Sunday, August 31, 2008

Sydney shuts the door on affordable average price

Australia is now at the top of the pack in terms of the shameful measure of housing affordability.  House price collapses in Britain and California mean Sydney has become the dearest place among major cities to buy an average house in relation to average family income.

And several smaller Australian cities -- Mandurah in Western Australia and Queensland's Sunshine Coast and Gold Coast -- are even further ahead of Sydney.  At the same time, only a handful of overseas cities are less affordable than Melbourne, Perth, Brisbane and Adelaide.

At the end of last year, house prices in 227 urban areas in North America, Britain, Ireland, New Zealand and Australia were examined by St Louis-based consultancy Demographia.  All major Australian cities were among the most unaffordable, primarily due to planning policies that ration housing land availability.

Among major cities, all those less affordable than Sydney were in California.  Those cities included Los Angeles, San Francisco and San Diego where there have been 40 per cent average declines in house prices over the past year.

Prices in other unaffordable overseas cities are also collapsing.  London is down 20 per cent on last year, Washington 18 per cent.  Even New York's upscale Hamptons, a familiar name to Seinfeld and Sex in the City fans, is down 17 per cent.

As yet, Australia's regulatory driven house price inflation has not buckled under the whiff of recession.

Though Sydney prices for both houses and units were off a tad in the June quarter, the city has seen nothing like the price carnage experienced in other urban areas across the world where planning restrictions have brought inflated prices.

Australian house prices are being buoyed by all the wrong reasons.  State governments have created a shortfall of available land that has ramped up prices.  This has choked off demand far more savagely than in other highly-regulated housing markets overseas.  The resulting supercharged prices have led to five consecutive years of falling new house starts across Australia.

Australian politicians at the state and local government levels are pinioned between two groups each with their own interest in stopping development.  First, there are those who want to funnel growth into high-density housing and allow no development on the urban fringe.  Second, there are those opposed to inner city redevelopments that may devalue their own property.

Sydney and other cities have building restrictions that comprise zoning rules, lengthy approval procedures, heritage restraints, environmental requirements and, of course, hefty taxes masquerading as "development levies".

The outcome is a chronic shortage of new developments and an escalating price of all housing.

The US cities without draconian controls on the supply of land for housing experienced neither the price boom nor the subsequent bust.  Moreover, those cities have much faster population growth than any Australian city, which nails the canard that it is demand pushing up Australian prices.

Australian major developers have expressed confidence we will not face a recession-induced price crunch.

They may be right but, as the holders of stocks of land and unsold housing, they would say that wouldn't they?

The lessons are being painfully learned.  Regulations that reduce the supply of housing not only bring price rises that prevent aspiring new home owners getting a foothold in the market.  They also nurture price bubbles.


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