HOUSE PRICES – AND WHY GLENN STEVENS IS RIGHT TO BE WORRIED

Glenn Stevens is the most influential banker in the country. As head of the Reserve Bank, when Stevens speaks markets listen. But do politicians?

Recently, Stevens made some telling comments about the shortage of housing stock and the prospect of rising house prices. Those comments have since fuelled a flurry of ‘housing bubble’ stories in the media, but typically the underlying problem of supply was glossed over.

For the record, here’s what Stevens had to say on the 28^th July to a Sydney business lunch in support of the Anika Foundation:

“A very real challenge in the near term is the following: how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices. Given the circumstances – the economy moving to a position of less than full employment, with labour shortages lessening and reduced pressure on prices for raw material inputs – this ought to be the time when we can add to the dwelling stock without a major run‑up in prices. If we fail to do that – if all we end up with is higher prices and not many more dwellings – then it will be very disappointing, indeed quite disturbing. Not only would it confirm that there are serious supply-side impediments to producing one of the things that previous generations of Australians have taken for granted, namely affordable shelter, it would also pose elevated risks of problems of over‑leverage and asset price deflation down the track.”

Stevens was by no means first to identify the problems of undersupply. Industry groups and some informed economists have been pointing to the supply problem for some years. Almost two years ago, the ANZ Bank flagged a shortfall of 200,000 homes by 2010, in a warning issued in November 2007 (you can read it here).

The Federal Government’s National Housing Supply Council confirmed the shortage in its ‘State of Supply’ report in 2008, arriving at a ‘crude’ estimate of 85,000 dwellings in the then market of 2008. (The Exec Summary is here).

So the fact that there is a shortage is undisputed and the number is probably somewhere between 100,000 and 200,000 and getting worse. That’s a lot of rooves. But what got Stevens worried was that this shortage, combined with renewed activity in the market as a result of the increased First Home Buyer grant and the prospect of a ready supply of housing finance, would push house prices up without addressing the shortfall.

Evidence

The signs are already there. In Melbourne, a robust market is producing intense competition at auctions. New land releases are so eagerly anticipated that homebuyers are camping out to be first in line. As one agent described it “stock levels were so low buyers were being funneled into what is available and being forced to compete for it'' (full story here). Mortgage lenders have marginally tightened the amounts they will lend to first home buyers while typically leaving deposit ratios and LVRs untouched. (Story here). House prices generally have withstood the onslaught of the GFC, in some areas even rising marginally, leaving the IMF to suggest that Australian house prices remain 20% over valued – a sure sign that supply is insufficient for demand, and that even a global recession isn’t enough to cool people’s fundamental desire for shelter.

But public policy settings – the very things causing the chronic undersupply – remain unchanged. Queensland’s revised ‘South East Queensland Regional Plan’ will only exacerbate the shortage by setting hopelessly unrealistic targets for infill housing and limiting the areas capable of development for detached housing on the fringe. Councils are adding to the problem with unwieldy if not impossible approvals processes and usurious infrastructure levies.

The market reality now is that developers find themselves faced with a chronically undersupplied market – and are basically powerless to do anything about it. The first problem is obvious: a global credit squeeze and the retreat of lenders from the domestic market. Many developers can’t find the credit needed to proceed with projects while others have been hit with massive devaluations such that their existing debt ratios don’t exactly make the prospect of more debt something that would appeal to markets (or lenders).

A pricing floor?

But even if the credit squeeze was eased tomorrow, the raw price of land – a reflection of its scarcity – combined with the extortionate approach to upfront levies, has put a minimum cost on the price of new detached and attached housing. And that cost is currently above what many in the new homebuyer market can afford to pay.

I was quoted a figure this week of a minimum $500,000 per home unit for anything basic in Brisbane, given the land costs, infrastructure levies, planning compliance and build costs (which are higher for high rise developments than detached housing). A $500,000 home unit is roughly eight times average incomes, so the likelihood of finding a rush of buyers in that price range to ease the housing shortage isn’t good. (Assuming there are enough people wanting to live in units to begin with).

Detached house and land packages fare a little better although it would be difficult to bring any new supply onto the market for much under $400,000. Half of that, roughly, is the land cost alone. And that’s if you can find the land to begin with.

Conundrum

This creates the conundrum that has Stevens worried. New supply lead times are such that it would just about be easier to get a new coal mine happening than release a new housing estate. So supply is inelastic in response to the demand.

There is a price floor created by new regulatory weapons in the hands of public policy makers, which means that new supply is also very costly. Probably more costly than many people in the market can afford to pay. That being the case, developers will need to rely on second and third home buyers to make many projects stack up, or for the return of investors, provided rates of return remain attractive relative to alternatives (cash or equities).

So the chances of this nationwide undersupply being brought into balance by the rapid addition of new housing stock are looking pretty remote right now.

That being the case, you would imagine that the pressure of an undersupplied market will invariably find its way into the stock of existing homes. Evidence of that would be in the form of rising established house prices despite a climate of falling employment, or intensive competition for existing stock. Which is what we’re seeing now.

What happens next?

The shortage of housing is chronic but the willingness of public policy makers to do much about the problem is practically non existent. Given we can usually rely on policy makers to do the wrong thing (or nothing) when action is needed (other than perhaps hold an inquiry), the chances of radically changed policy settings freeing up land supply are remote, at best.

Economics 101 tells us that a shortage of supply relative to demand should equate to rising prices. And that’s quite possible in established markets, where competition for stock amongst those with secure incomes and the capacity to pay will translate into increasing prices.

But surely prices generally can’t increase by much – they are constrained by people’s incomes. If house prices rose much further, we would be facing housing costs on average at nine or even ten times average incomes, which on a global scale would make Australian housing the most expensive in the world (if it isn’t already). Incomes are unlikely to rise quickly for average workers and bank lending policies are unlikely to return the heady free for all of recent years. So that in effect puts a ceiling on price growth.

By the same token, prices are unlikely to fall, given the floor under the market created by public policy settings controlling the release of land (hence restricting supply) and the unrealistic approach to infrastructure levies.

The gap between that floor in prices and the ceiling is the space in which developers must operate to provide new supply. And it’s not a wide gap.

All of which means we are probably faced with a waiting game. Incomes need to rise faster than the increasing supply side costs created by policy settings, or those policy settings need to be relaxed so that relativity with incomes is restored.

In the meantime, Stevens has probably nailed what happens next. In his own words: “it will be very disappointing, indeed quite disturbing”.

INTERVIEW WITH A PLANNING MINISTER

Interviewer: So Minister, we’ve heard a lot about your new planning schemes, can you tell us what’s actually involved?

Planning Minister: Thank you, and might I say I am very proud to tell you about how much planning we’ve actually been doing. The plans are very comprehensive, and have been painstakingly developed over many years, so they’re extremely comprehensive and we’re very very proud of what we’ve done.

Thank you Minister, but what’s actually involved?

That’s an excellent question. As I’ve said, these plans are comprehensive and the result of extensive public, industry and stakeholder consultation. The plans cover a wide area of planning – I can assure the people of this State that no stone’s been left untouched by any of this planning. So what’s involved is a very comprehensive plan for planning the future of our region.

Yes Minister, but what does the plan actually contain?

I’m sorry, but you possibly don’t understand what’s involved ...

Clearly not.

Well let me say the plan has actually been refreshed and recharged and we’ve done away with the dated, inappropriate plans of the past and replaced them with a whole new set of plans for the future that ...

... contain what exactly?

I’m not sure your listeners would appreciate your line of questioning. Look, it’s a very comprehensive plan – in fact, there’s more than just one plan in case you didn’t get that message. We have plans for every contingency, for every possible scenario, based on the extensive review of our planning and consultation with leading industry and public groups. In fact, it’s fair to say we’ve never had so many plans available for so many contingencies and interests that have been, in themselves, very comprehensively planned out. The Premier has told me she’s 100 per cent behind these plans and what they mean for our region.

Does she know what’s in them?

Don’t be flippant with me, of course she does, she’s a very well-informed Premier, who’s been fully briefed on all of our planning activities and the plans themselves and the consultation process and understands that these are the best plans we’ve seen for a long, long time in this great State...

Can I change the subject for a moment?

Provided you don’t miss the point about our planning. I welcome any enquiry into our planning!

Minister, your Department employs many hundreds of public servants in the planning field. Are the public getting value for money?

Of course! (laughs). Haven’t you seen all the plans they’ve produced?

But what are the plans for? I mean, why all this planning? What’s it for, where’s it leading?

Because (irritably) you HAVE to have plan for things, you can’t just let growth happen all willy-nilly without a decent planning framework. And let me also say, which is something you need to appreciate: planning takes planning. You can’t just produce the sort of plans we’ve produced without lots of carefully thought out planning for the plans. It’s a subtle point sometimes lost on a cynical media, but producing good planning is an investment in our future and that in itself needs to carefully planned out, which I’m sure your listeners would fully want.

Minister, we’re running short on time. Can I wrap this up by asking what has actually been DONE with these plans and all this planning?

Done? I’m sorry?

Yes Minister, what’s actually been done?

Oh, I see, well that’s easy to explain, you’ll need to redirect your question – you see, I’m the “Planning” Minister, the “doing” is not part of my portfolio. But when anyone is ready to do anything, absolutely anything, I promise you we have the plans! I’m very proud of that.

Minister, I’m afraid we’ve run out of time – that’s all we have time for today.

You should have planned that better then, shouldn’t you?

Thank you Minister.

Planning Never Never Land?

The one thing you should expect from any half decent plan of any sort is that it should have at least some vaguely remote chance of actually delivering on its ambitions. Otherwise, it isn’t a plan because the end result is unrealistic and falls into the realm of fantasy.

The release last week of the revised South East Queensland Regional Plan brings into focus many issues, but one central assumption – that infill housing targets can accommodate future population growth in existing urban areas – suggests this plan might have about as much chance of realistically being achieved as Peter Pan being told to ‘think happy thoughts’ so he can fly.

The revised SEQ Regional Plan attempts to ‘manage’ the growth of south east Queensland by containing future population growth largely into existing urban areas, and limits expansion on the fringe by imposing an urban growth boundary. The philosophy owes much to concerns about ‘sprawl’ (a pejorative term which on a global scale is hardly applicable here) and has its roots in land use policies developed in parts of the United States and Europe.

Setting aside any critique of ‘smart growth’ policies and their impact on housing choice and costs, the attempt to contain future growth in SEQ into existing urban areas is perhaps the most contentious aspect of the SEQ Regional Plan. Put simply, it is hard to see how the numbers stack up.

The targets.

The plan proposes that half of all new residents are to be accommodated in existing urban areas via infill housing (medium to high density). Within the City of Brisbane, the target is even higher at 88% of new growth. That figure isn’t really surprising given there’s really no large parcels of land left suitable for detached housing. But when you start to look at the raw numbers of infill dwellings required to meet the plan’s targets, the credibility gap widens.

For south east Queensland, the plan acknowledges the need for 754,000 new dwellings to accommodate predicted growth. Of that, 374,000 dwellings are mandated as infill (townhouses or high rise units). Within Brisbane City there will be 156,000 new dwellings of which 138,000 will be townhouses and unit type dwellings, according to the plan.

That’s a lot of units. Some back of envelope sums are helpful here. Imagine a twenty level highrise unit block, with four units per floor. That’s 80 units. The 138,000 dwellings infill target, if it was all delivered as 20 storey highrise buildings, would equate to 1,725 such twenty storey unit towers across Brisbane, between now and 2031. That works out to roughly 78 unit towers, each year, for the next 20 years or so.

For south east Queensland, the 374,000 dwellings infill target equates to 4,675 twenty storey apartment towers or 212 per year, every year, for the next 20 years.

Now the SEQ Regional Plan makes precious little comment about how the planners expect this scale of infill to actually be delivered. It’s a bit like envisaging a Dubai-scale apartment boom right here in Brisbane.

Does this sound like a plan, or are we being asked to think happy thoughts?

So where will they go?

The revised SEQ Regional plan does at least suggest that there are some preferred areas for infill development activity, particularly around transit nodes – which makes sense. Transit oriented development exploits existing public transport infrastructure (however overtaxed it may already be) and mixed use development to create work-live-shop-play environments. It can be tremendously successful, and Brisbane has a couple of notable examples already, with more on the drawing board.

But bring the issue of scale back into focus – the hypothetical 1,725 apartment towers are for accommodation only. They do not include additional requirements for more office space, more retail space, more schools, hospitals, medical centres etc – it’s a long list.

Chermside, Indooroopilly, Carindale and Upper Mt Gravatt are some of the activity centres expected under the plan to accommodate this frenzy of building activity over the next twenty years. But within these centres, the plan again is silent on precisely where the activity is to take place. It seems fair to ask the question: have the proponents of this plan at any stage pulled out a map and decided which entire suburban blocks are to be demolished to make way for the 1,725 apartment towers needed for infill development, or is there some new approach to infill which somehow creates new development sites in built out neighbourhoods?

The credibility gap is actually much wider than this. Infill housing is usually delivered as a mix of medium (townhouse style) to high density. Medium density projects by nature occupy a larger footprint than a high rise tower. So the reality of the numbers is that the foorprint needed to achieve the infill targets will be much greater than our hypothetical 1,725 towers in Brisbane (or the 4,675 towers throughout south east Queensland).

Where exactly are these sites? I’ve had a good look at Chermside, Indooroopilly, Carindale and Upper Mount Gravatt, and even the wonders of Google Earth don’t reveal vast hectares of vacant land adjoining transit nodes just waiting to be developed as housing.

Has anyone asked the people?

The physical impossibility of the target numbers being delivered is one fatal flaw of the SEQ Regional Plan, and will remain so until the plan’s proponents explain – in precise detail – where and how these numbers will be delivered. Only with that sort of street by street analysis of available land can the credibility gap be closed.

But then there’s another, significant gap in all this. The SEQ Regional Plan proposes perhaps the most fundamental change in the way of life and urban environment for Brisbane and the south east ever proposed in the history of this state’s development. Did anyone actually ask the people if this is what they want? It is a democracy after all and we have debated and voted on lesser issues than this.

The reality is the community are highly likely to object strenuously to dozens of 20 storey towers appearing in their neighbourhood. Jim Soorley was once savaged by the Liberals for proposing a ‘sardine city’ but his ambitions for infill were miniscule compared to what the SEQ Regional Plan now proposes. The scale of community objection to the infill targets of the SEQ Regional Plan, once the community realises, could be sufficient to unseat local Councillors or State MPs, and the prospect of that is another fatal flaw for the plan. Politically, it is hard to see how it could ever be delivered.

Then there are other market realities to deal with. Families overwhelmingly prefer detached housing and backyards for the kids, so even if deprived of housing choice, will there be a big enough market to buy all the units and townhouses proposed? There’s an issue of cost also – high to medium density is expensive to deliver, inflated by infrastructure levies and build costs. So will there enough people who could afford to buy all the units and townhouses proposed? There’s an issue of planning polarity, in that while the SEQ Regional Plan is a state instrument adamant on infill, many local council planning schemes don’t support it. Once again, how that tension will be resolved adds yet another wedge to the credibility gap.

Never land?

Is it possible that such a comprehensive planning scheme which purports to deliver on so many noble objectives (preservation of open space, quality of life etc) actually failed to do the most basic maths on the key assumptions that underpin it? And if that maths was done, why is the plan silent on the answers?

The questions are already being asked and the answers are not forthcoming. At the end of the day, unless and until the Plan’s authors and proponents can answer the physical realities of ‘where’ and ‘how’ in fine detail, site by site, street by street and neighbourhood by neighbourhood, the SEQ Regional Plan is suffering a yawning credibility gap from day one.

In the meantime, a region with a demonstrable housing shortage could find the shortages worsen, affordability deteriorate and growth – the economy’s engine room – falter.

And that doesn’t sound like much of a plan.

[If you haven’t searched through the SEQ Regional Plan for all the details yet, this is a good place to start: Chapter 8 on ‘Compact Settlement’ sets it out. You can find it here - http://www.dip.qld.gov.au/resources/plan/SEQ/regional-plan-2009/seq-regional-plan-2009-part-d-dro-08.pdf ]

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’.

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?