Negative gearing, foreign investors, and immigration have nothing to do with the cost of housing
Negative gearing, foreign investors, and immigration have nothing to do with the cost of housing; The fix is simple: deregulate land use and remove government interference
Australian house prices have been on a huge upward trajectory since the 1980s, far outpacing both inflation and wages. The median price of all dwellings within Australia was $554,008 in June, 2014 . Only a median house price to household income ratio of under 3.0 is considered affordable. In Australia, this ratio is over 6 , and in some markets like Sydney, is nearly 9. Even in Hobart, the capital city of Tasmania, a small state struggling economically and with markedly less population growth than all other states, the median house still costs $338,000.
Overseas, in markets like Houston, a large US city growing faster than any Australian city, with a population of 6.18 million people in the greater area, the median house price is only $184,900 , merely half that of the small and economically depressed Hobart. In greater Atlanta, another fast-growing United States city of population 5.48 million, the median house price is even less: $150,000 .
According to the RBA, “the cumulative rise in dwelling prices since 1970 has been more than twice that for construction costs” , so the culprit for our high house prices can not solely be bigger and more lavish houses. The culprit, as it turns out, is the cost of land, or, more precisely, land appropriately subdivided, zoned, and approved to build a house on. As Bob Day notes in his Home Truths Revisted – The politics of home ownership article, in South Australia, the cost of a new block of land has gone from $15,000 a block (in inflation adjusted terms – today’s dollars) to $160,000 a block . Not only that “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”.
Additionally, blocks have got smaller, with the average block in South Australia now only 450 square metres, down from 700 square metres in the 1990s.
Rural land on the fringe of any Australian town or city is not expensive. This can be confirmed by anyone by simply looking up land for sale on any real estate website. Most of the time, this land is available for $10,000 a hectare or less, which is the equivalent of only $400 for a quarter-acre. Yet at the end of the process developers (and anyone else) must go through to actually build houses on this land, the cost has ballooned to up to $1,000,000 a hectare , and that’s before any infrastructure has been connected up to the new lots.
Then, lots need infrastructure, but it doesn’t cost $280,000 (the cost of a lot on the fringe of Sydney ) to supply basic infrastructure to a new lot. Lots outside Houston, Texas are as little as $15,000 each . The reason for this cost disparity lies solely with government land use regulation. Alan Moran writing in the Drum notes that in Melbourne, the Growth Area Authority identified 540 separate regulatory ticks required from when the land was designated as approved for housing and a house’s completion . This inordinately complex and expensive process is the sole reason for Australia’s unaffordable housing.
The effect of strict land use regulation can be shown clearly when observing the difference in house prices in California and Texas. California mandates counties comprehensively zone and plan , thus restricting the amount of land available to build houses on. Texas, on the other hand, bans zoning by counties, and thus in most areas of Texas there are no restrictions on building new houses for people. Cities are allowed to zone, but developers can just build outside the city limits to avoid city planning authority; this gives cities an incentive to develop efficient, fair planning processes.
Californian house prices, because of their land use regulations, are still some of the highest in the United States, even after the 2008 crash. Texas’ house prices are some of the lowest, and there was no crash in Texas. Texas is both richer than California and growing faster.
If there were no restrictions on the subdivision of rural land, and no restrictions on building on those subdivisions, the cost of housing would fall dramatically. Anyone, including a developer, could purchase a rural block of land, or multiple such ones, at $10,000 a hectare, subdivide and start building houses. There would be no more paying $280,000 for a measly plot of land which is often no bigger than 600 square metres.
Australia has no shortage of land. According to Demographia only one quarter of one percent of Australia’s land mass is used for urban purposes. We are not in danger of running out. Australia also has more arable land per person than any other country in the world, at 2.13 hectares per person . We are not in danger of running out of that either.
Sometimes things like negative gearing, foreign investors, and high immigration are cited as reasons for the cost of housing in Australia. These factors have nothing to do with the cost of Australian housing. If housing supply in Australia could respond to housing demand, dwelling prices would not increase at all. When people demand more iPhones, Apple’s factories crank out more iPhones. The price per iPhone does not increase, because supply can meet demand. In Houston, Texas, and many other states in the United States, housing supply is flexible in the same way. Texas’ population growth, running at 2% a year between 2000 and 2010 (higher than Australia), did not yield higher house prices. House prices stayed approximately the same in that period of time, because developers could build new houses at an appropriate pace. This is because, as mentioned earlier, in Texas, counties are banned from zoning, and the state does not play a role in land use regulation. Restrictive covenants, which act like zoning, are used by developers to provide certainty to house buyers. Australia has been building less houses than are demanded, and consequently, prices have gone up. When banana plantations were destroyed by weather in Queensland, banana prices went up. The same principle applies with housing: supply and demand.
There is no shortage of land outside any major Australian city to build houses on. It is only a matter of the government letting us use it. This mismanagement of land has led to quite possibly one of the biggest misallocations of resources in history. The Australian economy is getting bent and distorted unprecedented ways. A few examples: business finds it difficult to get finance because all available capital is going in to houses; households delay childbirth because it takes longer to save up for a deposit on a home; households opt for both parents to work because a single income is no longer enough to afford a house.
The longer this goes on, the worse the correction must be. It is time to deregulate land use outside urban centres and see house prices plummet. This is the most urgent policy change needed in Australia. Forget industrial relations, forget green energy mandates, and forget the taxation regime. The cost of land, and thus rent, both commercial and residential, is the single biggest factor in Australia’s competitiveness. Taking rent out of the equation, Australia is no longer one of the most expensive countries in the world – not by a long shot. Real wages would in fact soar.
The fix is simple: deregulate land use outside urban centres. Remove state and local government interference in property rights, and the system will fix itself.
The Australian Property Institute’s 33rd survey on Property Directions has seen international investment flagged as the main driver, of prices and demand in Sydney, Melbourne, Brisbane and Perth.
The results describe international investment as a "significant" to "very significant" factor in the cities' demand levels.
Surveying valuers, fund managers, property financiers and property analysts, the survey noted that while in Brisbane fewer participants than those in Sydney and Melbourne noted international investment, it still emerged as the main driver.
A similar trend was seen in Perth, where smaller numbers again suggested international investment.
In Melbourne, 95% put “Foreign Investment” in the "significant" or "very significant" category. While in Brisbane and Perth this fell to 68% and 55% respectively.
In Sydney, this figure sat at 96%. In May, it was recorded with 88% of respondents noting it as significant or very significant, and 75% of those in Melbourne putting it into this category..
Supply was the second most influential driver noted in Sydney and Melbourne, while recording a joint second with Self Managed Super Fund (SMSF) negative gearing in Perth and Brisbane.
There are swaths of land being held by developers in Melbourne, some in the outer west and Sth west, but others a lot closer in. Keysborough, Mulgrave and parts of Rowville were plumbed in, paved up and ready to build a decade ago. The developers, Mirvac was one, released small pockets of land year after year. I have no doubt there has been a deliberate and concerted effort to control prices with the supply they chose to drip feed the market. Keysborough is a prime example, there are 100's of allotments (approx 150-200) that are ready to build on, roads, sewerage and lighting all set to go but it's fenced off and kept a secret until demand/pricing get back to where the developer is happy.
Keysborough is case in point because there is enough and there in the developers control to build 1,000's of homes but they won't because it will impact prices.
The most logical change that needs to occur is the development process. If you buy land as a developer you need to submit plans for the site immediately. Once those plans are reviewed and approved, bar minor changes, you should be legally bound to build the entire development in a 'reasonable time' or face hefty fines. It saves Mirvac, Stockland and others tying up billions of dollars worth of land to release at their whim and ultimately their mass profits at the detriment to the buyer/community.
There are swaths of land being held by developers in Melbourne, some in the outer west and Sth west, but others a lot closer in. Keysborough, Mulgrave and parts of Rowville were plumbed in, paved up and ready to build a decade ago. The developers, Mirvac was one, released small pockets of land year after year. I have no doubt there has been a deliberate and concerted effort to control prices with the supply they chose to drip feed the market. Keysborough is a prime example, there are 100's of allotments (approx 150-200) that are ready to build on, roads, sewerage and lighting all set to go but it's fenced off and kept a secret until demand/pricing get back to where the developer is happy.
Keysborough is case in point because there is enough and there in the developers control to build 1,000's of homes but they won't because it will impact prices.
The most logical change that needs to occur is the development process. If you buy land as a developer you need to submit plans for the site immediately. Once those plans are reviewed and approved, bar minor changes, you should be legally bound to build the entire development in a 'reasonable time' or face hefty fines. It saves Mirvac, Stockland and others tying up billions of dollars worth of land to release at their whim and ultimately their mass profits at the detriment to the buyer/community.
Chris if you punish developers and make their business model unprofitable they won't develop land, and then we would have no land at all for expansion, just farmland and councils will only permit one house per block, maybe two at the most. Building permits are strictly controlled. In Rural NSW the locals build unapproved dwelling all over the place, but the council can make them demolish the buildings if they choose to. They then become unsaleable.
The culprit is the input costs. That is the high developer contributions, the GST, Stamp Duty, Land Tax, and other charges that the state, local, and federal governments leech out of the developers forcing up the basic cost of providing vacant blocks of land.
Without those costs our housing would be as cheap as any other country can provide.
Governments are not the solution, they are the problem. Getting agro about anything else is just tilting at windmills.
I'm pretty sure that you will think I'm having you on, but I'm not. Absolutely everyone in the industry knows the root problem, but they can't change it, only governments can, and they won't. When you do understand the issue it's easy to get your head around what is happening in property, but until then it's just a mystery.
Cheers,
Any expressed market opinion is my own and is not to be taken as financial advice
There are swaths of land being held by developers in Melbourne, some in the outer west and Sth west, but others a lot closer in. Keysborough, Mulgrave and parts of Rowville were plumbed in, paved up and ready to build a decade ago. The developers, Mirvac was one, released small pockets of land year after year. I have no doubt there has been a deliberate and concerted effort to control prices with the supply they chose to drip feed the market. Keysborough is a prime example, there are 100's of allotments (approx 150-200) that are ready to build on, roads, sewerage and lighting all set to go but it's fenced off and kept a secret until demand/pricing get back to where the developer is happy.
Keysborough is case in point because there is enough and there in the developers control to build 1,000's of homes but they won't because it will impact prices.
The most logical change that needs to occur is the development process. If you buy land as a developer you need to submit plans for the site immediately. Once those plans are reviewed and approved, bar minor changes, you should be legally bound to build the entire development in a 'reasonable time' or face hefty fines. It saves Mirvac, Stockland and others tying up billions of dollars worth of land to release at their whim and ultimately their mass profits at the detriment to the buyer/community.
What nonsense. Quite apart from the impossibility of knowing whether someone bought land "as a developer", you are proposing to make housing cheaper by increasing the risk and cost of developing and building. Quite a creative approach, but doomed to failure, I suspect.
Here's another creative approach. How about getting certain councils to process a DA in under a year. That would take a bunch of interest, rates and land tax out of the cost of building and would help more closely align supply response with demand fluctuations. Heresy!!!!!!
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
As you can see, money is god. Anybody who breathes a word against the process of land speculation is an infidel. These pair aren't directly in it but they are deluded enough to think they are part of the holy Catholic church of gouging on homes. And are enamored of the holy church. If the business was honest in intent then the major developers wouldn't be hogging all the land the government releases.
70 years ago the government would only release land to purchasers that intended to build a family home, then the speculator parasite crawled into the government brain and took over.
The developers aren't a charity, they maximize profit by all means possible, the preferred method is monopolization.
It will work until one day social breakdown sees the nation turn to civil war. And this nation is heading towards the point where there will be no return.
The next trick of our glorious banks will be to charge us a fee for using net bank!!! You are no longer customer, you are property!!!
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