Tuesday, 21 January 2014

Australia's housing unaffordability caused by restrictive land use policies

In Unrealised fringe benefits in the housing market Leith van Onselen looks at the 10th Annual Demographia International Housing Affordability Survey which again "ranks Australia as having one of the most expensive housing markets out of the countries surveyed".
At the national level, Hong Kong has by far the most unaffordable housing, with a median multiple of 14.9. Australia and New Zealand are tied for second most unaffordable market out of the nations surveyed (both 5.5), followed by Singapore (5.1), United Kingdom (4.9), Japan (4.0), Canada (3.9), United States (3.4), and Ireland (2.8).

All of Australia's 39 markets captured in the survey are ranked as either "Seriously Unaffordable" (14) or "Severely Unaffordable" (25). Australia currently has no housing markets ranked as "Affordable" or "Moderately Unaffordable". The result represents a slight improvement on last year's survey, where 30 markets were ranked as "Severely Unaffordable".

Looking at the major metropolitan areas only - i.e., those with more than 1 million inhabitants - Australia ranks as third most expensive after Hong Kong and New Zealand (Auckland).

Overall, Australia has moved down the league tables, registering 5 out of the 20 most expensive housing markets identified in the Survey, versus eight in last year's survey.
So why are Australian house prices so expensive. The report puts it down to high land prices, which in turn is due to Australia's restrictive land use policies. It's no surprise that locations with more liberal land use regimes have lower prices:
By contrast, affordable housing markets, like Texas and Georgia in the United States, utilise open market-based land use structures whereby plentiful new housing supply is able to be built quickly and cheaply on the urban fringe, thereby preventing rapid house price escalation.
The report claims that less restrictive land use policies also have other benefits:
In addition to lower costly housing costs relative to incomes, lower population densities in liberal markets are associated with less intense traffic congestion and shorter average work trip journey times.
Leith van Onselen concludes with:
So under an open market-based model (provided there are not also substantial physical barriers to housing supply), increased demand, such as from reduced lending standards and easier availability of credit, quickly leads to the building of additional low priced housing on the urban fringe, which helps keep house prices in check and reduces the likelihood of speculative housing bubbles developing. Further, highly leveraged speculators are less likely to be encouraged into open land markets, since there is little prospect of achieving strong capital gains. Investing in open land markets is, instead, more about rental yield.

I will add that restrictive urban planning structures should not be viewed as a one-way bet for house prices, with unresponsive land supply also more likely to result in higher levels of house price volatility and boom/bust price cycles - a fact also acknowledged by Demographia. Why? Because strict land-use policies (planning) steepens the supply curve, which makes house prices more sensitive to changes in demand, increasing the likelihood of the housing market experiencing boom/bust price cycles as demand rises/falls.

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