Often when people ask my wife where I am she replies, “Oh, he’s off somewhere saving the world.” Well the other day I said to her, “I’ve now worked out how I’m going to do it.” “How?” she asked. I said, “a quarter acre at a time.”
This is not as silly as it sounds.
As the great British historian Paul Johnson says,
“The connection between political liberty and the individual ownership of property is one of the great certitudes of human society. It is carved in granite where the words “freedom” and “freehold” come from the same root and have interrelated with each other through many centuries.”
The Peruvian economist Hernando de Soto observed:
“Legal property gave the West the tools to produce surplus value over and above its physical assets. Whether anyone intended it or not, the legal property system became the staircase that took these nations from the ‘universe of assets’ in their natural state to the ‘universe of capital’ where assets can be viewed in their full productive potential.”
In other words, freehold land, property rights, markets and liberty all go hand in hand.
Prior to 1832 the British Parliament consisted of a representative assembly of property owners. The suffrage was greatly extended with the 1832 Reform Act but it wasn’t until after World War II that universal suffrage was adopted in the UK. For centuries, the legitimacy of the British parliament was based on property rights, not citizenship. Nations in the 20th century that either adopted, or had democratic institutions imposed upon them, proceeded immediately to the one-person-one-vote method of election rather than going through the property ownership stage – which in England lasted over 800 years. Perhaps this is one of the reasons why such democracies have proven so fragile. Without property of their own, voters have limited interest in protecting the property of others. And if history teaches us anything, it teaches that when you take away property ownership rights, you take away a substantial chunk of personal freedom.
Perhaps instead of rushing to impose democracy in developing countries in more recent times, the West would have been better off establishing private property, embedded within the rule of law, first. Private property creates civic order. Civic order gives rise to civic representation – as it did in pre 18th Century Britain. Make everyone secure in their own quarter acre and many of the benefits of democracy will be achieved.
Since World War II the average Australian or New Zealander was able to buy their first home on the average wage. Traditionally, the median house price was around three times the median household income.
Today, according to international housing affordability index Demographia (www.demographia.com), co-authored by New Zealander Hugh Pavletich, house prices in Adelaide, Auckland, Brisbane, Christchurch, Melbourne and Wellington are now more than six times median incomes and in Sydney and Perth more than eight times. The long-standing nexus between house prices and incomes has been broken.
So what went wrong? Consider if you will, these words by former Australian Reserve Bank Governor Ian Macfarlane giving evidence to a Parliamentary Economic Finance Committee in 2006.
“Why has the price of an entry-level new home gone up as much as it has? Why is it not like it was in 1951 when my parents moved to East Bentleigh, which was the fringe of Melbourne at that stage, and were able to buy a block of land very cheaply and put a house on it very cheaply? Why is that not the case now? I think it is pretty apparent now that reluctance to release new land plus the new approach whereby the purchaser has to pay for all the services up front – the sewerage, the roads, the footpaths and all that sort of stuff – has enormously increased the price of the new, entry-level home.”
The regulatory seeds of the current housing affordability crisis were sown back in the 1970s. Up until then land was abundant, affordable and the development of new suburbs was largely left to the private sector. Our pre-1970s leafy suburbs of large allotments and wide streets are an enduring testimony to the private sector’s ability and the traditional laissez-faire approach to urban development. It was into this environment of clearly successful urban growth that governments started to get involved by introducing ‘urban growth boundaries’ and ‘urban consolidation’ policies. These policies have been responsible for astronomical rises in land prices.
The case for urban consolidation has been advanced on the back of a number of arguments – namely, that it is good for the environment; that it stems the loss of agricultural land; that it encourages people on to public transport; that it saves water and energy; that it leads to a reduction in motor vehicle use, and that it saves on infrastructure costs for government. All of these claims, I repeat, all of these claims are false. The facts and evidence from around the world refute each and every one of them.
Urban planners, by promoting urban consolidation and at the same time demonizing urban spread have inflicted enormous damage on the economy and society.
This massive escalation in the price of land carries with it a multitude of detrimental impacts. Establishing affordable rental accommodation for those in greatest need becomes even more difficult for social and public housing authorities as they seek to purchase land and houses in a greatly inflated market. Road widening and major infrastructure projects experience cost blow-outs as land acquisition costs sky rocket, and the cost of establishing schools, community centres, health services and business facilities becomes difficult, and at times impossible.
Politicians and public servants should stop listening to urban planners.
I used to run a newspaper advertisement with the headline, “If you do nothing else, make sure you own your home by the time you retire.” I used this approach because I wanted to emphasise that the benefits of being a homeowner become most evident when people retire.
In human affairs there has been an imprecise, and at times neglected, moral contract between generations which dictates we should leave things better than we found them. In other words, we shouldn’t arrange our lives simply to serve our own needs but we should consider those who are to follow.
When it comes to home ownership however, we are clearly breaking our contractual obligations. We are making home ownership much harder for the next generation. If we do not act to ensure that housing affordability is restored we will most certainly deny vast numbers of young people the opportunity to become home owners.
The social and economic consequence of large numbers of people reaching retirement as renters will not only effect the quality of their lives and the choices they are able to make but it will also create an enormous burden for governments in funding housing and social services.
The economic consequences of all that has happened over these past few years have been as profound as they have been damaging. The capital structure of our economies have been severely distorted and getting them back into alignment will take time. But it is a realignment that is necessary.
Let me touch now on the financial problems which are spreading around the world as a result of the collapse of the sub-prime mortgage market in the United States.
California, the birthplace of the sub-prime mortgage industry, is paying the highest price of any State in America as the housing meltdown persists. California had nearly 500,000 foreclosures on properties last year and by far the biggest decline in house prices. By the end of 2008 property values in that State alone will have fallen by $600 billion.
Not surprisingly, almost half of the 25 biggest US subprime lenders were based in California.
California also happens to have one of the strictest urban planning regimes in the world. It, along with Florida, another highly regulated urban planning regime, account for around 70-80% of all sub-prime losses in the US.
Foreclosure losses however are significantly lower in States like Texas and Georgia where planning and regulation were held at bay. Losses there are one tenth the losses in California and Florida.
Like most epidemics, the US sub-prime (and now ‘prime’) mortgage housing crisis can be traced back to this one source – urban planning laws. The current credit crisis is the direct result of unprecedented house price inflation caused by the kind
of urban planning policies I outlined earlier.
In Australia and New Zealand, the housing affordability problem, ‘mortgage stress’ and the current rental crisis, are all caused by the same thing.
Again, none of this needed to happen. But it has happened and it now falls to the governments to fix it. Before that can happen, politicians and bureaucrats have to become not only much better informed about the causes of this appalling mess, but also much wiser in their attitude towards the bureaucrats who advise them.