Bubble, bubble, toil and trouble

So while I don’t see a ‘bubble’ I do see a structural problem which needs to be addressed. And that problem is that where once Australian cities offered a ‘pressure valve’ via low cost, entry level housing on the urban outskirts, the price advantage of this option has now been removed by public policy changes.

The arrival of Urban Growth Boundaries (UGBs) in the late 1990s to early 2000s created an immediate shortage of low cost land for new housing. Market pressure built up within these artificial boundaries and vacant land prices shot up, while lot sizes fell – a double whammy. The GST - which applies only to new housing - added 10% to the cost of a new home, and infrastructure levies compounded the problem, adding in many cases $30,000 to $50,000 per dwelling. Soon enough, we reached the point where between a third and 40% of the cost of a new home could be attributed to new policy initiatives delivered via our planning regulators and Treasuries.

Remember, the actual building cost of detached housing has remained largely unchanged for decades – at around $1000 to $1200 per square metre. But the land cost on which that house sits has skyrocketed, as have taxes on new housing, as has the regulatory compliance cost. So the new house and land option, which was once a low cost pressure valve accessible to young families and low to moderate income groups, quickly became just as expensive as established housing in inner city and middle ring areas. Little wonder the rate of new supply collapsed so quickly.

Look again at the graph above. The market distortion took hold in the early 2000s. It doesn’t matter whose graphs or analysis you use, it was around this time that prices for housing started to move well out of sync with incomes or measures of economic activity. It was also around this time that State Governments were busy extolling the virtues of growth boundaries to ‘contain sprawl’ and plan for ‘sustainable futures.’ It was around this same time that State and Local Governments latched onto the idea of per lot infrastructure levies on new housing as a means of raising revenues. It was around this time that the GST arrived, applying as it did only to new housing. It was a triple whammy effect that has so distorted housing markets that there are virtually no low-cost entry-level options left. The pressure continues to build on existing house prices while the new building market continues to suffer. That pressure isn’t coming from first home buyers, but from people already in the market: upgraders and investors. It’s also coming from overseas buyers, and (worryingly) from geared Self-Managed Super Funds.

Talk of an Australian housing market ‘bubble’ is too simplistic but appeals to media appetites for ‘boom’ and ‘bust’ scenarios. The real story behind Australian housing markets is more complex. For those prepared to invest some time looking into it, the signs of markets distorted by inequitable regulatory and tax measures are immediately apparent, particularly as they apply to new supply.