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Price not right in debate over great Aussie dream

 

The Sunday Territorian of June 28th carried an interesting article written by Corey Sinclair, suggesting “Baby Boomers” should give “Millennials” a break.  While there are a few comments in the article I would like to discuss with Corey, his point about a lack of fairness with respect to relative house prices in 1980 compared with today is a legitimate one.

 

Corey states that the average house price in Darwin has moved from $37,500 to around $625,000 over the past 35 years, whereas inflation alone would have resulted in average house prices of only about $149,000.  Clearly the cost of a house compared to average incomes is much more expensive today than in the 1980s.

 

During the early 1990’s, the term “Ecologically Sustainable Development” (ESD) began to pervade relevant disciplines in Australia.  It referred to development which aims to meet the needs of Australians today, while conserving our ecosystems for the benefit of future generations.  Application of Ecologically Sustainable Development principles requires consideration of the wider, long-term economic, social and environmental implications of our decisions.

This is relevant to the house prices issue because a key principle of ESD is intergenerational equity.  In addition to avoiding leaving a legacy of a badly damaged planet for future generations to deal with, the principle of intergenerational equity means that society should be ensuring a critically important element of the costs of living like housing remains affordable.  So where have we gone wrong?

 

The key issues that appear to have had the biggest impacts on housing affordability in Australia include increased taxes, land supply rates that have not matched demand, additional “red tape” and regulation and the almost universal application of the “user pays” principle.

 

One of the big ticket items is taxes, which can make up over one third of the total price of a property.  These taxes include the obvious ones like GST, Stamp Duty, infrastructure charges (levied by Government, local government and water authorities) and planning charges.  But there are also less obvious taxes such as the hidden tax component due to the monopoly of supply that the Government has over land release.  This means the sale price of the land is higher than the value of similar land that is not available for residential use.

 

Another major contributor to increased costs is tardy land release programs which do not match demand.  Each year UDIA issues a national “State of the Land” report, to examine whether or not land releases are keeping pace with demand for new housing.  Sadly, land release usually falls well behind where it should be.  Because real estate prices are determined by demand and supply, it is clear that prices will increase when there is insufficient land release to meet demand.

 

Unfortunately “State of the Land” does not yet include information for the NT.  But it is clear that increased demand for housing in Greater Darwin after around 2005, coupled with a shortage of supply, created a significant increase (around $200,000) in the cost of land.  In contrast, a strong emphasis on land release programs by the current Government has resulted in supply exceeding demand at present, and prices have levelled off.

 

House construction costs obviously need to increase with the costs of labour and materials.  But increased regulation (the dreaded “red tape”) has also added significantly to the costs of construction since the time Corey’s grandparents bought their first house.  Inclusion of items like air conditioning, built-in cupboards, ensuites, as well as many other features, have also added to costs since the 1980s.

 

The industry now delivers a lot of infrastructure that was not included thirty years ago, such as underground power, high speed internet, parks, bicycle paths, improved lighting and street signage, and these all add to costs.  But additional infrastructure charges have had a very large impact on the costs of housing.  Today new home buyers entering the system are required to pay all of the infrastructure charges (the concept of “user pays”); this was not the case in the 1980s.

 

To address the problems Corey referred to, UDIA proposals include:

 

  • · The Commonwealth should work with state governments to prepare comprehensive strategic plans for future urban infrastructure, land-use planning, and land supply, to align with forecast population growth;

 

  • · Stamp duty on property purchases should be phased out, and replaced with more efficient taxes, such as a broadening of the GST;

 

  • · Governments should avoid revenue raising through the application of up front developer charges, and should seek to fund infrastructure through recurring charges directly related to specific infrastructure investment, over extended time frames; and

 

  • · State and local government taxes and charges should be excluded from GST calculations on land development, to reduce double taxation and improve tax system integrity.