Are Aussie housing regulations the dumbest rules on Earth?

Commenter Colin Docherty sent me an article on the Reserve Bank of Australia’s counterproductive attempt to hold down house prices with tight money:

The Reserve Bank of Australia’s surprise decision to defer its widely anticipated April rate cut for at least another month might have been influenced by the increasingly pricey housing market, which it regards as posing a real “dilemma”.

According to UBS, in March the ratio of Australian dwelling prices-to-disposable household incomes equalled – and is presently surpassing – the previous record of 5.3 times set back in September 2003. And they predict it will climb further.

As a result, Aussie inflation is now sliding far below the 2.5% target, and unemployment has been climbing. This is the same policy the Fed tried in 1929. This is the same policy the Riksbank tried in 2010.  Do central bankers ever learn?

Back in 2009 I ridiculed the idea of bubbles by pointing out that while all the English speaking countries had seen huge house price surges in the early 2000s, only the US and Ireland saw a crash.  Australian prices were particularly robust. But despite the bubblemongers being wrong about these countries, they continued to insist it was all a bubble.  OK, I can sort of understand how people could make that mistake in 2009. But now, six years later, Australian house prices are still up at the same lofty levels.  Is the term “bubble” now so elastic that it can fit a house price boom that’s occupied virtually the entire 21st century?  How about if prices are still high in 2020—will it still be a bubble?  How about 2030?  How about 2050? Of course the bubblemongers will refuse to answer these questions because like soothsayers they always want an “out” if their predictions fail.  They always want to be able to say; “You just wait and see.”

And how about those people who said Bitcoin was a bubble at $25?  I’m will to buy coins from you guys at twice the price you said was a bubble back then.

I still haven’t gotten to the dumbest policy on Earth.  Australia is the size of the continental US, with a population smaller than Texas.  Like Texans, Aussies should be able to afford comfortable single-family homes.  But in the right column of the article linked to above, I see links for these articles:

I can visualize microapartments in Hong Kong, but Australia? Are the zoning regulators there sadists?  What would cause an otherwise sensible country to have such insane housing rules that Sydney would end up with some of the highest land prices on Earth?

Milton Friedman said:

If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand.

Well the Australian government was put in charge of land use in a country the size of the Sahara, and now they have microapartments.

I’m begging regulators there to make me look like a fool.  Pop that nonexistent housing bubble by changing the fundamentals.  Give landowners the freedom to build, like they have in Germany.  Please, make me look like a fool.

Update:  Lorenzo has a much better post today on housing, interest rates and monetary policy.



35 Responses to “Are Aussie housing regulations the dumbest rules on Earth?”

  1. Gravatar of Ben Y Ben Y
    7. June 2015 at 06:32

    So what about the size of Australia. With the U.S. so large, we can afford larger living spaces even with a bigger population. So why are Manhattan apartments so expensive. (I’m asking rhetorically.) are you sure it’s the zoning that’s the issue in Sydney?

  2. Gravatar of Mabuse Mabuse
    7. June 2015 at 06:35

    As an Australian law student who has studied our planning regulations I can categorically answer your titular question in the affirmative, our land use policies are f–king insane.

    Basically the big problem is the disconnect between state governments, who get a lot of kudos from existing homeowners (those ones who aren’t subject to crushing mortgages, at least) as well as environmental and heritage groups for keeping land locked out from development (in addition to being manifestly unwilling to make the infrastructure expenditures that such development would require) and the federal government who use everything from mortgage interest deductions and first homeowner’ grants to the absurdity that is negative gearing to prop up owner-occupiers and small landlords.

  3. Gravatar of Kevin Erdmann Kevin Erdmann
    7. June 2015 at 06:43

    Ben Y, Manhattan apartments are expensive because of the local limits on renting and building.

  4. Gravatar of Mabuse Mabuse
    7. June 2015 at 06:48

    The federal government is doing everything it can to get more people into homeownership and property investment, to be clearer.

    Also Scott, I think you’re misinterpreting what most Australian commentators mean when they say “house prices are in a bubble”. They don’t mean it in the strict economic sense of “house prices are being irrationally bid up and are likely to drop soon” but in a looser political-economy sense of “house prices are being rationally bid up well beyond their fundamental value due to a confluence of government policies incentivising the expenditure of vast amounts of capital on an artificially supply constrained resource”.

  5. Gravatar of Lorenzo from Oz Lorenzo from Oz
    7. June 2015 at 06:55

    The State and Territory governments control land use, not the federal government.

    But we copied British land regulations, starting with Adelaide and Sydney because they have the most geographical positional goods (Adelaide Hills and Harbourside respectively).

    It is very disappointing that the RBA is losing the plot. Australian house prices make perfect sense given the supply constraints.

  6. Gravatar of Lorenzo from Oz Lorenzo from Oz
    7. June 2015 at 06:58

    But central banks seem to be infected with deeply silly ideas about housing policies and monetary policy: which, sadly, they get from their economists.

  7. Gravatar of ssumner ssumner
    7. June 2015 at 06:58

    Ben, Yes, I am sure. Housing costs in Australian cities are dramatically higher than American cities of equal size.

    Mabuse, Thanks for that useful information on housing policies. On the “bubble” question, people are free to define words as they wish. But if there is no implied prediction of a “popping,” then I’d suggest Aussies use a different metaphor than “bubble.”

  8. Gravatar of ssumner ssumner
    7. June 2015 at 06:59

    Lorenzo, Very good points.

  9. Gravatar of ssumner ssumner
    7. June 2015 at 07:08

    Also excellent post, I added a link to this post.

  10. Gravatar of Colin Docherty Colin Docherty
    7. June 2015 at 07:11

    First of all, honored to have my name on TheMoneyIllusion even if it’s as a lowly commenter! A nice “long time listener first time caller” moment for me.

    I feel Sydney has a pervasive conflict when it comes to housing: The city thinks of itself as quite centralised, a “world city”, yet does not have political divisions to represent this. The combination of many small local councils with high power to block development, with the division of state MP seats along, for the lack of a better word, ‘class’ lines has led to intense NIMBYism. Everyone agrees Sydney should be doing more to become the post-Olympic poster world city, as long as it doesn’t affect them in any way.

    A more news cycle related problem was the corruption of the last NSW Labor Party government, in which many developers in order to “skirt” this myriad of development regulation and laws through campaign donations, favors and bribery. Property development is now seen by the people as a corrupt undertaking by would-be used car salesman. These scandals are about 5 years old. If supply was already a problem thanks to the approval mechanisms, “citizen activism” ensured the ticking time bomb would never be addressed.

    If ever there was proof that glamorous symbolic white elephant events like the Olympics can’t change the fundamental drag of bad governance and policy, Sydney is it.

  11. Gravatar of Colin Docherty Colin Docherty
    7. June 2015 at 07:29

    Also a quick plug, I talk about some local govt corruption scandals in suburban Sydney, and how small businesses are wrapped, muzzled and locked in a dungeon with draconian legal requirements:

    In this example, this small business was made to pay $300000+ (off a $400 000 investment in a gym) to offset the cost of 12 parking spaces, all the while the same councilmen are getting rich from “insider trading” zoning changes. Something needs to be done.

  12. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    7. June 2015 at 08:32

    As Kevin Erdman already noted, Manhattan real estate prices are so ridiculous because of its ridiculous land use and building codes, and the ‘temporary wartime measure’ of rent control. Nicely documented in the 1980s Tom Wolfe novel, Bonfire of the Vanities.

    Then there’s San Francisco. Same problem, same causes. As this SFGate piece documents;

    Which is what happens when tenants are ‘protected’.

  13. Gravatar of marcus nunes marcus nunes
    7. June 2015 at 11:55

    Australia caught the “Swedish virus” some months ago!

  14. Gravatar of ChargerCarl ChargerCarl
    7. June 2015 at 12:31

    I refuse to believe anyone’s housing policy is worse than the Bay area’s or LA.

    Ok, maybe London…

  15. Gravatar of ChargerCarl ChargerCarl
    7. June 2015 at 12:34

    Scott, Santa Monica recently just banned 5 story buildings on it’s major avenues. This is a place that will soon be served by the new expo light rail line AND the new purple line subway.

    Makes me want to tear my hair out.

  16. Gravatar of Major_Freedom Major_Freedom
    7. June 2015 at 14:07

    Sumner, you wrote:

    Milton Friedman said:

    If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand.

    You don’t actually side with Friedman on this. You are just using that quote to push your socialist agenda.

    For one thing, Friedman in his later years stated that he had long been in favor of abolishing the Fed. I recognize that this contradicts his earlier promotion of it. Which one is his real belief I leave up to the reader.

    For another thing, you are not even applying the principle behind the statement to money itself. The federal government took over money in 1913, and not surprisingly you speak of a “shortage of money” during 1929.

    What you never bothered to address is how in the world can it be that we can still have shortages of money despite the fact that the onset of central banking was the onset of a significantly enlarged rate of growth in the money supply. That is why the federal government enacted the Federal Reserve Act. It was to reduce the limitations that a non-fiat standard of money presented the feds. It has succeeded in this.

    I am sure we can agree only a fool would entertain the notion that a free market money, or a gold standard imposed by the state, would have brought about more inflation as compared to fiat money. History has shown a dramatic rise in the rate of money production when there are no constraints.

    But how can that square with your feelings on there being periods of shortages of money?

    [Sidebar: You of course look at aggregate spending and claim that shortages occur when aggregate spending declines. This is a shortage defined by the outcome of the utilization of the supply of something. Yet is the supply of something, not the number of times that something is exchanged per year or month, that economics over the last 300 years has referred to as that which can go into a shortage. Economics says the supply of water is what in a shortage, not how many gallons changes hands.]

    So how can we have “shortages in money” despite the fact that right now we probably have more than 10 times the supply that we otherwise would have had if gold were money, or if some unknown free market commodity were money? How can we possibly FEEL like there is not enough money to go around?

    This is the crucial point of thinking were “market monetarists”, as well as Keynesians, and narrow minded laymen, all make the same fundamental error. This error is the belief that the cause for why productions in the aggregate lack a continually growing demand in the aggregate, has nothing to do with productions. For here we have an “excess” supply of labor, an “excess” supply of goods and services, and the sellers all need a minimum nominal demand to make profits, but it is not there. The supply of money is there, and is more than enough to be a means by which total revenues can be say twice what they are now, or more.

    But the spending is not there that would cover the costs of investments made in the past. Why? Why are people not spending money given that the supply is more than enough to be spent?

    The answer, which market monetarists and Keynesians can’t grasp using their theory, is that the investments that have been made are NOT in relative coordination. And, the cause for this lack of coordination is itself the federal government having taken over money and given you the illusion of a shortage of money.

    As with all shortages, they are caused by government. In a free market, shortages of a good are eliminated by a rise in the price of that good. This reduces the quantity demanded down to the quantity supplied. Market monetarists seem to understand this when the good in question is water, or food, or cars, or oil, or HOUSING. But with money, up becomes down, black becomes white, logic turns to illogic, and now they believe that the solution to a shortage of money is no longer a rise in the price of it, but a rise in the supply of money, as if the lack of nominal demand has anything to do with the supply of money being too low.

    I mean have any of the true believers here stopped to think about how in the world can all the inflation of the money supply STILL be followed by the same perceived insufficient supply of it?

    Clearly there is a disconnect here. The same observations are being viewed differently depending on one’s theory. No matter how flawed. Market monetarists have been wrong since the theory’s inception. Yet they continue to spew the same fallacies over and over. No matter what is observed. Falling spending? Has nothing to do with supply, but insufficient printing. It is absurd. It is as if a failed project should have a rising revenue. The economy as a whole is a series of divided projects that come together to produce a supply of diverse goods. If one project fails, that signifies the entire structure is out of coordination. This is what is not understood. Faulty theory.

  17. Gravatar of ssumner ssumner
    7. June 2015 at 14:09

    Colin, Thanks for that interesting information. You probably already know about Lorenzo’s blog, but if not check it out.

    And please comment more often.

    Marcus, You are always one step ahead of me.

    ChargerCarl, That’s right, I wonder why Matt Yglesias is the only person on the left who understands that when it comes to urban planning, conservatives are not the problem (everyone is.)

    PS. Regarding the purple line, define “soon.” 🙂

  18. Gravatar of Major_Freedom Major_Freedom
    7. June 2015 at 14:29

    One of the typical replies I read for the above is:

    “MF, we’ve told you a million times, sometimes people want more money, and in those circumstances it is the job of whoever issues money, to issue more money to satisfy that demand. If they do not, then they would have failed, free market or socialist money issuer alike.”

    This reply as I have shown a million times is flawed, because it implies that people can desire money for its own sake totally apart from what money can buy. It is as if there is such a thing as money being valued in an absence of what money buys.

    Ultimately the flaw in monetarism and Keynesianism with regards to money, are their theories of money. It is what leads a free market advocate in food and water and medicine, to believe socialism in money has an optimal solution that does not itself cause any problems.

  19. Gravatar of Lorenzo from Oz Lorenzo from Oz
    7. June 2015 at 14:49

    Thanks 🙂

  20. Gravatar of ChargerCarl ChargerCarl
    7. June 2015 at 15:03

    Scott, it really baffles me. It stems from some combination of distrust of markets + fear of 1970’s type urban squalor.

    Thankfully young people today don’t fear density like their parents generation did and are, IMO, much more open to market solutions to problems.

  21. Gravatar of Njnnja Njnnja
    8. June 2015 at 05:24

    You can’t talk about Sydney or Melbourne real estate without talking about mainland Chinese buyers. Australia is the second largest country for Chinese direct investment (after the US).

    It’s not so much housing regulations restricting supply as a sudden large influx of exogenous demand. And much of the demand is not merely for a place to live, or even for a good return on capital, but rather, for a place to store value outside of Chinese jurisdiction. As a result, owning cheap land in the outback doesn’t do much good; much better is prime downtown or tony suburban real estate. So certain locations become Veblen goods, and the more expensive they are, the more demand there is for them. Even if housing regulations were as lax as Dallas/Ft Worth, the new affordable houses in the boonies would be bought by locals at a reasonable pace of inflation, while the really nice places would continue to be bid up by foreign millionaires and billionaires.

  22. Gravatar of benjamin cole benjamin cole
    8. June 2015 at 05:54

    Nationwide, NIMBYism rules and no local government screws with homeowners.

    The Fed should just accept reality on this. Housing is going to get more expensive. Not a Fed problem.

    in truth, cities should encourage more and more high-end housing to the max. This would not only bring in wealthy residents, but as wealthy residents traded up, middle-class residents could move into the housing that upper-class people abandoned.

    No one likes chintzily built housing.

  23. Gravatar of Floccina Floccina
    8. June 2015 at 07:07

    Some have said that it is only because of real-state interests paying off local politicians that anything is built in the USA. Perhaps Australia’s politicians are to beholding to the voters, mostly current home owners. I consider local builders paying off politicians to be corruption but I also think of current home owners pushing slow growth policies to be corruption.

    I do think environmental protections are important but new housing can built with low impact on the environment beside people need to live somewhere. And the new housing can be built to have lower impact that the average existing home.

  24. Gravatar of Blue Eyes Blue Eyes
    8. June 2015 at 09:44

    At least Australian planners can argue that there are limited water resources, etc., which may limit suitable development land, possibly. What are Britain’s excuses?

  25. Gravatar of ssumner ssumner
    8. June 2015 at 10:24

    Chargercarl, Yes, maybe the Uber/Tesla generation will rethink all of this restrictive regulation.

    Njnnja, All true, but aren’t even suburban Sydney homes much more pricey than suburban Dallas homes?

    Ben, Exactly.

    Floccina, And you’d think that homeowners would care at least a little bit for their children.

    Blue Eyes, I’m told it’s NIMBYism, not water shortages. I’m also told that they use less water than we do, as it’s priced more appropriately.

  26. Gravatar of Willy2 Willy2
    8. June 2015 at 10:34

    – Australian real estate IS & REMAINS in Bubble territory. There’re some very good valuation metrics available that do point to australian real estate prices being in a bubble.
    – But as Colin Doherty has pointed out there’re a number of reasons why prices – for the time being – will remain that high.
    – Australians can benefit from a number of special tax benefits\deductions (e.g. reduced capital gains taxation) when they become a landlord. It was used to reduce the taxburden. But (as usual) the words “tax benefits/deductions” has lured australians into doing things they’re going to regret (financially) in the future.
    – If you want to see an example of a housing bubble then look at Canada.

  27. Gravatar of LK Beland LK Beland
    8. June 2015 at 12:27

    Considering that Australia is essentially selling real estate to China in exchange for cheap goods, could it not be argued that propping up real estate prices through regulation is profitable from Australia’s point-of-view?

  28. Gravatar of Nopa Nopa
    9. June 2015 at 02:56

    There are clearly a lot of factors that drive housing prices in these places (Australian cities as well as U.S. cities).

    The effect of the myriad of restrictions on supply is like a regulatory quota on housing production. When developers are allowed to only build a limited number of units, of course they maximize their profits and only cater to the high end of the market. It would be irresponsible to the development company and financial backers to not do so.

  29. Gravatar of ssumner ssumner
    9. June 2015 at 04:45

    Willy2, You said:

    “Australian real estate IS & REMAINS in Bubble territory.”

    Did you even read the post? Or do you just like to respond without thinking?

    LK, Possible, but it’s extremely unlikely to be true. The harm would mostly hit other Australians.

  30. Gravatar of Mabuse Mabuse
    9. June 2015 at 05:44

    The Flood-of-Chinese-Investors argument is the most popular media narrative over the affordability crisis (the other, more accurate term our commentators use to describe our current predicament) but it falls down when you realise that it is simply describing a symptom of the problem and not its source, Chinese buyers wouldn’t have piled into our property market searching for a store of value if our house prices weren’t already being bid up by domestic demand. And even if you could call some Melbourne/Sydney real estate “Veblen goods” currently, I guarantee that such conditions would not hold if the structural problems with our property market were fixed.

    But they’re never going to be fixed because doing so would require a bipartisan resolve at both the federal and state levels to do so, but the Liberal Party don’t even seem to think that it’s a problem (witness Tony Abbott blatantly stating that he hopes house prices continue to rise purely because he is a homeowner himself and Joe Hockey saying that people who cant afford to buy a house should just “get better jobs”) while the Labor Party, while willing to recognise and constantly bemoan the problem, simply refuse to consider the structural reforms required to straighten the situation out.

  31. Gravatar of Sean Sean
    9. June 2015 at 08:44

    What about price volatility. Something the general public is not use to with real estate than say the stock market.

    Think of it this way;

    let’s say in a free market median house cost 2x median income, because of supply constraints the median house costs 5x median income two decades later, but now because housing has been such a exceptionally great investment people double down on housing bidding the median house up to 10x income, when even with all supply constraints prices may only be sustainable at 8x income. If it crashes it could drop for short time to 6x income.

  32. Gravatar of Mabuse Mabuse
    9. June 2015 at 10:44

    I can also confirm that even the most peripheral suburban properties are being affected by this, my house, located on the very edge of the north-west of the greater Melbourne metropolitan area, was purchased in 2000 for a little over AUD200,000 and is now worth on the order of AUD750,000. In the central districts and inner suburbs of Melbourne, on the other hand, the median house price has risen to over AUD1.2 Million, meaning that the minimum income a household needs to purchase the median house there and not be classed as a distressed mortgagor is AUD250,000 per annum.

  33. Gravatar of Willy2 Willy2
    10. June 2015 at 05:43

    – In the 1st part you were talking about bubbles. And one of them is in Australia.
    – The RBA not lowering interest rates is also a sign the RBA is acknowledging there’s an Australian housing bubble. But as long as real estate prices keep going higher and (long term) rates won’t rise too much the bubble will continue.
    – But zoning restrictions is not determined by the federal government but by the individual states and local authorities. They determine where one is allowed to build. And those authorities have an interest to keep home prices high.

  34. Gravatar of ssumner ssumner
    10. June 2015 at 07:32

    Mabuse, I was in Australia when Abbott was running, and I formed a very low opinion of him. I couldn’t understand why lots of Aussie conservatives like him.

    Willy2, You said:

    “In the 1st part you were talking about bubbles.”

    Actually I was saying there is no such thing as bubbles.

  35. Gravatar of Jack’s Links | The Zeitgeist Log Jack’s Links | The Zeitgeist Log
    20. June 2015 at 22:30

    […] restrictive building codes and the ubiquity of negative gearing (when everyone you meet from an area knows about a sure-fire […]

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