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Housing affordability

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The government can make housing more affordable by adding greater flexibility and efficiency into the systems that control land use. So it’s time to unshackle the building industry to tackle housing affordability.

Nick Ward

Senior Economist

In 2019, HIA commissioned independent consultants The Centre for International Economics (The CIE) to calculate the components of house-and-land packages paid by consumers. This analysis found that 50 per cent of a house-and-land package in Sydney is government taxes, while the remaining 50 per cent is the cost of the resources used to provide the home. 

Within taxes paid by consumers, The CIE includes “statutory taxes”, “the fraction of any levy that is excessive” and “regulatory costs”. Statutory taxes include stamp duty and GST that raise money for the government. Excessive levies include an estimate of the component of infrastructure charges that is excessive to what’s required to facilitate the housing project. Regulatory costs in new home construction are costs that arise from government policies which control the use of land, and which restrict the supply of new housing. The largest of these costs is the regulatory cost in land. In simple terms, this regulatory cost in land is the cost of permission to build a new home. 

Government, via the system of zoning and development controls, controls how land is used. This means that to build a new home in Australia, it’s not sufficient to merely own suitable land. One also requires permission to build a new home from the relevant authority. Permission to build is granted only after the land has gone through numerous regulatory hoops: the land must be appropriately zoned, subdivision must be approved, a construction certificate must be issued, etc. 
Whether permission to build a new home is granted or not is determined by government policy. If government fails to permit sufficient housing, the supply of housing falls behind the demand for housing. This drives up the price of housing, as competition among households to secure the housing that is available intensifies.

Increase in value

In the market for land development and new homes, if government fails to permit sufficient housing, this pushes up the value of the permission to build a new home, where this permission has been granted. The CIE analysis attempts to put a dollar value on this.

New housing and existing housing are substitutes. Where government fails to permit sufficient housing development, this causes the price of existing housing to increase, given demand. 

The NSW Government published a case study on a parcel of land in Schofields, Sydney. Before rezoning, its value is around $40-$70 per square metres. After rezoning, its value climbs to around $330 per square metre. The intrinsic value of the land has not changed. All that has occurred is that the first regulatory hurdle in the process of obtaining “permission to build” has been cleared. The increase in value reflects the value of passing the first hurdle. 

HIA estimates that in a good year, the total land area that’s delivered for new Greenfield detached housing in Sydney is equivalent to around one per cent of the total area in Sydney zoned for agriculture. In most years, the planning system delivers less than this. HIA argues this rate of conversion is not adequate. 
Housing demand increases when babies are born, workers get pay rises, banks offer better interest rates, and migrants bring their skills and talents to this country. Most of these events are causes for celebration! It’s reasonable for Australians to expect that the supply of housing should respond to growth in housing demand.

Consumers bear these costs

HIA argues that the real effect of government policies that restrict the supply of new housing is to reduce the options and choices that are available to consumers. Because their options are reduced, it’s consumers who bear the cost of these policies.

The housing market is dynamic. Market participants will adjust their behaviour to minimise the impact of taxes and government policies on themselves. The person with the fewest outside options is the one who has the least ability to adjust, and thus bears the cost of taxes and restrictions. 

If existing landowners are unhappy with taxes and restrictions on development, they can delay the sale of their land to developers and wait for its value to appreciate. This offsets the taxes and regulatory costs that are imposed on them. 

According to the NSW Valuer General, the value of hobby farms located in Sydney increased at an average annual compound growth rate of 10.3 per cent per year in the 10 years to 2021. Even for land this is unusually strong growth. Rural bank report the value of farmland in NSW increased at a compound growth rate of 7.1 per cent per year in the 10 years to 2020. CoreLogic report the value of detached houses in Sydney grew at 7.3 per cent per year in the 10 years to 2021.

If the developer is unhappy with restrictions and taxes, they can choose to delay their project, and wait for its value to appreciate. This appreciation offsets taxes and regulatory costs that are imposed on them. Alternatively, the developer can sell the land to another developer and redeploy their capital to other business opportunities. This withdrawal of capital allows the developers who remain to pass on more costs to end consumers. 

Fewer housing options

Developers have the option of delaying or withdrawing supply because the effect of the planning system is to restrict the number of alternative housing projects that can proceed. 

This leaves the end consumer. They can avoid taxes and regulatory costs in new housing by choosing not to buy. This means they continue to live with their existing arrangement. The fact they are looking to move implies their existing arrangement is costly or unsuitable for them. 

In the extreme case, the first home buyer avoids taxes and regulatory costs in new housing by continuing to live with flatmates, parents, or parents-in-law. Because housing is a necessity, the end-consumer has fewer outside options than existing landowners and developers. The consumer must live somewhere. They have the lowest ability to change their behaviour to avoid taxes and regulatory costs in new housing. They are the person most likely to bear costs, in one form or another.

Where consumers offer a price on an existing dwelling, it must satisfy the seller. Because the consumer’s outside options are restricted, the seller has capacity to insist on a price that offsets whatever costs the planning system is likely to impose on their next purchase.

Pushing up the costs

Some commentators complain that developer behaviour pushes up the cost of housing. If the only problem in housing supply is developers’ behaviour, there’s one simple solution for this. The consumer who is looking to buy a block on which to build a new home can get back in their car and drive further down the road for 10 minutes. They can ask the farmer whose land sits outside the new housing development if they can build on his/her land. Even if the consumer offers a great price, and even if the farmer wants to sell, the answer is no. The reason the farmer can’t accept this offer is because it’s not permitted by the government. Alternatively, the consumer can drive back into the city, find a big block in an existing suburb, and enquire if the owner would consider redeveloping his/her property and build townhouses, which the consumer is willing to buy. The answer is still no for the same reason. Developers respond to the incentives that are created for them by government regulation.

Permit more housing

The government can make housing more affordable by adding greater flexibility and efficiency into the systems that control land use. The right to supply new housing should be given to a far larger and more diffuse group of property owners. This will increase competition among suppliers, and give consumers greater choice. If housing supply responds to housing demand, housing will not become more unaffordable. 

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