Rising land prices behind global property boom

ScreenHunter_18 Jul. 05 10.22

By Leith van Onselen

Over the weekend, VOX published interesting research paper examining long-run house price trends across 14 advanced economies and some of the reasons behind the rapid global escalation of house price costs since the 1970s.

First, the paper presents the (unweighted) mean and median of the 14 house price indices since 1870, which shows that “house prices in the early 21st century are well above their late 19th-century level, and increased in all advanced economies in the long run”. It also shows that house prices have exhibited “a hockey-stick pattern” whereby “real house prices remained broadly stable from the late 19th century to the mid-20th century, and increased strongly in the following decades”. The end result is that “real house prices have approximately tripled since 1900, with virtually all of the increase occurring in the second half of the 20th century” (see next chart).

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House prices have also outpaced incomes, particularly over the past few decades (see next chart).

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As has been frequently argued on this site, the paper attributes the lion’s share of the growth in house prices to escalating land values, rather than construction costs:

While construction costs have flat-lined in the past four decades, sharp increases in residential land prices have driven up international house prices. Our decomposition suggests that up to 80% of the increase in house prices between 1950 and 2012 can be attributed to land price appreciation alone.

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The paper pins the escalation of land prices globally on a cocktail of demand and supply-side factors:

From the 19th to the early 20th century, the transport revolution – mostly the construction of the railway network, but also the introduction of steam shipping – led to a massive and well-documented drop in transport cost. An important side effect of the transport revolution was to substantially augment the supply of economically usable land.

…this land-augmenting decline in transport costs subside[d] in the second half of the 20th century, so that land increasingly became a fixed factor.

At the same time, zoning regulations and other restrictions on land use also inhibited the utilisation of additional land in recent decades, while rising expenditure shares for housing services added further to rising demand for land. Yet our stylised facts are also compatible with other explanations that help explain surging land prices in the past few decades, such as growing subsidies for home ownership or easy borrowing condition…

The paper’s conclusions are correct, in my view. While the escalation of house prices has been largely a global phenomenon, markets that have had 1) liberal land supply/planning and/or 2) have not juiced demand via tax incentives or easy credit, have tended experience far less price appreciation.

Examples of the former include many markets in the US where there are few regulatory or geographical constraints on land-use, such as Texas and Georgia. There, land/house prices remained relatively stable and affordable, when compared against the supply constrained “bubble” markets, even in the lead-up to the US housing bubble (see next chart).

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Germany is another market that has bucked the global trend (for reasons explained previously). There, house prices have remained roughly stable since the early 1970s in real terms, despite strong growth in incomes and positive population growth until 2006.

Obvious policy lessons arising from the paper are to remove artificial restrictions on land-use and planning, remove policies that artificially raise demand, such as tax concessions (negative gearing) and subsidies to first home buyers, as well as facilitating the adoption of ‘telecommuting’ so that workers no longer need to travel to a central location for work.

Expensive land/housing is not a fait accompli, but rather the manifestation of poor policies on both the demand and supply-sides.

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Unconventional Economist
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    • I think I would change the word “boom” in the title to “bubbles”.

      There is a world of difference between real and illusory wealth creation.

      Housing bubbles in reality are poverty creation … fools gold.

  1. A mate, who knows my thoughts/interest in the subject pointed this one out to me on friday night.

    He posed to me the question of if there is anywhere else in the world that has constipated land supply like it was in Australia – and I noted the UK, parts of the States, large chunks of Europe etc..

    He posed the question of if there was anywhere in the world which juiced demand and access to funding like we do in Australia and i noted Canada, the US UK all the usual.

    Then he asked if there was anywhere else in the world where the banking system lent 60% for mortgages and 40% for somehting else productive – my reply was nup.

    Then he asked if there was anywhere else facing the economic adjustment Australia is stepping up to the plate for – involving mega private debt, a profoundly uncompetitive exposed sector, a shrinking exposed sector not plugged into any major market anywhere (unlike say the Canadians) – and i couldnt help but think the answer was a straightforward nup.

    • @Gunna

      You are wrong! All the families on 130K buying houses in the fringe at 360K at 3x income. We have affordable housing, no bubble and the wall of Chinese money is just coming our way.

      All we need is for the whiners to stop whinging and buy a house….and an IP while you’re at.

      Now where are the t-shirts with “Be calm and take a mega mortgage for Team Oz”

    • Gunna, FF has a point about the wall of Chinese money. Is what we are seeing a conversion of melbourne into the next shanghai or Mumbai?
      If so the outer ring will become middle and the middle inner……
      The problem is this could go in for a long time, and be divorced from the local economy.
      Further it is unrelated to the charts that Steve Keen and UE rely as it is unrelated to ox GDP or wages, merely the desire to get money and people into Australia.

      • I must confess I thought FF was joking a bit…..

        I agree the Chinese wall of money changes the immediate adjustment shape and timing, but I dont think it changes that there will be an adjustment.

        On another note I drove through Melbourne yesterday and couldnt help but think all those monstrosities in Southbank and along the freeway/docklands are god awful ugly by and large. A sort of 22nd century Melbourne Krushchevka – and give them 15-20 years there will be howls of protest about them.

        I keep getting told occupancy rates in them are very low (including from a mate who designs them – yes he thinks they are ugly too but ‘that is what the clients want, and cheap’) does anyone know of any data on this?

      • If it wasn’t obvious, my post was complete sarcasm, continuing over form the weekend macro posts with one unnamed mortgage broker.

        Personally, I think the Chinese wall of money is or will soon be behind us now that their government is starting to take notice. Those in the know where getting out 18 months ago.

        It might be an issue but I suspect the now that the locals are beginning to tale notice as well, it will become political poison for this to continue. Just see what happened in Canada.

      • FWIW a house in my street (Hills area Sydney) went for auction last week but failed to sell. The Agent told them they would get 1.2-1.3m maybe even more!
        I think it got to 1.1m and is now on the market for offers above 1.2m.
        I was keeping my eye out on inspection days but most lookers were in Toyotas and Mazadas….and this is an area that has had a lot of RMB (rorters money boom) dropped into it in the last 12 months.
        I get the feeling that those in the know have pulled their heads in….for a while.
        I think the fair price for the house would be 7-800k but if it was In a German city then say about AUD 400k IMHO

  2. There was an article on the weekend suggesting that those who telecommute work longer hours for less money.

    IMO it will always comes back to people living near the limits of their means. Reduce living expenses or cost of debt, and either wages will fall or house prices will rise.

  3. What he realised, and more clearly as time went on, was that money-worship has been elevated into a religion. Perhaps it is the only real religion-the only felt religion-that is left to us.

    Money is what God used to be. Good and evil have no meaning any longer except failure and success. Hence the profoundly significant phrase, to make good. The decalogue has been reduced to two commandments.

    One for the employers-the elect, the money priesthood as it were- ‘Thou shalt make money’; the other for the employed- the slaves and underlings’- ‘Thou shalt not lose thy job.’ It was about this time that he came across The Ragged Trousered Philanthropists and read about the starving carpenter who pawns everything but sticks to his aspidistra. The aspidistra became a sort of symbol for Gordon after that.

    The aspidistra, the flower of England! It ought to be on our coat of arms instead of the lion and the unicorn. There will be no revolution in England while there are aspidistras in the windows.”
    ― George Orwell, Keep the Aspidistra Flying

  4. By gum…!

    If you find the original paper and read it, it is further ammo for what we are saying, Leith.

    There are outliers, especially the USA.

    They say:

    “…..this global picture conceals considerable country
    variation. Figure 16 demonstrates the heterogeneity of cross-country trends………Exploring the causes of
    such divergent price trends is an important object for future research, but is beyond the scope
    of this study…..”


    “…..A second central insight from Figure 15 is that the growth of real house prices has not been
    continuous. Our data show that house prices remained constant until World War I, fell in the
    interwar period and began a long lasting recovery after World War II. On average, it took until
    the 1960s for real house prices to recover their pre-World War I levels. Since the 1970s, house
    prices trended upwards and the past 20 years show a particular steep incline. In other words,
    real house prices in most Western economies stayed within a relatively tight range from the
    late 19th to the second half of the 20th century. In subsequent decades, they have broken out
    of this range and increased substantially in real terms…..”

    I regard the causes as self-evident. It is even more obvious if you look at urban land rent per square foot; “house prices” actually mask this. In the period following WW2, as the price of urban land per square foot fell, demand for space and other attributes of housing was discovered to be very price-elastic. People actually spent more in real terms than before, on many attributes of housing, because there was good value for their money that had been absent before.

    But as soon as you start running a racket in urban land, the economic rent per square foot RISES, and rises faster than any of the other attributes can be sacrificed.

  5. I don’t see how shipping costs have much to do with residential land prices. I would have thought that commuter transport (railways and cars) enabled factories to draw their labour from a much wider area than walking distance, and enabled workers to live out of sight of their workplaces, and that relieving the pressure to live close to work is what kept real house prices relatively flat from 1870 to 1950, notwithstanding the growth of industry and population. But trains and cars have not fundamentally changed in function since that time, and it may be no coincidence that land prices have escalated steadily since then (consistent with Ricardo’s views).
    So is it plausible to anticipate a similar market-flattening effect from universal high quality broadband infrastructure which makes another paradigm-shift in the cost of getting people to work (or work to people) and services to business? I don’t believe the Liberal government have thought this through in such terms but they might have an intuitive feeling that universal optic fibre to the home will change the world as we know it. Is that what they are worried about?

    • You are thinking in the right direction. What is staring the authors of this report in the face, is that automobile based development from around 1930 onwards systemically made housing more affordable even as houses got bigger and better, AND that the onset of the most significant price inflation in each country correlates with “save the planet” and BANANA urban planning policies even as houses reduce in land consumption.

      The failure of these authors to come right out and state the self-evident has a strong smell, to me, of fear of upsetting the anti-car, anti-sprawl progressive P.C. theocracy.

      They even mention “cars” briefly in the report itself, but leave this dirty word out in the abstract/exec summary and the conclusions. When it is obviously the BIGGEST factor!! Trains only bring ribbons of land into the urban economy: the distance/land price trade-off is steeper. Automobile based development in the first instance, filled in all the gaps between the radial rail lines, and secondly, kicked off a systemically more efficient urban form. As William Wheaton found in the paper (the title is self explanatory) “Commuting, Ricardian Rent and House Price Appreciation in Cities with Dispersed Employment and Mixed Land Use” (2002), the EFFECT of this dispersion and mixing is LOWER urban land rent and SHORTER commutes. And you can’t have this mixing and dispersion if you are trying to concentrate everything along a few rail lines!!

      There is another older brilliant economics paper that should be better known: Michael A. Goldberg, “Transportation and Urban Land Rents: A Synthesis” (1970). In fact as Goldberg points out, Robert Murray Haig in a 1926 paper, had the general idea right regarding the direction urban land rent was heading as a result of “friction” reducing in the interface between land and the transport system.

      Obviously a door-to-door fast transport method is much lower-friction than one requiring a walk at both ends, waiting times, and possibly transfers as well – especially if we are considering access to “the entire urban economy” from any given point.

      • Thank you PhilBest. Incidentally, to be accurate, rail transport was only accessible within walking distance of stations. (I mean before ubiquitous car ownership and park-and-ride facilities). There is no benefit in living “near a railway line”, unless the train stops for you. A railway divides communities as much as it connects them (you don’t want to live “on the wrong side of the tracks”). So the social effect of rail transport applies to a series of access points, not a ribbon. As you said, the motor car is the BIGGEST factor, that fills in ALL the spaces between.