The New City aims to foster critical thinking and debate
on contemporary public issues, including the future of the Australian labour
movement and the disproportionate exercise of political, economic and cultural
power by inner-city interests on urban planning and national, state and
local politics.
an independent web journal of urban and political
affairs
‘Sydney must stop growing sooner or later’,
demanded Clive Hamilton
of the Australia Institute recently. ‘If the “endless growth”
mentality is not reversed’, he continued, ‘in 20 years time we will
be reading in the Herald of the next plan to lever an extra
million or so residents into a bursting metropolis’.
Hamilton hopes to turn back the tide. His anti-growth outburst is
pure wind, even though the accompanying prediction may prove
accurate (the NSW Government plans for an additional 1.1 million
people by 2030).
Perhaps Hamilton missed the significance of last year’s astounding
United Nations
forecast. More than half the world’s six billion
people will be urbanised by the end of 2007. Several factors are
driving this population drift to cities. Rates of progress vary
between developed and developing nations of course, often starkly,
but a world-wide pattern is clear. Changing forms of land tenure,
new agricultural techniques and technologies, and shifting patterns
of consumption, mean fewer people can, or in some cases need to,
extract a living from the land. Still, population growth rolls on.
At the same time, globalisation and economic deregulation are
transforming urban regions, creating zones of opportunity where
diverse markets for all types of goods and services emerge in the
wake of international trade flows. On a vast scale, manufacturing is
gravitating to the fast growing megacities of the developing world,
where millions are leaving subsistence farming behind. In the
spreading cities of the developed world, traditional manufacturing
struggles to keep pace with building construction, high-tech and
services. A profusion of small operators are sprouting all over
suburbia, offering services ranging from software design to discount
retailing to weekend lawnmowing.
Developed and developing nations alike face the challenge of
settling growing urban populations.
Australia is no exception.
Contrary to received wisdom, enquiry into this complex field
suggests our cities must expand or slide into a phase of slow
decline. In the wake of drought, the Stern Review and now the IPPC
fourth assessment report, climate change hysteria sweeps all before
it. The intractable crisis of home ownership and affordability, on
the other hand, commands only fitful attention. For thousands of
working Australians, the backbone of our suburbs, this is where our
most serious social and economic challenges intersect. Acquiring
decent accommodation for their families means taking on increasingly
oppressive burdens, and this has wide-ranging consequences for the
vitality of our urban regions. Surely, discussion about the future
of our cities starts here.
Throughout its history, Sydney has been a magnet for aspiring
newcomers from all over Australia and the world. So when newspaper
headlines start to declare ‘Workers flee Sydney as rents rise’,
something has changed. No doubt, the city continues to grow and to
attract affluent settlers from local and foreign sources (mostly
foreign: since 2001 Sydney has drawn 76 per cent of its population
growth from overseas). And some city dwellers are moving to the
country or the coast in pursuit of a lifestyle dream (the so-called
‘sea-changers’ and ‘tree-changers‘). But increasing numbers of low
to middle income earners are being squeezed out against their
wishes. NSW's population growth slowed from nearly 90,000 in 2001 to
53,000 in 2004. This fall was partly due to a net loss in population
that year of 26,000 from interstate movements.
The housing affordability numbers are bad and getting worse.
According to a recent Reserve Bank review, 35 per cent of households
now have a mortgage compared to 27 per cent a decade ago and the
number of NSW mortgage holders with repayments overdue more than 90
days rose by twice the national average. Macquarie Bank analyst Rory
Robertson
estimates that house prices have risen 75 per cent faster
than wages over the past two decades. The proportion of
owner-occupiers in the 25 to 35 age group dropped by 10 per centage
points in the last 20 years and the rate for 35 to 44 year olds is
edging down. For most of the 1990s, says Robertson, first-home
buyers accounted for more than 20 per cent of home loans in
Australia but by 2004 it had fallen to just 12.6 per cent, and even
less in Sydney.
The most widely cited measures of home loan affordability in
Australia are the Real Estate Institute of Australia home loan
affordability indicator, the Commonwealth Bank of Australia-Housing
Industry Association housing affordability index, and the BIS
Shrapnel home loan affordability index. A Reserve Bank research
note
on these measures last November said ‘there has been an appreciable
deterioration in affordability since 2001’. It was considered
‘significant that in 2006 the affordability indicator had fallen to
a level comparable to that reached in 1989, despite the fact that
interest rates in 2006 have been very much lower than they were in
1989’.
The news is no better for renters. Sydney’s rental vacancy rate
is running at 1.5 per cent, the lowest in 20 years. And rents are
predicted to rise by 20 per cent this year. Landlords never had it
so good.
Few now deny that housing affordability is a serious social problem,
particularly in our larger cities. However, there is heated
disagreement about its causes, and how to respond. In general terms,
the debate is between those who contend that house prices are
essentially cyclical and others who argue that they reflect
structural distortions. The NSW Government, for example, views
Sydney’s current level of affordability as a function of last year’s
interest rate hikes. These have bumped up borrower repayments and
flattened the property market by scaring off investors. Predictably,
the NSW Opposition says state-based property taxes (especially land
tax) and levies are the killers. The underlying assumption, in both
cases, is that property markets are inherently cyclical, so
conditions for buyers and renters will improve once monetary policy
is loosened or tax rates are adjusted.
The cyclical explanation is attractive to those with a vested
interest in the prevailing system of land zoning, mortgage lending
and property taxation. Left-leaning academics and environmentalists,
who harp on about the boom-and-bust pattern of capital accumulation,
tag along.
Monetary policy, taxes and levies do have a significant impact
on affordability. The federal government can’t just blame the states
in this respect. But the factors driving housing values are more
diverse, complex and interrelated than the cyclical interpretation
suggests. A complete explanation must also focus on the supply side
of the equation, particularly the supply of land, which - for many -
is the real lynchpin of the prevailing system. One leading member of
Australia’s structural camp, Alan Moran of the Institute of Public
Affairs, estimated that ‘the land component, which in 1976-77
comprised 32 per cent of a new home in Sydney, in 2005 comprised 62
per cent’.
Moran is in no doubt that this escalation relates ‘to the squeeze on
land availability originated in misplaced desires to prevent “urban
sprawl”’, while noting that ‘building costs have been stable’. If
land prices remained stable or increased only at the rate of
underlying inflation, says Moran, ‘average new house prices would
have been 40 per cent lower than is presently observed’. This is a
powerful point considering that the median house price in Sydney was
$520,300 in September 2006.
Reports and studies highlighting the impact of land supply policies
on affordability are starting to flow from housing and property
industry associations and analysts. The most influential catalyst
for discussion remains the Annual Demographia International
Housing Affordability
Survey, the third edition of which was
released last month. The survey measures affordability across 159
markets in Australia, Canada, Ireland, New Zealand, the United
Kingdom and the United States by means of the ‘median multiple’
(median house price divided by median annual household income).
The benchmark for affordability is a multiple of 3.0, where the
median house price is three times the median household income.
Consequently, the survey assigns Sydney (8.5), Melbourne (6.6) and
Perth (8.0) to the category ‘severely unaffordable’ (5.1 and over).
Sydney is the eighth most unaffordable market surveyed, less
affordable than New York and London. Australia’s national median
multiple is 6.6, more than double the affordable benchmark.
The survey’s strength lies in its comparative methodology. It’s hard
to dispute a consistent pattern emerging from so many markets with
varying population sizes, histories, locations, industrial and
economic orientations, interest rate regimes and taxation
arrangements. In contrast to the dire Australian findings, 42
markets are assigned to the ‘affordable’ category, including
sizeable American and Canadian cities like Atlanta, Detroit, Dallas,
Houston, Pittsburgh, Quebec and Ottawa. The survey’s message is
clear, and consistent with Moran’s:
Research in the surveyed nations identifies
the cause - the housing cost escalation is principally the result of
supply factors. Where there are significant constraints on the
supply of land for residential development, housing inflation has
occurred. Where there are no such constraints, housing cost
inflation has not occurred. Demand does not raise prices by itself.
Demand can only raise prices where there is insufficient supply.
This conclusion undermines a popular Australian criticism of the
structural or land supply explanation, namely that historically low
interest rates in the early 2000s - which boosted the purchasing
power of home buyers by 60 per cent, according to Rory Robertson -
drove up demand and prices. The NSW Government and some media
elements dismissed the survey on this ground. The Government also
thought Sydney’s dismal ranking was misleading, since the ‘study
included expensive harbourside areas’. This objection would have
more substance if the survey used mean rather than median prices -
median values, unlike means, are barely affected by a few extreme
observations. As the survey points out, the median multiple has been
recommended by the World Bank and the United Nations as a tool for
evaluating urban markets.
On the strength of his paper, Thinking About the Big Drop in
AustralianHousing Affordability, Robertson was trotted
out by the Fairfax newspapers to trample on the structural or land
supply perspective.
One Sydney Morning Heraldarticle featured his assertion that
releasing more land on the outskirts will do nothing to improve
affordability. Desirable inner Sydney suburbs like Bondi, Bellevue
Hill, Bronte, Mosman and Paddington, he said, would remain beyond
the reach of most first home buyers. This is a statement of the
obvious, of course, and beside the point. Land releases improve
affordability on fringe greenfields sites - where a large
proportion, probably a majority, of low to middle income couples
with children are willing to live. Shortly afterwards, the
AustralianFinancial Review quoted him deriding the
Demographia survey because the ‘the 26 most-expensive cities
were high demand locations with a “large, sexy and high profile”’.
In contrast, said Robertson, the affordable cities ‘were generally
low-demand locations’, like Fort Wayne and other US cities which
‘were actually shrinking in size, such as Youngstown, Buffalo,
Dayton, Rochester, Akron and Toledo’. He neglects to mention,
though, that the affordable category also includes the booming
cities of Atlanta, Dallas, Pittsburgh and Houston.
The NSW Government is not oblivious to the need for more residential
lots on greenfields sites, and its comprehensive City of Cities
plan earmarks two substantial north-western and south-western
‘growth centres’ for residential development. But the plan envisages
that over the next 25 years only 30 to 40 per cent of Sydney's new
housing (160,000 lots) will be built in these centres, while the
balance will be assigned to higher density developments in the
city's established inner suburbs. This is unlikely to have much
impact on the affordability problem, however. In this respect at
least, Robertson is correct. Yet the Government rejects expanded
land supply as a solution to Sydney’s housing crisis, claiming that
although 26,000 lots (including 17,000 rezoned by the Government
last year) are currently available, there is simply no demand from
developers and buyers in the weak property market. This reflects a
narrow cyclical view of the market, however, and ignores the
relationship between demand and prices. If lots were more freely
available, their price would be lower and demand higher.
Housing affordability is on the agenda. But until planners and
policymakers break free of their limited cyclical perspective, we
aren’t likely to see more than stopgap proposals to increase the
first home owners grant, cut taxes and stamp duty, increase the
stock of public housing and rent relief - all of which are helpful
but amount to little more than tinkering around the edges. Freeing
up the land supply disturbs powerful interests, who will resort to
flawed economic analysis, and fears of social dysfunction and
environmental degradation, including the prospect that suburban
expansion will increase carbon emissions. All of these grounds are
proved baseless on closer scrutiny. They will be examined in future
editions of The New City.
This
editorial was republished by
On Line Opinion,
Australia's e-journal of social and political debate.
