Government chips away at planning controls

Bookmark and Share Economics & Deregulation and Deregulation Unit | Alan Moran
Herald Sun 14th December, 2012

House prices are off the boil. In Victoria they fell two per cent last year. Interest rates have been declining and compared to two years ago it now costs borrowers 15 per cent less to service the average $300,000 mortgage.

The Reserve Bank has even predicted that an upsurge in house building will replace the resource boom in driving economic growth.

Governments claim to have forged policies that will improve housing supply. The Commonwealth Infrastructure Minister, Anthony Albanese, has announced a greater role for planning. Similarly, Victoria's Planning Minister Matthew Guy has announced a "masterplan" development approach including "integrated employment"," high quality urban design" and water sensitivity. A more plausible approach to increasing housing supply is Mr Guy's other policy of extending Urban Growth Boundaries to encourage increased land availability.

However, notwithstanding all the words and plans, house building in Victoria and nationally is trending downwards.

Victoria is building 30 per cent fewer new houses than a decade ago and new starts in the latest quarter were 10 per cent lower than a year earlier. Although apartment construction in the state has increased, this still leaves total home building in the doldrums.

Superficially, the reason for the low level of new house building is lack of demand due to a first home buyer's costs of getting onto the housing ladder. In Victoria, a standard new home sells for over $350,000. Mortgage expenses on this often remain unaffordable. And it requires a deposit of $50,000, which even with a First Home Owner grant of $7500 represents many years of saving.

Regrettably, around $100,000 of a new home's cost is caused by government planning controls. These artificially reduce the acreage available for housing, even though there is almost unlimited land on the urban edge.

The value of a housing block, currently being used for farming, is under $2,000. It costs a developer $70-80,000 to put in the roads, water, electricity and other services to prepare it for housing.

Yet, the latest Victorian Property Sales Report shows the average price of a serviced block is $178,000. The $80,000 underlying costs of a serviced block of land balloons out to $178,000 because the planning induced scarcity of housing land. Hundreds of different and unnecessary regulations have accumulated over the years to create that scarcity. Land prices have barely fallen, demonstrating that even the expanded Urban Growth Boundaries has inadequately increased supply.

In amplifying the costs of new housing blocks, regulations reduce the industry's size and constitute a form of discriminatory tax on new home owners. They are supported by interest groups who oppose development, including urban planning "experts" and by busybodies who want to force people to live in city apartments rather than on the urban fringe. Many developers who have pre-committed to buying land at inflated prices also support regulations.

Yesterday the Productivity Commission offered governments a blueprint for stemming the regulatory tide. This involves greater pre-scrutiny of proposals. But the more urgent task is removing existing regulations. To this end the Baillieu Government has announced a new deregulation commission. Planning regulations clearly cause excessive house prices and should be an early priority for the new commissioner's attention.