The seventh annual Demographia International Housing Affordability Survey is out.  Australia is still a world-beater: our house prices are judged Severely Unaffordable in almost every city.  Sydney comes second to land-constrained Hong Kong and Melbourne fourth.

Houses sell for the combined value of the building and the land. Buildings are worth their construction cost, less wear and tear, and ALL the remaining price one pays is for the land.

Outside Australia’s great cities, the sheer scale of the space we enjoy is breath taking and exhilarating – this is a land of sweeping plains. We are not land-constrained.

The Demographia team’s argument is that high land prices are solely due to government intervention to limit the sprawl of cities through zoning regulation.  They have a good point: the world’s cities with the greatest intervention show the most distortion and highest land prices.

Their solution is to remove zoning restrictions – to let the market decide.  Land prices would fall dramatically. Hurrah!

But these assertions have little merit.  See:  Bryan Kavanagh’s post.

Unfortunately, their solution would destroy government finances.  Housing estates would erupt in piecemeal fashion outside the built up area – some at a considerable distance.  Home-buyers would instantly begin demanding schools, roads, buses, trains, drains, sewers, water supply, electricity connections, pools, ovals, parks and community centres.

Building these long-life infrastructure assets to widely dispersed estates would be expensive and grossly inefficient. The money would have to come from consolidated revenue.  High tax levels already deter citizens from productive activity into economy-shrinking underachievement. Higher taxes can only make this worse, much worse.

Melbourne charges land developers a one-off capital levy toward these staggering costs.  The price of newly-minted house lots has been driven up strongly and brought strident criticism, while the levy meets only a fraction of the burden.

There is a better way. It is Land Value Tax.  The infrastructure citizens demand raises the value of their land.  Funding infrastructure from this increment would form a ‘virtuous circle’: government would have every incentive to service new estates and citizens every incentive to pay.

A soundly-based Land Value Tax to reduce the taxes on labor and enterprise would restore the rewards to effort and propel the economy forward like a rocket.

This reform would create an economic Golden Age.  ‘Animal spirits’ would be liberated in explosive productivity improvement and rising income per person.  Is this not the objective of government? To improve the lives of its people through far-sighted policy and the reform of its institutions in a sound and principled way.