Rampant land inflation behind 300% increase in home prices

By Leith van Onselen

The Queensland Productivity Commission has released a new report into housing affordability which finds that:

Brisbane house prices have increased around 300% in real terms since 1986 (a bigger increase in than the Australian capital city average of 262%), primarily driven by the cost of land rather than the quality of housing. However, real prices have changed little since 2009, and, outside of south east Queensland, they have generally fallen.

Housing affordability in Queensland: – measured as the ratio of income to house prices, deteriorated considerably from the 1980s, but has roughly stabilised since about 2010. Measured as a proportion of income, has improved over the last five years for the median household, both in terms of rents and mortgage repayments. This is a bigger improvement than in Australia as a whole.

Compared to major international markets, housing affordability in Queensland’s urban markets remains poor.

Housing affordability problems are most acute for younger people and lower income earners. More than a third of low-income households (37%) are in rental stress. These households have the most to gain from improvements in the functioning of housing markets.

Most Queensland households (65%) own their home. However, this proportion is lower than in other states and has fallen more over the last 20 years. Home ownership is lower among younger and lower-income households, and is falling, but it remains unchanged for households over 65 years of age.

Queensland’s housing stock is dominated by houses (74 per cent) but this is slowly changing. Younger people, families and couples are increasingly living in townhouses and apartments, while older households tend to stay in houses rather than downsizing.

Governments significantly affect how housing markets operate and their outcomes. As housing markets are complex, no single measure will address housing affordability issues. Efforts are best focused on ensuring policies do not unduly affect housing supply and demand. Key policies include tax and planning.

The Report notes a bunch of supply-side factors that have contributed to rising housing prices:

As noted earlier, the increasing cost of land is a significant contributor to the rising price of housing. Hence, factors that affect the supply of land, as well as those affecting construction costs, are both significant…

The supply of housing refers not only to numbers of dwellings, but also to their type, quality and location. A misunderstanding by planners and developers of what people want can lead to mismatches between the housing stock and what people would prefer, which may last for many years…

Recent reports suggest that real construction costs are not a significant driver of escalating house prices (NHSC 2013, p. 90; Stanford 2016). Construction price have only slightly exceeded inflation—they cannot explain most of the increase in the price or cost of Queensland housing. Since 1998, Brisbane house prices have grown several times faster than measures of construction prices (Figure 28)…

One view is that the increasing cost of land, particularly in urban areas, is the ‘most significant driver of increasing costs’ in housing (Yates 2011, p. 271). The increase in house prices appears to have been caused more by changes in the value of land than by improvements in the quality of dwellings or increases in construction costs. Since 1990, the ratio of the value of dwellings to gross state product (GSP) has changed little, while the ratio of residential land value to GSP has approximately doubled (Figure 29)…

Most of Queensland’s population (84.5 per cent) live in areas the ABS classifies as urban—accounting for just 0.7 per cent of land in the state (authors’ calculations based on ABS 2017g). While land overall is not scarce in Queensland, well-located land is…

In practice, planning does not always achieve its stated goals, and state and local governments are not always aligned in their understanding of or approach to planning…

The supply of housing depends not just on availability of land but also how fast it is developed. The New Zealand Productivity Commission (2015, p. 80) found the practice of withholding land from development widespread and with many causes…

Apart from developers, much of the land supply is owned by farmers, investors and other private land owners that may not sell their land to make way for housing development or may want to hold it to realize a higher price. The number of residential lots approved for development by councils is much smaller than broadhectare land. About 18 per cent of Queensland’s and 16 per cent of southeast Queensland’s land supply is approved for development…

The New Zealand Productivity Commission (2015, p. 4) suggested strategies to encourage development of housing rather than holding should focus on:

  • increasing certainty about what can be developed
  • reducing the scarcity value of land
  • influencing holding costs, to reduce expected returns on delaying development…

Infrastructure charges are a substantial component of development and construction costs. Developers will seek to pass these charges on to consumers through new house prices…

The Henry tax review argued that poorly targeted infrastructure charges, can impose a range of unintended distortions on housing markets

It also notes demand-side factors that have also driven-up prices:

Australia’s population growth has been high in recent years compared with other developed nations, due to a high rate of immigration. This is borne out by net overseas migration over the last decade well above the historical average19 (PC 2016, pp. 339—340) and both the third highest proportion (27.7 per cent) of the population born overseas (OECD 2017, p. 37) and population growth rate (OECD 2018) of developed nations.

If average household size falls—as it has in Australia, from 3.1 in 1976 to 2.6 in 2016 (ABS 2012, ABS 2017e)—the number of dwellings demanded increases faster than the population. Lower birth rates and increasing life expectancy, which have led to an ageing population and smaller families, combined with other changes such as an increase in sole person households, have contributed to this change (Baker et al. 2013, p 17)…

Brisbane has had more population growth through younger people, who are more likely to form new households…

Increasing urbanisation demonstrates that many Australians prefer to live in large cities to take advantage of the economic opportunities and amenities. Jobs have shifted towards the inner cities of Australia’s largest cities (Daley et al. 2018, p. 29). The benefits cities offer mean that location matters, which pushes up well-located house prices (CEDA 2017, p. 18; Stillwell, cited in The Senate 2015, p. 102)…

Household capacity to pay for housing exerts a strong influence on the demand for dwellings and house prices (NHSC 2009, p. 24)…  financial deregulation, which has increased access to credit and allowed households to increase their leverage (Kirchner 2013, p. 13)…

State and federal governments have introduced schemes to increase the purchasing power of first home buyers, including First Home Owner Grants (FHOGs), stamp duty concessions and shared equity schemes…

Foreign direct investment (FDI) in real estate in Australia (as a share of total FDI) increased by 36.8 per cent in 2015–16…

A range of taxes, tax concessions and subsidies affect housing in Australia. Those most commonly discussed, in the context of housing affordability, are negative gearing, capital gains tax concessions, and stamp duty… The RBA’s (2015, p. 23) submission to the 2016 Home Ownership Inquiry said that concessions to property investors were at the more generous end of the range of practice in industrialised countries…

If concessions were removed, house prices would likely decrease (all else being equal), but this would be because the expected after-tax returns on housing had decreased…

Stamp duties discourage housing turnover and matching of people’s preferences with appropriate housing—which reduces labour mobility and matching, transport efficiency, productivity and incentives to downsize…

Broad-based land taxes are, in principle, preferred to stamp duties because they do not have the same distorting effect on decisions. The amount of land tax paid does not depend on how often a person moves, and many would regard this as fairer. Taxes could be paid over a longer period (HoR 2016, p. 36)—reducing upfront costs and improving opportunities for first home buyers to enter the market.

Stilwell (The Senate 2015, p. 80) argued that uniform land tax would drive out the speculative element of the market and bring land price inflation under control. Poghosyan (2016) found a statistically significant correlation between higher property taxes and lower housing price volatility.

… a broad-based land tax, would promote more efficient land use by imposing a holding cost or opportunity cost on land. This cost on owners reduces the viability of withdrawing or holding back supply from the market…

Finally, the Paper concludes by stating that “governments should concentrate their efforts on ensuring policies do not unduly inflate demand or constrain supply over time. Removing existing distortions may be more effective than additional responses”.

Regular readers will know that MB offers the following ‘solution’s’ for housing affordability:

  • Normalising Australia’s immigration program by returning the permanent intake back to the level that existed before John Howard ramped-up it up in the early-2000s – i.e. below 100,000 from 210,000 currently [reduces demand];
  • Undertaking tax reforms like unwinding negative gearing and the CGT discount [reduces speculative demand];
  • Tightening rules and enforcement on foreign ownership [reduces foreign demand];
  • Extending anti-money laundering rules to real estate gatekeepers [reduces foreign demand];
  • Banning borrowing into property by SMSFs [reduces speculative demand]; and
  • Providing the states with incentive payments to:
    • undertake land-use and planning reforms, as well as provide housing-related infrastructure [boosts supply];
    • swap stamp duties for land taxes [boosts effective supply];
    • reform rental tenancy laws to give greater security of tenure [reduces demand for home ownership and reduces rental turnover]; and
    • force developers to supply housing for lower income earners via inclusionary zoning [boosts supply of affordable rentals].

We all know what needs to be done.

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