The Impact of Government Land Regulation on House Prices
Alan Moran
The Impact of Government Land Regulation
Alan Moran, Institute of Public Affairs
Address to the
6th Annual Housing Congress, Brisbane 28 June 2011
The Big Picture
House price increases throughout the world reflect two sorts of forces.
First there is the intrinsic scarcity of some locations – which economists call
“positional goods”. These places are in the scenic areas or close to the fashion
shopping or to major prestige offices. Like the best footballers, they are automatically
valuable and, in the face of consumers’ rising income levels, competition for them
lifts the prices they can command.
Secondly, there is new housing, mainly located on the urban periphery on land that is
plentiful.
We should be relatively indifferent to escalating prices in areas of intrinsic scarcity
since the price system offers the best way to ration and allocate the supply.
But the story of the Australian housing tragedy is one of increasing land prices on the
urban peripheries, and, not unrelated to this, declining lot sizes.
Using the median house price allows us to examine housing costs which exclude the
prices for the dwellings in intrinsically scarce areas.
Demographia collects data on house prices for over 300 cities across the world. To
adjust house prices for different incomes, multiples of household income levels are
used. On this basis, for Australia house prices have increased relative to incomes by
between 60 and 100 per cent over recent years.
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The Impact of Government Land Regulation on House Prices
Alan Moran
As I shall demonstrate, what has amplified prices is a scarcity driven by contrived
shortages of land that might be used for housing, which has amplified prices.
Australian Housing Cost Trends
Australia has one of the smallest urban footprints in the world. Whereas the built
environment accounts for around 8 per cent of southern England and more in some
other European countries it accounts for only 0.3 per cent of Australia, and only two
per cent of Victoria, the most densely populated state.
In spite of this, zoning creates a regulatory shortage of land available for conversion
into housing blocks on the urban fringes of all major Australian cities. Government
planning policies have, as a result, boosted the costs of housing.
The most direct effect of the creation of housing land price premiums is on new
“starter” homes but the impact has flow-on effects throughout the housing market.
For “starter” homes, price in the absence of regulated land shortages would be
determined by costs, since the housing and land development industries are highly
competitive with few barriers to entry.
The costs of a new house comprise three components: the land, the cost of preparing it
for housing and the building of a house itself.
These three elements are shown for three major Australian cities

The cost of preparing a block, depending on terrain and size is between
$40,000 and $80,000. This involves putting in local roads, leveling putting in
water, gas, electricity and so on.

Finished houses with three bedrooms, two bathrooms and a double garage are
readily available from many builders across Australia at $130,000 or less.

Land itself in its dominant use, farming, is worth around $10,000 per hectare,
or around $1,000 per housing block. A regulatory induced shortage of land
raises this to between $100,000 and $190,000 in the areas on the fringes of
major Australian cities.
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The Impact of Government Land Regulation on House Prices
$'000s
Alan Moran
New Housing Costs
180
160
House Cost
140
120
Land
preparation
100
80
Cost of
Unserviced
block
60
40
20
0
Melbourne
Brisbane
Perth
Source: UDIA and IPA estimates
Cost boosting regulatory measures are evident in all three of the housing cost
components.
But, in spite of these, neither house building nor land preparation costs have
outstripped inflation.
The effect of land-use regulation is different. Government induced shortages of
housing land have created a major boost in existing prices and the tightening
regulatory vice has also been the main contributor to house prices having doubled in
relation to income levels over the past 20 years.
The following pictures show lot approvals and the inflation-adjusted price of land in
major cities.
In Perth, notwithstanding the city servicing the mining boom, the provision of new
blocks declined in the period post 2003. The Government’s policy was to concentrate
new developments on in-fill. This led to a doubling of the real price per block.
Lots
18000
$000s
450
Perth
16000
400
14000
350
12000
300
10000
250
8000
lots
6000
4000
Inflation adj
price
2000
0
200
150
100
50
0
2001 2002 2003 2004 20052006 2007 2008 2009
Source: Derived from UDIA
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The Impact of Government Land Regulation on House Prices
Alan Moran
In Melbourne there was a similar though less painful outcome. Lot releases dipped
but then recovered somewhat. Even so, real prices per block increased by 60 per cent.
Lots
25,000
Melbourne
$000s
300
250
20,000
200
15,000
150
10,000
lots
5,000
100
Inflation adj
price
50
0
0
2001 2002 2003 2004 20052006 2007 2008 2009
In Brisbane the government responded to a steady increase in demand by reducing the
supply of land. The number of lots produced fell 40 per cent below those of the mid
noughties. The result was a doubling of real prices since 2001.
Lots
12,000
Brisbane
$000s
300
10,000
250
8,000
200
6,000
150
lots
4,000
2,000
100
Inflation adj
price
0
50
0
2001 20022003 2004 2005 2006 20072008 2009
All of these increased cost trends are in fact even greater than they appear. This is
because the planning process and higher land costs have conspired to bring about a
reduced lot size. This is illustrated in the data for Brisbane. While the average lot
price increased 190 per cent in nominal terms, the price per square metre rose by 215
per cent due to the smaller lot size. Lot sizes fell from 700 to 600 square metres.
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The Impact of Government Land Regulation on House Prices
Alan Moran
Land Use Restrictions
Raw agricultural land sells for around $10,000 per hectare or around $1 per square
metre. But once approval for housing development is given, that square metre of raw
land on an urban periphery of a major Australian city becomes worth $200 or more.
In no Australian city is there an intrinsic shortage of land. Sydney, although it is
hemmed in by parks and mountains, has a considerable acreage of accessible
residential land – the Plain of Cumberland alone could comfortably accommodate an
increase in the city’s population by 50 per cent. Other cities are surrounded by vast
acreages of farm land, most of it somewhat unproductive.
Planning creates a dichotomous land market around major cities: that which is in use
for farming and that which has been given regulatory approval to be used for housing.
This results in three tiers of value for what is a homogenous product: tier one is fully
approved for development; a second tier is outside of any likely development
approval; and in between is land that might at some future time be permitted to be
developed for housing.
The regulatory restraint raises the value of land with approvals because it creates a
scarcity of that land. This does not reflect intrinsic value but is simply due to
government. Without requirements for planning approvals the cost of a block of
ready-to-build-upon serviced land on the urban perimeter would be not $200,000$400,000 but less than $100,000. Existing home owners see their own house values
rise and are protected – even enriched – by the knock-on effects of inflated prices at
the periphery. The losers are those who don’t own their homes.
In my book, The Tragedy of Planning1, restrictions on land use are traced back to the
UK developments in the 1930s which became progressively more restrictive after the
1947 Town and Country Planning Act required all new developments to be approved
and set out to restrict certain areas, though it was not until the late 1960s that the
restrictions in favour of conservation started to bite.
1
The Tragedy of Planning, Alan Moran, IPA 2006
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The Impact of Government Land Regulation on House Prices
Alan Moran
The Australian states followed this approach, led by NSW which from the late 1960s
was starting to focus on planning and provision of services that would lead, rather
than follow, development.
Gradually, we have seen the planning process morph from facilitative to restrictive.
What commenced as a seemingly sensible approach to allow for long term planning
of infrastructure like trunk roads, schools and medical facilities as well as confirming
environmental land use has become a land rationing system.
The affects of restraining supply are seldom understood by those proposing the zoning
system and its further tightening. Most land use restrictions advocates simplistically
assume that, denied space to build on the periphery, people will accept greater
concentrations of homes in existing areas. But imposing these second best solutions
raises the price of all land throughout the urban area.
The price increases stemming from government-induced housing land scarcity is
further exacerbated by other factors. Among these is that new house building on sites
designated for denser redevelopment within existing areas often turns out to be more
sparsely built upon than planned. Incumbent home owners often consider new high
density developments would reduce their own amenity values and downgrade the
value of their properties. The outcome is delays (which add to costs) and reductions in
the numbers of individual titles the development originally envisaged (which further
adds to average property costs).
This is facilitated by planning processes. In Victoria the various steps are
A. Land preparation
1. Agricultural
2. Strategic plan designates it “future residential” a status that could
remain unchanged for years
3. Once trunk infrastructure is closing in on the area a “Planning scheme
amendment” is created with full plans, traffic assessment, vegetation
assessment etc.
4. If this is supported by the local government, they then approach the
State Government and seek a “Ministerial consent” to place proposals
on public exhibition
5. Then goes on exhibition
6. Any objections to the proposal are assessed by a Planning Panel
7. Minister examines and rules on objections in the light of advice from
the panel
8. The ruling can then be appealed at VCAT
B. Having received consent, the infrastructure providers are approached by the
developer
C. Planning permit application is made which incorporates detailed engineering
design.
The losers from this process are those not presently owning their own homes.
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The Impact of Government Land Regulation on House Prices
Alan Moran
Infrastructure Charges - Sharing the Regulatory Spoils
In the eastern states land close to the urban development areas incurs a “growth areas
infrastructure tax” allegedly “to pay for new schools, roads, community facilities and
services, public transport and healthcare.”
This is a totally fraudulent rationale. New areas require no greater government
services’ costs than existing areas. Indeed, with respect to schools, an ageing
population profile in established suburbs allows under utilized school land to be sold
generating revenues that far exceed the costs of new schools in new suburbs.
Hence the charge is a tax designed to ensure a share by government exchequers of the
shakedown on new home buyers caused by land rationing from governments’
planning systems. Rather than removing the reason for that excessive price,
governments prefer a share of the price increase their policies create.
These special levies across the different states are designed not to add to costs. And
in Sydney levies have been reduced to prevent them bringing extra costs. In June
2010, the Government announced a $20,000 cap on council imposed charges (known
as Section 94 Contributions)– a reduction from up to $60,000 per lot in some areas –
which the State Government recognised, “can make a good project unviable”.
The HIA estimates the levies (which include a water headworks component) are as
follows
Infrastructure Charges
$80,000
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$-
2000
a
Bu
nd
ab
ur
g
ild
ur
M
el
bo
ur
ne
Br
is
ba
ne
Q
ue
an
be
ya
n
Bu
nb
ur
y
M
Sy
dn
ey
2010
Source: HIA
Although infrastructure charges are intended to be set at a level that does not impose
additional costs, should the value of the land fall (either because of a collapse in
demand or because of a reform in the planning regulations) the charges would
constitute a genuine price raising tax.
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The Impact of Government Land Regulation on House Prices
Alan Moran
Other Adverse Effects of Planning Regulations
Land restraint also brings other distortions within the economy. Among these is the
likelihood of a shortage bringing speculative bubbles. Housing is well documented as
being a key trigger of the Global Financial Crisis post 2007. However the housing
boom and bust cycle was largely confined to those jurisdictions where government
land use regulation has caused price escalation.
In Germany, a Constitutional provision gives a landholder a near automatic right to
build a house on his land and house prices have been stable for many years. In most
of Canada and the US south and mid west, land regulations do little to restrict the
quantity of land available for housing. House prices in these areas are far lower and
more stable than in the areas like Florida, California, Arizona, and in the UK and
Australia.
The lack of price escalation in areas where there is easy entry into home ownership
can be most readily demonstrated with different US jurisdictions since these all had
the same national fiscal and monetary policies.
The S&P Case Shiller Index measures prices of stand-alone US houses taking into
consideration for quality changes. If the Index is deflated by the CPI to offer a
measure of real price changes, the picture is as follows.
Real house prices
1.6
CA-Los Angeles
CA-San Diego
1.4
CA-San Francisco
1.2
CO-Denver
DC-Washington
1
FL-Miami
0.8
FL-Tampa
0.6
GA-Atlanta
0.4
IL-Chicago
0.2
MA-Boston
MI-Detroit
Jan-09
Jan-07
Jan-05
Jan-03
Jan-01
Jan-99
Jan-97
Jan-95
Jan-93
Jan-91
Jan-89
Jan-87
0
MN-Minneapolis
NC-Charlotte
NV-Las Vegas
NY-New York
This cacophony of change illustrates two facts. First, California (Los
Angeles, San
OH-Cleveland
Francisco and San Diego) and Florida (Miami and Tampa), where land supply is
constrained, had the most pronounced price surges between 2001 and 2007. Falls
over the past three years have led to as much as a halving of inflation-adjusted prices.
Secondly, markets with few land constraints have shown no increases in real prices.
Dallas, Cleveland, Charlotte and Atlanta have shown little movement. Detroit, where
real house prices are down by a quarter from their levels of 20 years ago, is probably a
special case.
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The Impact of Government Land Regulation on House Prices
Alan Moran
The message is that when supply is not regulated it adjusts to demand and roller
coaster price movements are transformed into gentle undulating trends.
Australian Political Parties’ Approaches
Opinion surveys regularly rate housing as among the most important issues. House
purchasing is also the most significant expenditure item for the vast majority of
people. But in spite of the issue’s importance, it was not prominent in the 2010
Federal election campaign.
Labor confined its policy statements to social housing.
The Greens discussed housing policy at length, proclaiming “affordable housing is a
human right”. But their proposals would further restrain land use and inflate land
prices. The Greens’ plans to require higher spending on insulation and bicycle paths
would require increased housing costs that would need to be passed on to buyers.
Family First explicitly called on “state and federal governments to release more land
suitable for housing”.
The Liberals, in a late policy announcement, proposed measures that would actually
promote the relaxation of restrictions on land being made available for housing. The
Liberal Party announced that it would use federal funding to make the States increase
the supply of housing land and reform their planning and approval systems.
Relaxing land restraints allows greater efficiency and reduces discrimination against
the young and others adversely affected by price-boosting regulations. Even so,
political parties pander to existing home owners and some anti-sprawl interests and
are reluctant to back-off once regulatory restraints have been introduced.
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