This private submission by Michael Dromgool to Australia’s Housing Affordability Inquiry identifies supply restrictions as the key cause of the current housing affordability crisis:
Traditionally the flexible forces of demand and supply in the property market self-managed the development of land for housing. Development occurred in locations where and when demand was sufficient to warrant it, with a process that was responsive to demand.
…Now fast-forward to the present day. The government has shut off the supply of land on the city fringe to limit the city to its present size, abolishing a free market system in favour of a centrally-directed scheme that severely distorts the property market…..Smart growth is a deliberate policy to make land more expensive, to increase the city’s population density and force more people into apartments, not the detached houses that most people actually prefer to live in….
Economists and politicians in Australia confidently attribute the decline in housing affordability to strong demand driven by economic and population growth, conveniently neglecting the supply side of the equation…..
Many cities in the United States, such as Atlanta, still use responsive planning. In 1981 more people lived in Melbourne than Atlanta and in both cities the median house cost less than three years of median income in that city to purchase. Over 30 years demand from economic and population growth in Atlanta was stronger than Melbourne, it grew much faster and Atlanta’s population was nearly 50% greater than Melbourne’s by 2011 and the median house price there was $129,400, 2.3 times the median income of $55,800. Yet in Melbourne the median house price reached $565,000, nine times the median income of $63,100. The government tries to convince us that houses are expensive due to high demand, yet they are actually cheaper in a city where demand is substantially stronger. The state government of Georgia drew no arbitrary boundary around the city of Atlanta and consequently it expanded outwards onto greenfield land. In Australian cities, homes are expensive because the land is expensive.
I agree, and would go further to say that governments have been close to being criminally negligent in choking off land supply. Despite the grandiose view they have of themselves, governments really have just a few simple missions to achieve, and one of them is to create an environment where people can aspire to and achieve a better life than their parents had. Affordable housing is fundamental to this mission and in that they have failed badly. Unfortunately government measures its success by the crude and myopic metric of the state of the economy, which is basically just a measure of how much money is being spent, irrespective of where it comes from and what it’s spent on.
I am from Mumbai City in India, Here an average income is 0.5 Million Rupees and average housing price is 23 million rupees. so it would take 46 years to pay down the debt. Anywhere else you find the numbers these bad?
Atrocious. Are there similar controls over release of new land for housing?
This article is spot on. And the comment by frankaquin0 is dead right as well.
Lack of supply IS the elephant in the room. I can understand pollies not wanting an ever expanding fringe around major cities but why why why do they then allow local and State govts to severely limit medium and high density dwellings. And because these limits are so extreme we end up with developers maximising profits (fair enough too) by building small over priced apartments.
One of the things that struck me in some European cities was just how comfortable and large some of their apartments were.
Everyone seems to know there is a housing affordability issue except for the people who can make a change, ranging from all levels of governments to the RBA, who continuously denies any affordability issues.
It’s a disgrace, I’m in my early 20s saved enough to buy a house, but chances are I will rather leave this country with my money and live else where than to park it all in a place for shelter and no other economic benefit.
There is one other issue that adds to the cost of new dwellings – profit & risk. Risk has to be factored in by the developers and as risk increases so does the margin required to cover that risk. Risk encompasses planning uncertainty, delays, cost of objectors, increasing cost of council and government charges, availability of finance, economic cycles, etc.
There is no way that a new small house of 150 sqm on a small block of land that was 400sqm could be produced in Australia for $129,400. Even if the raw land was purchased for $1.
Based on an ultra cheap sale price of double the Atlanta price of $258,800 for a single dwelling on its own lot with street frontage the costs would be:
(1) GST $23,527
(2) conveyancing, marketing and commission at 3.5% $9,058
(3) house construction at $900 per sqm $135,000,
(4) infrastructure contributions $27,000
(5) roads & services $65,000
(6) finance during development $10,000
(7) raw land $1
TOTAL COSTS $269,586
End result is a LOSS. And that is after placing only $1 value on the land – which is unrealistic as it is worth more than that under its existing use.
Interesting that actual construction costs are no more than half of the total cost.
Good analysis and comments, but why is this so, that is why is supply limited? Well it’s all about vested interests. State government’s are hooked on stamp duty for income, the higher the land price the higher their income. Likewise with those companies with land banks. Then you have the federal government and the rba who will do anything to avoid having to bail the banks out, which includes inflating the housing bubble to ridiculous levels through lowering interest rates and allowing foreigners to buy in willy nilly. Are we really the lucky country?