Australian housing’s regulatory price boost not about to end

Australian housing’s regulatory price boost not about to end, by Alan Moran.

Global housing consultancy, Demographia, has confirmed what Australians always knew.  Our house prices are extremely high and there is no relief in sight.

In 2016, out of 406 world cities surveyed for housing prices in relation to incomes, Australia is the leader with four cities the top 11 and 8 of the top 20 most highly priced housing markets.

least-affordable-cities-house-prices-2016

Sydney comes second (after Hong Kong) where it takes 12.2 times the median household income to buy the median priced house.  Sydney’s median priced house now costs north of a million dollars.  Melbourne, where the median house costs 9.5 times the median income, comes sixth. Adelaide and Brisbane are not that much more affordable. …

australian-house-price-to-median-income-2016

A fully finished new house (three bedrooms, two garages) costs as little as $150,000.  Preparation of the land with sewerage, local roads, water and other utilities costs around $70,000 per block.  The land itself is mainly used for agriculture and is intrinsically worth maybe $2,000 a block.  Yet that new house in western Sydney costs upward of $700,000.

We don’t have the excuse for our high prices that Hong Kong has with its land shortage – even Sydney hemmed in by national parks has enough land on the outskirts in the county of Cumberland alone to allow an 50 per cent increase the housing stock. Nor do we have the same population growth pressures on supply of cities like Houston, Dallas and Atlanta. Not only do those cities have faster growing populations than Australian cities but their house prices relative to incomes are a quarter to a third of Sydney’s. …

Our high cost housing position is earned in the regulatory department.  In this we are the world champions.  The Victorian planning authority has identified over 600 separate approval decisions for a new house in Melbourne.  And that excludes the all-important strangulation of the first stage planning permission, the “release” of land to allow it to be built upon.

To which I would also add that prices are also high because the supply of money is extraordinarily high. In a house purchase there are two things exchanged: a house and some money. Most people only focus on the supply and demand of houses, but the supply and demand for money — which would be measured by the interest rate in a free economy — are also crucial.

Interest rates are near record lows, so people can afford bigger mortgages. Banks manufacture new money for loans if they believe you can pay them back — and with three decades without a recession, they are pretty confident you will pay them back.

Central bankers are bureaucrats who set the interest rates by diktat (at the short end, but that flows through to rates for longer terms). They override any natural interest rate that the market might set — though some would argue that is an inevitable consequence of our paper money system. It is largely their policies over the last four decades that have landed us with housing that is so expensive.

Government stamp duty is also exorbitant, making moving house ridiculously expensive. For typical middle class people in the suburbs of an Australian state capital city, moving house costs around $100k for stamp duty and a removalist — which greatly hampers life style and mobility for jobs. People used to move “all the time,” but not any more.

hat-tip Matthew