High land prices are killing the housing construction industry: Bob Day

High land prices have all but killed the Australian housing industry.

Lower housing starts has led to lower GST revenues (house construction attracts full GST), and lower stamp duty receipts are crippling state budgets and cruelling the chances of low and middle income earners to get a start in the housing market.

What has caused this slump in housing starts? Land prices.

Raw land for new housing developments should be close to its agricultural value – in other words, around $10,000 per hectare. But land released for residential development fetches up to $1 million per hectare – 100 times the agricultural price.

Government land management agencies and private land developers may well argue a lot of land has been released for residential development, but clearly it is not enough.

Only when urban growth boundaries are removed will we know a piece of land’s true value. It will then be a trade-off between price and distance. People may be prepared to travel another 10 or 15 minutes by car (10 to 20 kilometres) to get a cheaper block.

To highlight the “‘X’ years supply of land available” argument, I heard a state bureaucrat say recently that the government had released enough land for 15 years’ supply. I raised my hand and asked “15 years’ supply – at what price?” He didn’t know what I meant. I said “at $200,000 a block it may well take 15 years to sell. So why don’t you double the price and then you’ll have 30 years’ supply?”

These points highlight the fact that, as with most central planning, housing planning is based on a fundamental flaw – that price does not matter. But as we know, price does matter. Imagine the demand for housing if land was $100,000 per block cheaper. Think LCD, LED and plasma TVs over the past five years.

Australia does not have, and never has had, a housing affordability problem, it has a land affordability problem. The cost of building a new house has hardly moved in 20 years. Land prices however have skyrocketed. By restricting the amount of land available on the urban fringes of our cities, state governments have sent the price of entry-level housing through the roof.

The reasons state governments give for these restrictions all centre on urban planning. They have persisted with their policies of urban densification (squeezing more and more people into existing suburbs), an idea that has failed all over the world.