You can't explain real estate bubbles by zoning controls

The Age reports that Wendell Cox’s Demographia hasreleased a study showing Melbourne to be 321^st on a list of 325 most affordable world property markets.

In other words, we’re almost the world’s most unaffordable market: almost the world’s dearest city. Incredibly, London, with a population of 7.6 million is said to be cheaper than the city of Geelong which is home to a population of only 200,000 souls.

Amongst more important things I’ll mention later, it could be argued that homes and sites in Geelong are generally larger than those in London, but that’s not mentioned by Cox. Instead, he shoehorns Melbourne’s astronomical residential property prices to square with the extraordinary claim that they're a result of its zoning regulations. Perhaps this means Melbourne also has the 321^st worst residential zoning regulations in the world?

A “shortage of land” to explain ludicrous land prices was also the story put about by real estate agents in California just before its real estate bubble burst in 2007. For one reason or another, they (and Cox) don’t want to accept the rather obvious connection between California’s high land prices and the ceiling Proposition 13 had put on its property tax in 1978.

A strong case may be made that it was a combination of a relatively low property tax regime, necessitating higher taxes on productivity, which turned the once golden State of California into America’s economic basket case. It is no coincidence that the highest property tax-paying states in the US have proven to be its best economic performers; the property tax warns off the land speculator whilst enabling other taxes to be kept to a minimum.

Ken Henry’s review of the tax system caught up with the principle of capturing publicly-created economic rent by taking taxes off productivity and putting them onto land and natural resources, but the government has run scared of any such fundamental reform, preferring not to attempt to educate people to the principles behind such a proposed revenue switch. There’s a vast property and mining lobby to be appeased. Such timorous leadership consigns Australians to repeat the sorry saga of property bubbles and ensuing economic busts.

Wendell Cox and his ilk don’t particularly like zoning controls. They smack of excessive government interference with development. But whilst many examples may be found of excessive bureaucratic intervention in the development process, the zoning of land is clearly not the culprit for high prices.

It cannot be, because there is no shortage of suitably zoned residential land in Melbourne, now, nor previously. Yet the Housing Industry Association, Urban Development Institute of Australia and the Property Council of Australia have signed up to this explanation instead of understanding the benefits to industry and development Ken Henry’s proposals would bring.

There’s more than enough residentially-zoned land around Melbourne, and a massive amount of vacant and underutilised land within its existing boundaries. Nevertheless, Wendell Cox has found such admirers as the Institute of Public Affairs’ Alan Moran to support his vacuous conclusion. The Ayn Rand-like baggage to limit zoning controls, if not get rid of them altogether, has come to override their logic.

Like most people untrained in the theory of valuations, Cox and Moran haven’t yet discerned that land price is the capitalization of that part of the economic rent of land which has not been captured to the public purse. The amount privatised simply becomes capitalized into the land price of a block of land.

Except for relative locational values, supply and demand plays little part in the price of a residential lot. Up-front government development costs play a far greater role. We allow too much publicly-generated economic rent to be privatised by a relatively few individuals, and Wendell Cox is their spokesperson.

As with real estate interests, who don’t appreciate the principles behind land-based revenues, Australia’s big mining companies recently also displayed a preference for retaining the public’s rent in their profits. Of course, banks also captured the economic rent of land from the public via interest and capital mortgage repayments on bubble-inflated prices. In both cases, the big boys will take it if the public doesn’t claim it.