Is Urban Planning to Blame for Inflated Property Prices?
Every year, a private consultancy firm in the United States called Demographia publishes its International Housing Affordability Survey. The report ranks the least and most affordable major metropolitan markets in the developed world. It focuses on major cities in Australia, Canada, Hong Kong, Ireland, Japan, New Zealand, Singapore, the United Kingdom and the United States.
In the most recent survey, Australia was in the spotlight, as both Sydney and Melbourne were near the top of the list of the most unaffordable cities in the world. Hong Kong is the most expensive, and Sydney came in at the number two spot. Vancouver narrowly beat out Melbourne at number three.
Measuring Affordability
To effectively measure affordability, it’s necessary to compare median house prices in a market to median incomes. This can be expressed as a ratio, for example, four to one, where home prices are four times the average annual income. The same figure can also be expressed as a median multiple, such as simply four instead of four to one.
Demographia considers a median multiple of 3.0 or less to be “affordable,” while a median multiple over 5.0 is “severely unaffordable.”
Here’s a list of the top 10 least affordable major metropolitan markets of the world:
City | Median Multiple |
Hong Kong | 19.0 |
Sydney, NSW | 12.2 |
Vancouver, BC | 10.8 |
Melbourne, VIC | 9.7 |
Auckland | 9.7 |
San Jose, CA | 9.7 |
San Francisco, CA | 9.4 |
London | 8.5 |
Los Angeles, CA | 8.1 |
San Diego, CA | 8.1 |
The 10 most affordable major cities were all in the United States:
City | Median Multiple |
Buffalo, NY | 2.6 |
Cincinnati, OH | 2.6 |
Cleveland, OH | 2.6 |
Rochester, NY | 2.6 |
Pittsburgh, PA | 2.7 |
Detroit, MI | 2.8 |
Grand Rapids, MI | 2.8 |
Oklahoma City, OH | 2.8 |
Saint Louis, MO | 2.8 |
Columbus, OH | 2.9 |
Melbourne City Skyline
As you can see, Melbourne is nearly four times more expensive and Sydney is nearly five times more expensive than the most affordable city, which is Buffalo, New York. If it’s any consolation, Hong Kong is nearly twice as expensive as Melbourne.
As we all know, Sydney got a lot more expensive over the past year. The median multiple jumped 2.4 points, up from 9.8 last year. This was the largest one-year increase ever recorded by Demographia.
The survey also noted two other facts about Sydney. First, Swiss-based financial services company, UBS Group, rated the city as the third most vulnerable market in the world to a real estate correction, behind London and Hong Kong. Second, Sydney’s housing affordability is now worse than that of the U.S. West Coast during the housing bubble of 2007.
Looking at our nation as a whole, Australia ranks as the least affordable place in the world to live outside of China. Demographia claims the nationwide median multiple is 5.6, but as Macro Business points out, the median of all of our cities weighted against population looks a lot more like 8.4 to one.
No matter how you measure it, Australia is clearly an expensive place to buy real estate.
Why is Australian Property So Expensive?
Australian property is expensive due to a number of reasons. Most economists point to factors that impact demand, such as favourable capital gains tax treatment, negative gearing tax benefits, the availability of cheap credit, foreign investment, state grants and booming population growth through immigration. However, the Demographia report highlights a different factor, one on the supply side.
The survey unapologetically blames inflated property prices on “strong land use regulations aimed at urban containment.” Urban containment is the practice of councils placing barriers around suburban expansion to encourage density near public transport and within walking distance of suburban shopping.
Demographia claims that these policies “severely ration land for development” by restricting supply and forcing density growth into specific areas through zoning laws.
In the introduction to the report, Bob Day, a Senator for South Australia, sounds off on the issue by stating the following:
“It is undeniable that demand factors played a role in stimulating the housing market… However; the real culprit, the real source of the problem, was the refusal of local and state governments and their land management agencies to provide an adequate and affordable supply of land for new housing stock to meet demand.”
The historical data seems to back up his view. Prior to 1987, median home prices in Australia remained, for the most part, within the range of from 2.0 to 3.0 times median household incomes, as the following graph indicates:
It was also in 1986 and 1987 that urban containment policies began emerging within state planning departments. Since then, councils have continued to heavily regulate density and restrict development to predetermined zones.
And since that time, unaffordability has been on an upward trajectory.
Demographia’s report further highlights how urban containment and high property prices tend to go together throughout the world. It notes that every metropolitan market with “severely unaffordable housing” in their survey has “severe restrictions or even prohibitions on new housing development on and beyond the urban fringe.”
It’s tough to make a case to deny the connection between urban containment policies and high property values. So, is this the price we must pay for a higher quality of life? Is it a coincidence that four of the five most unaffordable cities in the world all make the top 10 list of The Economist’s most “livable” cities?
What Could This Mean for the Future of Property Prices?
I still hold to the conviction that the ultimate reason real estate is so expensive is the availability of cheap credit. If the flow of credit into housing diminishes, property values will fall, as we’ve seen over the past few months since APRA imposed its will. But if Demographia’s assertions are true, our zoning laws may provide a floor under real estate values, if and when the next economic shock wave comes from overseas.
That said, if the belief gains momentum that urban containment is the primary culprit for high property prices, political pressure from the growing discontent amongst first home buyers may force state planners to loosen development restrictions. This would then put downward pressure on property values, as supply of developable land would increase.
For the time being; however, it seems the property bulls in Australia have another feather to put in their caps.
What Do You Think?
Are state and local council planners primarily to blame for home unaffordability in Australia or is this a secondary driver?
Are urban containments policies here to stay or will pressure mount to loosen zoning restrictions?
Comments
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Hi Jason,
Hehe, when I read charts like this, it reminds me of the old saying
“Lies, damn lies, and statistics”. Just a quick look at the so-called “Top 10 Most Unaffordable” is quite laughable, based on common knowledge of other major cities (Tokyo, Singapore, London, etc).
For some reason, this Demographia group seems to be rather selective with its data. If you will, do check a few of those cities mentioned using this link :-
http://www.numbeo.com/property-investment/gmaps_rankings.jsp
e.g. London on that map shows a figure of 35 times, while your chart for London shows less than 9. Check these cities on the map also – HongKong 37, Tokyo 26, Taipei 26, Singapore 23, Rome 20, Paris 18, Naples 17, San Francisco 13, Brooklyn NY 13, etc, etc – and we haven’t even scratched the surface yet. Why weren’t ALL of them above Sydney?
Suffice to say there are MANY cities that show numbers of 20 and above – yet Sydney with a figure of 12 is second place least affordable ????? What were these blokes smoking when they formulated those charts?
I think those charts are close to mischievous. I had found out a lot re these almost 2 years back, and have included a bunch of interesting info in this post (check the links therein):-
https://www.propertyinvesting.com/topic/4393180-best-advice-dont-invest-into-property-the-australian-market-is-crashing/page/31/#post-4930220
Re your question, Jason – I believe the Councils are a secondary driver – though land is often restricted, they do allow urban infill and relaxing of residential zonings to prevent stifling the industry. Then, when times are right, land is released. What happens then, is that large development groups take over those areas and set their own pricing for H&L packages, thus affecting (lifting)the surrounding market values.
Benny
Thanks for your comment Benny.
I’m not so sure that numbeo.com is the best resource for finding the home price to income ratio, as the data is “user contributed.” For example, there’s no way that London’s median multiple is 33.51.
The median home price in London is around 500k pounds (http://www.telegraph.co.uk/finance/property/house-prices/11959731/Average-London-house-price-hits-500000-as-capitals-housing-market-shows-no-sign-of-losing-steam.html) while the median income is 48k (http://metro.co.uk/2015/11/18/how-does-your-salary-compare-with-the-rest-of-the-country-5511194/). That would put the figure close to the official government statistic of 11.04 (http://data.london.gov.uk/dataset/ratio-house-prices-earnings-borough/resource/122ea18a-cb44-466e-a314-e0c62a32529e).
Granted, that’s still higher than Demographia’s figure of 8.5, which could be skewed due to their methodology of measurement.
If Sydney’s median house price is $1m and the median wage is $82k, then their Sydney measurement is spot-on. That’s still very expensive, and as far as I can tell, the highest in the world, unless we include China.
But yes, reading the report, it’s hard to deny the fact that they have an agenda to blame high property prices on urban containment policies.
Rather than an overall average, why don’t they compare suburbs directly.
I bet Toorak’s average income vs property price ratio is probably similar to Pakenham or Doreen. I am sure it is the high sales of $4M+ that really skew these averages.
As Benny says, developers will charge as much as they can. They aren’t interested in making affordable housing.
Along with the reason that – maybe, just maybe – Australian’s like the council zoning laws. I don’t want to buy a house and then have a 4 storey apartment building built on either side of me. I suspect these laws have come into place from community feedback and I don’t expect that feedback would have changed since 1987. If anything i suspect most people living in actual houses would be even more in agreeance with restricting development to around the train stations. Most families don’t want to live in apartments and have 100 cars parked on the side of their residential street.
Like you said in your article – the expensive cities are rated among the worlds most livable cities. makes sense because people want to live there.
Take away the rules, change the zoning laws, and we end up with a place noone wants to like. prices will go down for sure, because noone will want to live there.
Good points. Perhaps it will come down to who will win the battle over zoning laws – the haves or the have-nots.
Apartments next to established houses is not the issue here. It’s the complete lack of opening of new greenfield development because of the irrational fear of ‘urban sprawl’ in the least populated continent on earth.
Large developers price their products to sell, not to gouge. The high price reflects the massive investment and long lead time for development, coupled with the very real risk of having significant investment derailed by nimbys or non-local activists.
The study is correct ‘it’s the supply, stupid’. High demand only produces high prices when supply is constrained. If credit ease caused high prices why not for other financed items like cars, boats and planes? Because those items have supply matching the demand.
An interesting read. For me the underlying issue is the cost of harvesting land i.e. infrastructure costs. For years NZ land developers have been able to piggy back on existing infrastructure established post war, at minimal cost, which has kept retail land prices down. This is no longer the case, due to as you say, crazy Planning theory of ‘ring fencing’ urban limits and ‘obstructing’ roading solutions here in Auckland. This combined with the lack of will of Govt and local authorities to think ahead and plan and commission infrastructure solutions – albeit over private land holdings.
Central Govt did step into the Auckland scene with the housing accord, which provided fast-track Planning assessments / approvals with a tag that 10% of proposed dwellings had to be ‘affordable. The model was flawed from the get go as it delivered 1000’s of development Lots (on paper) but very few actual dwellings (as yet) Main reason – why would a developer bear the risk, and hand profit over to a third party? there’s lots more to be said……. The solutions?: Govt infrastructure bonds (with a hi-yield) is one answer. Introducing competition in materials supply is another. ‘Encouraging’ land-bankers to release land is a third component.
Thoughtful insights Bob, thanks.
In the comments for the article “the ultimate reason real estate is so expensive” I stated that the main reason why the prices are so high is that government restricts supply which drives prices up. Looks like there was a merit in this proposition after all.
Anyway, as a property and land developer I can confirm the poor state of planning laws in Australia which undermines ability of developers to offer affordable land pretty much anywhere in Australia.
Another reason for high property prices, that have not been mention in detail is tax regime here in Australia. There is no CGT on primary place of residence and no land tax which encourages land hoarding on a massive scale and on top of it there is no inheritance tax.
Someone with zero income living off pension or centerlink handouts can be easily sitting in a 3m-4m house and then leave it to their children, all without paying a single cent in tax.
Compare that to US where there is a property tax that is in the rage of 1-2% of the assessed property value and on top of it there is a CGT on all properties. What it means is that if you can afford then you live in a nice house, however the moment you can’t afford payments you have to sell which encourages a better land utilization. Also, if government forked out cash to build infrastructure close to your property then you will have to pay via higher taxes.
In terms of changes – I do not believe that we will ever have a political will to change planning laws in any meaningful way. Infill development is really a very poor policy that only benefits current property owners who gain a tax free windfall selling to a developer. Everyone else is a loser – developer takes high risk and often ends up making a really average profit. Buyers get a substandard product with cheapest fittings, low quality construction, small units. Council gets s94 contributions, but then ends up with a long term problem of ugly buildings and increased population without proper infrastructure put in place.
Proper policy would be to acquire all land within 20-40k radius around CBD, do a clean slate planning, then demolish all existing buildings and build a well planned livable cities, not the ugly shoe boxes.
Thanks for the insightful comments Dmitry, especially regarding the impact of urban containment. I’ll stick to my guns that the availability of cheap credit is still the primary driver of value, but the restricted supply of land seems to be a close second. And our tax laws have clearly been a massive driver of demand. That said, in the States an investor can defer CGT as long as sale proceeds are reinvested in real estate (1031 Exchange). I’d take that over a 50% CGT discount any day.
Dmitry notes two ‘small’, but IMO transformational taxation ideology concepts – the taxation of the home as a (potential) Income-producing Asset, and an inheritance tax.
The argument against (old pensioner evicted from family home) is weak – proper planning and budgeting ensures sufficient liquid assets held to cover costs of holding asset.
A government prepared to introduce a significant ‘wealth’ tax will instantly (lose all corporate donations and be voted out)…..sorry, I meant to say reduce/eliminate the Federal (and State) debt crisis.
Make it difficult to hold on to wealth, but easier to accumulate. Less generational rich, greater allocation and efficiency of resources on a national scale.
Markets are affected by both supply (Councils) and demand (tax concessions and historically easy money). But what frustrates me is that many Council members are unaware that their planning restrictions impact on real estate prices and housing affordability. And yet many believe we could govern Australia with only the Federal Government and Councils.
Hi Jason,
Its common to hear the argument that the reason why Australia has planning laws that restrict urban sprawl etc is to avoid having to build costly roads, public transport, new schools, shops etc to service the far outer fringe areas.
People seem to view Urban sprawl as the wrong way to grow a city.
I am very suspicious of Australia’s planning policies. Just view google maps. Some of our major cities look atrocious from above. Perth, Adelaide, Melbourne are the main culprits.
We have this infill policy which crams more houses on what use to be a 1 house lot. There is no room for trees, yards etc. People have to share driveways with others (common property). Also you will notice we have a lot less public open space.
Now lets look at the united states or Canada on google maps. Populations in the US dwarf Australia’s population so you would expect to see lots of infill like Australia.
But Guess what? totally opposite. North America with all their population have managed to still retain large lots for their population without having to do infill. Their estates have ample public open space, big winding roads, large houses (some with dual access in the form of rear laneways.
Compare north America’s demographics to Australia’s (land mass, population, GDP/ income per capita,tax rates, habital land, civil project building capabilities). You will find that any argument Australians use to justify why we have ruined our neighbourhoods with infill does not hold. Sometime in the past we have allowed central planners to convince us that we cannot afford to sprawl and create satellite cities etc.
Australia is as far as I can see one of the only countries in the developed world who have adopted this way of growing cities.
Without a doubt this has contributed to high prices, I’m not sure though if it deserves to be labelled the number one reason why property is so expensive.
Other reasons such as the abolishment of laws restricting women to work post WW2. This gave household more disposable income which found its way into property.
My parents bought their house in Perth for 40k in 1984 when I was 2 years old. At the time my fathers wage of 15k a year was all that was needed to support a mortgage which was about a 3:1 ratio. Not only did our parents (boomers) get away with only one person working they also got far more land for their money. Today you would be lucky to get 400sqm2.
The reason why we have been given cheap and easy credit is because US president Richard Nixon took away the gold standard backing the currency thus allowing unlimited amounts of fiat credit. Australia followed the lead of the US.
It should be noted also that Australians have a love for property. This is also the reason why we have run up the prices.
If we as a country were more industrious and followed other countries like Germany, U.S. etc and focused a bit more on inventing things we probably wouldn’t have ended up here in this debt.
We would have realized that owning multiple residential properties in a bid to hoard future demand and cut of genuine first homebuyers is not a wise action and quite inconsiderate as we are hurting our fellow future generations.
There is nothing wrong with sprawl, just look at the US/Canada.
Our planning policies will end up forcing us to live in a city which remsembles the city’s in the stallone film Judge Dredd.