Land values are the crux of affordability, and there's no easy solution

It has practically become a national pastime for Australians to remark on just how expensive the property market is in this country. Be it BBQs, social functions, or even over a casual drink after work, affordable housing is always a hot topic of conversation. The reality is that be it purchasing a home that ticks all the right boxes, or securing an investment property that is affordable while still offering strong a return, property ownership remains a costly affair for many.

Even saving for a deposit can be a disheartening affair. Take lender’s mortgage insurance, for example. It is arguable one of the most unnecessary and wasteful expenses that a home or investment property buyer can.

The key issue when it comes to affordability however is not the cost of housing, but rather the cost of land. That is what you are really paying for when purchasing most properties. Land in highly desirable areas is very expensive because it is a scarce resource. This is because all but one of our capital cities are coastal, built on harbours, peninsulas and river fronts. Add to that the extensive urbanisation of our overall population, and all of these factors reduce the volume of available land to build more housing stock, where dwellers need it most.    

I believe the biggest oversight is neglecting to effectively manage the value of land throughout our capital cities. Instead, more effort has been focused on reducing construction costs.    

This is ridiculous for two reasons:    

1) Take an average three-bedroom Sydney house on a modest block (450 square metres), within a 15 kilometre radius of the CBD. You’d be looking at say $900,000 minimum to buy that property. But the land value of that parcel is more likely to be $600,000+. What good would it do for the buyer, then, to attempt to reduce the $300,000 portion of the cost for the dwelling, down to say $250,000? Overall the buyer would still be paying $850,000 for the property.

2) The impact on our construction industry, which has been hurt in recent years and only just recovering again now. Making construction and development companies less profitable will encourage them to want to build less projects, since their margins are not as great. Punishing the construction industry will only stress affordable housing concerns, and not ease it.

The Australian government has, at both federal and state levels, initiated programs in recent years to ease affordable housing challenges throughout the country. Take for instance the introduction of the National Rental Affordability Scheme (NRAS) in 2008. Almost 50,000 entirely new residential dwellings were constructed since the introduction of the scheme. The aim was to build housing in the most needed and desirable locations – so mostly throughout CBD areas of capital cities – and to make it affordable and accessible to the rental markets who needed it most.    

The government called on investors to buy into these developments and enter into a minimum 10 year arrangement. More information on how the NRAS scheme works can be found here.    

The problem with the NRAS scheme though is that is merely a Band-Aid fix to a bigger land value issue. Making physical dwelling construction costs more affordable is not really a viable solution here because it is the high land value that will see these properties become just as unaffordable once the decade-long investor ‘ownership’ scheme ends. Furthermore, encouraging investors to buy these properties should raise affordable housing alarm bells, as investors will be pursuing values growth more than anything else.

This is the real crux of the broader affordable housing crisis that much of Australia is facing, and I believe it is all entirely related to our near-unique demographic position.

You’ll note I mentioned ‘near-unique’ above. If you compare Australia to a similar market, Canada, you’ll see that the two countries have more in common than just having an affordable housing crisis. Like Australia, Canada is a geographically massive country with a comparatively small human population. In fact, according to the World Bank (see link below), out of all the countries on Earth, Australia is the fourth least densely populated country in the world. Canada is ranked 10th. 

This means that with a low population of working age people (which will shrink as the baby boomer population moves to retirement in both countries) being available to ‘run’ the country, it will become more expensive to maintain the quality of life in these countries. This will push up land values over time. This has direct and indirect consequences for land values. In both Australia and Canada, there are only a handful of major cities that present as genuine employment hubs.

By no means am I about to paint a bleak picture here, however, as values could improve if the population continues to shrink after the baby boomer generation passes on. Effectively, there would be more properties then available to a smaller population, and this would make dwellings more affordable.

So yes, affordable land is needed, and it almost seems a farce that spare land is something Australia offers in abundance. So what’s the problem, right? If Australia’s population distribution had evolved to be more like a smaller-scale version of say China or the US; where the population is pretty evenly distributed around dozens of smaller size cities versus being clustered in just a handful or less of larger ones, like Australia, Canada, Brazil, and Russia; then affordable land would be less of an issue.    

Imagine if Australia’s cities were like this: Brisbane, Perth, Adelaide and Canberra were the same as they are, but instead of having Sydney (4.6 million people) and Melbourne (4.1 million people), we had lots of smaller cities in NSW and VIC instead.    

For example, in NSW, say Sydney was only 1.6 million people, then Port Macquarie was 1.5 million, and Wagga was 1.5 million, and in VIC, Melbourne was 1.5 million, Mildura 1.5 million, and Bendigo 1.5 million. Land would be infinitely more affordable because, well, there would be more of it to go around, spread across more medium-sized cities, versus two large ones.    

Sadly, our population is not spread out in such a way, and unfortunately this means that demand in our larger cities will continue to keep land costs high, and thus affordable housing will remain scarce.    

Although there does not appear to be any easy solutions to the problem, I believe a potential one is to consider satellite cities on the outskirts of major capital cities. In these kinds of locations, land values are lower, yet access to CBDs can still be feasible within say a 90 minute travel time.    

For CBD commuters this likely won’t be viable, however it is worth keeping in mind that the job you may have in five to 10 years may not even require you to commute to a CBD to do it! Australia’s workforce is embracing technology more and more. Although this is in the pursuit of greater work efficiency and not affordable housing; I believe Australian mortgage holders may be a beneficiary.

If innovation continues to evolve and the trend to negotiate more ‘work from home’ days continues, I believe many urban Australians will begin to reconsider why they are continuing to hole themselves up in an expensive ‘rat race’ shoe-box apartment, when sub-90 minute travel time coastal house may be more feasible with their new work schedules.

It will be interesting to see if this trend picks up speed in the coming years.

Cameron McEvoy is a NSW-based property investor and maintains a blog, Property Correspondent.