dr philip lowe rba deputy governor on rising australian land values 1879762015

Speaking in Perth in his address to the 54th Shann Memorial Lecture, RBA Deputy Governor Philip Lowe recalled Edward Shann’s fascination with balance sheets and land prices.

One of Australia’s most distinguished economists, Shann understood deeply the dangers of excess leverage arising from the liabilities side of the balance sheet, be it that of an individual or that of a nation. Shann’s pre-occupation with land prices also found him taking an interest in the land boom of the 1880s: “Free conveyances carried people to the sales, champagne lunches gave them courage to bid, and extraordinary terms of credit reconciled them to their purchases.”

“Today, people mostly find their own way to property sales and I hope that champagne is consumed only after the bidding process has stopped,” said Dr Lowe. “But, our fascination with land, its value, and its financing has endured. In a way, it has become part of our national culture.”

Dr Lowe observes that Australian land values as a percentage of GDP have grown primarily on the back of an increase in the value of residential land. Factors that worked in favour of higher residential land prices were financial liberalisation and low inflation, which both contributed to increased borrowing capacity.

“Many Australians took advantage of this and borrowed more in an effort to buy a better property than they previously could have done,” says Dr Lowe. “But, of course, collectively we can't all move to better properties. And so the main effect of increased borrowing capacity was to push up housing prices, and that means land prices.”

Another factor that boosted residential land value was the combination of population growth and the limited scope to increase the available land. “Since 1989, the Australian population has increased by more than 40 per cent, or around 7 million people, one of the fastest rates of increase among the advanced economies,” observes Dr Lowe. Bottlenecks on the supply side, as well as infrastructure shortcomings such as transportation, pushed up the average price of land in major Australian cities.

But do rising internal land prices increase Australia’s net wealth? No, Dr Lowe argues – it only changes the distribution of the wealth. And this is more pronounced across generations, “Current owners of dwellings earn capital gains, but future generations pay higher housing costs. Many parents around the country look at the high housing (really land) prices and worry that their children will not be able to afford the type of property that they themselves have been able to live in, even if their children were to have the same life-time income profile as they have had,” observes Dr Lowe.