The true cost of NIMBYism

A home is the biggest purchase most Australians will make in their lifetime and yet most of us know very little about the forces that determine what types of homes are available to live in and what we must pay for them. Most of us think we have a pretty good idea of what our homes should be worth, but home prices, like prices for all private goods and services, are ultimately decided by the forces of supply and demand.

Put simply, the only possible explanation for the steep rise in house prices over the past few decades, both in outright terms and compared to incomes, is that demand has outstripped supply. The real question is why?

Even those troubled souls who think Australian house prices are in a bubble waiting to burst accept that house prices are the result of supply and demand. They just think demand has been artificially boosted (for example through unrealistic expectations of future price growth), or supply artificially constrained (through developer land banking and the like), and that one day one or both of these forces will quickly reverse.

Much of the recent debate about Australia’s home affordability crisis has focused on the demand side of the equation. Freer availability of credit and lower interest rates have enabled borrowers to spend more on home purchases.

Population growth and the rise of single-person households have also increased the demand for housing, although both these forces have slowed recently.

The tax treatment of housing also influences demand. For instance, the exemption of the family home from capital gains tax increases demand, forcing prices up. But arguably some tax breaks for investor housing also encourage new home supply.

The less well-understood side of the housing equation is what determines the supply of new homes.

A new paper from a team of researchers in the Reserve Bank’s economics group, titled Urban structure and housing prices: some evidence from Australian cities shines new light on why we live in the types of homes we live in and why they cost what they do.

Through a combination of empirical research and new economic modelling, the authors Mariano Kulish, Anthony Richards and Christian Gillitzer highlight some factors that contribute to Australians living in more expensive, smaller and lower density housing than we would if the housing market was not constrained by a number of structural factors, including high transport costs, restrictions on density and costs imposed on new housing supply.

We all suffer as a result, paying higher home prices (if we can afford to buy at all), being unable to live where we prefer and increasingly squashed into smaller homes than we would like.

The urban structure of our cities is obviously a product of history. But what if we could start anew? What would our cities look like if we could build them from scratch to suit our current needs?

To find out, the researchers created a theoretical model of a city with 2 million people, situated on the coastline and with one central business district where most people worked. Of course, real cities are more complex, often with satellite centres such as Parramatta and North Sydney. But some simplification is unavoidable.

The most telling finding from this model is that such a city would be far more densely populated in inner-city areas than all of Australia’s five major cities are today. About half the population would live within 10 kilometres of the central business district.

When the model was changed to produce a city for a population of 4 million, interestingly the footprint of the city only expanded a couple of kilometres, from about 35 kilometres to 38 kilometres. Although there were 2 million extra people in the new city, just 1 per cent of them lived outside the borders of the alternative, lower-population city.

Unrestrained, the market’s natural response to a higher population would be rising densities in inner-city areas. But in the real world, because we’ve constrained new supply in various ways, housing costs have risen.

Indeed, the researchers found Australian cities today are much less dense than European cities of comparable size and more on par, in people-per-square-kilometre, with US cities.
Zoning restrictions are one culprit. In Australian cities, local councils make the ultimate decision on what developments to allow. The Reserve Bank researchers note they found it very hard getting good information on land zoning in the major cities, calling for better data in this area. But by modelling the impact of just one imaginary restriction – say, a cap of four storeys permitted per building – the researchers found it changed the urban structure, increasing housing prices, lowering average home size, decreasing density and decreasing the population in inner-city areas, pushing city limits further out. Sound familiar?

Similarly, a lack of investment in public transport and roads was also found to have an impact on urban structure, increasing house prices in the inner city and lowering them in outer areas, where residents must set aside more of their income to pay for transport costs.

Unsurprisingly, the researchers conclude more investment in transport would reduce the average cost of housing in cities.

Lengthy delays and hurdles in the urban planning process, along with upfront developer and infrastructure charges, also add to the upfront costs of new developments, dampening the supply of new housing. Higher costs are passed on to buyers through higher home purchase prices and ultimately people live in smaller houses than they would like.

It is the ultimate deceit of NIMBYism. Policies which enable existing homeowners in well-located areas to protect their own patch of turf come at the expense of others who are forced to live in smaller homes, further out from the city than they would like and to pay more for the displeasure.

Interestingly, the Reserve Bank researchers found evidence that Sydney’s population density has increased in recent years. But more needs to be done.

If we want to solve the housing affordability crisis it’s clear we’ll have to tackle the supply side. And the only way is up.

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