House prices must be allowed to fall
The NSW budget allocated $561 million to promote increases in new housing. Part of this was for grants to new buyers of $15,000 plus remission of stamp duty on new houses priced up to $650,000.
The $650,000 limit is around the median-priced Sydney home. Sydney has had the most draconian regulatory regime imposed on it since the days of Premier Carr, and its house prices are a fifth higher than in Melbourne, and 50 per cent above Brisbane's.
But all Australian cities have massively overpriced housing compared to their counterparts overseas. In relation to median family-income levels, Demographia puts the average Aussie home 60-80 per cent above that in the US and Canada.
In fact, in relation to incomes, average Sydney prices are over three times average prices in comparable major US cities like Atlanta and Dallas, and even two-thirds higher than Los Angeles in regulation-wracked California.
This sorry picture is not caused by the cost of building houses themselves. The weekend newspaper pages around Australia have many ads for three-bedroom, two-bathroom, two-garage houses on your own land priced from $140,000.
The cause of high prices lies squarely with regulatory approval processes. Starting with the designation of land as potentially available for housing development, there are mountains of approvals to gum up the process of building the house. 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; Sydney would have more.
This restrictive approach starves supply, driving up the price of a block of land (serviced so it includes water and sewerage facilities, roads, electricity and so on). Further costs result from the inevitable days and holding charges and plan modifications required by the regulatory agencies.
Without restraints on subdividing land for housing, a serviced block would cost around $80,000. Regulations over land boost this by $250,000 and more, converting a house-land package from $220,000 to $400,000 and more. And yet, notwithstanding national parks and mountains, there is no shortage of developable land on the outskirts of Sydney or any other city in Australia. Sydney's County of Cumberland has enough developable land to expand by 50 per cent without any expansion in the Blue Mountains.
In Sydney, the underlying demand for new houses is upwards of 60,000 per annum, but government regulations mean developers have struggled to get half this amount approved. Victoria's performance has only been a notch better.
In both Sydney and Melbourne, state governments are now taking steps to ease the regulatory planning impediments. Such measures would entail considerable savings to new home owner. In the case of Sydney, they would be worth tenfold the value of the subsidy packages.
For NSW, budget measures seek to provide up to 76,000 additional new housing lots. But even if these survive the regulatory thickets and are completed over a five-year period, they will add only 15,000 new houses a year to existing annual supplies of, at best, 30,000. With the underlying demand in NSW at over 60,000 new blocks a year so that even the target is met, it will leave ongoing annual shortfalls of 15,000 blocks.
NSW Treasurer Mike Baird has allocated $50 million to help expedite the planning process time. There are undoubtedly measures that can be taken to better computerise applications so that developers can see where the process application is within the planning and approval network. And more administrators might expedite processing times. But the real problem is not the state and local bureaucracy but the bevy of environmental, cultural, anti-sprawl and cost enhancing requirements that successive governments have enacted.
These regulatory measures have been in response to pressures from noisy groups. And those pressures are not abating - in Victoria Planning Minister Mathew Guy announced a 30-year plan for 37,000 new greenfield approvals - that's 1000 blocks for year in a market where underlying annual demand is over 40,000. He faced the usual pressures against the proposal from a mixture of environmentalists and planners, people who want to impose their own preferred living situation, and its associated cost premiums, on those not on the home ownership ladder.
Such pressures have been crucial in creating the accumulated regulatory barriers to allowing inexpensive houses to be built.
Additional funding for administrators and a piecemeal expanding of the urban growth area boundary is of only limited help in increasing the available supply of land on which housing is permitted. Even if the growth area boundaries were to be eliminated, this would be only the first step in expanding market supply. It needs to be accompanied by Governments eating into the array of regulatory impediments preventing developers from providing the houses that consumers want at an affordable price.
Finally, as pointed out by Greg Jericho, house prices boosted artificially by regulatory measures create illusionary wealth. As housing comprises the greater part of most Australians' wealth, unwinding the regulatory scarcity can bring about financial pressures on banks and on households. The housing bubble in the US was really confined to the west coast, Florida and some east coast markets, and prices fell much less markedly in states like Texas which have never had regulatory-induced land shortages driving up prices.
The US housing bubble burst as a result of a collapse in demand. Australian state governments aim to generate an increase in supply to allow more gradual downward pressure on prices. If they are successful, existing home owners will suffer an apparent loss of wealth.
Nevertheless, house prices have been artificially boosted in Australia and need to be allowed to fall so that they reflect their true underlying value. Without this, younger people who are presently priced out of the market will face continued discrimination and as a community we will be wastefully spending too much on housing.
This article originally appeared on The Drum on 21/6/12 and can be accessed at http://www.abc.net.au/unleashed/4082380.html