Regulations retard home ownership

Housing issues are always news in Victoria.  Now we have resident action groups opposing new apartment building in inner suburbs.

Moonee Valley was the latest suburb to feature Geoffrey Rush protesting against such redevelopment.

Stopping such in-fill development means less land available for home sites.  This aggravates the shortages created on city outskirts, due to planning schemes like Melbourne 2030.

In both inner urban areas and the city fringe, bureaucracy and multitudes of costly requirements magnify the price increases caused by issuing inadequate numbers of development permits.  The planning bureaucracy also requires additional outlays by forcing set-asides of land for communal and other purposes.

All these costs are passed on to the new homebuyer.

Every so often, the Premier, in a photo opportunity, announces a reform of the permit approvals system and foreshadows increases in new home building.  But once the cameras have departed we see little change.

There is excess demand for housing.  The Housing Industry Association has quantified Victoria's shortfall of supply compared with underlying demand this year at 12 percent.

In spite of this shortfall, new housing approvals in Victoria have been trending down for the past five months.  In the case of apartments, new approvals are in headlong retreat, down almost 40 per cent on a year ago.

And yet, the industry is far from overheated -- Victoria was building far more homes in 2002 than today.  Clearly, we are not hitting a ceiling beyond which the industry can't increase supply.

Some people say the decline in new home building is to be expected as a result of interest rate increases reducing affordability.  Fears of an economic downturn would reinforce a resulting reduction in demand.

However, one vital corollary of weaker housing demand is missing.  A softer housing market would be expected to bring declining prices.  But average prices last year in Melbourne increased by more than 10 per cent.

Clearly, any softness in demand is being matched by even greater restraints on supply.  Part of this may be due to reduced credit available to builders, something surveys by the Master Builders have indicated.

But the main reason why prices are rising in spite of higher mortgage costs comes back to government regulations that restrain the number of permits and raise building costs.

The new homebuyer pays for the political and bureaucratic measures that impede housing land development.  And these measures create scope for enormous profits.  In forcing shortages of developable land, the political permit system means a stroke of the pen can increase the value of a block of land from a few hundred dollars to tens of thousands of dollars.

Lobbying to get a favoured project through the planning system can therefore bring rich rewards to land developers.  Not surprisingly, they make handsome contributions to Labor Party funding.

It is commendable when businesses support political parties to promote a vigorous democracy.  However, when the support comes from firms in areas where politicians have the keys to unlocking considerable profits, it starts to look like corruption.

Meanwhile supply restraint destroys the dream of home ownership.

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