Australia’s population has not dramatically increased compared to the increase in housing costs. So there seems to be a supply and demand problem.

I have heard that in some towns where the population has not significantly increased, (or may be decreasing), divorce and separation drives up to 75% of the real estate market for housing. This is because after a divorce or separation, there is now a requirement for 2 houses instead of 1, and this increases demand over available supply, and the housing prices go up, with a demand for new housing, for no increase in population.

Also Australian’s want to live in houses and not in high-rise units it appears, (although new housing blocks are now so small, people might as well live in units). However roads are now some of the most expensive real estate in towns and cities, because roads take up so much room.

So each new subdivision requires new roads which take up more area, which means new subdivisions have to be located further away from the town or city centre, which means more dependency on cars, which means even more roads, which means more petrol consumption, which means more pollution etc.

I think Australians will have to stop getting divorced, and will have to go high-rise.

In a sense, home ownership is not "natural" for want of a better phrase. What I mean by that is this:

A recent ad I saw advertised a flat in Newtown (Sydney's inner west) for $380,000. The person who will buy that flat will not, in all likelihood, have a spare $380,000. They will have a fraction of that amount which will cover the "deposit". The rest will be covered by money which is not their own (the "loan"). This contributes to the inflated cost of housing because the buyer is not required to come up with the correct amount from their own hard-earned cash.

Logically, nobody should be allowed to buy a house or flat without being able to cover the total cost. After all, when you do your supermarket shopping do you give the cashier a deposit and then get someone else's money to cover the rest? No, if you suggested that the cashier would call the manager. However, you can buy groceries on credit (another way of saying "not your own money"). I wonder if that is inflating the price of food?

Housing is unaffordable because, unlike so many other things in life, it is not bought with up-front cash. And that is inflating the price because if you take commodities away from actual real dollars and peg them to potential dollars (loans) anything goes.

And the sad thing is the flat in Newtown I mentioned is a piece of garbage I wouldn't part with a fiver for. But it will sell, no doubt.

DavidJS has come close to the point, but not quite there. Governments have a dual interest in housing prices being as high as possible. One is obvious, that stamp duty and land tax rise with higher prices. What most people don't realise is that they profit greatly from borrowing. Just think; say you borrow $100,000 at 8%. The interest you pay, $8000 per annum, is not tax deductible. But for the person who collects the interest (bank, investor, it doesn'e matter), it is taxable. So the government collects something like $4000 per year for nothing. Great racket. In addition the person with the mortgage will have to work hard to be able to repay the mortgage out of after-tax dollars. Even better racket.

Yes you're right and when you see a house advertised the stamp duty is not even factored into it - unlike the GST on other products. So as well as being a racket it is false advertising.

Australia historically has had a high percentage of homeowners due partly to the fact that people can get access to finance without having much of their own ready cash (and instead get a loan based on their earning power and other factors). This may not be the case for much longer as house prices start to "globalise". In fact, they're doing that now.

So, I believe that the percentage of Sydney residents who own their own homes will start to match New York, Tokyo or Paris residents. As we race to the bottom with wages, so too will we see homeownership decline. I'd like to think I'm wrong but I'm not in an optimistic frame of mind.

Plerdsus,
I think there was something else missed, which is GST. A company can collect GST from a customer, but does not have to pay that money to the government for some weeks. In the mean time, they can invest that money and earn interest on it, and they earn money without having to sell anything, or produce anything.

But consider the following:-
1,000 divorces per week, requiring 2 set of accommodation instead of 1. About 30 – 40 % of those adults get remarried, but after a number of years, and overall there is a major demand for new accommodation, for no increase in population.

Possibly up to 1,000 separations per week from de facto relationships, and similar to divorces, it creates a major demand for new accommodation, for no increase in population.

The whole thing eventually pushes demand beyond supply.

Solicitors, real estate agents, and housing developers just love divorce and separation, but if anyone is paying rent or a mortgage, then they are paying for it.

The number of single person households is steadily climbing, and I have seen one estimate that by the year 2050, the vast majority of adults in Australia will be living in single person households. Solicitors, real estate agents, and housing developers will love that also, but there wont be much environment left outside the front door.

Negative gearing makes buying investment properties a good tax dodge for those who can afford it. The extra buyers in the market would help push up the price somewhat.

If we had a network of high speed rail(mag-lev) connecting our capitals with regional centres and rural infrastructure to deliver power, communications and water to those areas then maybe people would tend to decentralise and move inland, taking pressure off the cities.

Elizabeth, the problem in my experience is that state governments (in particular) embrace newsworthy initiatives either without a cost-benefit analysis or in denial of it - I doubt that any of the "sustainable" housing initiatives (except for an appropriate level of insulation) are cosrt-effective. Most states have requirements for CBA on regulation but make decisions regardless. I recall one piece of environmental legislation in Queensland with estimated costs to the community of $1 billion, and no obvious benefits.

I broadly agree with Elizabeth's concerns.

Note that developers recently got the NSW state govt to back down on its BASIX requirements for cost (i.e. profitability) reasons.

Note that most of the housing inflation problem of recent years is due to an arbitrary 'land value' being ramped up and up, not to increasing construction costs. This land value is free floating in the market place, and is tied to interest rates, tax breaks, increases in earnings, influxes of wealthy immigrants, and so on. In other words, it's a brave Western capitalist government which attempts to control housing prices for the benefit and welfare of its citizens, let alone countenance how to factor in sustainability costs.

In many ways, as building technology and methods improve, it has never been cheaper to construct a dwelling. Why, then, has there been a housing price boom? Because that's how that particular unregulated market works. The same is occurring in the UK, US, Netherlands, Spain, Eire, etc etc right now, mostly due to low interest rates and liberalised credit from lending institutions. The Australian Commonwealth government has added fuel to the fire with huge tax breaks for speculative investors, and done a lot of irreparable damage. (And then put out a 'green home' guide assuming unlimited capital and goodwill.) Consider that a Californian bungalow in Kensington, NSW, was originally bought by a police sergeant with a wife and 4 kids on a single wage in 1924. Now 2 doctors couldn't afford to buy it - it costs many multiples more.

There is simply no capital left for 'green' improvements without interventionary regulation by government to control prices. See my blog at http://www.housingaffordability.blogspot.com for the beginnings of a site addressing this question, to be expanded very soon into a full website. (I intend to be holding all indifferent, laissez-faire governments' feet to the fire for a very long time over this.)

In the meantime, the regime will continue to suit banks, billionaire developers, investors, speculators, the odd shrewd and greedy babyboomer, and be extremely unjust to the rest. The exploitation never seems to end.

Sean,
Talking to a long time speculative builder, when he first started in the industry, the cost of the block of land was only 10% of his total costs. Now it was about 30%, which means that either the cost of land has gone up, or the cost of building the house has proportionally gone down, or both.

However if demand is always above supply, then a lot of rorting or profiteering can occur, and this seems to be the case within the housing industry, and I would think that demand is going to be above supply for many years, due mainly to trends in household type. The number of couples without children, and the number of single person households will become a predominate factor.

EG
The number of Australians living alone is expected to almost double by 2026….In 2001 nearly two million Australians lived alone. That is expected to rise to almost four million by 2026…By about 2010 the number of couples without children may overtake the number of families with children. …By 2026 as many as 49 per cent of couples will not have children.
http://abc.net.au/queensland/news/200406/s1135299.htm

So there will be many more buildings required in future years, to house the same or fewer people, and that is likely to continue demand.

Further, I think the building industry is quite environmentally unfriendly. Many new subdivisions are eating up natural bush or farmland, and there is very little in a modern brick building that can be safely recycled.

So within the housing industry, there would be a lot of rorting, with enormous numbers of buildings required to be built for little or no population gain, and the housing industry chews up considerable amounts of natural resources. As well as this, many people have to spend long hours at work to earn enough money to afford a roof above their heads, and ironically that seems to be a common reason for family breakdown, thereby increasing the cycle.

Elizabeth, while I share your concerns about affordability I’m not satisfied that abandoning the small regulatory moves made to date toward sustainability is sufficient or necessary to have any serious impact upon affordability over the medium term. Nor do I agree that politicians that enact these regulations do so without due cause or consideration, sustainability wins votes because it matters to voters.

The fundamentals driving house prices are much more impressive than the 6% cost increase you quote from Victorian regulations for energy efficiency. Thats why the relative cost of land has increased. The earlier postings on this link discuss some important demographic and social forces impacting on supply and demand. A major factor that hasn’t been mentioned much is that land – flattish, flood safe, vacant land - is becoming scarce around our capital cities.

Before we blame koala-hugging conservationists for this, let us not forget that times change, cities get so big that it’s inconvenient to live on their edges and work in the CBD, demand outstrips supply in some markets, and the market determines price. What is a house worth? A house is worth whatever someone will pay for it (plus stamp duty). Why are so many Australians now unable to afford the price of a house? Not because of the solar panels on the roof, or the grey water system! Removing sustainability regulations is not sufficient to substantially affect affordability.

On the other hand many Australian cities face serious sustainability issues, particularly around water supply. Greenhouse, is a serious issue for our civilisation. Every sector of society must bear the cost of change, otherwise all we’ll continue to see is groups pointing at one another saying, “they should change first”. Of-course big polluters like power generators should be priorities, they are, and they’re responding. Governments must always consider impact upon affordability. Housing affordability is obviously important, but in this age of economic rationalism it seems a little petulant to criticise a report on sustainable cities for focusing on sustainability.

While stamp duty, regulations the building industry must comply with (reasonable or unreasonable) and the prices of materials are part of the equation, the most fundamental problem seems to be the location of the land the housing is situated on. You could lower or abolish stamp duty, you could give the building industry free rein but you can't alter the fact that people increasingly need to live in large cities to get jobs and preferably close to their work. That's why Sydney is the most expensive city in Australia to live in. That's why it's cheaper to live in Exeter than London in Britain. In regional NSW you will also find larger centres such as Newcastle are more expensive than remote communities such as Bourke.

This is globalisation at work like it or not. And in the US, the result of this increased need to find work in the cities (because there are few alternatives) is a homeless working class. Unless something happens to push prices downwards you will have a working homeless class of people here. Already bus drivers on the North Shore can't afford to live anywhere near where they work. British agencies advertise in Australian papers for teachers, social workers and nurses. They are some of the most underpaid professionals. And quelle surprise, they can't afford to live in the capital.

Unless we seriously address housing affordability more comprehensively, rather than just complain about environmental regulations and other tangential matters, these trends will continue and homelessness will become a way of life for more people and will be more visible.

Thanks for that comment, Timkins. Yes, poor developers, always losing money... : )

I hate to think where all the rorts are in the building industry, both in small-scale and large-scale developments, apart from the normal value-adding chain of supply of building materials, labour, etc. However, I argue that the process of selling land to the highest bidder is inherently inflationary and unnecessary and ultimately harmful to the social fabric overall.

My website and other writings suggest mandating a govt agency to try to do cost-controlled PPP development on a tender basis on a large scale, as a way around the inefficiencies of property transfers, infrastructure rollout, excessive market prices on land, etc, really to provide a break for the people, rather than for the industry.

I find it interesting that the NSW Labor govt can talk tough about wholesale resumption of land for a $2bn desalination plant 'if it has to', yet cannot provide any relief for land costs for ordinary wage-earning citizens in distress, cries limited budgets and powers, etc.

Regarding family breakups, unnecessary economic stress, excessive commute times, etc, yes, I agree. There's plenty of evidence for that, even for excessive housing costs causing obesity in 20-something year old women -- have a look at my blogspot on this.

Governments like people to be under constant economic stress, it keeps people 'productive' and prevents them from the luxury of thinking.

It's interesting about the percentage land costs your builder friend pays -- i don't know whether the equation is different for a commercial decision to buy a vacant block or do infill than the ordinary single suburban house construction. However, I see land costs in Sydney outstripping the house value by multiples, sometimes. It's often based on development potential. There is a fibro hut in Mascot on a largish (for the area) block of land in a noisy spot which is zoned at FSR 0.5:1, which is pretty limited, and there is no movement by council to rezone or allow subdivision. The building value of the fibro hut could only be $50 000. Asking price? $700 000.

OK, I can't resist getting the message out there through whatever means are available.

Here's a group of interesting articles and resources (further links, etc) concerning the housing boom, both in Australia and overseas. Unfortunately, it seems as though the negative gearing breaks and recent capital gains concessions, all coming from Canberra, have added fuel to the unaffordability fire, and caused an orgy of 'rational exuberance' amongst investors. Not many countries have such generous tax breaks for investment property, which is why the proportion of property investors in Australia is very high by comparison. (Forget about the myths of home ownership and social equality.) As people have pointed out, 'land value' is arbitrary, and it can be used to create a group of dispirited renters as a kind of pool of slaves who will never get into the market - the only chance for someone in the next generation is if they chose their parents wisely.

In the words of Macquarie Bank 'interest rate strategist' Rory Robertson: "If you owned two or three houses you just got a massive windfall; if you owned one you're basically square and if you owned none you just got screwed. And that, to some extent, was just an accident."

Or, in the words of Professor Michael Pusey of UNSW, this society is "burning up its social institutions for fuel" right now.

While even the most basic building structures are allowed to remain so over-valued, and soak up every single last cent of spare capital for stretched homebuyers, there will never be the goodwill or capital to put in green measures. Micro-economic narrow-sightedness, selfishness and greed by property purveyors simply cannot be expected to produce beneficial environmental outcomes.

How tax system egged on property speculation (SMH)
http://www.smh.com.au/articles/2004/06/28/1088392603764.html

Landlords and speculators reap billions from tax rule changes (SMH)
http://www.smh.com.au/news/Business/Landlords-and-speculators-reap-billions-from-tax-rule-changes/2005/04/17/1113676648176.html

Sydney and Melbourne homes just not affordable (SMH)
http://www.smh.com.au/news/Business/Sydney-and-Melbourne-homes-just-not-affordable/2005/04/13/1113251680813.html

Patrick's housing crash site (links to hundreds of international articles)
http://patrick.net/housing/crash.html#links

My advice to governments is to rapidly address the housing affordability crisis by regulating the market and doing price-controlled PPP developments where they more or less gift the land to the owner-occupiers buying into the scheme. Long-term price covenants would have to be put into place, and the houses would be earmarked to be owner-occupied, not rental investments. All these humane steps could be taken, but I don't think any Australian government is brave enough to do the right thing.

I've been looking at prices on fibro huts in the Bexley area for a laugh in domain.com -- it's generally $450 000 for an asbestos ridden 3 br hut with 1 bathroom, built shortly after WWII - fibro was used to keep the cost of construction down. The social capital and amenity of Bexley is inherently depressing, these prices make it doubly so. Talk about the emperor's new clothes. Forget about quality architecture, sustainable building, cross-flows, passive heating and cooling, etc, this is just bare survival for $450K.

Thus spake the market.

I forgot to include this link also, an excellent review of the Australian housing boom by the very well known Peter Saunders, who writes on a range of public welfare issues.

After the House Price Boom: Is this the end of the Australian dream?
Peter Saunders
http://www.cis.org.au/Policy/autumn05/polaut05-1.htm

I don't think widespread sustainable building measures will be possible until the govt acts to prevent profiteering in real estate land values by real estate agents, developers, and greedy baby boomers.

I personally don't believe there is a problem with supply and demand, it's more a problem of price-fixing, where the price-fixing cartel is made up of real estate agents and vendors, exacerbated by the 'ratchet effect' of excessive state govt stamp duty.

Further, it will be interesting to see what will happen when the current large generation of baby boomers starts dying off in large numbers in the next decade or so, leaving a smaller sized generation behind them.

This is an even pithier and to-the-point post by Professor Julian Disney, as posted on the National Summit on Housing Affordability website (http://www.housingsummit.org.au/). Note that the HIA co-hosted this event. For how much longer will we be asked to pay $450K for dilapidated fibro huts built in the 1940s?

Keeping the Dream Alive - Julian Disney
http://www.housingsummit.org.au/media/KeepingTheDreamAlive.pdf

and the Summit Call For Action: http://www.housingsummit.org.au/media/Summit_callforaction.pdf

(The Call for Action was prepared by the four non-governmental hosts of the Summit – HIA, ACOSS, ACTU and NHA. It is based on the experience and expertise of their many member organisations around Australia and on views expressed by the wide range of participants at the Summit.)

The cost of a serviced house block in inland country towns is about $10,000 and this can be assumed to be the raw cost of the product before the impact of scale, intensity, complexity and congestion turns it into a $250,000 block on the metropolitan fringe.

The problem is concentration of both inputs and outputs in a single dominant capital city. Devolve the political processes to new provinces or states and a portion of that future concentration will be dispersed to the new capitals. This will reduce the scale, intensity, complexity and congestion impacts on the remaining metropolitan population while delivering very low cost outcomes to that portion of the population that moves to the new capitals.

But are the metropolitan voters too narcissistic to recognise that they are entirely responsible for their own problems?

The problem is also price-fixing and greed by vendors and conditioning and brainwashing in the 'market model'. The housing market is highly permeable to fallout from failures in the stock market and other capital outflows. Governments make no distinction between owner-occupiers, investors or speculators, and real estate agents are free to ramp up prices any way they can, lie to buyers and sellers, use unethical practices at auction (including the method of auctioning itself), talk up a market-based approach to providing shelter, and so on - all inflationary measures designed to enrich only themselves and possibly the vendor. There are also (apparently) systemic inefficiencies from land allocation processes through to obtaining council approvals for construction, cumulative taxes, and so on.

The point is, Landcom (the state govt property development arm) is happy to charge 'market' rates for land, reflexively and without thought. Maximises returns to govt that way. Government flacks everywhere either aren't able to think (they have to hire consultants for that), or follow the brainwashed eco-rat market dominance line, as do councils. Not a good start...

Would you buy a 50 year old run-of-the-mill car for 10 x the price it originally sold for? Why buy an old Californian bungalow for 10 x the original price in the same condition then?

What's the end result of all the price fixing? The same result as if you were living in the darkest days of Soviet Russia, and possibly worse - shoddy housing at a high price. You can't tell me suburbs like Pagewood and Eastlakes in Sydney could in any way be held to be living...