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No opportunities on the property ladder

By Alan Moran - posted Wednesday, 23 August 2006


In launching a program that featured The Tragedy of Planning, the IPA book I was responsible for authoring, the Treasurer Peter Costello drew attention to high house prices preventing young people getting a foot on the home ownership ladder. He suggested that this might have adverse effects on family formation.

Although there was some initial reaction to the suggestion that land prices were being pushed up by government rationing its availability, other material has been since issued by the Urban Development Institute that corroborates the facts. The following chart illustrates price developments over the past 30 years. 

  1973 base 2006 real per cent change over and above CPI
Sydney land 100 687%
Sydney house 100 -8%
Melbourne land 100 130%
Melbourne house 100 11%
Brisbane land 100 190%
Brisbane house 100 -5%
Perth land 100 543%
Perth house 100 3%
Adelaide land 100 995%
Adelaide house 100 23%
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The figures examine price developments in land and the house structure itself over a 33-year period. This clearly illustrates that the bricks and mortar elements of house prices have barely moved in real terms over the period. By contrast, prices of the land component have increased by between a factor of two (Melbourne) to eight in Sydney and as much ten in Adelaide.

A block of land on the periphery of Sydney sells for $460,000 with Melbourne being the cheapest of the major capitals at $112,000. The increase in prices of housing land has taken place in a context where the price of its alternative use, farming land, sells for something like $3,000 per hectare, or $300 per block. Yet housing land acquisition costs, according to information collected by UrbisJHD is up to $120,000 in Sydney down to a low of $12,000 in Adelaide.

Such price levels are only possible because government regulates land availability by preventing land owners from building houses on their land or selling to others to undertake the building. This throttling of the availability of land for housing has grown at an accelerating rate over a 50-year period. It owes nothing to the availability of land - in Australia urban areas account for only 0.3 per cent of the area. Nor is it anything to do with infrastructure costs. It is barely conceivable that in any area within commuting distance from existing urban areas such infrastructure could cost more than $50,000. In most cases it would be under $30,000 once roads, water, sewerage, planning costs and other land preparation measures have been taken.

The excessive costs are purely due to government rationing of land. Many areas around the world, including some of the fastest growing municipalities like Houston, Atlanta and many other US cities as well as some slow growing areas (most German cities) have no such rationing. The outcome is flat real land prices in these places. Median house prices in Dallas, Houston and Atlanta are under $A180,000 including the land). And this is in spite of the fact that house construction costs in Australia are lower (indeed among the lowest in the world).

In addition to the scarcity-driven prices of land, Australian state governments have been progressively increasing the up-front development charges imposed on new housing developments. HIA put this at over $60,000 for Sydney and the UDIA, using a different accounting methodology put it at twice this level. In many US cities, the developer contribution required is one tenth of this.

The upshot is that government regulations and taxes are forcing up the cost of new houses which are now, in real terms more than twice what they were 30 years ago. In doing so, the prices of existing houses are boosted making those of us who already own our homes richer compared to those not yet on the ladder: many of whom, unless policy is changed, will never get a toehold into property ownership. Present policy is highly discriminatory, and exploitative, towards younger people, few of whom own houses. It is a sad indictment on governments who claim to represent all their citizens’ interests.

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In addition, at a more mundane level the regulatory induced price increases are devouring savings (with household savings levels at record lows and even now at negative levels). This is likely to bring about lower than optimal levels of investment and productivity as years go by.

The policy changes required include a considerable increase in the land cleared for housing development. Longer term all planning restraints, except those preventing land owners from being adversely affected by developments on adjacent properties, should be removed. One of the secrets of low German house prices is a constitutional right German landowners have that means they can do with their land as they wish. The onus is reversed in modern Australia - the landowner may do nothing with his or her land unless the government gives regulatory approval. And the extent of the restrictions on use have grown to their present highly intrusive levels.

In the interests of smaller government, restoring landowner property rights and, above all, restoring affordability for those without their own homes governments must accelerate land releases and must cease the discriminatory taxation of new homes.

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About the Author

Alan Moran is the principle of Regulatory Economics.

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