Higher Interest Rates And Lack Of Land Fuel The Flame To Just Go Bananas

Worth A Look, Housing Affordability, Frontier Centre

WE HAVE seen a lot of hand-wringing over housing affordability this week. And there will be more if the Reserve Bank, against good sense, puts up interest rates.

Everyone is in on it. Social-welfare do-gooders want cheap housing for the poor, the housing industry wants more construction and more immigration to fuel it, and the real-estate industry wants more transactions. All have a point.

A two-day conference in Canberra looked at affordability (dreadful word) in the same week that the Demographia International Housing Affordability Survey came out. It was fairly damning of Australia.

It seems bizarre that Australia, with low population and high land mass, should do so badly.

When we talk of affordability, you get a clearer picture if you separate land costs from construction costs.

When I bought my first block of land in the early 1970s it was one-tenth the cost of the house that was later built on it. Sure, it was Canberra in the heady days of the Federal Government making life easy for people to live in Canberra, but it was still not far off the picture across Australia – the land was less than a third the cost of the total package. Now it is as much as 80 per cent.

In the 30 years to 2003 the price of raw land on which one could build a house rocketed in Australia. It went up 16 times in Melbourne, a bit more in most other cites, 25 times in Canberra, and an astonishing 50 times in Sydney and 70 times in Adelaide. But what happened to the cost of houses built on that land? It went up a little under the rate of inflation – say seven or eight times.

So “housing” affordability is a misnomer. Houses have been as affordable as ever, even more affordable than in the early 1970s and arguably a better product. It is not the construction, but the other elements of dwellings that have made them less affordable: land, planning costs and taxes.

In the early 1970s, stamp duty was a little more than one-tenth of 1percent of the total cost of house and land. Now it is about 4percent.

It is a similar picture with development costs and planning-approval costs. Indeed, if you allow for standard bank interest on the value of the fallow land while you wait for planning approval, the costs of planning approval are probably more than 100 times what they were in the 1970s – for precious little better result.

The cost of farming land or bushland has not gone up at anywhere near the rate of residential land. As with most things, scarcity drives up prices. There is plenty of land, but there is not plenty of land where you are allowed to build houses. Nor is there plenty of land close to the good things in life: schools, shops, houses, transport and the beach. You cannot do much about the about the closeness, but you can do a lot about land availability. Governments in Australia can free up more land and can rezone land more freely. They don’t because it would drive down the price of land and upset existing householders. Also, Governments like to make as much money from land sales as possible. Flooding the market would lower their return.

Australia now has the worst housing affordability in the world, according to the annual Demographia International Housing Affordability Survey, which looks at all major urban markets in Australia, Canada, Ireland, New Zealand, Britain and the United States. It calculates affordability by expressing the median price of a house as a multiple of average earnings. Sydney, on 8.5, was the least affordable city in the world outside the US. The six Australian state capitals were in the top 25 of the 100 cities surveyed in the six nations. “The most pervasive housing affordability crisis is in Australia, where all markets in metropolitan areas with more than 1,000,000 have median multiples of 6.0 or higher,” the survey said.

It doesn’t have to be this way. Some US cities with populations of more than five million have median multiples below 3.0 and are thus rated “affordable” – Atlanta, Dallas-Fort Worth and Houston.

The survey found that higher prices were nothing to do with interest rates, demand or other purely economic factors, because affordability in similar cities in similar economies changed differently.

So it was down to regional factors. The extraordinary house-price escalation in the unaffordable markets is because of government policies that create land scarcity.

“These policies, which range from so-called ‘smart growth’ policies that prohibit housing on large swaths of land to government land hoarding, are found throughout the markets rated as ‘severely unaffordable,”‘ it said. “At the same time, much lighter land regulation is typical of the ‘affordable’ markets.”

Policies that make housing less affordable are not very smart.

“Economic research is showing that metropolitan areas with stronger land-use regulation pay a price in diminished economic growth,” the survey said. Nor is it very smart to make housing even less affordable by raising interest rates, as is likely to happen next week because of this week’s high inflation figures.

The Reserve Bank chants the mantra of keeping inflation below 3 per cent because it blindly believes that any inflation above this will cause a wages blow-out.

But this time the inflation figure is warped by petrol and bananas.

However, people have stopped buying bananas – so they should be thrown out of the CPI basket. And people are cutting fuel consumption. There is little evidence that employees are asking employers to increase wages so they can buy petrol and bananas. Of course, if the Federal Government had not dished out tax cuts at the wrong time in the economic cycle, the inflation figure would not have been so high.

So if you are worried about high housing costs you know who to blame.

Yes, it is so easy to blame governments – especially when they are, in fact, to blame.