IPA in the News

Put the house price myths out to pasture Alan Moran

Australian Financial Review

Monday, July 23, 2007

The Labor Party will hold a conference to finalise its housing policy in Canberra on Thursday. Some people claim that the current high house prices are a result of a decade of interest-rate reductions that have made houses more affordable.

This is difficult to square with continued house-price increases in the face of more recent interest-rate rises, creating what the ALP has labelled "mortgage stress". While affordability may increase demand and raise prices in the most sought-after areas, generally the effect of this is possible only where supply is restrained. After all, interest-rate reductions did not lead to prices increasing for light planes, yachts or other costly durable goods.

Four of the five main housing industry groups last week jointly called for deregulation-based initiatives, including greater land release, reduced government charges and less red tape. Housing supply comprises established and new homes, but it is new houses that are central to the new home buyer.

The prices of new homes can be dis-assembled into four components: raw land, land preparation and development, the house itself, and government charges and taxes. Raw land on the periphery of of urban areas is plentiful. It is used for fanning and is worth perhaps $5000 a hectare.

There are about 10 housing blocks a hectare, including allowances for factors such as schools and open spaces, so the raw land should be $500 a block.

Yet the housing land shortages created by government controls means a permit to build brings that land value to $50,000 in Melbourne and $115,000 in Sydney.

Sadly, our politicians don't seem to understand this. Planning Mister Frank Senor in NSW claims there are 33,000 approved lots "ready to go". In fact, government-created land shortages in NSW have reduced new build levels by 40 per cent from their early 1990s levels.

The cost of the house itself is well publicised. In every weekend paper, home builders offer fully finished homes on your own land. These start at $110,000 and go up to $250,000 and more for the much vilified McMansions.

State and local taxes come on top of the regulatory impost misnamed as "planning". These measures, "development contributions", stamp duty and other taxes and regulatory requirements, can amount to as much as $122,000 a house in Sydney. Even in other capitals such as Melbourne and Brisbane where they approach $40,000, they are an unfair and discriminatory charge on new home owners.

In fact, requiring development contributions is a fraudulent form of revenue raising. The new houses' infrastructure, such as land preparation, roads, drainage,sewerage, and water, is provided by the developer and incorporated into the house price. These land development costs that the buyer pays are $40,000 to $60,000 a block.

If we reassemble all the cost components, new houses on the periphery of our cities should sell from as low as $176,000 including goods and services tax. Yet the median new-house price varies from $330,000 (Melbourne) to $535,000 (Sydney). The cheapest land/home packages are around $240,000 in Melbourne and $360,000 in Sydney.

The biggest culprit in this price augmentation is regulatory control of land together with taxes. By creating an artificial shortage and heaping on other imposts and regulations, state governments transform the cost of a housing block of land on the outskirts of our major cities from an underlying $500 to over $230,000 in Sydney and $86,000 in Melbourne.

This also boosts established house costs. There is an interconnectedness of house prices between new and old, suburb and suburb, and even from state to state. When the supply of housing on the periphery falls below demand, the consequent price rises ripple across the urban area.

The effect diminishes with distance and is minor in the upmarket suburbs. Escalating price levels are possible only where taxation or regulatory controls prevent supply adjustments. And we have both these factors in spades throughout Australia.

We have no shortage of land, land developers, builders or bricks. Yet regulations and taxes mean new house prices are between 33 per cent and 100 per cent higher than they should be. Addressing these impediments to lower costs must be at the heart of any credible policy response.