The Price of Land is hurting Australia
Alan Kohler 11 Dec 2013, 8:12 am
The high price of land in Australia is one of the reasons businesses like Holden and Qantas are uncompetitive and the combination of several recent developments is making the situation much worse.
Australian house prices are already among the highest in the world, both in absolute terms and relative to income, and are now starting to rise rapidly again, especially in Sydney.
Yet new developments in planning laws by Conservative state governments in NSW and Victoria are drastically restricting supply, and at the same time demand is escalating because apartments have become a financial commodity being sold by investment spruikers and the business is rapidly becoming globalised, with powerful demand coming from China especially.
It is a combination of factors that will tend to make Australia even less competitive as housing costs rise and put upward pressure on wages, and put huge intergenerational pressures on families as first home buyers are priced out of the market.
There is now growing demand for investment apartments from self-managed super funds because property is not caught by the Future of Financial Advice legislation that bans commissions paid to financial advisers.
This means developers are able to pay large commissions - usually 10 per cent - to advisers who put clients into apartments that are essentially financial investments.
In some ways it's similar to the boom in tax-driven managed investment schemes, usually based on gum trees, which collapsed spectacularly in 2009. The promoters of those schemes paid 10 per cent upfront commissions to financial advisers, pushing hundreds of millions of dollars into them, before the money was lost four years ago.
Superannuation regulators and industry are now starting to warn about the potential for big losses in the future for self-managed super funds that are being pushed by spruikers and unscrupulous commissioned advisers into high-priced apartment developments that will be hard to rent and even harder to sell when the time comes.
The other explosive new development is the globalisation of the apartment market.
The research director at property advisory firm Charter Keck Cramer, Robert Papaleo, told me yesterday that global developers operating in most major cities around the world have been outbidding local developers for the best sites and, as a result, the apartment market is no longer acting as a traditional housing submarket to service the basic accommodation needs of Australia's growing population.
It's increasingly being distorted by non-housing factors like global demand, residency applications and currency movements.
This is exacerbated by the fact that non-residents can't buy existing dwellings, only new ones, which means all of the rapidly growing foreign demand is being channelled into new stock.
Meanwhile, in Melbourne the state government has given local councils the right to impose restrictive new planning zones that prevent high density housing in the suburbs, and therefore contain the apartments to diminishing areas close to the city.
The Victorian government has introduced what it calls "Plan Melbourne", which proposes 393,000 new dwellings in established suburbs, as well as 200,000 in an "expanded central city" to make housing more affordable, but the plan is now being subverted by the freedom the government has granted to councils at the same time.
Specifically, councils have been given the right to impose what's called a "Neighbourhood Residential Zone" on most of their suburbs, and they're doing it. NRZ limits development to a maximum of two dwellings per lot plus a range of strict design constraints - effectively banning suburban blocks of flats like the ones that were built in their thousands during the housing boom of the 1960s and are still dotted around the suburbs.
Those mostly ugly blocks of 10-20 flats released a lot of the pressure on house prices in the 1960s that resulted from the post-war baby boom, but local communities are now trying to make sure it doesn't happen again.
Glen Eira has already applied NRZ to 78 per cent of its land and others like Boroondara, Yarra, Brimbank and Whitehorse are looking to apply it to up to 80 per cent.
In Sydney, the planning reforms of the O'Farrell government's White Paper on the subject have been watered down by the NSW Upper House and now deferred completely, following lobbying by community action groups.
Chris Johnson of Urban Taskforce, which represents developers, says the process has put the state back many years; "Sydney needs 32,000 houses every year and we are only producing 21,000 now," he says.
Bans on new suburban apartment blocks by local communities plus rapidly growing demand from ‘financialisation' and globalisation means that the apartment market is becoming disconnected from the general housing market. But the distorted prices are infecting the whole.
According to Robert Papaleo, less than 10 per cent of Sydney's and Melbourne's housing needs are supplied by apartments, whereas in comparable cities like Vancouver and Seattle it's up to 40 per cent.
The demand for apartments is only going to grow but supply is being choked. The inevitable result is higher prices and less affordable housing, putting more upward pressure on wages and making Australian industry even less competitive than it currently is.