Reserve bank of Australia

OPINION: Governor of the Reserve Bank of Australia Philip Lowe might be good at his job but he was told in no uncertain terms recently to stay out of global trade issues after he suggested that the world should not retaliate against the US imposition of steel tariffs.

Lowe should pick up the hint and tell the rest of his team to also stay out of zoning issues.

A report released by the RBA last week and splashed as a lead story on front pages of major newspapers suggests we need to loosen zoning restrictions in order to ease pressure on housing prices.

The report found that zoning was responsible for adding close to $500,000 to the price of an average Sydney home, and close to $350,000 for Melbourne.

The report, however, fails to understand the nuances of housing economics, nor the other very human related issues that relate to housing. We are not talking about widgets here. We’re not talking about manufacturing cars or mobile phones.

Zoning protects the quality of our built form, or should do. It creates certainty. And it looks to do so for a wider public good. While that can end up looking like protection of elite treed areas at times, allowing free for all to housing development is not necessarily the way to create more equitable distribution of housing assets.

The RBA has huge influence that could temper runaway housing prices without destroying amenity or ecological infrastructure. It can lobby for changes in macro economic levers such as negative gearing, for instance.

Economist Dr Cameron Murray questioned the findings, concluding that the report had produced “nonsense outcomes”.

Aside from the misapplication of economics and lack of consideration of other drivers of unaffordability, what we’re talking about here is also a hugely emotional issue, probably the most important of all – the places we live and work.

House buyers are often chided for making emotional choices in the places they choose to buy; for bidding up prices well beyond their means. But on what other basis are going to choose the places they want to live in?

Those who have limited resources have always, and always will, go beyond what’s financially comfortable in order to get the home of their dreams. And the more money people have the more they will stretch to the next aspirational target. And if they can’t stretch financially they will stretch in other ways, by moving to Goulburn for instance.

Which is why the cost of money is such a powerful driver of housing prices. The RBA knows this and does a good job, a very good job, when it sticks to its knitting. It understands the impact of interest rates and negative gearing, and possibly even that of immigration on housing.

But zoning of land is way out of its skill set.

When you research the impact of zoning on price alone you are in danger of forgetting critical issues around amenity, community, liveability and belonging.

You’re also playing right into the song book that property developers have been singing from time immemorial, regardless of the facts, regardless of all the other research and empirical evidence put in front of them.

Property lobby groups choose to ignore these critical issues because they have one objective only – the profitability of their members. Not that of the people who buy housing, not that of the economy and society that must deal with the impact of their actions, other than in vague social licence ways.

Property development, the built environment, our physical infrastructure has a powerful impact on what we do and how we behave. It’s crucial for climate change mitigation and adaptation. This understanding is starting to seep through to the most influential people on the planet – those who control our prudential and banking systems – because it’s clear that climate change, largely through our built environment, will have an impact on our economic system as well.

In which case, RBA, since you’re closely tied up with the future economic health of our nation, you need to cast further afield in dealing with housing than what the lobby groups say.

Stick to leveraging, negative gearing, even immigration.

But for goodness sake stay out of commenting about zoning.

The Productivity Commission more than a decade ago waded into this area to call for deregulation of zoning in order to lessen price pressures and obtain some kind of rational economic decision-making in the allocation of land based resources.

Demographia – that bunch of closet highway lobbyists from the US who masquerade as an empirical housing research outfit to call for urban sprawl and deregulated zoning to bring prices down – did the same.

What this line of thinking ignores is the market itself. Prices are lowest in areas that have no zoning restrictions because they’re not very popular.

That’s the demand-supply curve working: What’s not strongly demanded is generally the cheapest; prices rise in areas that are attractive or convenient to live.

In order to understand housing the RBA would need to wade into sociology, psychology and even biophilia (lovely treed areas always cost more to live in).

It would need to do something way out of its comfort zone and apply economic demand and supply rules to weird human centric drivers that force people to make so-called irrational choices and pay way over what they can really afford for the best place to live and the best house they can possibly have.

So where is the RBA’s evidence about what constitutes that goal?

Where is the evidence that deregulating zoning, the thing that protects quality of life, will continue to be attractive when you’ve applied an economic rationalist macroeconomic lens to the housing industry and allowed double densities, or more. Or for factories or offices or big box retailers to set up where they like?

And where is the evidence the RBA has looked impartially at what else is going on in housing. Has it applied a public interest test to see who stands to benefit from deregulated zoning and who not?

Has it done forecasts to see what will happen to the price of housing in an areas that’s suddenly flooded with cheap units.

The RBA might surprise itself and be right but for the wrong reasons. And not for long. Prices may well fall as floods of housing enter the market and if it’s unattractive prices may fall even faster. Those who can will move to better areas, and less affluent people will be forced to move into what they can afford.

Until of course the economic pressures again bid up the price of overcrowded and ugly places because people need to put food on the table and economic pressures become the dominant driver. When this happens they will be forced to give up the quality of life goal or degrade its importance in order to simply survive.

It’s not wise to let economists or other narrow focused interest groups decide the shape of our future housing and cities by pricing alone.

Pricing is critical to affordability but before we let loose the economic rationalists on our zoning let’s look, RBA, at the huge impact you could have on affordable housing by getting rid of negative gearing, restricting foreign ownership, or strongly taxing unoccupied housing. Maybe you should encourage widespread co-ownership and more social and affordable housing instead.

And shame on major news outlets for giving this RBA thought bubble front page status without digging deeper.

How we tackle housing affordability, land use and composition of our housing is much more complex that the RBA or Productivity Commission can possibly hope to properly deal with.

We need instead a mix of people who understand the broad complexity of human actions, drivers and desires and how these feed into price and then in turn how these feed into the liveability of our cities and survival of our climate and planet.

Which is why economics is such a fascinating topic. It’s neither science nor humanity, but when it works properly can be a beautiful blend of both. And now that our planet is imploding we also need to understand economics needs to incorporate the impact of and on nature.

NOTE: A response I made to a LinkedIn comment on this story that said the RBA should be trusted on economics:

“Yep, agree on RBA and economics but how we zone land has to create certainty and quality of life. Higher densities are fine, as long as developments are well designed and sustainable. Zoning is something that needs to be co created with the community. And at a time when we built more apartments than any other time in recent history, prices went up not down. I also asked a very senior developer what would happen to prices if he could suddenly build double the quantities of apartments for each site Would the prices suddenly drop to affordable levels? No, he said, it would stop them going up by 20 per cent a year, maybe only 10 per cent. The property industry has inbuilt mechanisms that won’t see prices suddenly drop no matter what. if they look like falling, they stop building.

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  1. Thanks for posting this. As someone renting in a wealthy “leafy” area where I couldn’t possibly buy and where the residents always arc up about any change whatsoever, I found the headline reporting from this seductive. Your well-argued opinion piece has given me much pause!