“The poorest man may in his cottage bid defiance to all the force of the Crown. His cottage may be frail; its roof may shake; the wind may blow through it; the storms may enter, the rain may enter—but the King of England cannot enter. All his forces dare not cross the threshold of the ruined tenement.” – William Pitt, British House of Commons 1763.
It’s been said that housing is the single most important factor contributing to a family’s financial and emotional security. Secure and stable accommodation is central to our well-being.
In recent years a disturbing trend has emerged in the level of home ownership among young families. It is in substantial decline. Those who bought into the housing market before 2000 when prices were low have done very well, but those who have bought since then have had to take out big mortgages in order to enter the market.
Housing is being consolidated into the hands of fewer and fewer people. Homelessness is growing. Low income people – young people in particular, are spending a much higher percentage of their income – up to 50%, on housing costs than previous generations at the same age, and the number of young people in rental accommodation has doubled. The number of years to pay off a home loan has also increased dramatically and the number of people who are ‘mortgage free’ by age 50 has halved.
The severity of the problem is also being masked by low interest rates. An interest rate rise would be catastrophic for the many homeowners who have borrowed huge sums in order to enter the market highlighting the danger of measuring affordability by the capacity to meet mortgage payments, rather than the total amount borrowed.
In creating the conditions for housing to become the privilege of the few rather than the expectation of the many, governments have produced intergenerational inequity and breached the moral contract between generations which dictates that we should leave things better than we found them.
In making housing less affordable for the next generation it has denied them much more than a roof over their heads, it has denied them the security and benefits that go with home ownership and the opportunity to provide options for themselves in later life.
Those who own their homes have much more control over their lives. Many are now choosing to defer having a family in the hope that they will be able to somehow put together the funds to buy a home later in life. If they can’t afford to buy a house, they certainly can’t afford to have children.
German economists are said to be baffled by reports that rising house prices in many western countries are deemed to be ‘good news’. In Germany, inflation in house prices, like inflation in energy prices or food prices, are considered just the opposite. How can it be “good news”, they ask, when it now takes two incomes to support a mortgage when previously young couples could buy a home and raise a family on one income? Or that a homebuyer will pay many hundreds of thousands of dollars more in mortgage payments and government taxes and charges than would otherwise be the case?
The immutable laws of supply and demand – the causes of high housing costs
It was once the case that if a person, or indeed a country, knew how to make something, the world would beat a path to its door. The factories and mills of 19th Century England bore witness to the power of being able to make things. Britannia ruled the waves. Today, manufacturing is global. From motor vehicles to whitegoods, kitchen appliances, widescreen TV sets, personal computers, mobile phones, the world is awash with supply – and demand. And yet despite this ever-increasing demand, prices continue to fall.
So why does housing – a simple manufactured product, defy this trend? Why does a house, which like other manufactured goods containing readily accessible components, increase in price out of all proportion to other consumer products?
Demand stimulators like immigration, low interest rates, favourable tax treatments and first home buyer grants have unquestionably increased demand for housing, however increases in demand do not, of themselves, cause prices to rise. The exponential increases in demand for mobile phones, laptops and digital TVs has not led to increases in price. In fact the opposite occurred – prices have fallen, in some cases by more than half due to increases in supply of these goods. The 1950s and ‘60s population explosion – the ‘baby boomer generation’ saw massive increases in housing demand but house prices remained stable because supply kept up with demand.
So what has gone wrong?
On the fringes of our cities there is a more than adequate supply of cheap land and a housing industry ready, willing and able to put houses on it at competitive prices.
So why are houses not being built on this cheap land? Cheap land attracts not only home buyers but commercial interests as well, leading to more employment opportunities.
The answer is simple – money.
Take South Australia as a case study.
The SA Land Commission Act of 1973 clearly stated the aim of the Land Commission was “the provision of land to those members of the community who do not have large financial resources”. The Act further made it clear that the Commission “shall not conduct its business with a view to making a profit.” Once the Commission was up and running however and the potential to start making a quid became apparent, these noble motives were quietly ditched. Clauses like “shall not make a profit” were deleted and replaced with “maximise financial returns to government”. The Commission then changed its name to the SA Urban Land Trust, then to the Land Management Corporation then RenewalSA. The SA State Government has made millions by manipulating the land market – all at the expense of housing affordability.
Members of parliament have also hopped onto the property-owning bandwagon with numerous ‘investment properties’ of their own and, keen to maintain their own wealth, publicly support urban planners who continually rail against the so-called evils of ‘urban sprawl’. The resulting urban growth boundaries which restrict home building activity through zoning laws, force new home buyers into high density housing developments in inner suburbs. It is the monetisation of urban planning.
Claims that urban sprawl is bad and that urban densification or urban consolidation is good for the environment, or that it stems the loss of agricultural land, or that it encourages people onto public transport, or that it saves water, or that it leads to a reduction in motor vehicle use or that it saves on infrastructure costs for government are false.
Urban consolidation is an idea that has failed all over the world. Whether it’s traffic congestion, air pollution, the destruction of bio-diversity or the unsustainable pressure on electricity, water, sewage, or stormwater infrastructure, urban densification has been a disaster. Urban consolidation is not good for the environment, it does not save water, it does not lead to a reduction in motor vehicle use, it does not result in nicer neighborhoods, it does not stem the loss of agricultural land, it does not save on infrastructure costs for government and worst of all it puts home ownership out of the reach of those on low and middle incomes. Sir Peter Hall of the London School of Economics claims, “The biggest single failure of urban densification has been affordability.”
This limiting of housing on the urban fringes of cities distorts the inner suburban market where the ‘Save our Suburbs’ groups – committed to maintaining the character of existing suburbs by limiting the amount of additional in-fill housing, are highly effective. This further exacerbates the supply/demand distortion.
And it’s not as if high rates of construction of high density housing apartments – a favourite of urban planners, leads to improved housing affordability. Sydney, Toronto and Vancouver which have seen very high rates of high rise apartment construction are among the worst cities in the world in terms of affordability. Here again, planning restrictions limiting the number of apartments per site in the form of height restrictions add hundreds of thousands of dollars to the cost of an apartment. In Sydney for example, the average construction cost of a high rise apartment is $430,000 whereas the sale price is over $800,000.
And it is young home buyers, hit with the spiralling costs of home ownership who end up paying. Whilst it is true there has been an increase in younger people preferring CBD apartment living, they are mostly forced into these overpriced units without being given the option of a low cost, free-standing home of their own on a large block on the fringe. Given the price distortions inherent in today’s housing market, it is impossible to know what the trade-off points might be between downtown living, size of home, large backyard, children, pets, and suburban living.
Given housing is such a political hot potato, governments have responded but unlike ‘the war on drugs’ where governments primarily focus on trying to limit supply, with housing, the overwhelming response by governments has been calls to try to limit demand – lower levels of immigration, the removal of favourable taxation treatments – negative gearing and capital gains tax discounts and bank lending restrictions.
These are merely window dressing, and, together with measures like changes to self-managed superannuation fund rules, pension rules, first home owner grants, shared equity schemes, social/public/community housing projects, deposit saver accounts, stamp duty exemptions for people down-sizing, congestion taxes, land taxes, negative gearing, capital gains tax, bank lending restrictions (eg requiring banks to have less than 30% of loans as ‘interest only’) they are totally ineffective at solving the affordability problem.
Red tape, green tape, housing taxes, zoning taxes, development charges
Planning controls, development restrictions, environmental regulations, multiple jurisdictions, minimum lot sizes, lengthy approval processes, ‘developer’ contributions, ‘affordable housing’ requirements on new housing developments … building a house is no longer a simple matter. What has for centuries been an uncomplicated industry has become mired in planning rules and regulations which have sent land prices skyrocketing. Restrictive planning rules – effectively housing taxes, now account for up to 50% of the cost of a house.
Traditionally, actual land costs have been no more than 20% of the total cost of a house and land package. Average construction costs have also been fairly consistent across most jurisdictions at approximately $1,000 per square metre, a figure that has changed little in over 20 years. This equates to an average construction cost of a 150 square metre starter home of $150,000. Likewise land development costs – roads, water, sewage, power, telecommunications, footpaths and street signage, across most jurisdictions are consistently around $40,000 per lot. Add profit margin and raw land costs of $10,000 per lot for a total house and land of $200,000 – three times median incomes.
The affordability of housing is overwhelmingly a function of one thing – the extent to which governments impose rules and regulations over the construction of houses and land allotments.
In essence, what has been described as a ‘housing affordability’ problem is simply a ‘land affordability’ problem.
Regrettably, the general public is profoundly ignorant of the underlying causes of housing unaffordability.
Edmund Burke once said “It is the job of political leaders to teach people that which they do not know”.
First, what not to do. As discussed above, policies which seek to supress demand – lower levels of immigration, the removal of favourable taxation treatments – negative gearing and capital gains tax discounts, bank lending restrictions, changes to self-managed superannuation fund rules, pension rules, congestion taxes and land taxes, are futile. As are attempts by governments to assist home buyers with first home buyer grants, shared equity schemes, social/public/community housing projects, deposit saver accounts and stamp duty exemptions for people down-sizing.
As for what to do, first and foremost, where they have been applied, urban growth boundaries or zoning restrictions on the urban fringes of cities should be removed. Residential development on the urban fringe should be made “permitted use.” In other words, there should be no ‘zoning’ restrictions in turning rural fringe land into residential land.
Second, create a low entry level for those wanting to develop housing allotments. Smaller players need to be encouraged back into the market by abolishing compulsory so-called ‘Master Plans.’ If large developers wish to initiate Master Planned Communities, that’s fine, but they should not be compulsory.
Third, allow the development of basic serviced allotments ie water, sewer, electricity, stormwater, bitumen road, street lighting and street signage. Additional services and amenities – ornamental lakes, entrance walls, childcare centres, bike trails and the like can be optional extras if the developer wishes to provide them and the buyers are willing to pay for them.
Fourth, no up-front developer or infrastructure charges. All services should be paid for through the rates system – paid for ‘as’ they are used, not ‘before’ they are used.
Fifth, the Federal Government should consider using corporations powers to override state or city planning laws to allow land holders the right to make their land available for housing.
Similarly, the Federal Government should reduce Commonwealth grants to the States commensurate with their profiteering from land supply constraints.
I’m loath to quote the United Nations but one of the UN’s sustainable development goals is “to ensure adequate housing for all by 2030”.
Without some decisive action, this goal will never be achieved.