June 16, 2021 by Dymphna

Why freedom = high house prices

The OECD has shown us a link between democracy and house prices.

One of the key questions I hear a lot is why are Aussie house prices so high?

And look, they are. They’re high relatively to where they’ve been in recent years. They’re high relative to incomes and rents and pretty much all the things that matter.

New data in the Australian Financial Review this week shows that over the past 20 years, we’ve had the fourth fastest house price growth in the OECD, behind only Sweden, Canada and New Zealand.

We also have the second highest mortgage debt in the world:

Now people who are new to the game look at this and think, we’ll prices are high, so they’ll have to come down at some point. They might even say it’s a bubble.

But we’ve been hearing about a bubble for at least twenty years now, and I still haven’t seen anyone make a good case for it.

So the question remains, why are house prices so high, and why are they going to go higher yet?

The OECD reckon they have an answer for us. They’re a little late to the party, but they think they have it figured out.

We’re just not building enough houses.

Thanks, rocket scientists:

Planning and zoning restrictions are a key problem behind Australia recording the fourth-fastest house price growth out of the world’s advanced economies over the past 20 years, according to a new report by the Organisation for Economic Co-operation and Development.

Local households are the second-most indebted in the world and it takes six years longer to afford a home in Australia: 16.4 years of disposable income for a 100-square-metre dwelling versus 10.4 years for the OECD average.

… Paris-based OECD director of policy studies in the economics department, Luiz de Mello, said low interest rates had contributed to rising house prices.

But restrictive regulations were also a leading reason why the supply of new housing had failed to keep pace with demand from high population growth and strong immigration levels before the pandemic, he said.

“Australia has high housing costs relative to incomes and house prices have increased very quickly over the last 20 years,” Mr de Mello said.

“Supply has been rigid because of regulatory measures such as restrictive land use regulations and restrictive zoning in many cities.

“Greater flexibility in land use regulations and zoning such as height caps in cities, and the speed of administrative processes for construction, would make supply more responsive to the increase in demand.”

Ah, that old chestnut. Zoning and planning, land release and density.

And look it’s true. Everyone knows it’s true. We haven’t built enough houses to keep pace with population growth.

We know it’s true and yet we just can’t fix it.

Why? Because it would involve coordinating across Federal, State and Local Government jurisdictions. It would mean getting the greenies and the NIMBYs on side, as well as the land bankers and developers.

It’s a political nightmare. 

And look, a lot of that ‘red tape’ makes good sense. I’m personally a fan of preserving some historic areas in our cities. I don’t want to see them all replaced with 50-storey apartment complexes.

I at least want to have a discussion about it.

It’s just the nature of democracy. It’s slow. They don’t have this problem in China. If the government wants to build a high-rise tower, they just make it happen.

So is it any surprise really that the four most expensive property market on the planet are also four of the freest – that they’re often held up as examples of stable and highly effective democracies?

But democracy always comes with a price.

And in Australia’s case, it’s house price growth that continues to lead the world.

And I just don’t see that changing any time soon.