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Raising Global Consciousness

The common factor behind affordable house prices in world markets is a high property tax not deregulated markets

What has caused the large increase in house prices in Australia that are now coming to haunt us in the form of a housing affordability crisis?

Is a shortage of land supply caused by state government controls the sole reason for the price increases?, and will deregulation of this function bring prices back to affordable levels such as those found in Texas?

Does the Texas model have something to teach us about keeping housing prices affordable? Is there anything common about affordable housing markets across the world that may be a key explanatory factor for their affordability status?

My quick answer is there are many causes behind the price rises. Amongst these are the supply of land, the demand for housing, expectations of the future price of housing and land, an increased ability to pay more for housing (lower interest rates, easy availability of credit, reduced lending criteria etc).

The common factor in affordable housing markets is a high property tax.

I disagree withe the protagonists like the right leaning think tank -The Institute for Public Affairs (IPA) - and John Howard who blame the whole price rise on land supply shortage and claim that falling interest rates played no role in it. I agree that supply shortages are a factor but to the full explanation. Look at the IPA analysis in more detail and you will see that real price of rural land doubled in the two years 2001/02 to 2003/04 - their own analysis disproves their point and demonstrates the impact of interest rates but they are blind to it.

I disagree with the IPA analysis of the Texas housing market . They use the Texas market as an example to prove their assertion that land shortages and not falling interest rates are the sole driver behind housing price increases worldwide. They look over the recent past and note that while housing prices in most of the world increased as interest rate fell they remained constant in Texas. Why did they remain constant - why didn't the prices increase when the same monthly mortgage repayment could now buy a more expensive house. The reason according to the IPA is that the supply of land in Texas is deregulated and this means that the demand for housing can never overwhelm the capacity of the market to supply housing. Therefore prices don't rise if demand increases as it does when interest rates fall. I agree that it is a contributing factor but it misses the main reason - the high property tax rates in Texas.

So perversely - and I say this because the IPA is a free market think tank - Texas does provide a model for how we can keep housing affordable and avoid house price bubbles. But the solution is a socialising high property tax rather than the free market deregulation of land supply.

How the IPA and their cohorts could have missed the high property taxes in their analysis is beyond me. Maybe they didn't do their research properly or don't understand economics and human behaviour. Or maybe they were just being totally dishonest and hoping they would be able to spin the property tax issue out when it was discovered.

Texas is not the only example of house prices being constrained by high property taxes. One of the main proponents of planning deregulation as the key to maintaining affordable housing is a website called Demographia.com. They have made a survey of housing prices in 159 markets around the world. They found that in only 42 of these markets the ratio of median house prices to median wages less than 3, their definition of affordable housing. So I did a quick internet search on property taxes in those markets - guess what was common - high property taxes. And like most taxes they are not that popular.


Land supply deregulation would help reduce house prices but not uniformly across all parts of a city. It's major effect would be on the fringes of cities in virgin land developments and in existing suburbs close to these areas. But it is unlikely to have much of an impact on existing built up suburbs that are in high demand. So we would still be left with high house prices and the associated problems that we can now start to recognise they bring. What looked like such a positive thing initially has left us less resilient as a nation and as families and individuals. For all but the wealthy, double incomes are now required, 30-40% of income needs to go into pay the mortgage. In systems language speak there is no buffer in the system.

My recommendation - if you want to reduce house prices across the board - is to scrap taxes that are levied when properties are bought and sold. These taxes distort the market. Replace these taxes with a high property tax that is phased in over say 10 years. There would need to be exemptions and reductions available for retired people, disabled, unemployed etc.


Background Information

With the housing crisis hitting centre stage there is a group of organisations and individuals who have a very clear position that there is only one reason for the price increases and that can be sheeted down to a shortage of supply of land. Moreover, they claim that the sole reason for this shortage of supply of land is due to poor state government planning, over regulation and land rationing.

"There is a real problem in Australia about the affordability of the first home, and it's quite clear that the main cause of the high cost of housing in this country is the lack of supply of land," - John Howard, Prime Minister

"High home prices are due to state government controls." - Alan Moran, Institute of Public Affairs

Alan Moran has penned also penned a 93 page document titled "The Tragedy of Planning" in which he explores this theme in more detail and comes to the conclusions that interest rates have played a negligible role in the increase in housing prices. As the basis for his argument he uses information from Demographia.com. which as I explained earlier tries to link affordable housing markets to land deregulation while totally failing to mention anything about land tax rates as a possible cause.

He also uses charts where he compares Australian residential and farming land prices over time (figures 2 to 5). His logic is that farm land supply isn't constrained and therefore will not increase in price when interest rates fall. If the supply of residential land was not artificially constrained by planning regulations its price would behave like rural land. But have a close look at figure 5 and you will see that the real price of farmland looks like it has doubled in the two years between 2001/02 and 2003/04. Not a good look for an argument that says that interest rates have nothing to do with the price of land. I am amazed that he didn't pick this up or no one else commenting on this issue has.

Now we have an initiative called The Great Australian dream project. - to quote the front page of their website its a "joint initiative of the Institute of Public Affairs and the Housing Industry Association, The Great Australian Dream Project has been created to promote research and inform discussion on the major causes of housing unaffordability in Australia and to encourage the adoption of policies that will once again put home ownership back within the reach of ordinary Australians"
It was launched by no one less that Peter Costello and is hosting a nation wide tour by Wendell Cox the man behind Demographia.com who as I have pointed out has no idea of what is driving housing prices but is on a free market crusade.

If you know of anyone who wants high quality strategy/policy work done I am available for hire - I used to work for Boston Consulting Group