Sunday, July 26, 2009

What was so ‘bad’ about the bad old days?

If the complexity and extraordinary difficulty of planning regulations today are really all about securing good community outcomes, that would mean that prior to all this complexity of legislation and regulation (not to mention taxes fees and charges) things must have been quite grim.

You’d be forgiven for thinking ‘old style’ suburban housing development was some sort of free for all – a sprawling Levitt Town of housing ghettos – so bad that something had to be ‘fixed’ or ‘done about it.’ But were the bad old days so bad? And has all the additional cost and complexity associated with housing really added much value that we can see?

The Brisbane region in the mid 1970s had a population of 980,000. Today it’s hovering around 1.9 million and by the year 2030, it will reach around 2.8 million. So over the space of 60 years we’ll have added around 2 million people, or roughly trebled our population. Put another way, the rate of growth since the mid 1970s is roughly the same as we’re experiencing now. The numbers are just getting bigger.

So, what’s new?

One thing has certainly changed. We now seem preoccupied (perhaps justifiably) with what this growth will mean for our future. Concerns about encroachment of urban form into rural areas are now commonly expressed in the media and community at large. To place some regulatory and planning ‘order’ around this growth, we adopted an urban growth boundary to contain that growth, the first incarnation of which was really the South East Queensland Regional Plan, which followed the Integrated Planning Act (1997) and was enacted in 2004. Since then, as a community, we appear to have accepted that ‘more controls are needed’ to preserve a quality of life and prevent reckless ‘sprawl’ (a pejorative term but commonly used) consuming swathes of land which (we have been told) is in precious short supply. [As an aside, it is possible to trace the rapid escalation of housing prices to the period immediately following the Integrated Planning Act, from which point planning began to disintegrate into a regulatory maze. The SEQRP may have accelerated that process but there’s no question that prior to IPA, house prices were much more affordable in relative terms than after – still only around four times average incomes in 1996. They are now over seven times average incomes. The extent to which IPA contributed this is a hot topic in its own right].

Take a step back for a moment though, to mid 1970s Brisbane. Rates of growth were roughly the same as now. In those days, there was no growth boundary and no plethora of controls on the development and subdivision of land for housing needed to accommodate the growth. Developers were buying rural holdings on the (then) urban fringe and cutting them up for development. New home buyers back then typically saved for and bought their vacant block of land, often from a salesman in a bad suit sitting in a caravan on site. They then saved some more, and borrowed some too, to build their new home.

Because land for housing was generally freely available, supply constraints weren’t the problem they are now. The median price of a home in Brisbane in 1975 was just $30,000. That sounds cheap by today’s standards, but even by relative standards, it really was cheap: $30,000 was 3.7 times the average incomes on 1975 wage and salary earners. Today’s median is somewhere around $450,000 – or more than 7 times average incomes. So roughly double in relative terms.

We have standards now you know!

So housing is relatively much more expensive today than it was then. Part of the reason might be that, if you believe the mantra, our standards have improved. New housing these days is subject to a tight regulatory framework. The supply of new land is highly regulated – and no new areas on the fringe of the artificially drawn urban growth boundary are released without exhaustive studies that can easily involve millions of dollars in planning and legal consultants fees, with no certainty that the planning decision will actually be feasible in terms of development.

In addition, approved land subdivisions are subject to weighty upfront infrastructure levies and other costs, which now add more than $150,000 to the market cost of a block of land. Then there are the contributions to open space and parkland, public transport (even when none exists in the area being developed and there are no plans to do so) and pretty much anything else the relevant local authority deems necessary before development can proceed. All of which slows progress and adds to costs.

And finally, increasingly prescriptive building codes for energy efficiency, water and other features mean that the actual bricks and mortar cost of the dwelling is rising by more than the real costs of the materials alone.

All of this and more is done in the name of ‘sustainable’ growth and the prevention of ‘reckless sprawl’ on the urban fringe. New standards are promoted as improving the quality of life for residents and ensuring that new communities are created in a planned, orderly manner, while green space is preserved and social order maintained.

The Jindalee experiment

Back to the mid 1970s and it was a different story. The bad old days saw urban growth corridors to the west, south and north of the city being recklessly delivered at a pace roughly in line with demand. Bill Bowden was sprouting his ‘Little Aspley – that’s Strathpine’ housing subdivision as a place you could build a home and grow giant zucchinis (because it was built on farm land). To the south, Browns Plains was opening up former forestry and grazing country where cheap blocks of land attracted hordes of young couples planning a new future.

And to the south west, Jindalee was the region’s first ‘experiment’ in large scale housing development, made possible by a bridge over the Brisbane river. The Jindalee project occupied land formerly used for dairying (surprisingly, despite the absence of cows in Jindalee, we still haven’t run out of milk). The 1416 hectare project was earmarked for housing around 1960 and the bridge completed sometime in the late 60s. The area was given the name ‘Centenary suburbs’ because it all kicked off in 1959 – the centenary of Queensland. Developed by Hooker Corp, the project was supported by the State Government who contributed $2million to the cost of the bridge. (That’s correct – back then, the government contributed to the infrastructure as part of their community obligation in support of growth. That balance of responsibilities has changed a bit since then).

Housing costs were only 3.5 times incomes and despite the absence of a 180+ page piece of planning legislation or equally voluminous building codes or local planning guidelines, the houses are still standing and the entire region has miraculously not become a socially disadvantaged sprawling suburb with little or no community infrastructure.

The same thing today

The same thing today would of course be tied up in planning consideration for many years, and at substantial cost. Any bridges, or roads, or local schools or basic infrastructure would be factored into infrastructure contributions and building standards would mean that all new houses were constructed to a much higher standard.

In theory, all this planning progress and regulatory complexity should mean that the modern suburb of today is vastly superior to the Jindalee’s of the mid 1970s.

Personally, I don’t see it. If the standards are so much superior, how is that reflected? Today’s Springfield or Northlakes looks to me very much like the Jindalee of old. Of course there’s a lot more by way of landscaping, the houses are larger (but on smaller blocks of land), and roads are all kerbed and channelled and footpaths and bikeways are in before the first residents.

But really, how much different are things now? Are today’s suburbs so much improved, thanks to the careful planning and regulatory environment which guides their creation?

The price of progress

Whatever you view on aesthetics, there’s no argument about cost. Today’s new suburban home is vastly more expensive than its 1970s counterpart.

The combination of supply constraints, infrastructure levies and compliance costs mean that every new house and land is roughly delivered with a $150,000 to $200,000 built in regulatory cost. [That figure is based loosely on a study by Urbis JHD for the Property Council, back in 2005, which examined infrastructure costs and government taxes. I’ve inflated the number a smidge because things have only worsened since then. The report can be found here. So if you crudely estimate today’s charges at, say $100k to $150k plus make an allowance for the effect of land supply constraints of another $50k or so, you get your total bill of $150k to $200k].

So the question becomes, are new homes today $150,000 or $200,000 better than their 1970s equivalent? (Bear in mind that these extra costs alone are worth around 3 times average incomes. If today’s home is something like 6 or 7 times average incomes, the base cost could be back around 4 times incomes which is roughly where it was in the 1970s and 1980s, so it roughly works out ‘back of envelope’ style).

The first wave of settlers in Jindalee could rely on a single income family to service their mortgage and other living costs. Today, young couples really need a dual income to cover the mortgage alone, and the childcare industry has grown off the back of that change in dynamic. Housing affordability has become a pressing social issue in that space of time but rarely does affordability rate a mention in modern planning schemes or legislation, let alone feature as a KPI of how that scheme or set of regulations are delivering for the community it allegedly is there to protect from the bad old ways of the bad old days.

[To be fair, the Office of Urban Management’s website still lists a six page Queensland Housing Affordability Strategy that was released back when Peter Beattie was Premier. It promised to “ensure that the state's land and housing is on the market quickly and at the lowest cost.” The strategy is a quick read – so work out for yourself how it’s performed. Then, take a look at the much more comprehensive strategy on the same website devoted to koala preservation. Now I love koalas like everyone and would like to see their habitat preserved where possible, but it’s an interesting comment on planning priorities that the issue of access to housing for an entire generation rates so much less mention in a key planning document than koala conservation].

With all that extra household income now going into servicing larger mortgages – inflated by the $150k or $200k additional costs of regulatory progress – that’s a lot of money not going into the real economy but instead feeding bank profits. Put another way, today’s homebuyers are borrowing an extra $150k or so to pay the extra tax bill on a new home – a bill that didn’t exist even just over a decade ago. That’s a lot of repayment dollars and a big chunk of affordability riding on taxes and regulatory compliance costs.

So what have we achieved?

Has it all been worth it? Is our quality of life through the march of planning regulation measurably better for new home buyers (typically younger families), given the extra costs involved and the strain on household budgets? Are we really delivering, thanks to the protective maze of regulatory controls, vastly improved communities and if so, what are those improvements and would young home buyers – if given the choice – happily trade them off against homes that were substantially less expensive?

It’s a fair question, and perhaps one that various regulatory bodies and governments of any political persuasion should ask before embarking on further ‘reform’.

Thursday, July 16, 2009

How to increase the price of milk (and get away with it!)

Imagine if we treated a basic daily commodity like milk, in the same way we're treating housing? Adam Smith would have argued they both have something in common - the law of supply and demand. Does this sound like a familiar story? ...

Step 1. Introduce legislation which restricts the number of dairy cows any farmer can have, and don't allow any more dairy pasture for pasture expansion. Do this on the basis that your economic planners have told you that their economic modelling shows we have sufficient cows and anyway, cows fart a lot which creates methane which is bad for the environment and would lead to global warming which could ruin dairy farms. The legislation is promoted as being all about creating a sustainable future and it's actually a good plan for the dairy farmers - even if they say it isn't. The fact that the economic planners have never milked a cow themselves is immaterial, and anyone who suggests they’re not living in the real world is obviously just a red neck without any concern for the long term sustainability of dairying.

Step 2. Tax all the remaining cows. A new levy is brought in which charges farmers a large upfront tax for each Daisy and Annabelle in their herd. This is done because obviously as we know cows fart a lot and we need to save the planet so taxing cows for their methane is only equitable. Plus it's a handy new line of revenue and the consumer can't see how that tax affects them - it's only those wealthy farmers paying it after all.

Step 3. Hold a lengthy parliamentary inquiry which includes several parliamentary missions to overseas destinations which preferably bear no resemblance to our own geographic or population circumstance, to discover how they have legislated to limit the number of cows and how they have discovered innovative ways to charge farmers for the tax on these cows. It's all justified in order to save the environment and, obviously, because you're concerned about the long term viability of the dairy farming industry should global warming lead to a degradation of pastures. This inquiry will lead to a lengthy white paper, a green paper, then red tape and probably a black hole of regulation from which no dairy farmer can escape unless aided and supported by a bevy of consultants and lawyers acting on behalf of the farmer - and Daisy the cow. The cost of all this red tape and the compliance cost that goes with it make no improvement whatever to the quality of the milk bought by consumers but can be justified on countless grounds by the many hundreds of public sector spin doctors or by independent consultants who have been engaged - and paid for - by the government to look at the situation and who (totally unconnected to the fact that the government has paid for their services) conclude that the policy settings are appropriate.

The result?

The consumer finds long queues in their supermarket for milk because it's in short supply. We really don't have enough milking cows to go around but no one in government seems to be prepared to acknowledge the elephant in the room (or cow in the supermarket in this case). The price of milk, driven by a shortage of supply and combined with the new and high taxes paid by the farmer, and worsened by a black hole of regulatory complexity for the farmer which seems to suck money in without ever showing any sign of spitting anything out, rockets to the point that many consumers simply stop drinking milk. Only wealthy people can now afford milk. The working families who used to enjoy milk at reasonable prices now save it for special occasions. Or just do without. The producers see this happening so begin packaging milk in smaller and smaller containers – from 2 litres to 1 litre to 600 ml and finally the 250ml tetra pak, which costs a family roughly what a 2 litre container used to.

Many dairy farmers switch to growing something else or just leave their farms. This worsens the supply shortage. The government then spends huge sums of money on further studies and industry summits looking at how to make milk more affordable for families, without ever changing any of the three key factors which led to its price rise in the first place.

The government can't increase the number of cows or permit more dairy farms because the environmental lobby would howl them down for destroying the environment and would threaten to withdraw their preferences in the next election. They can't reduce the taxes on the cows because they've now got a budget that relies on milk taxes to pay for a wide range of services - like studies into how to make milk affordable and also their “affordable milk for working families” program which has become a cornerstone of their election platform. And as for less red tape ... well let's face it, what government ever in the history of this nation left its term of office with fewer rules and regulations and expensive compliance programs in place, than when they entered? Nope, that isn't going to happen either.

Some of the remaining dairy farmers begin to suggest that the solution really does lie in allowing them to grow more pastures and increase their herds, and to lower taxes and red tape, but this is attacked by a bevy of academics and government officials, who point out that a return to the days of the “Mc Milk urn” are simply not sustainable and that the farmers are only motivated by farm profits and don’t care about a sustainable future.

What if?

Now, what if we did the same thing to housing? Or have we done so already?