It was a pleasure to present to the Economic Society of Australia (VIC) on Wednesday my new work with Cameron Murray: "𝑍𝑜𝑛𝑖𝑛𝑔 𝑎𝑛𝑑 ℎ𝑜𝑢𝑠𝑖𝑛𝑔 𝑠𝑢𝑝𝑝𝑙𝑦: 𝑒𝑚𝑝𝑖𝑟𝑖𝑐𝑠 𝑖𝑛 𝑠𝑒𝑎𝑟𝑐ℎ 𝑜𝑓 𝑎 𝑡ℎ𝑒𝑜𝑟𝑦". Thanks to Aneeq Sarwar and Alex Millmow for arranging the event.
One of the key points in our talk, which will become a Prosper report next year, is that "The opportunity cost of using land for housing is the value it earns in the next-best use, which is speculation".
The choice a housing developer faces isn't to build housing today or run sheep forever. It's between building housing today and building housing tomorrow. The value of the latter is measured in the price of land today.
So the only coherent concept of the cost of land for development is a simple one: it's the price.
Economists have tied themselves in knots trying to measure an "underlying cost" of land, so as to decompose land prices into a natural and healthy "cost" component and an unnatural "excess profit" component. Which is understandable, for there's no hole better-shaped for one's policy agenda than the old-fashioned "unexplained residual".
The zoning tax literature, price/cost ratios, price discontinuity diagnostics and the like are all based on the flawed assumption that there's something more to the price of land than its value in use - that in the price of land we might detect distortion, and therefore sin.
But land prices are all just rent. There's no good bit and naughty bit. It's all excess profit. It's all unearned. The only morality tale to tell here is that letting the landed class capture it at the expense of everyone else is wrong.
Once you understand land rent, and the land monopoly, the fact of land speculation and the causes of unaffordable housing become clear. You can relax into seeing all those vacant lots your economic training assumed away.
An economics degree shows you "quantity" and, for urban economists, "location". It's tough to start seeing housing supply in another dimension, "time". It's like prying open a third eye.
There are more and less pleasant ways to do that (DM me)... so hopefully our report is closer to the former than the latter.
Director of Heritage 21 - Conservation and Heritage Consultants
8moLynne, why don't we do this as a meet and greet venue rather than on line. 50% of the talk is the like minded people that you meet there.