Land prices in Sydney and Melbourne are 30 per cent higher than they should be, driven by zoning and planning regulatory frameworks which create monopolistic outcomes, state government taxes and levies, inefficient infrastructure investment and historically high levels of dwelling demand.
Recent reports have suggested that the supply of housing has begun to meet demand and thus prices will stabilise for the long term. These reports are thinking about the problem the wrong way.
With constrained supply and increasing demand, working to increase supply would treat short-term symptoms of the problems in the land market but it is not the cure.
The best way to combat the inexorable rise of housing prices is to restructure the land market.
Here are three ways that this could be done without causing shockwaves in the housing market.
Firstly, we could develop a world-first "futures market" for land. Basically, the market sells options on a block of land now, to be delivered at some specified date in the future – much like any other futures market in operation today. Options could also be bought and sold in the same way as existing options markets. This would require realistic 20- to 30-year land supplies throughout Australia.
Currently, buyers compare housing estates, vacant land purchase and house and land purchase with prices set on a "spot" basis. Today purchasers are price takers. In a futures market developers can price land with lower levels of risk, lower finance costs, and greater revenue certainty. Allowing purchasers to select a lot for delivery at the right price point with the right timing will give them greater market power. Purchasers will become price-makers.
Longer-term planning cycle
An options market would flatten the cyclicality of the Australian property market and provide certainty to developers and future purchasers alike. Combined with a longer-term planning cycle, the delivery of these lots as house and land packages could be approved well in advance, thus allowing the delivery system to more easily compensate for short-term demand spikes and troughs while removing a significant portion of the risk associated with developing land.
A second option is to replace the process of rezoning land with the sale of development rights for land designated as suitable for urban development. This provides funding for infrastructure. This model could replace complex infrastructure costs and levies, providing certainty to developers and at the same time put downward pressure on raw land prices.
In this process, governments hold "development rights" auctions selling a pre-approved number of "rights to subdivide" with varying maximum time frames for actual subdivision to avoid price impacts of uncompetitive land banking. This is followed by a second stage where "rights to develop" are then applied to specific lots. This will provide clear market signals and allow the public sector to change the price of these development rights in response to the market, which will allow them to mitigate increases in land prices. "Rights to subdivide" should also include provisions that mandate low entry cost land be made available to low income households and first home buyers.
The third option is to implement a new type of land title – an "affordable lot". This title enables purchase at market prices of pre-designated lots with the right to occupy before payment of the land for seven years. Instead of the "first home owner's grants" system, all first-time purchasers would nominate for a means-tested right to purchase an "affordable lot". Due to lower up-front costs, this would halve mortgage costs while equity is built.
Savings for a purchaser are immense. For a $500,000 house-and-land package in the first seven years, purchasers could save as much as $12,500 a year at 5 per cent interest (based on a 50-50 split between land value and house value). Applying this concession to first home purchase adds tens of thousands of dollars to purchaser equity as pure savings at a time when young households are most vulnerable.
Einstein was right when he defined insanity – doing the same thing repeatedly while expecting a different result is madness. We need to try something different.
About the author:
Brian Haratsis is MacroPlan’s Founder and Executive Chairman. Brian is an economist and future strategist with over 30 years experience as an advisor to governments and major corporate clients throughout Australia and New Zealand. For more information or to discuss your property research requirements, please contact Amy Williams on 02 9221 5211 or email@example.com.