How government increases housing prices

Australia's housing prices are astronomical. Indeed, compared to local salaries, Australian cities are among the world's most unaffordable places to live. But you may not know why. The startling truth is that housing unaffordability is a costly, unfortunate consequence of zoning laws. These prevent developers from building enough properties to meet housing needs and boost the economy. It's a problem which the NSW government largely skirts over in its recently floated housing policy proposals. Substantial zoning reforms are unlikely to occur because not enough people realise that zoning increases prices.

Zoning laws like Melbourne's or Sydney's restrict developments based on their height, and on whether they are residential, commercial or industrial in nature. That makes it harder to build multi-storey apartments or commercial developments outside the inner city and commercial districts, which increases the cost of land. Indeed, economist Alan Moran estimates that many properties could sell for hundreds of thousands of dollars less if developers were generally allowed to build upwards and outwards throughout our cities.

Melbourne's South Eastern and inner Western suburbs, for example, restrict construction of buildings over two storeys high except on main roads. That means no apartment buildings or commercial complexes in some of the most hotly demanded and wealthiest parts of Melbourne. This may help explain why Melbourne's current median house price is $770,000. Relative to local median incomes, that makes Melbourne the tenth most unaffordable housing market in the world.

Sydney's zoning laws also impose restrictions on development. Large proportions of its suburbs consist of residential houses, units or small apartment blocks. Much of it is bereft of larger apartment blocks or commercial centres. Sydney approves construction of about as many new dwellings as Melbourne, despite its higher population. Consequently, Sydney is the second most unaffordable city in the world, with a median housing price of $995,000.

The housing affordability problem has even spread to country towns. NSW regions are experiencing rapid increases in property prices as city-siders buy holiday homes. Relative to regional median income, Wingecarribee and Tweed Heads are the seventh and eighth most unaffordable housing markets worldwide. It's clearly not for lack of space. Zoning is preventing these towns from building upwards and outwards.

Australian cities are also much dearer compared to Houston, Texas, which has no zoning laws. Houston's median housing prices are low at $230,000 USD, despite its booming economy and 6.4 million residents. In Houston, the median house costs about triple the median wage. By comparison, the median house in Melbourne costs nine times the median wage and in Sydney it costs about twelve times the median wage. Moreover, its residential, commercial and industrial centres largely stick together anyway as it is more efficient. Houston offers a model for reform.

Scrapping zoning also benefits us in other ways. Businesses profit by selling goods to more customers for lower prices as more people live in the same place. Deregulation also avoids housing "bubbles" by stabilising prices. As economist Thomas Sowell notes, Houston escaped the 2008 American housing crisis, unlike Californian cities with strict zoning and unaffordable housing. Deregulation may also reduce congestion by causing multiple city centres to develop, as in Houston.

As for the NSW government's housing policy ideas, they're too little, too late. Unlocking land around train stations for development is welcome but insufficient. Victoria has and its prices keep rising. Moreover, making apartments 'permanently affordable' by requiring developers to gift one floor to the government amounts to a tax that discourages housing construction and therefore increases prices. NSW risks taking one step forward and two steps back.

Housing could be cheaper if our suburbs expanded upwards and outwards with apartments and commercial complexes and industrial centres. Until that happens, our housing affordability problem will continue to exist.