What Australia needs is lower land prices

Australia enjoyed a mining boom over the last ten years but now faces a fall-off in capital expenditure on new projects as commodity prices fall. The RBA, eyeing the coming slow-down with some trepidation, is hoping that housing construction recovers to fill the void. So far the housing market has failed to respond to lower interest rates.

Housing Building Approvals

The reason that the housing market has not reacted to lower rates is partly attributable to housing affordability, with household debt in the last 20 years having trebled as a ratio to disposable income.

Housing Debt as % of Disposable Income

The uncertain financial climate has also contributed, with households repaying debt rather than looking for new homes.

Household Saving as % of Disposable Income

Further cuts in interest rates will not help. Encouraging home buyers to enter the market at unsustainably low interest rates would exacerbate the housing bubble and cause further hardship when rates rise. Rather than monetary policy, we need changes at federal, state and local government level to increase the availability of land for housing.

  1. Abolish transfer duties
    Abolishing transfer duties on property would encourage home-owners to re-size as their needs change, releasing more housing stock into the market. Abolishing transfer duties would also remove state support for higher property prices. Under a transfer duty, higher prices boost state revenues, encouraging support for property developers who land-bank large tracts of land and restrict their release to maintain high prices.
  2. Replace with a land tax
    Replacing transfer duties with a land tax, based on the value of the land, would also discourage land-banking by property developers. Restricted release of land is the primary cause of unaffordable housing in both Australia and the UK.
  3. Overcome zoning issues
    Zoning issues at state and regional level may also contribute to the slow release of new land for development.
  4. Reduce infrastructure costs
    Costs of new infrastructure development are another reason local government tends to restrict release of new land for housing development.  Establishment of municipal utility districts (“MUDs”) within a local government area would help to overcome this. Leith van Onselen describes how MUDs  in Texas, ranging in size from 200 to 5000 hectares, charge home-buyers a monthly infrastructure levy rather than requiring up-front payment for establishment of new services — which is then folded into the purchase price. The MUD levy expires when bonds used to finance the services have been amortized, or residents can decide to continue the levy to upgrade public amenities such as parks, swimming pools and other facilities.

Increased availability of land would drive down new house prices and encourage the establishment of new households. This would boost not only housing construction, building materials and general construction — through establishment of roads and services — but the retail sector as well, because every new home needs to be furnished. New jobs in these sectors would lift general consumption and the broader economy, helping Australia to avoid the approaching mining cliff.

Why British prosperity is hobbled by a rigged land market | Centre for European Reform

Simon Tilford, chief economist at the Centre for European Reform, writes:

The British have the least living space per head, the most expensive office rents and the most congested infrastructure of any EU-15 country. Thanks to a rapidly growing population – the result of a healthy birth-rate and immigration – these trends are worsening steadily. At the same time, the British economy is languishing in a prolonged slump brought on by a collapse of demand. The answer is obvious: Britain needs to build more. Unfortunately, the obstacles to development are formidable….

A similar problem to Australia: restricted land release drives up prices, making home ownership inaccessible to the younger generation while damaging the construction industry.

Read more at Centre for European Reform: Why British prosperity is hobbled by a rigged land market.