House-price rises fastest in the world
The Australian 12:00am February 4, 2017
David Uren Economics Editor
A study of global house prices going back to the 1870s shows Australian prices have risen faster than anywhere else, with soaring land costs mainly responsible.
The study, which has implications for the government’s housing affordability strategy, shows Australian house prices rose an average 2 per cent a year allowing for inflation over the past 140 years — twice as rapid as price growth in the US and Britain and more than four times faster than in Germany.
The study of housing markets in 14 advanced countries by three German academics, published in the American Economic Review, shows almost all price growth occurring since World War II.
In Australia, house prices fell after the land boom of the 1880s and were flat until the early 1950s. Almost all countries show the same pattern, with prices taking off between the 1950s and 1970s. Price growth accelerated almost everywhere after the 1980s, except in Japan, where they have fallen.
The study looks at both construction costs and land prices.
Construction costs were stable until World War II but rose rapidly between the 1950s and 1970s, possibly reflecting rapid wage gains in the construction sector then. But there has been little growth in housing construction costs, after allowing for inflation, since the 1970s, while house prices surged.
The study estimates that, in Australia, rising land prices have accounted for 90 per cent of the growth in house prices. Across the advanced world, residential land prices were constant before World War I but fell steeply during the period between the wars.
It took until 1970 for residential land prices in advanced economies to recover their pre-1913 level, but since 1980 they have doubled on average, with a much larger increase in Australia.
Between 1913 and 1980, land prices accounted for about 40 per cent of the cost of an Australian house, but since then, the cost of land has risen to more than 70 per cent of the price.
“If both land prices and the cost share of land in housing production are rising over time, the supply response to rising home values may not bring prices down again,” the study says.
This contradicts the Turnbull government’s strategy that maintains that increasing supply will improve housing affordability.
This week Malcolm Turnbull told the National Press Club that the key objective of the strategy was to “deliver more dwellings in absolute numbers and in supply of affordable housing”.
This is based on the idea that new land for construction on the city fringe should be available at a constant price, with house prices very responsive to supply either rising or falling.
But the study says on the contrary, the past 140 years show that it is the price of land that matters, and it responds to economic growth as desirable land becomes increasingly scarce.