Land Supply Action: At last something we can all agree on!

It has been great to hear Mr Hockey explain that the real problem of housing affordability is a lack of supply.   Fantastic to hear the Prime Minister Tony Abbott say the same thing. And simply superb to have Mr Mathias Korman come out and sing the praises of supply, supply, supply.

We know the Home Industry Association is on board and so are the Master Builders.   Plus the construction unions and tradies will be keen to get back to building houses now that digging big holes has started to slow.

Even the RBA is keen on the idea now that the interest rate lever controlling the Debt Machine is making grinding noises and the clutch seems to have gone.

Now all we need are the Greens and the ALP to get on board and the ENTIRE nation can rally around and starting building all these new houses and apartments that we hear so much about but of which we see so few.

Just to ensure that no tedious little issues get in the way and stop the juggernaut let us tick them off one by one.

It is NOT a state problem !

Sure states are responsible for housing but the simple fact is that it is the Federal Government that has jammed the nation’s front door open and approves high rates of migration in pursuit of a Big Australia.

Furthermore we have a Prime Minister who wants to be known as the Infrastructure Prime Minister.  Combining these facts gives us a federal government causing the massive shortage of housing related infrastructure and a Prime Minister desperate to be the solution.

Which is excellent because the most important infrastructure, when you are running a Big Australia program, is housing related infrastructure.  Yep all that boring stuff like drains, kerbing, power supply, access roads, parks, roads, transport corridors etc.  It all costs money and the best people to solve that problem, having regard to how the High Court have distorted the federal structure of our Constitution and who controls the purse strings, live in Canberra.

The First User Pays All model must go!

At the moment we have the dumbest model, known to man, funding vital housing related infrastructure.  It works like this.

Developers are forced to provide the long lasting housing infrastructure, that largely benefits the entire community, but then dump almost the entire cost on the first user of the land, who then tries to pay for it with a stonking large mortgage much of which our banks borrow off shore.

The banks borrow off shore because if they relied on local mom and pop term depositors the interest rates would be so high that no local borrowers would be able to afford the mortgages required to pay the ‘land charges’ generated by the “First User Pays All” model.

Too add to the problem  state and local governments also “go the gouge” and often whack on a nice assortment of fat levies and contributions as well.

This is what happens when ‘user pays’ thinking – which has merits – meets the great dumbness that is Australian civil administration and public policy.  By all means have some ‘user pays’ to reflect that some of the housing infrastructure benefits the home buyer but there is no rational reason to force the first buyer to fund the whole lot with a massive mortgage.

Especially when local and state councils are then motivated to try to load as much expense on the home buyer as possible

“no worries let’s make the developer put in top shelf services as the punter can just borrow a bit more from the bank.  That way we can cut down on maintenance work for the next 20 years …”

“Gladys from District 9 reckons she saw a butterfly on that paddock and will not drop the issue, so I have asked the developer to get Larry from the Uni to spend a few months monitoring and preparing a butterfly action plan. Will cost a bit but the developer can just pass it on to those young couples buying the first home – it will toughen them up and might encourage them to cut down on lattes”

In short the current system encourages gold plating and over charging when bringing land to market and forces the most vulnerable and less financially secure people pay the cost with hundreds of billions of foreign debt that requires a taxpayer guarantee.

Loony tunes stuff.

We cannot afford to invest in housing infrastructure –  ‘Nonsense’

The first user shake-down is the only reason first home buyers are being gouged circa $500K to live in a simple 3 bed-room 50 km from Sydney and why there is almost no-demand for expensive new housing like this unless interest rates stay close to zero.

Instead of this crazy “First User Pays All” model for financing development costs a much smarter solution is for the federal government to pay the servicing and development costs of bringing the land to market and then recover part or all of the cost from rates or taxes on the land over the next 20-30 years .

The commonwealth can do it directly via a Commonwealth Land Tax or have the state government collect it as rates and remit the required amount back to the federal government (or bond holder).

As noted above the reason why Mr Abbott and Mr Hockey should lead the way and fund the housing infrastructure is because the federal government controls population growth via its control of migration and most importantly because the federal government can borrow at lower cost than the home buyer or the state governments.

If Mr Abbott and Mr Hockey remain reluctant to fund such vital infrastructure they can simply set up a Municipal Utility bond model and let the growing SMSF sector do the funding.  The returns will be secure if the rates/taxes are a first charge on the property and SMSF industry is begging for simple secure long term investments that generate a steady return.  Certainly beats the current model where SMSF are having a punt with retirement savings on the housing bubble.

This Municipal Bond model will probably result in higher rates for the home buyer but we know how Mr Hockey and Mr Abbott are allergic to government debt if it is spent on little people so it may be the best way forward.

Local government red tape

It is certainly true that Australia has become infested with NIMBYs and BANANAs who love to whinge and whine about what the neighbours are doing on their land.  It is also true that their whingeing is part of the reason there is a shortage of new serviced land and what is available is much more expensive than it needs to be.

However, what gives the NIMBYs and BANANAs so much power is that local and state governments don’t really want to spend money on housing related infrastructure anyway so when in doubt they love nothing better to ‘rule it out’ or bury it with a bunch of daft unnecessary requirements and ‘studies’ and hope the proposal for development goes away.

Local and state governments will be much more reluctant to to say NO NO NO if Mr Hockey is waving a large cheque book around with a stop watch and they know that if they fool around with red tape and pandering to the neighbourhood “League of Rants” etc there is a real likelihood that some other state or local council area will pick up the housing infrastructure cash available for the period.

It will take too long

It need not take long at all.

For example next week Mr Hockey could announce:

That $20 billion dollars will be available for funding housing related infrastructure between now and June 2016 on the following conditions:

  • The developer of the land may be a private developer or a state land development agency.
  • A developer who wishes to participate must notify Joe of their interest and provide an estimate of the maximum expected servicing costs.  The Federal government can decline to include a development in the scheme.
  • Each block of land serviced with the funding must be sold or auctioned off to the highest bidding individual home buyer within 6 months of the servicing being completed.
  • The cost of servicing the blocks will be paid by the federal government on a pro rata basis as each block is sold.
  • The $20B will be allocated on a first come first served basis.
  • State govts who want some of the money to come their way must pass supporting laws and regs before any money will flow.  The laws required are minor and mainly relate to laws re rates and the additional rate being a first priority charge.
  • The rates on the land will have an additional component for the next 30 years that will be remitted to the federal government (or bond holder) until the funding of servicing has been repaid.   The additional rates will reflect the actual cost.  This is important as we want potential home buyers to be able to pick and choose based on the level of rates they will be required to pay.  They are likely to avoid blocks that have large rates attached due to inefficient developer management of the servicing or gold plating requirements by some zealot local planner.

But will developers sell at a lower cost if the federal government is paying for the servicing?

That is where supply and demand comes in.  Providing that the federal government approves enough developments in the scheme the volume of serviced blocks of land sprouting up across the country will force the developers to compete for buyers of their blocks.

Remember that they don’t get reimbursed by the federal government until they sell the block of land.  They will not been keen to hold onto the serviced blocks for one second longer than they need to.

But what if there are too many serviced blocks on the market?

There is nothing wrong with having a buffer stock of low cost serviced land that is ready to go.  It will help prevent the sort of house price madness we have seen over the last 20-30 years in Australia.

But how does this help me live in my dream home in a heritage village atmosphere 3 km from the CBD?

It doesn’t but chances are that if people have the choice between living in a new house on a full quarter acre block 20-30km from the CBD for less than $200K and paying $900K to live close to a finely whiskered barista in a house or $600K for a 2 bed apartment, they may decide that the barista is not worth $700K or $400K of extra debt.

When they are paying $500K to live 20-30 km out the difference between $500K and $900K / or $600K is less clear cut.  More people living further out and less wanting to live closer in means lower prices for hipsters!!

As for those that do want a quality soy latte and promixity to hip bars and cafes and not be a debt slave until age 65, you will need to get to work on the land use restrictions that encourage so much land close to the city being reserved for ‘cultural’ and ‘heritage’ purposes.  All those ‘victorian’ and federation houses get in the way of nice medium and high density apartments that might make living close by more affordable. By all means keep a few precincts to show the kids but do we need all of it – especially within a 20 min walk of a railway station?

Good luck with that though as those inner urban progressives and conservatives (it is truly an across the political divide thing) will fight tooth and nail to protect their “villages” from interlopers wanting to live in ‘dog boxes’ at the end of the street.

Your best bet is to campaign for fewer land use restrictions in the outer urban areas as the historically successful recipe for creating a creative urban environments is to allow people to live where they want and how they want.  That means you should perhaps tone down your obsessive hatred of personal mobility (aka cars) as that is how people get around when they don’t live in the nice inner urban village neighbourhoods serviced with all manner of public transport options.  Make their car lifestyle more expensive than it already is and they will want to build “dog boxes” in your village!

A compelling proposition

As noted above, Mr Hockey knows that supply is the problem, so does Tony and so does Matthias.

We also know that the government would sooner rip out an eyeball than take action on the demand side (negative gearing, macro-prudential, stop foreign buyers etc)

That leaves the above suggested solution as the fastest and quickest way of getting much lower cost new serviced land and housing onto the market and available to home buyers.

If the ALP, the Greens and the building industry all starting singing the song that the government ministry has been singing over the last week the problem of affordable housing might be solved by Christmas 2015.

Categories: Macrobusiness

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