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Common Urban Myths About Transport

Few of us will have failed to notice the ‘affordability crisis’ that has struck the Australian real estate market in recent years. In Melbourne between 1996 and 2003 the median house price more than doubled, from $150,000 to $350,000. Growth in incomes has been less spectacular, and this has led to people having to borrow ever-greater multiples of their annual disposable income if they want to share in the ‘great Australian dream’ of home ownership.

There is a general consensus that the explosion in house prices is due to a number of factors, chief among them being a sustained period of low interest rates up to 2004 and again in 2009 (allowing more to be borrowed for the same monthly repayment), a boom in financial speculation - including from overseas - inflating asset prices, and various new government incentives to spend up big on real estate (such as the halving of capital gains tax on investment properties held for a year or more).

But even the multitude of credible explanations available hasn’t prevented property developers (who profit handsomely from real estate inflation), and the right-wing think tanks who act on their behalf, from offering self-serving ‘explanations’ of their own. So it’s become fashionable in some circles to blame high house prices on - of all things - sustainable transport-and-land-use planning.

The gist of this particular fairy tale is that anti-sprawl policies, such as Melbourne’s urban growth boundary and planning rules barring certain kinds of development in rural ‘green wedge’ areas, create an artificial scarcity in the supply of land for housing and this is what pushes prices up. Since public transport allegedly needs strong planning measures like this to support its use, it’s concluded that public transport is bad for ‘the battlers’ because it leads to unfairly inflated house prices.

Too many state and local politicians and their planning advisers place obstacles in the way of people seeking to buy new homes.... Many of this view have an emotional attachment to public transport.
---Alan Moran (Institute of Public Affairs), Herald Sun, 9 September 2006

It is important to remember that the scarcity that propelled land prices is artificial.... It is the product of restrictions invoked through planning regulation and zoning.... State and Territory Governments have been spurred along by an urban planning cheer squad which is obsessed with curbing the size of our cities and pushing a policy of urban consolidation. Between them they have excluded more low and middle income earners from home ownership than at any other time in Australia’s history.
---Bob Day (Institute of Public Affairs), address to Australian Christian Lobby, September 2006

No longer do we all troop to work to the urban centre using buses, trains and trams. For the most part, we work in dispersed locations and prefer to travel by car to work and for entertainment.... Imposing constraints on developments means an alarming inflation in the cost of land.
---Alan Moran, The Age, 23 January 2007

Much of this rhetoric originated in the USA, which largely lacks the comprehensive urban planning that has been traditional in Australia, and where efforts to establish a planning system more akin to ours have been resisted by developers and the road lobby. But even in the Australian context the claims are nonsense. For a start, greater public transport use doesn’t actually require urban consolidation or high population densities, as we explain on another page. Nor does our general preference for big houses in the suburbs mean that public transport can’t cope, as we also explain elsewhere. But regardless of all this, the evidence (which the developer lobby never refers to) shows there has been no scarcity of housing in Australia or in Melbourne to coincide with the price boom, and that there is no connection between urban consolidation policies such as Melbourne 2030 and escalating house prices.

Consider the simple matter of timing. When the rapid escalation in Melbourne house prices began in 1997, Victoria was still in the grip of the notorious, laissez-faire I hate silly rules regime of Kennett Government Planning Minister Rob Maclellan. This opened up a lot of land for development in ‘green wedge’ and other non-urban areas just before house prices went up. Melbourne 2030, with its green-wedge protection legislation and urban growth boundary, was only brought in by the Bracks Government in 2003, at which time the rapid growth in Melbourne house prices promptly stalled. Between 2003 and 2006 prices were essentially flat, and in real terms declined slightly.

Then in 2006 the government gave in to developer pressure, loosening the urban growth boundary and announcing new land releases equivalent to a rolling 15 years’ supply. It’s not entirely fair to hold this responsible for the new price hikes that followed, since the same trend is found in other Australian capitals. Nonetheless, such evidence as exists suggests the exact opposite of what the developer lobby claims: laissez-faire development causes price inflation, while restrictive planning keeps prices under control!

Sources: Australian Bureau of Statistics, Established House Price Index (December figures). Michael Buxton and Robin Goodman, Maintaining Melbourne’s Green Wedges. In 2005 there was a technical change in the ABS methodology: the new series has been adjoined to the original series at this point.

The other major piece of contrary evidence comes from the Census data on households and dwelling sizes. It’s a reasonably well-known fact that through the last decades of the 20th century and well into this decade, the average size of households has fallen, with more people living alone and couples having fewer children. Yet it also turns out that the average house size (as measured by number of bedrooms) has been steadily rising over the same period. A 2009 ABS study found that new homes in Australia are on average the largest in the world, larger even than new homes in the USA. And within Australia, the biggest average house sizes are in Victoria, more specifically Melbourne.

As the table below shows, not only has the number of homes in Melbourne been growing faster than the number of households to live in them: because of the growing disconnect between house size and household size, the total amount of available accommodation (bedrooms per person) has grown even more rapidly.

Source: Australian Bureau of Statistics. Census data for usual resident population, dwellings and number of bedrooms per dwelling. ABS derived figures for estimated resident households. All numbers relate to the Melbourne Statistical Division.

However one looks at these figures, they cannot be made to support the claim that a growing scarcity of housing in Melbourne caused the inflation in house prices after 1996. What is evident instead is that at least until 2006, housing provision has more than kept up with population growth and with the shrinking size of households, and is doing so with houses that are larger than previous generations were accustomed to. Others who have looked at the Census data have come to similar conclusions, even for other parts of Australia.

The state of the land in Melbourne is substantially healthier and more positive than is the case in Sydney.... The Victorian Government has paid significant attention to the provision of sufficient land to satisfy demand in Melbourne’s growth areas.
---Urban Development Institute of Australia, State of the Land, 2006.

Of course there is a genuine problem with housing affordability in Melbourne, but it is a distributional problem, not a land supply problem. Available evidence suggests on the one hand a concentration of demand for real estate in (mostly inner-city) locations with good local facilities and public transport access, and on the other a glut of unsold real estate in suburban locations that lack local facilities and where public transport is of a particularly poor standard. For example, in the first quarter of 2008, house prices in Ashburton (on the Alamein train line) increased by nearly 8%, while those in Hillside (an outer north western suburb with a handful of bus services) dropped by nearly 2%.

Recent US evidence also confirms this pattern. Following the US real estate crash that precipitated the Global Financial Crisis of 2008-09, house prices in car-dependent suburbs crashed a lot further than those in inner suburban 'walkable neighbourhoods' valued for their superior transport access. This blog post from the New Republic notes that this locational pattern of price falls has not been seen in any previous recession.

It's certainly also true that if Melbourne's population keeps growing at the high rates the State Government is forecasting, the sheer numbers of people could put pressure on housing supply. But no amount of tinkering with transport policy one way or the other will alter this pressure - the only question, if we are to have high population growth, is whether we accommodate it with well-serviced suburbs or car-dependent ones.

(Meanwhile, as economic commentators have pointed out, the fact that most of Australia's population growth arises from immigration means that any population pressure on housing will be seen in the rental market long before it affects house purchase prices. New migrants are generally not in a position to immediately buy real estate and will instead start out renting. Yet although housing rents have grown, the rate of growth matches that of most other goods and services. There has simply not been a 150% increase in rents over 10 years to match the 150% increase in house prices. Again, this suggests that a lack of housing supply is not the main factor in house price inflation.)

If anything, investment in public transport infrastructure and services should help make housing more affordable, by levelling out the locational benefits of particular areas and so tempering what commentator Julian Disney has called bidding wars for well-located properties.

Tackling the issue of affordability only through the lens of supply misses the point. Merely adding to supply, say, through the release of land on the fringes of our cities - ‘fixing the fringes’ - has been recognised as having little effect on affordability, because it does little to assuage the insatiable demand for well-located houses. It may even add to the financial woes of struggling, overstretched households in those outer suburbs where prices have fallen and where negative equity has become a problem for whole neighbourhoods.
---Fiona Allon, Renovation Nation: Our Obsession With Home (UNSW Press, 2008)

But if one wants a ‘supply-side’ explanation for the housing boom, there is an excellent orthodox candidate: the supply of money for home loans. At the 10% interest rate that prevailed in the mid-1990s, a family on the median household income of roughly $39,000 in Melbourne could afford to borrow about $130,000 on a typical bank formula (where one third of gross income is applied to loan repayments). But at the 5% rate applicable five years later, a family on the 2001 median income of roughly $45,000 could afford to borrow around $300,000. Throw in the proliferation of home loan providers and the relaxation of lending criteria and the climate was ripe for house price inflation to occur, even with plenty of houses to go around. In part this has been due to the proliferation of housing investors ‘crowding out’ owner-occupiers.

What sent house prices soaring was the invasion of the investors, driven by the tax breaks for negative gearing and capital gains. Landlords used to own 20% to 30% of the housing market. But by 2003 they were taking almost 50% of housing loans (excluding refinancing), and even now, they take close to 40%, outbidding the first-home buyers.
---Tim Colebatch, The Age, 18 March 2008

Another supply-side factor that shouldn't be ignored is the practice of 'land banking', where large developers buy up vast tracts of land in new residential zones and then release it for construction at a rate calculated to maximise their commercial return. A December 2009 report by the Oliver Hume real estate group found that private developers were holding almost 70,000 vacant house blocks already approved for construction, with only 1,400 having been released to the market. So even if there were a shortage of land to build houses on, it would seem to be one created by developers themselves, not government policy!

Interest groups keep telling us the solution is to zone more fringe land for housing. But we already have zoned urban land in spades, owned by developers who are holding on to it so they don't flood the market. Releasing more land will solve nothing.
---Tim Colebatch, The Age, 6 April 2010

The jury is still out on how the global financial crisis of 2008-09 will ultimately affect real estate prices in this country. To date we have largely avoided the housing market turmoil that kicked off the crisis in the USA. While this appears largely due to the greater prudence of Australian financial institutions, the anti-sprawl thrust of our planning culture (even if watered down) will also have played a part. Not only has it helped restrain the urge toward oversupply in the boom years: it also ensured some basic level of access by (most) new home owners to shops, employment and public transport, even while their US counterparts found themselves struggling to afford the petrol to drive miles to buy food and other necessities.

In U.S. cities the proportion of household expenditure on transport increased from 10% in the 1960s to 19% in 2005.... Families with household incomes between $20,000 and $50,000 spend almost 30% on transport. In Atlanta, a city that features urban scatter within this income range, 32% of household incomes goes on transport. Households on the fringes of car-dependent cities are therefore much more vulnerable as the cost of transport escalates. The doubling and even tripling of gasoline prices this year.... provided the spark that lit the bomb underneath the subprime mortgage crisis, hitting many with a double whammy of increased transport costs and ballooning mortgage payments.
---Professor Peter Newman, radio interview, December 2008

Look at the [US] cities with stable and recovering home markets. On [the west] coast, San Francisco, Portland, Seattle and San Diego come to mind. All of these cities have fairly strict development codes, trying to hem in their excess sprawl. Developers, many of them, hate these restrictions. They said the coastal cities would eventually price the middle class out, and start to empty.

It hasn't happened. Just the opposite. The developers' favorite role models, the laissez faire free-for-alls - Las Vegas, the Phoenix metro area, South Florida, [California's central] valley - are the most troubled, the suburban slums.
---Timothy Egan, New York Times blog, 10 February 2010

In summary, a return to the free-for-all urban planning approach of the Kennett era will not make housing more affordable, and might actually make it even less affordable. A bigger problem for our planners is the fact that many new home buyers in Melbourne lack access to public transport and are therefore particularly exposed to escalating petrol prices. Providing families with a public transport alternative costs less than freeway building and occupies less land, making it easier rather than more difficult to achieve urban growth.

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© 2010 Public Transport Users Association Inc. (PTUA), Victoria, Australia. ABN 83 801 487 611.
General copying and distribution on a non-commercial basis is permitted subject to proper acknowlegement.
Authorised by Tony Morton, 247 Flinders Lane, Melbourne, for the PTUA

Last modified: 6 April 2010