Finally proof for what I've been saying all along
I'm just loving what's going on with the RBA right now. Maybe they've got a new direction with new Governor Phil Lowe.
Whatever the case, they're dropping truth bombs left, right and centre these days.
This week, they're sticking the boots into councils and state governments, telling them that they're responsible for unaffordable house prices in Australia.
Well, obviously not in such colourful language, and in the soft mix of boffin speak – but for me, the message is coming through loud and clear:
Zoning restrictions increase house prices.
To those of us in the game, this is obvious. Councils and state governments do a lot to stop new supply coming on to the market. This in turn has to jack up house prices.
That we even have to spell it out is ludicrous.
But still a lot of people just don't believe it.
And so along comes the RBA and proves it. Not just that, they put some dollar figures on it, and those figures are mind blowing.
They look at what house and land prices would be like without restrictive zoning, and the differences are stark:
“Zoning regulations provide benefits, but they also restrict housing supply and hence raise prices…
For detached houses, marginal costs comprise the dwelling structure and the land that other home owners need to forego. Relative to our estimates of these costs, we find that, as of 2016, zoning raised detached house prices 73 per cent above marginal costs in Sydney, 69 per cent in Melbourne, 42 per cent in Brisbane and 54 per cent in Perth. Zoning has also raised the price of apartments well above the marginal cost of supply, especially in Sydney… This effect is similar but smaller in other cities…
We emphasise that this is not the amount that housing prices would fall in the absence of zoning. The effect of zoning has increased dramatically over the past two decades, likely due to existing restrictions binding more tightly as demand has risen…”
73% in Sydney?!? Are you frickin kidding me? Here's all these investors over here being made to feel like the big bad wolf for trying to get ahead, when zoning changes are adding 73% to house prices??
What's worse, the zoning premium is getting bigger over time. The RBA estimate it this way, with the purple representing the zoning premium.
“In all four cities, our estimate of the zoning effect increased rapidly as a share of average house value over the early 2000s, alongside rapidly rising house prices. Subsequent to this initial rise, the patterns across cities diverged somewhat. The increase in our zoning effect estimates over this time period are likely due to existing zoning restrictions becoming more binding as demand has risen, rather than a meaningful change in the restrictions themselves…”
This makes sense. They're not saying that zoning is necessarily getting worse. But what they are saying is that there is a mismatch between the booming demand we've seen over the past ten years, and the planning system's capacity to deliver the supply that's needed.
And just for completeness, here's the zoning effect for apartments:
Seriously, if that chart for Sydney is not a slap in the face for town planners and politicians, I don't know what would be.
For those of on the ground here there's no surprises. It's stating the obvious to say that zoning restrictions increase prices.
Still, it's nice to hear it coming from someone with the intellectual weight of the RBA.
Now maybe people will listen.
But I'm not holding my breath.