We have an affordable housing crisis because we don’t have enough developed land to meet the demand for housing, and housing prices are far too high for first home buyers. The main underlying problem is the cost of land, as clearly demonstrated by Government land valuations.
Chart 1: Price increases in land and houses compared to income and CPI
Chart 1 compares the increase in the value of land (State Government annual valuations) with the increases in housing (land + house), house construction costs, income and CPI. This clearly demonstrates that the construction cost of houses is not the problem. Over the last 40 years it increased at about the same rate as income (except for a period after COVID). So the crisis is due to the price of land.
Each state values land at market value regularly for taxation purposes. Chart 2 clearly shows how government incentives, for both investors and for first home buyers, have contributed to the current housing crisis by increasing the price of land.
Chart 2: Impact of changes in Government policy on land price increases
It is the compounding effect of these incentives that has contributed to housing becoming unaffordable.
The steep rise in land prices is a windfall for government, investors and banks, but the long term effect is already evident in making housing unaffordable for most first home buyers, replacing natural population growth with immigration as families cannot afford many children, undermining Australia’s productivity and refocussing our economy from productive industry to unproductive housing.
Successive governments, at all levels of government, have failed miserably in meeting their responsibility of ensuring their citizens have access to affordable housing. Clearly this can only be achieved by ensuring adequate supply is available. This will not be achieved by private sector land developers who control supply to ensure high prices through practices such as land banking.
All incentives should be abolished, starting with investment incentives. Incentives only keep interfering with the market dynamics and increasing the cost of land.
In addition to social housing the Federal Government should make funds available to local government to manage the development of land to meet basic requirements for sale to first home buyers at the cost of development and interest free. The owners would then be responsible for building the house within their budget. Prof Dr Steve Keen has demonstrated how this can be achieved. This will enable first home owners to secure land at a much younger age and save for the house without the additional cost of exorbitant land price increases. House construction costs increase at a much slower rate than land costs.
Governments have contributed to the housing crisis and only governments can fix it, and that will take a few years. Many other changes have been proposed that will contribute to reducing demand, improving supply and making housing affordable again, but most will only result in marginal improvements. Very few tackle the fundamental problem of grossly overpriced land.
