Australian house prices caused by land use regulations

Australian house prices have been on a huge upward trajectory since the 1980s, far outpacing both
inflation and wages. The median price of all dwellings within Australia was $554,008 in June, 2014
i
.
Only a median house price to household income ratio of under 3.0 is considered affordable. In
Australia, this ratio is over 6
ii
, and in some markets like Sydney, is nearly 9.
iii
Even in Hobart, the
capital city of Tasmania, a small state struggling economically and with markedly less population
growth than all other states, the median house still costs $338,000!



Overseas, in markets like Houston, a large US city growing faster than any Australian city, with a
population of 6.18 million people in the greater area, the median house price is only $184,900
iv
,
merely half that of the small and economically depressed Hobart. In greater Atlanta, another fast-
growing United States city of population 5.48 million, the median house price is even less:
$150,000
v
.
According to the RBA, the cumulative rise in dwelling prices since 1970 has been more than twice
that for construction costs
vi
, so the culprit for our high house prices can not solely be bigger and
more lavish houses. The culprit, as it turns out, is the cost of land, appropriately subdivided, zoned,
and approved to build a house on. As Bob Day notes in his Home Truths Revisted The politics of
home ownership article, in South Australia, the cost of a new block of land has gone from $15,000 a
block (in inflation adjusted terms todays dollars) to $160,000 a block
vii
. Not only that the cost of
building a 135 square metre house increased from $97,000 in current dollars to just $102,000 over
the same period, virtually no increase at all.
viii
Additionally, blocks have got smaller, with the
average block in South Australia now only 450 square metres, down from 700 square metres in the
1990s
ix
.
Rural land on the fringe of any Australian town or city is not expensive. This can be confirmed by
anyone by simply looking up land for sale on any real estate website. Most of the time, this land is
available for $10,000 a hectare or less, which is the equivalent of only $400 for a quarter-acre. Yet at
the end of the process developers (and anyone else) must go through actually build houses on this
land, the cost has ballooned to $1,000,000 a hectare or more, and thats before any infrastructure
has been connected up to the new lots.
Then, lots need infrastructure, but it doesnt cost $280,000 (the cost of a lot on the fringe of
Sydney
x
) to supply basic infrastructure to a new lot. Lots outside Houston, Texas are as little as
$15,000 each
xi
.
The reason for this cost disparity lies solely with government land use regulation. Alan Moran
writing in the Drum notes that 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
xii
. This inordinately complex and expensive process is the sole reason for Australias
unaffordable housing.
If there were no restrictions on the subdivision of rural land, and no restrictions on building on those
subdivisions, the cost of housing would fall dramatically. Anyone, including a developer, could
purchase a rural block of land, or multiple such ones, at $10,000 a hectare, subdivide and start
building houses. There would be no more paying $280,000 for a measly 600 square metres of land.
Australia has no shortage of land. According to Demographia
xiii
only one quarter of one percent of
Australias land mass is used for urban purposes. We are not in danger of running out. Australia also
has more arable land per person than any other country in the world, at 2.13 hectares per person
xiv
.
We are not in danger of running out of that either.
Sometimes negative gearing, foreign investors, high immigration are cited as a reason for the cost of
housing in Australia. These having nothing whatsoever to do with the cost of Australian housing. If
housing supply in Australia could respond to housing demand, dwelling prices would not increase at
all. When people demand more iPhones, Apples factories crank out more iPhones. The price per
iPhone does not increase, because supply can meet demand. In Houston, Texas, and many other
states in the United States, housing supply is flexible in the same way. Texas population growth,
running at 2% a year between 2000 and 2010 (higher than Australia), did not yield higher house
prices. House prices stayed approximately the same in that period of time, because developers could
build new houses at an appropriate pace. This is because, in Texas, counties are banned from zoning,
and the state does not play a role in land use regulation. Restrictive covenants, which act like zoning,
are used by developers to provide certainty to house buyers. Australia has been building less houses
than are demanded, and consequently, prices have gone up. When banana plantations were
destroyed by weather in Queensland, banana prices went up. The same principle applies with
housing: supply and demand.
There is no shortage of land outside any major Australian city to build houses on. It is only a matter
of the government letting us. This mismanagement of land has led to quite possibly one of the
biggest misallocations of resources in history. The Australian economy is getting bent and distorted
unprecedented ways. Business finds it difficult to get finance because all available capital is going in
to houses; households delay childbirth because it takes longer to save up for a deposit on a home;
households opt for both parents to work because a single income is no longer enough to afford a
house.
The longer this goes on, the worse the correction must be. It is time to deregulate land use outside
urban centres and see house prices plummet. This is the most urgent policy change needed in
Australia. The cost of land, and thus rent, both commercial and residential, is the single biggest
factor in Australias competitiveness. Taking rent out of the equation, Australia is no longer one of
the most expensive countries in the world not by a long shot. Real wages would in fact soar.
The fix is simple: deregulate land use outside urban centres. Remove state and local government
interference in property rights, and the system will fix itself.

i
http://www.abs.gov.au/ausstats/abs@.nsf/mf/6416.0
ii
http://blog.rpdata.com/wp-content/uploads/2013/02/Dwelling-price-to-income-ratio-RBA.jpg
iii
http://www.rba.gov.au/publications/bulletin/2012/dec/images/graph-1212-2-04.gif
iv
http://blog.chron.com/primeproperty/2013/05/median-home-price-hits-all-time-high/#12494101=0
v
http://www.zillow.com/atlanta-metro-ga_r394347/home-values/
vi
http://www.rba.gov.au/publications/bulletin/2012/dec/pdf/bu-1212-2.pdf, page 15
vii
http://www.familyfirst.org.au/files/Home-Truths-Revisited-May-2013.pdf
viii
Ibid.
ix
http://www.adelaidenow.com.au/news/south-australia/adelaide-block-sizes-shrink/story-e6frea83-
1225804976238
x
http://www.renovationplanning.com.au/stories/Solid_ground_land_values_around_Sydney-
0000000057.html
xi
http://www.zillow.com/homes/for_sale/pmf,pf_pt/land_type/days_sort/30.337324,-94.5401,29.294783,-
96.324005_rect/9_zm/
xii
http://www.abc.net.au/news/2012-06-21/moran-housing-regulations/4082380
xiii
http://www.demographia.com/db-intlualand.htm
xiv
http://data.worldbank.org/indicator/AG.LND.ARBL.HA.PC/countries/1W?display=default