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NZCPR
Guest Forum
Bob
Day
11
May 2008
Saving
the world
-
a quarter acre at a time
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.
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