Land and house prices
Over at Club Troppo, Nicholas Gruen has a nice piece on what is driving the growth in house prices. He’s correctly sceptical of the view that restrictions on land releases on the urban fringe are to blame.
The crucial economic test here is the location-price gradient, measuring the rate at which prices increase as you move from the rural fringe to the inner city. I haven’t got numbers but it’s pretty clear that this gradient has become steeper over time. This is most obvious in Sydney where the Southwest was the last area to boom and the first to bust.
Sticking with supply constraints, Nicholas goes on to mention resistance to urban consolidation, an effect which works in the right direction. Still, it seems to me that this resistance has been much less effective recently than in the past.
It seems clear that the primary motive for the boom is increased demand. Of course, if the supply of land, skilled building workers, materials and so on were perfectly elastic, higher demand would not increase prices. But supply is never perfectly elastic.
Looking at policy, the obvious thing to change, if you want to make it easier for people to buyer houses is to remove taxes on entrants, like stamp duty, and replace them with taxes on incumbents, by removing the owner-occupier exemption from land tax. The fury with which this suggestion is invariably rejected makes it clear that, as a community, we don’t really mind high house prices.