Why do houses cost so much?


A good question that worries the young home makers as much as those already on the property escalator – I would say ladder but people are getting lazier.

There’s all the usual theories about land cost of course.

The answer, as always, is economics. The land costs whatever it costs based on council zoning and the supply and demand for that zoning or land use.

The sale price of the finished product is set by market demand and the customer’s ability to pay. No matter how nice the house, if I earn $100,000 there is a limit to the percentage of my pay that I can spend on a place to live.

Interestingly, this percentage has gone from 30% (When the economy was a happy and vibrant place filled with happy shoppers and a positive attitude prevailed) to the current 40-60% in some markets (Where the happiness hides beside the shopper’s wallets).

The historical average is 1.5 – 3 times the annual salary. Today we are up to 15% in some places – Gee thanks Baby boomer’s parents! In the next 20 years it will revert to the norm as all things do. When the last of the boomers has left the planet a sigh of relief and a 10 year transition period as a grand game of musical chairs is played out for the best properties. Abandon hope all ye suburb dwellers!

The push will be toward the best quality homes and apartments. Suburbia will be less interesting because the days of DIY on the weekends have already been replaced with big box store shopping. The young are simply not interested in the Readers Digest book of Home Maintenance when there’s Netflix.

The rich will choose mansions and a life far from the madding crowd, the new age hippies will head for the hamlets and lifestyle properties and the rest will be in tiny cubicles, close to the office work.

The trades will end up artisans living down the road from the hippies, making occasional trips to the big smoke to fetch money from the hapless inhabitants no longer able to put up an Ikea shelf in their concrete box.

Why so?

Concrete cubes are cheap to construct – far cheaper than ‘real’ houses in the ‘burbs’.

There is simply more profit in building cheap concrete cubes. If there were more profit in ‘affordable’ housing, that’s where the money would flow to. Long term there is no requirement for additional suburban housing – the Oldies are heading for the retirement villages and the young buyers aren’t aspiring to buy that kind of property.

Mansions are too personal to build ‘on spec’ and all the industries have outsourced to China, so there’s no industrial growth likely.

Farms are becoming industrial production units in cheap second tier economies. South Korea have leased 50% of Madagascar’s arable land for 99 years, North Korea are leasing land from Russia. From farm to plate is a fantastic concept but will never challenge the cheap cuts most people demand because of the financial pressure they are under.

 

Shop owners are migrating to malls only to discover that the rapacious landlords are farming them – a 2 year crop on a 3 year lease means 3 crops per 6 years, not the obvious 2.

The new hippies will work from their farmlets and that will be the new shop. Sounds like the Middle Ages revisited via an iPad.

The developer always seeks to maximise their profit, so what is built is simply the most profitable item possible. If we want to skew the market to affordable housing, we need to skew the economics. It has to become more profitable to build cheaper housing.

How do we do this? – The media needs to stop promoting ‘upgrade-itis’ with aspirational marketing (Never going to happen, but………) and we need to remove profit as the driver by contracting out construction on a ‘cost plus’ basis. Councils need to be pro active and employ builders directly, thus removing the emphasis on profit and focussing on quality.

Any time profit is put first, quality, reinvestment, training and all those long term business tenets go out the window in favour of a quick buck. New Zealand sold their railways to a Canadian company who simply ran it into the ground, making huge profits for the shareholders, then handed it back when it could no longer dodge the maintenance bills.

And still the idiots in Parliaments around the World say that privatisation is the way to go! (Because they get ‘Directorships’ when they retire from politics and other hidden gratuities).

The idiocy of privatisation of basic services is beyond belief – Economics 101 – it will cost more because the private company wants to make lots of profit. The Government run ‘businesses’ employed people long term, trained them and the emphasis was on doing the job ‘right’ not cheap. Sure, they are not ‘efficient’ in Keynesian terms, but the dollar isn’t the only measure of success. Happy, employed people enjoying life is more important than the 80’s ‘Greed is good’ mantra of current society.

Everyone participating and contributing to the overall good of society and the economy is how you do it, not by privatisation of profits.