pregnant. We have to get back to the situation where a couple can pay off a mortgage on one income so they can start a family in their late 20s, not in their late 30s or early 40s.

    • And sorry to be cynical – but if I recall correctly – the later in life one has children – the more likelihood of developmental problems: both mental and physical.

      This era is the gift that keeps on giving for generations – in ways we can barely imagine, let alone foresee.

      Might need to create a future fund for specifically these problems.

      (sigh)

    • “We have to get back to the situation where a couple can pay off a mortgage on one income”

      Neither the Libs nor Labor would go for any policy that would result in that.

      The Libs need as many workers in the system as possible to maintain productivity and company profits.

      Labor needs as many workers in the system as possible to maintain union membership numbers and fees.

      No major political party has any interest in families being able to get by on one income.

    • “We have to get back to the situation where a couple can pay off a mortgage on one income”

      Then you need to get on board the (alas, very small) anti-usury bandwagon. Because usury-based “money” — necessitating ever-growing debt/”money” supply — is The central reason why it is no longer possible.

  6. Stable Population

    Bob Day works in the housing industry… is a home builder. I.e. part of the construction lobby.

    Don’t take too much notice of a man with such vested interests, especicially when he dismisses the root cause of the problem – population growth (demand).

    • No vested interests in growth containment, then?

      The total “value” of land in a city increasing from 10 billion dollars to 200 billion in 10 years?

      No-one would be interested in that, no of course not.

      Lots more money to be made actually building stuff, taking risks and employing people and passing on land costs whatever they are, to end buyers, in a volatile market….

      Sarc off…….

      • Stable Population

        That depends on his business model.

        Greenfield house builders want land and population growth.
        High-rise builders want land lock and population growth.

        What does sarc mean?

    • Stable population,

      Your concern about population growth is warranted and should be pursued.

      However, there is nothing wrong about arguing for flexible and responsive supply whatever ones views might be about population growth.

      Your job is to convince people that population growth should be slower.

      Whatever the growth rate housing supply should be flexible.

      • Stable Population

        Agreed.

        The only point I’m making is population (demand) has to be in (50% of) the discussion, otherwise we cannot genuinely deliver sustainable housing affordability.

        Bob Day is a home builder, specialising in greenfield building. He sees stabilising population as a thtreat, so only really focuses on supply.

    • SP

      Even if immigration was stopped immediately and natural increase is at 2.0 (replacement level) more houses will always need to be constructed as family formation occurs at a faster rate than deaths (families vacating homes through death).

      Thus, as long as people wish to procreate the need to build houses must become accepted as a fact of life.

      Any policies that render supply unable to respond to the rate of family formation is anti-family.

  7. Alexandra Chapman

    What a terrific article.

    Another thing to consider – the health of young families who don’t have the space to get “muddy” in the back yard.

    Remember dirt? Remember playing on the grass under the sprinkler on a hot day?

  8. I don’t really get his focus on urban fringe land supply. Surely it is just as desirable, if not more so, to address the constraints on supply of the more valuable “infill” land (eg environment and heritage issues, NIMBYism).

    I don’t have a problem with upfront infrastructure charges.

    • I don’t really get his focus on urban fringe land supply.

      Keep reading here and you will eventually get it.

      Extra supply can come from out, up or afar (fringe, infill, new cities)
      Any extra supply is good for lowering prices and getting more families into better housing. However a case can be made that supply on the fringe is the most beneficial for poorer people, younger people and bigger families. Perhaps this is why Bob Day supports it. Bob Day is an experienced builder. Perhaps building on the fringe is what he knows the most about. He knows this will work. By contrast infill development has a history of failure.

      • TC
        If you free up supply generally the market should tell you which land is “most beneficial”.
        “Infill development has a history of failure”?

    • It is not an either/or issue.

      Certainly the current highly restrictive zonings on already developed land should be relaxed to allow owners to develop their land as they choose but why have more restrictions on land on the outskirts?

      Especially when relaxing zonings on existing land are very difficult to change politically as many people understandably resent having restrictive zonings relaxed after they buy into an area.

      People who bought into an area that limited development to detached housing don’t like that restriction lifted because it may mean a block of flats could be built next door.

      Personally, I think a 1 km radius circle should be drawn around every railway station in Sydney and zoned for office, retail, residential, quiet light industry (in any combination) up to 15 storeys. That circle is walking distance to the station and will leave most of the suburb with the existing restrictive zonings (or a mild relaxation – dual occupancy, terraces etc). But even something as limited like this will be fought tooth and nail.

      All new land on the outskirts should be zoned from day 1 with a simple broad zoning that permits owners to change use without a bunfight. Allow office, residential, retail and light quiet industry up to 5-6 storeys. Initially the development is likely to be detached housing but it means that usage can change over time as demand requires. This is exactly how Sydney (and most cities) were developed before town planners and their complex patterns of zones destroyed the organic development of cities.

      A land value tax on this newly developed land from day 1 is also a must.

      Upfront infrastructure charges are simply a poor way to fund development. There are plenty of people who would be eager to fund the development in exchange fora steady stream of quarterly payments over 30 years.

      The only reason the govt stopped doing exactly that (which is what Senator Day recommends) is the hysteria about govt borrowing. Govt borrowing for this purpose is a slam dunk but if it is too scary for some by all means privatize the investment.

    • Dale SmithMEMBER

      The reason why the fringe is important is that it sets the price going back in, not the other way around.

      Even in what is now the CBD, there was once only one dwelling, and everything around it was fringe, and the city slowly or quickly spread out from there with the effect that the cost of land was cheapest on the fringe and progressively dearer as you got closer in.

      All cities worldwide show this trend, and it does not matter if the city/country has low/no growth containment policies or high growth containment policies. What is different is the price of property in cities/countries that have these two different containment policies. City that have high containment have higher prices, cities that have low containment have lower prices, irrespective of what else is happening with interest rates etc.

      This is because the effect of containment seems to also be able to capture and transfer any benefit of these other measures into the land price of land. EG lower interest rates increase demand but not supply so any benefit of lower interest rates is lost many times over in the increase that demand has caused property prices to rise.

      Whereas lower interest rates in a low containment city also increase demand, but because the supply side is not constrained, it can quickly increase so supply always equals demand, and therefore prices remain low.

  9. I for one thoroughly enjoyed this article. How many other politicians have expressed a concern for the young people of Australia who are now forming the base of this massive Ponzi pyramid? Also, is social conservatism such an evil? If we want real communities (and I accept some people don’t) in Australia then we need stable home ownership rather than burbs of transient rentier masses. Mr Day should be applauded.

  10. It’s interesting that the Senator has mentioned the impact of our wretched housing industry on government finances… THIS is how you speak to politicians (none of them like finances falling apart on their own watch)

    To date, the states are relishing the $billions in stamp duties… basking in the misery of homebuyers who must fork out tens of thousands for the simple privilege of buying a home.

    BUT, this zombie economy is s sucking money out of discretionary spending and thus GST…

    I’ve done a quick assessment of the impact of increased rental expenditure on GST (I’m not even going to bother trying to assess the drain that is mortgage payments – that’s for another day). Back in 2000, rent took up about 17% of household final consumption expenditure.. now it takes up about 21%… This is due mainly to higher rents, rather than more people renting over owning their residence.

    If Australians only spent the same proportion of their consumption on rent as they did back in 2000, then state governments could potentially receive $3 billion PER YEAR extra in GST alone… let alone the benefits that this extra discretionary income would have for our retail and tourism industries (amongst other industries)…

    Australia’s housing industry is nothing but a parasitic leech..

    • But the landlord pays income tax on the rent received, which is at a rate a hell of a lot higher than the 10% GST.

      Even if the property is negatively geared, the bank pays corporate tax on the profits made through the interest they’ve charged the landlord. It ends up being taxed one way or another.

    • Interesting point…

      Although the rates on income/company tax are >10%, I wonder what the real marginal rates would be – with the myriad of deductions (and offshoring).

      Nonetheless, the Commonwealth government gets funds from income/company tax, rather than the GST that goes to states (and who are responsible for health/edu etc). Part of the job is to get the state govts pissed off about housing, rather than maintaining the status quo. The Feds will follow if there’s a bottom up mutiny.

  11. I know it’s like trying to mix oil and water but I think the answers Australia needs are represented by Fam First AND the Greens.

    Bob Day is certainly correct in pointing out the need for supply side reform.

    Many people in the Greens (e.g. Scott Ludlum) are actively advocating the need for greater public sector investment in social housing,stronger Tenant’s Rights for renters and abolition of negative gearing.

    We need a two pronged attack on the ugly beast which is “Australian Real Estate”.

    • To be more specific the “ugly beast” that is mauling our productivity is “the high cost of serviced land”.

  12. Neville Gearless

    Bob Day, the best article I have ever read on this site!
    He demonstrated the social impact of housing policy brilliantly.
    Well done.
    FF is my new political party..

  13. Family first would seem to be an extreme group who, to benefit mainly young people who haven’t bought a house yet, would reduce the value of houses already bought and so cause many hard working Australians to have negative net worth because they have bought houses with debt in the last say 10 years (most US markets with smart/compact city policies lost about 10 years gains).

    I wonder/expect the policy was ghost written by one of the propoents from this blog or other similar researchers into property prices eg Souris, but then again the policy was written by a former home builder. It may be another example of talking your book (as I also can be accused of, but I would defend by saying it is also the book of maybe half a million other Australians (last 10 years) and maybe say 4.2 million other homeowners, or 12 Milion Australians living in owner occupied housing whose values such policies must reduce).

    As house prices fell it would likely cause concern among banks, cause a deflation like environment where no one bought because prices were falling, so why buy now and possilby reduce homebuilding for a year of two.

    It would likely promote savings by those who were losing equity in their homes, might provoke banks to call for additional equity from people whose houses were under water and would probably lead to a paradox of thrift effect flowing through to discretionary retail sales and further unemployment.

    To me, these policies of “forced” lowering of house prices through greatly increased supply are far more dangerous to average Australians than almost any other policy proposed by any other party. The “almost” is a CYA.

    Adding to supply to hold nominal prices at around today’s level might be a very sensible approach, but causing significant falls in nominal prices is a potential disaster.

    • @Explorer When you realise that the calamitous events you speak of are almost a certainty under the current situation, you will also realise why people like Sen Day are calling for a more orderly unwind.

      These policies will not mainly benefit young people. They will benefit all of Oz. Instead of wasting countless dollars putting a roof over our heads, we can actually spend the money and encourage economic growth.

      • They clearly will not benefit all of OZ. Like everything else including the AUD FX rate it is sectoral in the short to medium term and in the long term we are dead.

        If I thought it was good for me and countless other Australian’s I wouldn’t waste my time pointing out the adverse effects on many of us.

        Quietly keepng nominal prices stable through increased supply might be a good idea but significant reduction of prices is not good for about 2/3 of adult Australian’s and their children and very bad for most who bought with high leverage in the last say 10 years.

        You might one day be right about a calamity, but this thesis has been wrong for the past 5 or so years if not longer..

      • +1 flyingfox
        Yes some people would be worse off if prices fell in real terms but it’s their responsibility to be managing their own risk and divest if they are living beyond their means. It is essentially a trade-off, a negative hit to personal wealth for a large proportion of Australian’s in exchange for a new paradigm where Australian’s are forced to allocate their resources into productive investments. I’m all for the paradigm shift, the economy needs all the help it can get.

      • flyingfoxMEMBER

        @Explorer

        …and in the long term we are dead.

        What your progeny lives on no? Most of us are thinking about future generations not the current or past ones.

        … not good for about 2/3 of adult Australian’s and their children and very bad for most who bought with high leverage in the last say 10 years.

        That’s the price you pay when you invest in a risky asset…no. Your argument is akin to saying that the share market should not go down because it will hurt every Australian worker via their super.

        As way of disclosure, both mine and my partners parents have significant property holdings and own their homes outright. I fall very firmly in the group you are talking about….yet here I am.

        but this thesis has been wrong for the past 5 or so years if not longer..

        I only need to be right once. You sir have to be right for all of eternity. I like my odds…

        Having said that… until the recent hysteria, most people were losing money in housing as an investment over the past 5 years. Moreover, the phenomenon of high house prices is a recent one, since 1996 and 2001 in particular. Economically this is a medium term scenario and the result of many storms colliding and bad decisions too boot.

        The last 20 years are not all of history, neither are the last 50. So if this transient change is unwinding or needs to be unwound, why should my tax dollars be used to hold up a system that should not have gotten this bad to begin with?

      • Explorer,

        You assume that encouraging a more flexible, responsive and efficient land market will cause significant declines in nominal prices for existing land.

        That may or may not be the case.

        Certainly, rapid volatility in asset prices is not desirable but neither is ongoing market distortion especially when those distortions cause ongoing damage to the economy.

        In any event I think your concerns are unwarranted.

        Having regard to the absence of reform over an extended period I don’t think a rush of reform is something you need concern yourself about.

        What is more likely is that some governments in some states will start the process of reform and over an extended period we may see some of the worst distortions reduced.

        That is likely to result in, at worst, an extended period of nominal price stagnation for existing dwellings.

        If that prospect is of concern there is an easy solution – transition out of the relevant asset class at a suitable time (residential property consists of many diverse individual markets – some might not stagnate at all).

        There is no future in maintaining distorted markets for a fundamental economic input.

    • Explorer, are you too young to remember that in “the old days” we used to have a recession every 8 or 9 years. Consecutive Federal Governments have been postponing these recessions for 23 years by pandering to vested interest groups, and handing out taxpayers money right, left, and centre to pump the property bubble. No politician wants a recession “on their watch” so to speak, because they get the blame and get voted out of office. But some would say that a regular recession is a “necessary evil” to keep prices in check, and punish the speculators. As Keating said “The recession we have to have”. So if existing homeowners and young naïve people who have been sucked into the property bubble in recent years end up with negative equity, blame the politicians for what happens, because they have the power to make changes to make society more equitable. Everything is now completely out of kilter, and it is inevitable sooner or later we will be heading for a hard landing, unless the politicians can be coaxed by Bob Day and other Senators to get change under way and maybe, just maybe, they can engineer a soft landing.

      I believe Bob Day has good intentions.

      http://www.bobday.com.au/

      • I worked in accounting & finance for most of my career and was a keen follower of markets since about ’72. I remember well the 4 year stock market cycle (Austin Donnelly, investing for profit in the 70’s) and the crashes/recessions of 74, 82, 87, 92/3 and 2003 as well as 2008. I remember Mainline, Parkes Developments, Home Units of Australia.

        My point is that a significant fall in nominal prices eg to 3x median incomes as often said to be a level in many countries and in Australia for many years would be a calamity for many both directly and indirectly. I remember my father talking about the depression and he (on a ware service pension) lost some savings in HG Palmer debentures.

        I would not wish the harm of a property price crash and resultant unemployment on anyone, which is why I suggest that a long nominal stagnation is a far better method of adjustment.

    • Of all the cockamamie reasons why we can’t do anything about this economic cancer, this is the one I hate the most.

      “There’s a huge number of people who blindly leveraged themselves to the eyeballs without the slightest thought beyond the propaganda that was shoved down their throats and their interests need to be protected, no matter what the long term damage to society or the prospects of those born later or with more sense.”

      Bollocks.

      What about all those hard working cotton farmers who spent good money on slaves?

      What about all those sixth form boarders who themselves had to go through the hazing when they first came to school?

      The sad thing is of course that this argument will end up winning the day, to the detriment of all those who did not or could not take part in the insanity.

    • arescarti42MEMBER

      The argument that a significant fall in prices is unfair to the majority of homeowners is complete bollocks.

      To start off with, a large proportion of homeowners bought 15+ years ago before the bubble, for these people any fall in prices is a hit to wealth that they didn’t earn, and don’t deserve.

      As for the remaining few that leveraged to the eyeballs to buy property towards the end of the bubble, for the ones that bought a place to live, well falling prices aren’t going to take their home away. At the end of the day, they made a decision to pay X amount for a place to live, and that’s what they’ll get.

      As for those that bought to speculate on rising prices, does the government manipulate horse racing to ensure that gamblers don’t lose money? Do they manipulate the stock market to ensure that investors in stocks don’t loose money? No. So why should they interfere in the housing market to backstop the terrible investment decisions of property speculators at the great expense of those that want a place to live?

    • So it’s ok for governments to actively pursue the rapid escalation of house prices but not the rapid decline? Reminds me of the arguments against the abolition of slavery! What about all the money I’ve already invested in this evil system? I pity you.

  14. The Real Estate mob. Do you know in Perth this morning the top news story on the local radio channels was that house prices in Perth will rise again this year, the source of this information? Well I never, the source is the Real Estate Industry of Western Australia.

  15. This guy has it nailed but I’m not sure what he expects to be able to do about it in the federal parliment… these are all state issues.