The Labor Party has claimed the federal government is causing housing unaffordability or mortgage stress. They claim this is created by high interest rates.
A contrary view is offered by Macquarie Bank’s Rory Robertson. Mr Robertson maintains that low interest rates are the reason why house prices have gone up because the lower interest payments have made houses more affordable. He argues that this phenomenon is confined to what he calls the “s-xy” cities and excludes those he classifies as “dull”.
Australia is rather flattered by this perspective because “s-xy” means high prices and these prevail in all our capital cities. Australian cities are joined by US cities in this respect, including New York, LA, San Francisco, and Honolulu, as well as British cities like London, and, based on their house prices, such unlikely places as Bournemouth and Cardiff. All of those urban areas have seen average house prices double in relation to average income levels.
One problem with the Robertson analysis is that those urban areas that have seen house price stability cannot be dismissed as “dull”. They include bustling Toronto; Houston, the world’s space industry capital; Cosmopolitan Quebec; Dallas, one of the premier energy and high tech centres in the world; and Atlanta the city which is the third most favoured HQ of the Forbes Top 500 companies.
Nor can the price stability be due to lack of growth. Dallas, Houston and Atlanta are three of the fastest growing American urban areas.
So, while house prices have risen in real terms in many areas, this cannot be attributed solely to demand.
It is true that increased demand and affordability will put pressure on house prices, particularly those favoured by the real estate agents’ mantra, “Position, position, position”. Potentially, all the prices in the urban area could face an impact. But this will not materialise unless governments restrict the supply of new land for development on the urban periphery.
And this gets to the nub of what differentiates cities like Houston, Dallas, Atlanta from other cities like Australia’s capitals. The key factor is that in the cities where housing has remained affordable land supply is lightly regulated on the fringe. Farmland can readily be sold and converted into land for homes.
Such outcomes are easily available in Australia. Only 0.3% of Australia is urban development and even Sydney, hemmed in by mountains and parks, has land on the Cumberland Plain alone sufficient for a million more houses. Moreover, current levels of building throughout Australia are not even approaching the industry’s full capacity.
A raw, undeveloped housing block on the city edge used as farmland is worth only $500 but the government’s approval sees its value catapult to $115,000 in Sydney and $50,000 in Melbourne. On top of this, state governments sting the developer, and hence the new buyer, for tens of thousands of additional dollars in taxes and charges.
This is the real cause of the housing crisis. But the ALP in power in all states will not countenance reduced land controls to put downward pressure on prices. Those developers with long positions on land already approved for housing would also find the additional supply unappealing.
Alan Moran is with the Institute of Public Affairs