Great conversation Riley. We certainly need more of this long form discussion. Unfortunately long form discussion does seem to be a dying art. I would suggest that we could spend some time considering the question or even the problem that we are trying to address. As Charles Kettering put it "A problem well defines is a problem half solved". "Housing Crisis" is a headline to sell many and varied stories (some agencies are clearly using it as click bait) but it is not actually a tangible thing to be addressed. I believe that the benefits of this discussion and getting it right are far too valuable to be put off by the difficulty of questioning the existing beliefs or status quo.
The problem starts from recognising that we have multiple problems under the umbrella of housing. Affordability, homelessness, social insecurity, an imbalance of between genuine population demand and availability of supporting infrastructure in the right locations is to name but a few. While these problems remain narratively joined (as 'housing') their complexity is amplified. Yet, while there are a range of interconnections between these, the individual problems and interconnections can be deconstructed and prioritised. However, this leads to a further problem; how to model the individual problems and their dependencies in a form that increases stakeholder engagement and leads to their agreement on tackling the issues over the terms dictated by their solutions. Here another problem arises as stakeholder various interests become apparent. All of this, and further emergent issues, can be addressed but not without commitment, coordination and collateral in the form of necessary resources. At this point most would see that solution landscape as the responsibility of government. Given current polemic politicking, bipartisan engagement seems unimaginable and hence the resolution of these related housing problems hopeless. That's not how I see it, though. There are possibilities for action that extend beyond government. I believe these do start with the patient, long-form dialogue you mention.
We have better tools than the limited (economic only) lens to address this issue. With the amount of financial resources sloshing around in this space, I am convinced we do not need more or additional money.
We need 1. Different thinking and 2. An intent to make a change.
For these two reasons, all levels of Government are excluded from leadership in this space. They will be necessary laggards to participate, but we cannot continue to wait for their involvement. Government is not the place to go for new thinking or intent to change. All levels of politics are desperately trying to convince a jaded public that they are relevant and that we should vote for them. This seems to be at odds with any observation of the systems provided by the Government being decidedly unfit for purpose and continuing to be pushed and prodded with tweaks at the edges.
Medical system - (working or not working?) The medical system noise seems to be we all need more from someone else.
Education system - (working or not working?)
Defence system - (working not working?)
Housing system - (working or not working?) All the suggestions being touted have all been given a run over the past 4 decades and have contributed to where we are today.
Reports generated for the HIA show that the current government collection from the new house and land delivery is a whopping 40%, and this system is their current cash cow!
I've really enjoyed the series Riley, hope you always find time to write the next article. What do you think about the fact that even if people with 'the greater good' in mind got together, the political will isn't there? Cameron Murray talks about this: https://www.fresheconomicthinking.com/p/why-politicians-must-pretend-to-want.
Love Cameron Murray - he’s much smarter than me haha.
Yes if you read my previous article “the housing crisis is here to stay” this is basically the whole premise. I go through each policy proposal and note how most of them are political suicide. This is why more sprawl is always the end result - because it’s the path of least resistance.
Unless the federal and state governments can find ways to get creative about taking housing policy out of the hands of local governments - unfortunately, things are going to need to get a lot worse before they get better.
Yes, take housing policy out of the hands of local governments. Anarchy would be better.
From an economist's point of view, the market for housing is set up in such a way that the first and most essential precondition for capitalism to function effectively, so that the consumer is sovereign, and his needs are met at the lowest cost, aesthetically, namely 'freedom of entry' is not attained. Zoning restraints ensure that most of the land is simply not available for use, it's that part called 'rural'. In the part that is zoned for development there is just one formula applied, subdivision to create freehold title. Once its zoned for use and carved up into millions of tiny parcels and capital is sunk, you can't easily unscramble that egg. Project builders manage to exploit subcontractors and organize themselves to secure economies of scale which is a plus in the sense that it tends to keep costs down. Even so, the result is only marginally affordable from the middle-income perspective, providing both partners bring in an income. Established developers are protected by their ability to navigate the complexities of the planning system and spread the cost quite thinly across a large number of lots but the little guy, where the new entrants must come from can't do that. So, between the planners, the big project builders and the few large-scale developers what we get is a cookie cutter solution that is increasingly dysfunctional from the consumer/community point of view. It's like packing sardines, but we are now packing them in plastic rather than in metal, and the oil is going rancid.
Allow rental of numerous residences on rural land, as in a caravan park. Allow the owners to experiment to better meet consumer needs. Exclude cars, create safe places for kids to play and adults to interact, form informal interpersonal bonds and promote an environment where people will naturally assist each other to better meet their needs. This is natural to humans, and a source of joy. A good caravan park can offer a lifestyle superior to that in our suburbs.
Freedom of entry and design flexibility are essential.
It would be a good idea to limit the growth of a city geographically and plan to add new centres for development. We criticize the Chinese for their 'ghost cities'. But did we criticize the pioneers of railroad development 100 years ago? China has a single, unified low voltage, direct-current based, very safe, power grid that is being extended into the remotest corners of the country, a massive fast rail and highway network and the Belt and Road initiative that is the latest iteration of the Marshall Plan that rebuilt Germany and Japan. I could go on, but perhaps at the risk of being de-platformed.
One of the problems with macroeconomics is our tendency to always look at the most macro level.
Demand and supply at the highest-level attempts to explain why house prices are rising based on the **whole** market but that's not the issue.
The housing market is a constrained market as most of the stock is illiquid meaning that the vast majority of property is owned by people who live in them. They do not, generally speaking, trade their homes.
What's traded is a portion of the market, and that portion is also constrained, this time by concentration of ownership of investors.
So, the problem with house prices always heading north is that 1) the market is illiquid and 2) concentration of ownership in tradable properties
I'm sorry, this is a well-written and cogent essay. I'm of the opinion however, that it's simply dead wrong. Get rid of density zoning, do permit reform, enact a high Land Value Tax (get rid of taxes on buildings and cut income taxes, sales and VAT taxes on building materials, and investment taxes as much as you can) and you've solved the housing crisis. Now, I'm not Australian, so maybe I'm missing something unique about your particular housing crisis, but I honestly don't think so
"There's been numerous times in history where a complex, cursed problem turned out to have a 'simple' solution. As it turns out, citrus juice straight up cures scurvy. Some moldy bread unlocked an entire arsenal in the fight against infectious disease. The cholera epidemic in London was cut short by simply removing the handle to the Broad Street Pump. You can save tons of lives very cheaply by distributing mosquito-treated bed nets. Or just by washing your hands. And instead of maintaining a giant bureaucracy whose sole purpose is to scrutinize the 'worthiness' of each welfare recipient through obsessive means testing, it turns out it's more effective–and cheaper!–to just give people money.”
No one is going to allow you to do it because you will have irrevocably damaged too many entrenched interests. Existing homeowners will see their values stagnate and diminish, banks will lose money on refinancing, land speculators and some landlords will be ruined (but by no means all or even most of them). However, we need to stop pretending that this can be solved without some pain on somebody, and I suggest we stop inflicting it on the productive sections of the economy.
It is a little bit different in Australia in that we have some really bad immediate problems that would stop some of the solutions you propose from taking effect. For example, the cost of construction has gotten so high here that it has killed almost every type of apartment project that isn't aimed at the high end luxury market. Nobody can afford a new apartment and they cost significantly more than an existing house. So basically very few apartments are getting built. In this environment, upzoning and freeing up planning regulations won't actually affect the feasibility of new developments in a meaningful way. I do agree with you though that we should enact those changes, for the long term gain if and when these problems normalise.
But you also point to a much bigger problem that is more common across the anglosphre - that most of the necessary policy proposals aren't politically feasible - so can we really call them solutions?
In Australia 2/3rds of households are home owners which is a durable political majority, for whom the housing crisis is not so much a crisis, and is more like the best thing that ever happened to them. Until this changes, we won't see any bold policy proposals, because homeowners will not vote to crash the economy.
So if you were to simplify the issue, it is ultimately a political problem. Liberal democracy is very bad at solving big complex problems in a proactive way, and only gets motivated when there is a durable political majority for whom the situation is bad enough that they vote for change. So that's my prediction: things will need to get worse before they get better.
"For example, the cost of construction has gotten so high here that it has killed almost every type of apartment project that isn't aimed at the high end luxury market."
This is a problem that a very high land value tax would solve (or at least mitigate significantly). Only high-end luxury housing is built because that's the only housing that can provide a return that justifies the cost of land acquisition.
Your point about it not being politically feasible may be true, but this issue in particular has made me personally far more radical than I used to be.
I'll say it outright, if liberal democracy must necessarily result in kids sleeping on the street and workers unable to afford decent shelter simply to provide a high return to a passive and unproductive investment, then someone is really going to have to explain to me what the point is in defending it and I probably won't believe them.
Re: LVT. Explain to me how a high LVT results in more apartments getting built?
Re: Political feasibility. I totally agree and my next article is basically about why and how liberal democracy needs to evolve so we can get back to building the things we need. We are creating a situation where millions of people who were ideologically bought into The Australian Dream are becoming alienated from it. We are creating an ever-increasing caste of people without a stake in the system and that should worry us. The implication for our politics being the erosion of the formerly stable polarities of acceptable discourse and ideas that has defined the Australian political centre for generations.
You also may enjoy this article which goes through the role of housing in Australia as our primary tool for social mobility throughout our history, which basically lands on your point.
I should have said, part of the problem is zoning in addition to land price. Together, zoning and land prices basically create a volume cape for developers.
"The development industry is... behaving exactly the way we would expect any industry to respond to an artificial cap on their production volume. The same thing would happen in the auto industry: if we limited Toyota to only 100,000 cars per year, they might well choose to keep the Lexus and scrap the Camry, even though, at volume, the Camry is more profitable."
Now, the zoning problem is obvious. As for LVT, the land price issue basically means that developers can only build a certain amount of houses where they can afford to buy land. It's a charge that makes building more volume more expensive. If we taxed Toyota $1000 for every car they made, they'd find it worth it to only make more expensive models. LVT reduces the upfront cost of land access for developers. Land costs also serve as a volume cap when we consider that a developer can only access a certain amount of capital at one time.
Let's take a plot that costs $10 Million to own outright where there is no LVT and let's say you can build a 100-Unit apartment building on it. Let's say Construction takes two years. The cost of land is to build the apartment, therefore, $100,000 per unit built (plus the interest and/or exit cap costs of that $10 million for two years).
Let's now looks at that if we levied an 85% LVT on the parcel. The cost of the land purchase would go down to 1.5 Million (roughly). A $10 Million land parcel annual rental value is (by rule of thumb) about 15-20% of the sales price so let's say $2 Million to keep things simple. The 85% LVT on $2 Million is $1.7 Million. So the total cost of land acquisition to put up the building is now:
($1.7 Million x 2 Years Construction time) + 1.5 Million Land Purchase = $4.9 Million.
We've cut the land cost of putting up the building by more than half.
If "no one is going to allow you to do it" it's not a solution. Hypothesis have to be implemented and evaluated (over time) before they are deemed solutions
Like I've said before, this issue has radicalized me. I simply don't believe the problem can be solved without destroying the power of various entrenched interests. There is no solution that this system will allow, living with the problem is intolerable, and therefore the system has to go. I'll be very explicit about it; if liberal democracy must necessarily result in kids sleeping on the street and workers unable to afford decent shelter simply to provide a high return to a passive and unproductive investment, then someone is really going to need to explain to me why we should defend a system that deliberately makes it difficult to get shelter.
Great conversation Riley. We certainly need more of this long form discussion. Unfortunately long form discussion does seem to be a dying art. I would suggest that we could spend some time considering the question or even the problem that we are trying to address. As Charles Kettering put it "A problem well defines is a problem half solved". "Housing Crisis" is a headline to sell many and varied stories (some agencies are clearly using it as click bait) but it is not actually a tangible thing to be addressed. I believe that the benefits of this discussion and getting it right are far too valuable to be put off by the difficulty of questioning the existing beliefs or status quo.
The problem starts from recognising that we have multiple problems under the umbrella of housing. Affordability, homelessness, social insecurity, an imbalance of between genuine population demand and availability of supporting infrastructure in the right locations is to name but a few. While these problems remain narratively joined (as 'housing') their complexity is amplified. Yet, while there are a range of interconnections between these, the individual problems and interconnections can be deconstructed and prioritised. However, this leads to a further problem; how to model the individual problems and their dependencies in a form that increases stakeholder engagement and leads to their agreement on tackling the issues over the terms dictated by their solutions. Here another problem arises as stakeholder various interests become apparent. All of this, and further emergent issues, can be addressed but not without commitment, coordination and collateral in the form of necessary resources. At this point most would see that solution landscape as the responsibility of government. Given current polemic politicking, bipartisan engagement seems unimaginable and hence the resolution of these related housing problems hopeless. That's not how I see it, though. There are possibilities for action that extend beyond government. I believe these do start with the patient, long-form dialogue you mention.
Over
We have better tools than the limited (economic only) lens to address this issue. With the amount of financial resources sloshing around in this space, I am convinced we do not need more or additional money.
We need 1. Different thinking and 2. An intent to make a change.
For these two reasons, all levels of Government are excluded from leadership in this space. They will be necessary laggards to participate, but we cannot continue to wait for their involvement. Government is not the place to go for new thinking or intent to change. All levels of politics are desperately trying to convince a jaded public that they are relevant and that we should vote for them. This seems to be at odds with any observation of the systems provided by the Government being decidedly unfit for purpose and continuing to be pushed and prodded with tweaks at the edges.
Medical system - (working or not working?) The medical system noise seems to be we all need more from someone else.
Education system - (working or not working?)
Defence system - (working not working?)
Housing system - (working or not working?) All the suggestions being touted have all been given a run over the past 4 decades and have contributed to where we are today.
Reports generated for the HIA show that the current government collection from the new house and land delivery is a whopping 40%, and this system is their current cash cow!
I've really enjoyed the series Riley, hope you always find time to write the next article. What do you think about the fact that even if people with 'the greater good' in mind got together, the political will isn't there? Cameron Murray talks about this: https://www.fresheconomicthinking.com/p/why-politicians-must-pretend-to-want.
Would love to chat further!
Love Cameron Murray - he’s much smarter than me haha.
Yes if you read my previous article “the housing crisis is here to stay” this is basically the whole premise. I go through each policy proposal and note how most of them are political suicide. This is why more sprawl is always the end result - because it’s the path of least resistance.
Unless the federal and state governments can find ways to get creative about taking housing policy out of the hands of local governments - unfortunately, things are going to need to get a lot worse before they get better.
Yes, take housing policy out of the hands of local governments. Anarchy would be better.
From an economist's point of view, the market for housing is set up in such a way that the first and most essential precondition for capitalism to function effectively, so that the consumer is sovereign, and his needs are met at the lowest cost, aesthetically, namely 'freedom of entry' is not attained. Zoning restraints ensure that most of the land is simply not available for use, it's that part called 'rural'. In the part that is zoned for development there is just one formula applied, subdivision to create freehold title. Once its zoned for use and carved up into millions of tiny parcels and capital is sunk, you can't easily unscramble that egg. Project builders manage to exploit subcontractors and organize themselves to secure economies of scale which is a plus in the sense that it tends to keep costs down. Even so, the result is only marginally affordable from the middle-income perspective, providing both partners bring in an income. Established developers are protected by their ability to navigate the complexities of the planning system and spread the cost quite thinly across a large number of lots but the little guy, where the new entrants must come from can't do that. So, between the planners, the big project builders and the few large-scale developers what we get is a cookie cutter solution that is increasingly dysfunctional from the consumer/community point of view. It's like packing sardines, but we are now packing them in plastic rather than in metal, and the oil is going rancid.
Allow rental of numerous residences on rural land, as in a caravan park. Allow the owners to experiment to better meet consumer needs. Exclude cars, create safe places for kids to play and adults to interact, form informal interpersonal bonds and promote an environment where people will naturally assist each other to better meet their needs. This is natural to humans, and a source of joy. A good caravan park can offer a lifestyle superior to that in our suburbs.
Freedom of entry and design flexibility are essential.
It would be a good idea to limit the growth of a city geographically and plan to add new centres for development. We criticize the Chinese for their 'ghost cities'. But did we criticize the pioneers of railroad development 100 years ago? China has a single, unified low voltage, direct-current based, very safe, power grid that is being extended into the remotest corners of the country, a massive fast rail and highway network and the Belt and Road initiative that is the latest iteration of the Marshall Plan that rebuilt Germany and Japan. I could go on, but perhaps at the risk of being de-platformed.
Thanks for the reference to the Cameron Murray article it is indeed a great read.
One of the problems with macroeconomics is our tendency to always look at the most macro level.
Demand and supply at the highest-level attempts to explain why house prices are rising based on the **whole** market but that's not the issue.
The housing market is a constrained market as most of the stock is illiquid meaning that the vast majority of property is owned by people who live in them. They do not, generally speaking, trade their homes.
What's traded is a portion of the market, and that portion is also constrained, this time by concentration of ownership of investors.
So, the problem with house prices always heading north is that 1) the market is illiquid and 2) concentration of ownership in tradable properties
Is population growth missing from the Demand side of the infographic?
It’s the first one at the top right!
OMG, off to the optometrist I go :-)
I'm sorry, this is a well-written and cogent essay. I'm of the opinion however, that it's simply dead wrong. Get rid of density zoning, do permit reform, enact a high Land Value Tax (get rid of taxes on buildings and cut income taxes, sales and VAT taxes on building materials, and investment taxes as much as you can) and you've solved the housing crisis. Now, I'm not Australian, so maybe I'm missing something unique about your particular housing crisis, but I honestly don't think so
"There's been numerous times in history where a complex, cursed problem turned out to have a 'simple' solution. As it turns out, citrus juice straight up cures scurvy. Some moldy bread unlocked an entire arsenal in the fight against infectious disease. The cholera epidemic in London was cut short by simply removing the handle to the Broad Street Pump. You can save tons of lives very cheaply by distributing mosquito-treated bed nets. Or just by washing your hands. And instead of maintaining a giant bureaucracy whose sole purpose is to scrutinize the 'worthiness' of each welfare recipient through obsessive means testing, it turns out it's more effective–and cheaper!–to just give people money.”
-Lars Ducet
https://progressandpoverty.substack.com/p/no-silver-bullets-to-the-werewolf
No one is going to allow you to do it because you will have irrevocably damaged too many entrenched interests. Existing homeowners will see their values stagnate and diminish, banks will lose money on refinancing, land speculators and some landlords will be ruined (but by no means all or even most of them). However, we need to stop pretending that this can be solved without some pain on somebody, and I suggest we stop inflicting it on the productive sections of the economy.
It is a little bit different in Australia in that we have some really bad immediate problems that would stop some of the solutions you propose from taking effect. For example, the cost of construction has gotten so high here that it has killed almost every type of apartment project that isn't aimed at the high end luxury market. Nobody can afford a new apartment and they cost significantly more than an existing house. So basically very few apartments are getting built. In this environment, upzoning and freeing up planning regulations won't actually affect the feasibility of new developments in a meaningful way. I do agree with you though that we should enact those changes, for the long term gain if and when these problems normalise.
I wrote about this here:
https://theemergentcity.substack.com/p/brisbanes-housing-paradox-what-happens
But you also point to a much bigger problem that is more common across the anglosphre - that most of the necessary policy proposals aren't politically feasible - so can we really call them solutions?
In Australia 2/3rds of households are home owners which is a durable political majority, for whom the housing crisis is not so much a crisis, and is more like the best thing that ever happened to them. Until this changes, we won't see any bold policy proposals, because homeowners will not vote to crash the economy.
So if you were to simplify the issue, it is ultimately a political problem. Liberal democracy is very bad at solving big complex problems in a proactive way, and only gets motivated when there is a durable political majority for whom the situation is bad enough that they vote for change. So that's my prediction: things will need to get worse before they get better.
"For example, the cost of construction has gotten so high here that it has killed almost every type of apartment project that isn't aimed at the high end luxury market."
This is a problem that a very high land value tax would solve (or at least mitigate significantly). Only high-end luxury housing is built because that's the only housing that can provide a return that justifies the cost of land acquisition.
Your point about it not being politically feasible may be true, but this issue in particular has made me personally far more radical than I used to be.
I'll say it outright, if liberal democracy must necessarily result in kids sleeping on the street and workers unable to afford decent shelter simply to provide a high return to a passive and unproductive investment, then someone is really going to have to explain to me what the point is in defending it and I probably won't believe them.
Re: LVT. Explain to me how a high LVT results in more apartments getting built?
Re: Political feasibility. I totally agree and my next article is basically about why and how liberal democracy needs to evolve so we can get back to building the things we need. We are creating a situation where millions of people who were ideologically bought into The Australian Dream are becoming alienated from it. We are creating an ever-increasing caste of people without a stake in the system and that should worry us. The implication for our politics being the erosion of the formerly stable polarities of acceptable discourse and ideas that has defined the Australian political centre for generations.
You also may enjoy this article which goes through the role of housing in Australia as our primary tool for social mobility throughout our history, which basically lands on your point.
https://theemergentcity.substack.com/p/from-convicts-to-the-castle-how-real
I should have said, part of the problem is zoning in addition to land price. Together, zoning and land prices basically create a volume cape for developers.
"The development industry is... behaving exactly the way we would expect any industry to respond to an artificial cap on their production volume. The same thing would happen in the auto industry: if we limited Toyota to only 100,000 cars per year, they might well choose to keep the Lexus and scrap the Camry, even though, at volume, the Camry is more profitable."
https://www.strongtowns.org/journal/2018/7/25/why-are-developers-only-building-luxury-housing
Now, the zoning problem is obvious. As for LVT, the land price issue basically means that developers can only build a certain amount of houses where they can afford to buy land. It's a charge that makes building more volume more expensive. If we taxed Toyota $1000 for every car they made, they'd find it worth it to only make more expensive models. LVT reduces the upfront cost of land access for developers. Land costs also serve as a volume cap when we consider that a developer can only access a certain amount of capital at one time.
Let's take a plot that costs $10 Million to own outright where there is no LVT and let's say you can build a 100-Unit apartment building on it. Let's say Construction takes two years. The cost of land is to build the apartment, therefore, $100,000 per unit built (plus the interest and/or exit cap costs of that $10 million for two years).
Let's now looks at that if we levied an 85% LVT on the parcel. The cost of the land purchase would go down to 1.5 Million (roughly). A $10 Million land parcel annual rental value is (by rule of thumb) about 15-20% of the sales price so let's say $2 Million to keep things simple. The 85% LVT on $2 Million is $1.7 Million. So the total cost of land acquisition to put up the building is now:
($1.7 Million x 2 Years Construction time) + 1.5 Million Land Purchase = $4.9 Million.
We've cut the land cost of putting up the building by more than half.
If "no one is going to allow you to do it" it's not a solution. Hypothesis have to be implemented and evaluated (over time) before they are deemed solutions
Like I've said before, this issue has radicalized me. I simply don't believe the problem can be solved without destroying the power of various entrenched interests. There is no solution that this system will allow, living with the problem is intolerable, and therefore the system has to go. I'll be very explicit about it; if liberal democracy must necessarily result in kids sleeping on the street and workers unable to afford decent shelter simply to provide a high return to a passive and unproductive investment, then someone is really going to need to explain to me why we should defend a system that deliberately makes it difficult to get shelter.