Demographia confusion

The 9th Demographia housing affordability report was released earlier in the week, and covered here at MacroBusiness in some detail.

The NSW Department of Planning and Infrastructure was not impressed, offering their response here (pdf). The crux of Department’s letter to the SMH is:

The latest Demographia International Housing Affordability Survey (Sydney house prices ‘severely unaffordable’, 22/1/13) is a flawed survey which doesn’t reflect Sydney’s wide housing choice.

It is based on the median prices for houses. These are traditionally far more expensive than multi-unit dwellings, which represent the majority of Sydney’s new housing.

Sydney’s housing market, more so than many other Australian and international cities, supports well-located apartments close to services and infrastructure.

But there is a much more crucial problem with the Demographia study.  It claims to be seeking evidence of detrimental price effects from planning controls, yet it ignores the rental market completely.  If housing development is being constrained, then rents must also rise.  Any variation between prices and rents can be explained by asset market behaviour.  If BHP shares rise 20% but the iron ore price is constant, we don’t suddenly scream about iron ore shortages.  But essentially this is what has happened for a decade now with home prices.

The graphs below show some key metrics for Australia housing markets from the ABS Housing Occupancy and Costs survey. While the most recent ABS data is from 2009, that year coincides with the peak unaffordable year in Sydney and Melbourne according to Demographia.

What are the important points to note in the ABS data?

First, and most critically for this debate, is that rents have been essentially flat compared to household incomes since the early 1990s.  Since rents for residential housing are determined by competition for location between renters, it is expected that rents are simply a constant share of income.  And they are, at around 20% of gross household income.

This also means that over the long run housing rents should rise by more than the CPI, if incomes are, which is generally the case.  Welfare agencies should take note.

Second, the steep rental growth observed during the 2007-2009 period was mostly the result of steep household income growth.  Waning income growth since then has led to waning rental growth.

Third, price-to-income ratios have shot up since 2000, but not quite as much as Demographia would have us believe (see top tight panel, and chart below).  Perhaps their methodology, which ignores the apartment market, is generating bias in their results.

Finally, if one does want to consider price as a measure of affordability, they must at least be adjusted for changes to the interest rate.  In the table below, using simple round numbers, it can be seen that a reduction in the interest rate on mortgages, from 10% to 5% means that prices can double while affordability remains constant in terms of the annual interest payment necessary to buy the home (median multiple of 6 instead of 3 in the bottom row).

If you want to be more conservative and consider principle and interests payments over a 30 year loan, then prices can increase by 63% while loan payments remain constant (median multiple from 3 to 4.89 in second last row).

In sum, the survey has little to add to the housing debate, apart from confusion. The price path we have witnessed for housing over the past decade has been the result of speculation, rising household incomes, and declining interest rates.

Please share this article.  Tips, suggestions, comments and requests to rumplestatskin@gmail.com + follow me on Twitter @rumplestatskin

122 Responses to “ “Demographia confusion”

  1. Pfh007 says:

    “In sum, the survey has little to add to the housing debate, apart from confusion.

    Confusion?

    With one small edit we can head off at the pass a tedious hair splitting debate.

    “The price path we have witnessed for housing over the past decade has been the result of speculation, rising household incomes, declining interest rates AND restrictive land use policies that force up the cost of green field sites and the redevelopment of brown field sites”

    • Revert2Mean says:

      I thought everyone knew Demographia are pushing a barrow?

      But that does not detract from their message about bloated house prices. Disregarding their spin, that message is still valid.

      • Peter Fraser says:

        No everyone doesn’t know that Demographia are pushing a very large barrow – that is NOT how they represent themselves.

        Without any in depth analysis, and study of Australian ciries that promote the Gold Coast, the Sunshine Coast, and Port Macquarie as being amongst the 20 most unaffordable on the planet, has clearly got it all wrong.

        I submit that their study is a laughable mockery of reality.

        End of story.

      • Rusty Penny says:

        I submit that their study is a laughable mockery of reality.

        Submission duely ignored.

      • Peter Fraser says:

        no problems RP, I didn’t expect you to understand.

        Cheers…

      • Rusty Penny says:

        Awww, the least knowledgable person here espousing from a position on superiority… bless.

      • 3d1k says:

        Actually I’m probably the least knowledgeable person here when it comes to property – absorbing via US, Cam and PF!

        Demographia must be quite the topic of the day – also covered at that site that is impossible to link to.

        Land regulation: the cause of excessive housing prices

        [link probably in spam]

      • Revert2Mean says:

        The hidden costs of toilet paper
        http://www.youtube.com/watch?v=qmmxgMCVZqs

  2. Janet says:

    The ABS survey sums up the crux of the matter for me, “… a decrease in the average household size …persons per household (whilst) The average dwelling size increased…” At some stage, now?, efficiency of dwelling will make a come-back and prices will adjust downward accordingly.

  3. I don’t think affordability should be simplified to serviceability of repayment. Run the P & I costs over 30 year loan term (using same repayment size) for $300k (3x income) at 10% interest rafes purchase vs $600k (6x income) at 5%. Difference over loan term is astronomical.

    This article adds little to the affordability debate other than confusion.

    • Sorry above example should not include loan term (was typing in quickly on bus), using fixed repayment of $3000 monthly (P&I):

      $300k borrowed at 10% costs $647k total
      $600k borrowed at 5% costs $1.3m total

      • Rumplestatskin says:

        The final table does that calculation. As I said, if you consider the cost of repaying a loan over a fixed period, the reduction in interest rates means you can buy a $490,000 home for the same total cost of the loan period as a $300,000 home.

        And I can’t follow what your calculation is. If you make a fixed $3000/month repayment, then you pay the same total cost. If you do the calculation I assume you meant to do, you get total costs of $1.159mill for the $600k home, repaying over 30 years at 5%, and $948k for the $300k home at10%.

      • The final table appears to use a fixed period instead of fixed repayment amount.

        Consider the example of a fixed payment amount instead of a fixed period, use this tool:

        https://www.moneysmart.gov.au/tools-and-resources/calculators-and-tools/mortgage-calculator

        With the “How long to pay it off option” and enter the monthly repayment amount, interest rate and loan principal to get figures I’ve provided above.

      • And my calculations are without taking into account the potentially lost return on the extra money you’ve pumped into the higher cost/lower interest property, see my example here where I compare $150k vs $300k purchase (same principal):

        http://www.bullionbaron.com/2012/06/does-australia-have-housing.html

        You effectively half the total cost and half the time to pay it off in a higher interest, but lower cost environment.

        I disagree that your methodology using fixed period instead of fixed payment as a way of accurately reflecting affordability.

      • Explorer says:

        Amazing that there can be such diversity in starting point of calculations to determine housing costs over a period, or is it because all assumptions are not clearly stated.

        What chance has an ordinary Joe/Josephine got?

        I would argue that to compare affordability you look at fixed period of same payment assuming same income and constant interest rates.

        The total cost of the house will be different but the difference in the price that can be paid at different interest rates over the same period (assuming same $ deposit) will clearly isolate the interest rate effect.

        Using Excel PV financial function:
        I Ann Nom 10% 5%
        I/12 0.83% 0.42%
        n years 25 25
        n months 300 300
        PMT/month 4000 4000
        Balloon 0 0
        Borrow today -$440,188.92 -$684,240.19
        Deposit paid -$50,000.00 -$50,000.00
        House price -$490,188.92 -$734,240.19
        Diiference -$244,051.27 (49.8%)

        I understand Steve Keen did a lot of work looking at interest rates, dual incomes etc and maintains that house prices in Australia have risen faster than all these factor would suggest.

        But then you have to adjust for/consider house quality, land size, distance to place of employment, cost of travel, time of travel.

        And maybe modal price is more relevant than average or median, or maybe you really need to know income dispersion and have quartiles or quintiles.

        To my mind Demographia performs a useful service and highlights a number of worthwhile issues which would not otherwise be highlighted and is therefore very worthwhile.

      • “I would argue that to compare affordability you look at fixed period of same payment assuming same income and constant interest rates.”

        I don’t know how this makes sense.

        Your calculation would work out the starting house price required for both purchases if starting with fixed period, fixed repayments, but different interest rates…

        In the table Rumple shows the buyers have the same wage, but they make different payment amounts in order for the loan term to remain the same. Basically he assumes that the borrower will make their minimum repayment over a fixed term (30 years).

        However if borrower A makes the same payment contribution on his (higher interest, lower cost) home as borrower B (in the lower interest, higher cost home) then borrower A will end up well in front, both in time, reduced amount paid for the property and potential to make a return on the extra income he will have after paying off the home in half the time.

        Rumple’s starting point is flawed.

      • raveswei says:

        I don’t think you are right about theory that interest rate reductions makes homes cheaper. It does in nominal terms but in real (income) terms it makes homes significantly more expensive. Mistake you are making is ignoring inflation and income growth.

        Higher interest rates are always consequence of higher inflation that makes high initial repayments (as % of income) low very quickly. With inflation around 10%, repayment that was initially 50% of income would drop to 20% of income in 10 years. If inflation is around 2% even after 10% repayment will stay at 40% of income.

        In reality this difference is even more significant because real interest rate (difference between nominal mortgage interest rate and inflation rate) is almost always higher when nominal rate is lower.

        I covered this issue here:
        http://popping-bubble.blogspot.com.au/2011/08/cost-of-mortgage-vs-interest-rates.html

  4. Pfh007 says:

    The argument that prices have risen due to a ‘structural change’ in interest rates is a major source of confusion and best illustrated when thinking about other assets that we assume are not supply constrained.

    For example:

    If interest rates are 10% and a Holden Commodore costs $30K but interest rates then drop to 5% – people don’t expect that the cost of a Commodore will then rise.

    Certainly if they are leasing a vehicle and the cut in interest rates means the monthly leasing cost falls they may consider upgrading to a better vehicle and maintain the old leasing payments.

    However, most people will take the savings, keep driving a commodore and spend the money on something else.

    But in the situation where they choose to maintain the proportion of income spent on their motoring needs they will be getting MORE for their money. Perhaps a BMW or Audi etc for the same lease payments.

    Certainly some people might be inclined to maintain the proportion of their income devoted to housing but that doesn’t explain why they would accept getting no more for their money (ie a better house).

    The only explanation for that is that restricted supply means the cost for the same quality of housing is bid up and they have no choice but to use the interest rates to pay more.

    So while low interest rates may allow people to spend the same proportion of their income on a larger mortgage, it doesn’t explain why they get no more for their money.

    Only supply restrictions explain that.

    • Rumplestatskin says:

      “If interest rates are 10% and a Holden Commodore costs $30K but interest rates then drop to 5% – people don’t expect that the cost of a Commodore will then rise.”

      Nor do we expect the costs of housing construction to rise. Which it hasn’t. All the price increase is in the land component.

      But the share price of the factory the makes the car will rise to reflect the now lower opportunity cost of money. Which is the same for land. It is costless to produce so where does the price come from? A simple capitalisation of land rents. And the capitalisation rate reflect the prevailing interest rates in the economy.

      • Hellenomania says:

        You say this :

        ” The price path we have witnessed for housing over the past decade has been the result of speculation, rising household incomes, and declining interest rates.”

        Then you say this :

        “All the price increase is in the land component.”

        And you also say this :

        “Nor do we expect the costs of housing construction to rise. Which it hasn’t.”

        Buttressed with this :

        “steep rental growth observed during the 2007-2009 period was mostly the result of steep household income growth. ”

        First off – the price of housing in Australia is clearly, without a shadow of doubt being kept artificially high due to land banking and restricting the supply of land in and around urban centres – no other factor can account for such a rigid and immovable floor price than a virtual monopoly on land releases as we are seeing.

        When this is coupled with consumer perception on real estate and value maintaining and growth expectations the model is self perpetuating – couple this with HUGE market distortions via government intervention and subsidies in the form of negative gearing and bonuses and you have a false market.

        The simple fact is that rental prices reflect the reality of supply and demand and are the truest reflection of real prices in the Australian market.

        Rent as 10% of the true value of a home means that instead of $500 a week rental property 10 km’s from the CBD being $1,070,000.00 it should be $500,000.00 and from everything I am seeing this is about right.

        Melbourne is already heading this way fast.
        Except of course for places like this -

        http://www.realestate.com.au/property-house-vic-brunswick+east-112356811

        which make a mockery of the entire system.

      • Pfh007 says:

        I see that UE is now at the crease so I will limit this is to one point.

        Even if rents remained a ‘stable’ proportion of income (I note UE says they have not) why should rents increase in proportion with household income?

        You note that they have risen faster than CPI.

        I earn more than I did when I first rented a property and I am pleased that as my income has grown the proportion spent on rent has fallen.

        I suspect you will find that many people have found the proportion of their household income has risen or remained stable despite their desire that it fall.

        Rents are rising because of low vacancy rates caused by a lack of supply.

        As a consequence, calculations of land value using the capitalization of land rents will be distorted upwards by land rents that are the result of a lack of supply.

        When adjusted for this the excessive cost of housing is even more apparent.

        While clearly speculation, cheap debt and other factors contribute, the lack of flexible and timely supply of fresh land – either by new horizontal or vertical subdivision – remains a major factor in the degree of the blow out.

      • Rumplestatskin says:

        “why should rents increase in proportion with household income?”

        That is really the crux of this problem. My theoretical argument is that prices result from competition between renters/buyers for location. The amount they are willing to spend on this is determined by the amount of their income they are willing to pay. What this means is that better located areas attract wealthier people, because their fixed share of income is higher than poorer people.

        The problem you have, as does everyone who makes arguments about supply-side impacts on price (rent), is providing a robust theoretical argument of where rents come from?

        You also have a problem explaining why there are hundreds of thousands of lots in the hands of developers, zoned, and approved for residential development, yet they don’t seem to flood the market.

        Indeed, why don’t all land owners, all home owners, who have scope to renovate and rent out spare room do it? It’s the same principle. Land banking and restricting supply.

        You might say its different. That home owners get some kind of benefit, what an economist would call utility, from having the empty space. Then surely the developers are expecting some kind of benefit from holding the land.

        And the do. They expect the land to rise in value along with household incomes over the long term. They can ride out a few years of low sales volumes rather than flood the market and decrease the value of their remaining stock.

        So it’s not a problem of markets not working. It’s a problem that markets do work. It’s just that the mainstream theory we all carry around in our heads doesn’t allow for the reality that land markets are monopolies, regardless of how many different owners there are. Otherwise, land would be worthless (rents would be zero). That’s the outcome of the mainstream market model.

        Governments could build homes themselves. But all this does is take away demand from these developers. Many studies have shown that demand is shared between all developers, so government development crowds out private development.

        Governments could sell State land to private developers. This has been occurring more in the last 5 years in QLD than ever before. Yet almost none is developed. Even studies of sales of government land in Hong Kong, a place where supply might be considered restrained, show that private developers simply land bank it and drip feed supply at the same previous rate.

        We could rezone more land. But then we simply give developers what the want – long term gains in value of their land banks. And we provide no incentive to decrease price to sell more.

        We could increase land taxes. If you believe land taxes encourage supply and reduce prices, you can’t also believe that costly regulation holds back supply. Both are costs that are subtracted from land value.

        I guess the final question is, what regulations/rules do you suggest would make the flexible supply utopia you seem to think is possible? And how low could prices go? And could we eliminate land bubbles? And why would that happen?

      • The Claw says:

        I guess the final question is, what regulations/rules do you suggest would make the flexible supply utopia you seem to think is possible?

        It is not about utopia. It is about fairness and commonsense.
        Read the demographia report and the use of the term “liberal” regarding land use. There is no claim of utopia or perfection.

      • Peter Fraser says:

        That is a very good explanation Cameron. In fact every landowner holds a monopoly on their tract of land, and they won’t sell it unless you satisfy their conditions.

        And you raise some excellent questions.

      • Pfh007 says:

        I have no plans on trying to make “a robust theoretical argument of where rents come from?”

        I will go no further than say that rents are what a tenant is prepared to pay and a landlord is willing to accept.

        When there is an excess of landlords seeking tenants they will lower their prices to attract tenants until the price falls to the point where they no longer desire to rent the property.

        An example of this are the people with empty bedrooms who decide the money they would make from renting the room is not worth the hassle of having a stranger in the house.

        The short term rental market during the Sydney Olympics was a good example of people prepared to become temporary landlords to reap some temporary high rents.

        Of course there are plenty of factors that affect the number of people who are willing to be landlords and the return for which they are willing to do it.

        How to increase supply?

        Basically do what they did when my great grandfather was building semis and terraces in the early 20th century.

        Keep the regulations and zonings to a minimum so the barriers to small land holders and small builders navigating the planning system and undercutting the big players are removed.

        That doesn’t mean steel works next to childcare centres but it may mean corner shops in suburbia.

        I enjoy your work but I think you have a bit of a blind spot when it comes to how the current planning system suits – planners, community planners, NIMBYs, large developers, builders and land bankers – but results in costs and delay.

        If the real estate market in NSW is your idea of a market working then I think your expectations are aiming a bit low.

        Over the last 50 years we have proved that we are capable of great complexity and sophistication (especially when we do not bear the cost) now we need to re-learn how to get things done.

        Fortunately, there are some signs around Australia that this message is starting to sink in and people understand that while we are perfecting complexity and excessive process the world is moving onwards.

      • raveswei says:

        rents stayed quite stable (compared to house prices) relative to median income, not somebodies personal income.

        Rents were going up in line with regular inflationary increase in wages, not in-line with promotional increase of somebody’s wage.

        Rent and income was growing faster than CPI but not faster than inflation. These two things are not the same anymore because of methodology changes in 80s and 90s.

    • foreigner says:

      This is a great argument Pfh007, loved the analogy!

  5. For all and sundry, see the Unconventional Economists rebuttal here:
    http://www.macrobusiness.com.au/2013/01/in-defence-of-demographia/

  6. Hellenomania says:

    Thanks, I have sent that to many people.

    Perfect.

  7. raveswei says:

    I agree with you that “land regulation” is not major cause of house price increase. Speculation driven by easy credit and taxation policy is the key in most of places. Land regulation might have role (in some places) in market failure to prevent bubble inflation but it didn’t cause bubble.

    I know that people argue with examples like Texas (to support idea that regulation is the cause), or US Midwest to support idea that regulation is not important. There are so many examples that could be used to support either view, but I think they are all simplifications.

    IMHO preferred lifestyle, has much more affect that actual land regulation. If we just look at Texas or Georgia (places with no land regulation) or Midwest with strong regulation – in all these places market response was strong enough to prevent bubble. Although land regulation was the opposite, strong preference for living far from a city centre played more important role. Similar thing can be observed in Germany, for example.

    On the other hand, places where regulation is weak but people prefer living in city centre recorded huge bubbles. Maybe the most extreme cases can be found in east and south Europe where everybody can (and does) build illegally without any approval and than get approvals afterwards, recorded largest bubbles of all. In these places everybody want to live is centre of the city where land is scares even though land is not regulated at all.

    • “Midwest with strong regulation”. What markets are you refering to here? Only Arizona and Nevada had strong restrictions in place, due to government control and slow release of land. And guess what, they boomed then busted.

      “On the other hand, places where regulation is weak but people prefer living in city centre recorded huge bubbles. Maybe the most extreme cases can be found in east and south Europe where everybody can (and does) build illegally without any approval and than get approvals afterwards, recorded largest bubbles of all. In these places everybody want to live is centre of the city where land is scares even though land is not regulated at all.”

      Of couse highly desirable places like the inner suburbs and coastal areas will always have a price advantage, since land is geaographically scarce, not due to artificial supply constraints. Because of this, places like Toorak and Point Piper will always be expensive. But how is this relevant to analysis of an entire urban market, included the outer (less-desirable) suburbs? This is why we use medians, because they focus on the typical home/buyer and exclude the high-end stuff.

      Also, if you are referring to Spain in your European comment, you are wrong. It had significant planning restrictions in place (see here).

      • raveswei says:

        land regulation increased in many growing Midwestern cities like: Milwaukee WI, Denver CO, Pittsburgh PA, Columbus OH, St. Louis. But prices didn’t despite population growth.

        In many places you use as supply responsive examples (Dallas, Atlanta, …) nobody want to live in geographically scarce inner suburbs (like Toorak and Point Piper). In those cities almost everyone (with money) wants to live in suburbs far from cities. Do you think that affects supply more than regulation. On the other hand in places like SF or NYC everybody wants to live in CBD. Even if there is no regulation at all almost nobody would be building new suburbs 50km far from city to accommodate new residents. That was actually the case in NYC – there is almost no regulation for developments in large areas around NYC (in NJ, Long Island etc).

        If everyone in Sydney or Melbourne wanted to live in new suburbs around satellite towns 50km from CBD, would regulation in city affect supply response?

        I don’t know why you used Spain but Spain is typical example of speculative not supply response bubble. Spain recorded the largest supply response still prices sky-rocketed. Now they are left with millions of unused, unwanted properties. Spanish prices were even fueled by big supply response.

      • tayser says:

        Excellent point and something UE doesn’t seem to understand: US cities went through one of the biggest changes with the garden city movement – they call it white flight to the suburbs – happened post WW2.

        Take a look at any of those southern US cities on google maps around their central cores – the distinguishing feature you’re more likely to see is car parks, car parks and car parks – whole swaths of central Houston/Dallas/Atlanta/Los Angeles/Phoenix/St. Louis were destroyed to make way for the mass expansion of this thing called the automobile.

        In say that, if you keep your eye on urban-specific forums on the web, you’ll note these cities are seeing a come back in terms of rebuilding what was destroyed.

        Toronto in Canada is a prime example of arresting the decline by building in suburbs, rather than in the urban core – they started in the 50s and 60s by kicking off its subway – fast forward to today and the urban core is outpacing suburbs.

        Sydney’s a little further ahead than Melbourne (we’re both about 20-30 years behind Toronto) but we have the added pressure that there wasn’t as much desertion of the urban cores than in North America – and that’s what’s made the central area of Melbourne so popular over the the past decade and it’s only going to increase in volume.

        The next core change for our cities will be the densification of existing nodes: a delay of a decade since the original “land constraint” policies of Vic.Gov.

        Rising oil prices (over the past decade), rhetoric about climate change and rising non-oil energy prices are all happening at a perfect time to superchange the change and it’s going to happen.

        Forget the high profile big residential projects within a 2km radius of Melbourne’s CBD – they’ll always be there – demand for that product is now what you’d called mature, but for the next 2-3 decades everyone should watch this, because this is well underway in Melbourne metro (Moreland, Moonee Valley, Darebin, Stonnington, Glen Eira, Maribyrnong, Brimbank, Yarra, Boroondara, Monash, Whitehorse to name a few): http://www.youtube.com/watch?v=lfnynzD0yDI

        ^ that’s our new reality, one that Demographia will NEVER accept as they are merely a lobby group for the continuation of mass suburban dwelling and car infrastructure expansion.

  8. The Claw says:

    Oh dear. I read Demographia and got so confused. They said that if government choked the supply of land then housing would become scarce and expensive. They said this had happened in Sydney. I am so confused.

    Then I read Rumplestatskin. He said that Demographia was wrong. In Sydney land supply is not choked. Rents are low. Now I know why Sydney is one of the cheapest places to live and do business. That you Rumplestatskin for making it so clear.

    • Rumplestatskin says:

      Thanks Claw. Enjoyed your facts there. Can’t wait till you’re in charge and you use your magic regulations to make land free for all. After all, a few mystery supply-side regulations should do it.

      • The Claw says:

        A fact is that seatbelts save lives.
        Another fact is that Sydney land use restrictions have driven up rents.
        The trouble is finding perfect data to show lunkheads. The facts remain, but the data is illusive.
        I told you that in 1970 an ordinary house rented for 1/3 an ordinary wage. Now the same house rents for 1/2 an ordinary wage. That’s a massive increase in rent.

      • Rumplestatskin says:

        Fact without evidence? Mmm… that’s a new one.

        Even Leith shows that median rents to income were flat at 18.5% from 2001-2006, while price to income multiple increased by 50% (from 4.5 to 6). Which measure do you say proves the supply problem by showing that ordinary houses are half and ordinary wage?

      • The Claw says:

        You’ve given two pieces of data. Neither one is proof of a supply problem. Read the demographia report for overwhelming evidence.

        Now you tell me why rent for an ordinary house rose so much.

      • Peter Fraser says:

        The problem is claw that the more we look at markets that appear to be working such as Germany, the more we realise they are not working and that prices have been artificially kept low though controls – when those controls are loosened, it will explode.

        I now know why german investors are buying property in other European countries rather than Germany.

      • Rusty Penny says:

        I now know why german investors are buying property in other European countries rather than Germany/

        I would suggest you actually don’t know why, and that you’re making it up off the top of you head.

        Just because ‘investors’ are prioritising markets other than Germany does not mean their market is broken.

        That’s like saying people pick Chinese labour, because their labour market is perfect.

        There is no proof that the German property market has ‘artifical’ constraints in price setting, there aren’t many homelss people for a start, nor does there appear to be subsidies.

      • Peter Fraser says:

        RP – the last time that I was in France – 2006 I think, the locals were complaining about the rich Germans buying their real estate. I wondered about the remark at the time but didn’t go into it.

        There may be data I really don’t know, but it does make sense now that I know that rents in Germany are articicially constrained. Why buy real estate in Germany and suffer the existing rent agreements when you can buy in a more liberal country with less controls.

        I have no data to support that, and if you have data to show me that I’m wrong then I would like to see it.

      • Rusty Penny says:

        Why buy real estate in Germany and suffer the existing rent agreements when you can buy in a more liberal country with less controls

        For the same reason you hire labour in China.

        Why ‘suffer’ paying a living wage or implementing facilities so workers don’t die.

        That doesn’t mean the Australian labour market is broken, that just means the distortions in the Chinese labour market offer a better return.

        So here we have it, the German housing market doesn’t shuffle excess economic rents to the rentier, where as France may.

        of course it makes sense to park money in French Real Estate.

        How it is answered however is, the ‘data’ you need to know is, are enough resources being allocated to shelter the German population.

        If there are vast numbers of German homeless, or government subsidies are required to bring the product to market, then their market is broken.

        It sounds like there market is structured well, after all, its just a manufacturing industry… and every other market is structured poorly to favour the rentier.

      • Peter Fraser says:

        RP here are some individual opinions on German rent control.

        http://econospeak.blogspot.com.au/2012/02/little-more-on-rent-control.html

        They don’t actually address the long term effect on dwelling prices but it will give you some insight into the controls themselves.

        Rent controls have the effect of keeping a lid on prices until at some point the pressure gets too great and the market has to adjust quickly and painfully.

        So it could well be a success story that is about to go all wrong.

        Think about it.

      • Rusty Penny says:


        Rent controls have the effect of keeping a lid on prices until at some point the pressure gets too great and the market has to adjust quickly and painfully.

        I know what constrinated prices do.

        If replacement/additional product is not viable to bring to market, in light of the yield (the rent) received warrants, then the replacement/additional product will not be brought to market.

        It is very simple.

        Producers may bring the product to market if subisidies are required, but they don’t seem to exist.

        Thus, the producers are still offering the product for what they consider an acceptable return.

        There may be greater return for some in France, but its not inhibiting German domestic suppliers.

        So it could well be a success story that is about to go all wrong.

        Or it could be an enduring sucess story, and we’re wrong.

        Maybe they don’t see value in structing society that permits the mortgage brokers not having to get out of bed because they have 0.1% ongoing trailing commission on a $100 million book.

        Think about it.

        Oh I have thought about it alright.

      • Peter Fraser says:

        an unnecessary ad hominen may make you feel better, but it gives zero weight to you argument.

        zero plus zero is still zero.

        Try absorbing information minus the impermeable membrane that you wrap yourself with.

      • Rusty Penny says:

        So my membrane should ignore the fact:

        * there are few homeless in Germany
        * there appear to be subisidies to bring housing to market

        So by all definition, points to housing can be offered at a more efficient price….

        and instead wipe that to be of zero meaning…

        and instead toe your line of the German housing market is broken.. “rent controls and.. and…just ‘cuz!”

        … no.. I can’t fathom why you’re regarded here as a dunce peter….

      • JC says:

        ” I now know why german investors are buying property in other European countries rather than Germany.”

        Apparently you have little idea Peter. This and your previous assertion about the market not operating are flase. If you examine the German housing market in the last 12-24 months you would know that German’s have been investing into their RP like they haven’t done in almost 40 years. The price appreciation has even fuelled concerns about a bubble forming.

      • Mav says:

        Pete, pot calling kettle black.

        Only difference is you use rhetorical devices like the one below for ad hom attacks and escape moderator action.

        I know you’re not stupid, now act accordingly.

        You are too smart by half… But not enough.

      • Rusty Penny says:

        Apparently you have little idea Peter

        Peter doesn’t do facts.

      • Peter Fraser says:

        JC that only confirms what I said.

      • Rusty Penny says:

        “People would rather buy elsewhere other than Germany” is confirmed by people now buying up in Germany?

      • JC says:

        “JC that only confirms what I said.”

        Care to elaborate Peter?

        You also said this in the other thread:

        “Investors won’t buy housing in Germany because the return is too low – so they have significant under investment in housing which is leading to major supply problems”

        The capital gains are low, returns are fine. As far as i can tell they haven’t had an undersupply problem for the last 40 years.

        And, FYI – the capital return in the last 24 months has been impressive. German’s have been “investing” in property at home because they perceive it as safer than alternative investments they could make.

      • Peter Fraser says:

        JC – safety isn’t yield. The shrinking population might save them, but it is just one more reason why they are not a worthwhile comparison as a “model” market to emulate. So far they have only lost 1 million, but in truth there are probably more than that in illegal immigrants not captured in the census.

        I have elsewhere supplied a link to a blog where severl individuals given some info on the rental increase restrictions, and I have also given a link to what is happening in Portugal where they have had to revoke similar laws, with some information on what may happen under the new laws.

        I’m sorry I don’t carry a hundred links around with me, but I have supplied them for those who are interested in looking.

        I have to go, but thanks for the pleasant exchange of views.

  9. The Claw says:

    The planning restriction argument explains nothing. Were all the planning restrictions introduced in the early-mid 1990s? No. The planning restriction argument cannot explain the timing of the Australian house price bubble.
    An understanding of planning restrictions will never explain timing of any bubble. Planning restrictions explain the long term structural price rise.
    Why are you denying their influence?

  10. The Claw says:

    Spot on. Nice post Cameron. The data shows the price/income bubble to have occurred circa 1995 to 2003. This corresponds precisely with the interest rates falls and a lag of a few years before people were confident the falls were here to stay.

    Stella. No smart person is denying the price effect of lower interest rates.

    Demographia has data comparing cities under similar interest rate environments. Some bubbled some didn’t.
    Why are you denying the price effect of planning restrictions?

  11. mattnz says:

    Rents reflect what people can afford to pay for accommodation.

    House prices reflect people’s willingness to pay a premium to speculate on the future value of that asset.

    • dam says:

      not really

      rents reflect what people are willing to pay for accommodation but House prices reflect’s willingness to pay for the land as well, land that store the real value (anti-fiat if you wish) can stay in the family forever and only increase in value as we add more people, more fiat and the gov invest in the surrounding infrastructure.

      I love land ;-), owning valuable parts of Australia, not being traceless visitor.

      • Christiaan says:

        “rents reflect what people are willing to pay for accommodation”
        .
        Couldnt agree more, thats why rents are dropping!

      • dam says:

        LOL
        a bit delusional isn’t ? there is a world outside of Melbourne (where most of the Asutralian’s housing supply went the last few years (in apartments LOL))

      • Christiaan says:

        Ive heard similar stories of rents falling in other states too dam, dunno what your smoking!

      • Christiaan says:

        LOL! DONT BUY NOW!

  12. reusachtige says:

    Thanks Cameron for adding knowledge to the complex story. Much appreciated and good to read an alternate view.

  13. The Claw says:

    Can’t wait till you’re in charge and you use your magic regulations to make land free for all.

    Demographia does not support a free-for-all. They support liberal land use. Read the report.

    After all, a few mystery supply-side regulations should do it.

    There is no mystery. Simply use the system from Australia pre-1970 or use the current day Texas system. The demographia report shows the difference. Read it, read it. You may like it. You will see.

  14. Peter Fraser says:

    Thanks Cameron, I think that you have broken down the old mantra of houses must be 3 times earnings however that doesn’t negate the risks of rising interest rates, which I would normally put as being quite high in the first 5 years of a loan term.

    I’m not convinced that will happen in this environment, I suspect that we will be sub 7.00% to borrowers for a long long time. If interest rates rise in 6 years then the home owner should be well established financially and able to ride out the waves.

    In short they will be protected by the herd for a long time. Someone buying in 5 years will need to be more astute though, as the longer this low rate cycle runs, the closer we get to the end, and a new cycle beginning.

    Some great points though. Enjoyed the post.

    • Rusty Penny says:

      Thanks Cameron, I think that you have broken down the old mantra of houses must be 3 times earnings

      Umm, no… he hasn’t done that at all.

    • Mav says:

      If interest rates rise in 6 years

      6 years eh? That is a vast improvement on your earlier assumption of 50 years of super low interest rates!! But 6 years is a mumbo jumbo assumption that even Glenn Stevens wouldn’t make!!

      In short they will be protected by the herd for a long time.

      Herd! Is that another one of your Freudian slips?

      Yep, the wildebeest herd in Africa relies on a similar protection mechanism while crossing the crocodile(merchants of debt?) infested river. The sheer numbers protect the majority, but the young(FHBs?) and the weak (reverse mortgage retirees?) get chomped on.

      But we are not wildebeest though. Unless we are in a bubble, We don’t herd together and we have a uniquely human ability to think for ourselves – Don’t Buy NOW :)

      • 3d1k says:

        Don’t Buy Now – think of that yourself did you… ;)

      • Mav says:

        LOL.. One wildebeest walks right in !!

        I knew that slogan will irritate a couple of people. So put it there as an after thought.

      • Peter Fraser says:

        Oh seriously mav I have never said that interest rates will be low for 50 years, I said that the calculations should be done over 50 years to take the 25 years of loan repayments into account and also the 25 years of rent and repayment free living into account once the loan has been repaid.

        Do I really need to break each post down into words of monosyllables so that you can comprehend.

        Please please stop deliberatly mis-quoting me, it just takes away the last shred of credibility that you might still have. You could add to the debate if you ever choose to stop attacking every messenger with a narrative that displeases you.

        I know you’re not stupid, now act accordingly.

      • Mav says:

        Alright Pete, I’ll give you that. You didn’t say 50 years. You said “some years” and left it at that. It was some other tool who anticipated 2 generation of low interest rates and I misattributed it to you. There were a spike in bullish posters yesterday, so you’ll understand it wasn’t deliberate.

        Over a 50 year time frame of buying a house when you are 30 and dying in it when you are 80, in an era of low interest rates at least for some years

        But my other point still stands. Now that you have put a figure of 6 years of low interest rates.

        Most professional economists and even the futures market do not go beyond 1 year of forecasts.

        What remarkable insights do you have as a mortgage broker to predict 6 years of low interest rates!!

      • dam says:

        yes the tool say it could well stay low one or two generations as china runaway growth in behind us, mining boom is behind us, the world is getting hit by a aging wall and flood of cheap money.

        noone know the future but I would not bet on a runaway economical growth or runaway inflation for a foreseeable future.Rates cannot increase until the debt get deleveraged considerably, and that could take many many many years.

        but rent will increase no doubt.

        As tool saying, Dont Buy Now.

      • Mav says:

        LOL. I should have known it was you!!

        Rates cannot increase until the debt get deleveraged considerably

        Umm.. I agree. :)

        but rent will increase no doubt.

        At what rate? Before you pluck out a number, understand the exponential function.

      • Peter Fraser says:

        mav – thank you for a half decent reply – but what I sad was -
        ” I suspect that we will be sub 7.00% to borrowers for a long long time. If interest rates rise in 6 years then the home owner should be well established financially and able to ride out the waves.”

        So again you have completely mis-interpreted. I didn’t put a figure of 6 years on it at all – you made that bit up.

        I have however spoken to some economists who all seem to think that we will have an extended period of low interest rates. No-one is going to say that rates will rise at 2:15 pm on the 4th of March 2018 are they, they can only give us impressions of what they expect.

        To satisfy yourself, why don’t you ask around and arrive at your own conclusions.

      • dam says:

        rents always increase at par or above CPI ( and that does not take into account the fact that a same house will have its rent increase much more than CPI by gentrification effect.New housing at the outskirt will be cheaper, which skew the average down but allow lower income to rent despite the “exponential” rent increase.

      • Mav says:

        LOL.. Pete, How long is a “long, long time”?

        Surely,your would be mortgage customers would follow and ask that question…(or not, depending on whether you use some high pressure sales tactics to deflect)

        You always leave a rhetorical back-door in your posts to slip away when challenged. But now there enough posters here to challenge and close the trapdoor every time.

      • Peter Fraser says:

        mav – no one can define a long long time, but the estimates that I have heard have been between a 5 year minimum to 20 years.

        But as I said, you do your own research.

        Alternatively you could wait 20 years and tell me if I’m wrong. In the meantime you are spending the only real commodity that has value to you – and that is the remaining years of your life.

        Don’t buy When?

      • Mav says:

        I have done my research.. and I have found that people making optimistic interest rate predictions that go beyond a year have NFI what they are talking about. Warning bells go off when I hear these predictions.

        And people posting on internet forums at 3AM in the morning are hardly in a position to lecture me on time management.

        Oh.. And Dont buy Now!

      • Peter Fraser says:

        Mav, wow one more blogger who follows me all over the internet 24 hours per day – creepy stuff.

        You can’t imagine how sad that sounds from my perspective. Do you and David work in shifts or separately?

        That’s just wierd.

      • PhilH says:

        “…I said that the calculations should be done over 50 years to take the 25 years of loan repayments into account and also the 25 years of rent and repayment free living into account once the loan has been repaid.”

        So nobody over the age of 30 should buy a place…

      • Peter Fraser says:

        PhilH – In my model I assume someone aged 25 to 35 buys and stays in that house until they pass away – roughly a 50 year time frame, so a buyer at aged 30 fits perfectly.

      • dam says:

        @PF

        Which pretty much never happen,& people have to pay 5-6% transaction cost/Stamp duty every 5-10 years each time they move (not that change the calculation too dramatically but it s still material)

      • Peter Fraser says:

        agree dam – I think it is foolish to keep upgrading and I have recently said exactly that.

        But for those here looking to buy their first place, they are spending their lives in an attempt to save a dollar, and probably not even doing a very good job of that.

      • DrBob127 says:

        “they are spending their lives in an attempt to save a dollar, and probably not even doing a very good job of that.”

        Way to go, so many people insulted with so few words, now you’re just being mean.

        You’re probably just an asshole, did you ever think about that?

      • Peter Fraser says:

        Well Drbob127 I presume that the rest of your life means more than dollars to you, it certainly does to me.

        In life we either spend dollars which can be replenished, or time which can’t be. I’m sorry that making that point disturbs you, but it is an indisputable fact.

        Perhaps I’m an asshole, but I would define that as perhaps someone who actively hunts other people across the blogosphere in a poor attempt to bolster their failing ego.

        Or perhaps someone who cannot confront a message that challenges their beliefs, so they launch endless ad hominens rather than reflect on their beliefs.

        But of course you’re too nice a guy to do that, and far too interested in the truth, aren’t you drbob127?

      • DrBob127 says:

        The point I’m making is that you saying that those looking to buy their first place are spending their lives in an attempt to save a dollar, and probably not even doing a very good job of that is just a ridiculous statement that you have no way of knowing if true.

        It is just as ridiculous as me saying that you are probably an asshole because I don’t know you, all I get to see of who you are is the very limited perspective of what you post online which I don’t think is nearly enough to be able to judge a person.

      • Peter Fraser says:

        But judge you did Bob, in fact you are constant sniper despite the fact that I have always gone out of my way to answer your questions.

        Now which one of us is the asshole Bob?

      • Rusty Penny says:

        Now which one of us is the asshole Bob?

        That would still be you Peter.

    • Explorer says:

      In the US interest rates have been in a downtrend for 30 years. Sure they spike up if inflation breaks out but this has been temporary for a very long time.

      Some say interest rates are so low they must rise, but the base interest rates can keep falling by a percentage in a geometric progression of 10% eg from 10 to 9, 9 to 8.1 for an (almost) infinite time. This is how democracy keeps promoting a feeling of increasing wealth for most adults.

      Taxation and social welfare (with a fiat currency) can also assist in this outcome.

      Sure interest rates might rise and people might have to ride out a year or two at higher rates and as others pointed out, this risk is highest early on before equity is built up, higher if there is only one income and the job is lost, higher if you are in a very cyclical industry and therefore more vulnerable to unemployment, higher if you can’t expect real pay increases through your career from the time you bought the house etc

      We also swing from relying on fiscal policy to monetary/interest rate policy and that can also have an impact.

      Never underestimate the desire of government to try to keep most punters happy so as to gain re-election, which is why bursting bubbles that affect large proportions of the population get ameliorated.

  15. Rusty Penny says:

    Cameron, this debate has to date, in the last 3 days, had virtually every party muddy the water.

    Some will argue the metholodgy, saying price to income is accurate, and then attempt to bring down the arbitrary ratio down by using another algorithm.

    Some will then talk about ‘houses vs apartments’.

    This really is irrelevant.

    The argument is what level of resources does a person has to exercise to acquire a product that provides the utility of shelter.

    So when Demographia says the ratio in Sydney is 8, then look back in time as see two decades ago it was 4.

    When people like Christopher Joy try to recalibrate today (with dodgy discretionary income such as superannuation) as having a ratio of 6, using varying methology…. the task isn’t to reflect on demographia’s 8, minus RPData-Rismark’s 6.

    The task is to look as RPData’s 6, vs RPData’a 3 two decades ago.

    Virtually all of the varying methodologies say the capital cost has doubled in proportion to wage.

    The second element of houses isn’t that relevant, that’s really a hedonic factor that ia guided by the environment. HONG Kong for example structurally can’t provide swathes of bungalow suburbia. of course it will be apartments there.

    So people weigh up HK shelter, vs shelter, and weigh up how desirable lifestyle. I again would call that hedonic.

    A person has a working career of say 45 years. How much of this acquisition of resources is outlaid on providing shelter.

    People today, confirmed by any equation you want to use, are spending more of their lifetime resources acquiring the same comparitive quality of shelter than they were 20 years ago.

    This argument, in beyond reproach, and should be the forefront of the message, thus guiding polciy to rectify.

    • Mav says:

      every party muddy the water

      +100.

    • Peter Fraser says:

      2 wrongs don’t make a right – it just makes it worse.

      Cameron gave you some food for thought, now think about it.

      • Rusty Penny says:

        I have already dopey, seriously you’re like the ball boy giving Roger Federer tips on his serve.

        I can see some outlines already from cameron that aren’t beyond argument.

        If BHP shares rise 20% but the iron ore price is constant, we don’t suddenly scream about iron ore shortages. But essentially this is what has happened for a decade now with home prices.

        If BHP prices stayed 20% above that benchmark for a decade, with constant Iron ore prices for a decade, then we may find ourselves with a different reaction.

        Also, BHP has other price finding mechanisms to place downward pressure on prices.

        I get his point, it’s just not beyond reproach.

        First, and most critically for this debate, is that rents have been essentially flat compared to household incomes since the early 1990s. Since rents for residential housing are determined by competition for location between renters, it is expected that rents are simply a constant share of income. And they are, at around 20% of gross household income.

        That’s not clear cut either. I looked up the figure before in regards to AWOTE vs household income, and the figure has increased, indicating a higher workload for the secondary income earner.

        Saying 20% of gross income has stayed a static figure isn’t clear analysis.

        I could contend with greater research perhaps, that gross income has risen, with the secondary income earner having to work more, to meet the rent increases.

        More work (framed as acquiring surplus resources) to afford the same item means the item has
        increased in price.

        Cameron may have (without being definate) put the cart before the horse perhaps.

        That is why these things should be framed as an solitary average wage ratio. Otherwise we end up with multi-generational mortgage.. where the exertion of (yet) unborn children is required to purchase shelter.

        What sort of lifestyle does one wage accord.

        It is buying less in terms of acquiring shelter that’s for sure.

      • Peter Fraser says:

        Well Roger I’m glad to see that between winning opens you are thinking about the realities of life.

        Best of luck against Dokovic. My money is on Novak BTW.

      • DrBob127 says:

        That’s a really disappointing response to Rusty’s well reasoned (and legnthy) post.

        You can do better than that.

      • PhilBest says:

        Rusty has absolutely “got it”.

        There are two reasons that most people refuse to get it.

        One is self interest – even if someone is not a property speculator, as long as they own their own home (lucky bastards) they do not want its value to go down. Their opposition to removal of growth constraints is because they will WORK, not because they won’t.

        The other is “religious”. Environmentalism is a religion. Often when I have quoted the work of Colin Clark on population and the earth’s capacity to sustain it, I have encountered the argument, “oh, but he was a Roman Catholic, you can’t believe anything a Roman Catholic would say on the subject of humanity breeding”.

        Well, the modern Eco-Taleban, the followers of Saint Al of the Ecopalypse, are even more irrational and un-objective than the medieval Papal hierarchy was. In this day and age, any fool can use Google Earth to be Galileo to the Eco-Taleban’s insistence that humanity is “running out of land”.

      • Peter Fraser says:

        Oh Phil, Rusty is still arguing that the shonky stats from Demographia are ok, and even if they are shonky that’s ok because everyone else is submitting shonky too.

        Well guess what, it’s not OK to print shonky data, and it’s not OK to pretend that the data isn’t shonky when it’s as clear as the nose on your face.

        Now tell me how the Gold Coast, Sunshine Coast, and Port Macquarie make it onto any list of the 20 worlds most expensive real estate – give us a break.

        No one is suggesting that you are not right on the supply side issue, it just happens that as in everything else in life there is more than just one single solitary problem that makes up the whole complex issue.

        Please don’t pretend that you and Rusty alone understand the issue, because from my standpoint you are only seeing a portion of the problem, albeit an important portion.

      • PhilBest says:

        OK, I understand that some markets may make it onto the unaffordability list because the study measures “houses” rather than apartments, and some locations may have a lot more “housing” in apartments rather than “houses”.

        But could’t a study that DID include apartments, be accused of having “shonky data” because it was comparing markets that were mostly “houses”, with markets that were mostly apartments?

        Which is the lesser evil?

        What you are arguing, would be like saying that a study that was comparing the prices of cars was unfair, because in some markets far more people ride bicycles instead, and therefore the price of bicycles in those markets should be included in the study. Of course that would be regarded as desirable by anyone wanting to hide the fact that their political ideology enacted as policy had made cars too expensive.

      • Peter Fraser says:

        Phil I think it’s all that and more. I certainly don’t pretend to have the answers, but I do have some questions that clearly are not answered by the Demographia study.

        I was offered a two bed unit on the Gold Coast for $110K but it was suggested that $93K might pull it – I can’t get 2 bed apartments or even co-ops in New York for anywhere near that price, I know I have looked. I’ve also looked in Paris, I can’t get them there either. So how does the GC end up on a list of the 20 most unaffordable cities in the world? It’s laughable isn’t it.

        NCY has co-ops – we don’t, they are often lower priced but come with high upkeep costs – you buy a share of a company which may or may not be financial. If it’s not financial then you have to contribute extra that isn’t in the sticker price.
        http://www.manhattanapts.com/coops-condos.html

        NYC has areas of rent control – control the yield and you control the price – we only have minimal rent control that stops constant large rent hikes. Some areas in NCY don’t have rent control -
        http://www.nypost.com/p/news/opinion/opedcolumnists/why_downtown_cool_to_rent_control_5C4kaDRchRDRwOReVoqyvK

        In fact a lot of cities throughout the world have rent control – again if you control the yield, yu control the price – we are not comparing like markets.

        We have a large tax component in our costs, other cities around the world may or may not have that tax content, so it is collected using alternate means. These things all have to be taken into account, so that when you compare a simple cost/income ratio it won’t necessarily be exactly transferrable to a seemingly like but actually unlike scenario elsewhere in the world.

        When Demographia can factor those and other issues such as “all dwellings” into their calculations, then pperhaps they may have a like for like comparison. I suspect that will never happen though, now that they have gone down this path any change in direction will be an admission of gross error, and they won’t have the kahunas to do that.

        It would be lovely if house prices corrected to a mean and remained there, but long term studies of a house on the Herengracht Canal in Amsterdam show that corrections overshoot and in fact the mean is something that is occasionally crossed after decades of non alignment, and they have had regular wars in Europe which always pushes dow the price of real estate.
        http://www.google.com.au/imgres?imgurl=http://hotelivory.files.wordpress.com/2010/08/herengracht21.jpg&imgrefurl=http://hotelivory.wordpress.com/2010/08/29/a-very-long-view-on-house-prices/&h=263&w=811&sz=81&tbnid=WADUxmLxAHHvRM:&tbnh=40&tbnw=124&prev=/search%3Fq%3Dherengracht%2Bindex%26tbm%3Disch%26tbo%3Du&zoom=1&q=herengracht+index&usg=__hGtI98edz9AWelRzZKPb-4r8Tfc=&docid=DqNYUCY_WKYpaM&hl=en&sa=X&ei=PDYDUbTHPO6uiQea-4C4DQ&ved=0CD0Q9QEwAg&dur=1

        Easy comparisons are not easy, in fact they are very hard and clearly yield incorrect conclusions.

      • PhilBest says:

        Peter, “New York” in the Demographia Report, is the “urban area”, not the municipality called “New York”. The whole methodology uses “urban areas” that function as an urban economy; obviously the political boundaries of municipalities bear no resemblance to the boundaries of a functioning urban economy. So what is the cost of apartments in the Bronx or Yonkers or New Jersey?

        Obviously the Gold Coast is not New York, either the municipality or the urban area. New York’s (urban area) median price of houses is kept relatively low because it includes houses dozens of kilometers from Manhattan. New York’s (urban area) median income is dragged up by the inclusion of fat Wall Street incomes. Gold Coast could easily have affordable houses if it too simply allowed urban growth into its abundant hinterland. It does not, hence it does not have affordable houses. Also, it does not have Wall-Street-level fat incomes pulling its median income upwards.

        New York is unique, it is hardly “the yardstick” by which every city’s urban planners should measure their own city’s “housing” affordability. Many of them do, which is cargo cultism, in all its stupidity.

        Australians need to understand that Gold Coast COULD be an “urban area” that has affordable family houses in it, and does not because of land planning policy. Demographia does a useful job in pointing this out.

        Who is doing a comprehensive analysis that does attempt to dis-aggregate all factors, on the scale of the Demographia Reports? Why cannot the world’s thousands of highly paid bureaucrats in well funded government departments, actually get this useful research done? Perhaps they are scared of the truth?

        There is a good chance that a study that DID disaggregate all the factors re tax policy etc, would show up Australia as even worse. Basically, if a housing market is “affordable” due to elasticity of “supply”, there is NOTHING you can do in terms of subsidies and incentives and fiscal distortions, to make it “unaffordable”. If you do NOT have affordability due to elasticity of “supply”, EVERY distortion you introduce on the demand side, will capitalise straight into housing prices, AND “speculative” demand will go critical like a nuclear chain reaction out of control. You can’t plead the demand-side distortions as “the underlying problem”.

        In fact you could have NO demand-side distortions at all, and every imaginable fiscal disincentive, and you would most certainly still have a problem with young people locked out of home ownership. Politicians, however, are so stupid that they ALWAYS look at subsidies and incentives and fiscal loosening on the demand side, as the “solution” with which they as white knights can ride to the rescue.

      • Peter Fraser says:

        Phil – I’m sorry but there is NO shortage of supply on the Gold Coast, and prices are VERY reasonable for anyone who wants to look.

        You, Rusty and Demographia are WRONG.

      • PhilBest says:

        A bit of time on Gold Coast Real Estate Sites, and checking locations on Google Earth, leads me to think that it is you that is wrong, Peter Fraser. The price that sections ANYWHERE are going for, it is obvious that something is hindering genuine competition between land vendors and has caused greenfields land price inflation of a factor of “several times”. No different to any other city in this part of the world.

        Maybe short run supply elasticity was not high enough, and “supply” ramped up too slowly, even if “supply” levels are NOW high by your standards. The Phoenix/ Las Vegas/ Riverside/ Spain/ Ireland phenomenon.

        I don’t know where your “affordable” houses on the Gold Coast are. I tried sorting RE sites by price, and it looks to me as though there is absolutely nothing that could be described as “budget”.

      • Peter Fraser says:

        Phil – you are kidding aren’t you? The Gold Coast represents the best buying in Australia.

        http://www.realestate.com.au/buy/between-0-250000-in-gold+coast%2c+qld/list-1?activeSort=price-asc&includeSurrounding=false

        It’s a vultures market, has been for a while. The high dollar and the GFC have savaged the GC.

  16. AF says:

    Point 1

    FHB’s no longer entering the market because it is too expensive

    Point 2

    Converted into any other currency it the world house’s are F*&%$ expensive

    Point 3

    1 mil for a 4 bed house, not even near the beach, halfway between Sydney and Brisbane where the average salary is about 50K a year, insane

    I could list another 100 items as to why compared to any other country in the world house prices are too high

    All those that are happy with things how they are, well you may as well beat up little children in the street, because that is the kind of future in Australia that you are creating for them.

    • dam says:

      yes our currency is monstrous overvalued, we should use 0.60 AUD for a fair comparison ;-)

      Also dont forget we also have one of the highest discretionary income in the world to spend on housing

      • AF says:

        That is going to make crap all difference, so you say that instead of buying a 10 bedroom mansion in France 500km from the nearest city, because our currency is high it is fine that we can only afford a 8 bedroom mansion

        Our currency would have to be 25 cents to the dollar to make your argument valid and even then it still means our houses are overpriced for us

      • dam says:

        “500km from the nearest city” you would have to swim a bit ;-)

        at 0.7 house prices are similar than the french ones (cheaper if you look at Paris ) and if you want to compare apple with apple you need to look at main city prices ( we have only few large cities here but France has 36,000 towns). Brisbane/Perth/Melbourne prices are at par with Nantes/Bordeaux/Lyons.

        as I said before, Grocery is also 50% cheaper there, what s the point of the comparison ? In US salaries are half Australian’s ones, would you expect the same prices ?

  17. PhilBest says:

    Sorry I have come late to this discussion. I will post my arguments one at a time.

    Firstly, Cameron Murray is wilfully blind about the theoretical difference between “the total supply of land being fixed” in the sense that Australia has 7.692 million square kilometres of land, and the “fixed” nature of a land market in which one type of land use that takes up 0.4% of the total, is denied the use in the form of “supply”, of the other 99.6% of it.

    It is nonsense to argue that “there is 20 years supply zoned”, when because this is only a few dozen square kilometers, it is a piece of cake for speculators to corner the entire supply.

    Tell manufacturers who actually have to use gold in their production, that the price of gold is set by what they and their customers are willing to pay to actually use gold as a product, rather than by speculation.

    Land does not have to behave like gold at all, if the supply of it for each city was not restricted to amounts that speculators can easily “corner”. “20 years worth” is nonsense when it is an actual amount of land that is in use already for farming; if we were REALLY to allow for “20 years supply”, we would have to include dozens of times as much farmland within the boundary so the amount that was going to come up for sale ANYWAY as farmland, WAS 20 years worth…!!!!

    What is the natural rate of churn of ownership of farmland?

    The moment the incumbent owners of the planners “20 years worth” know that they have a de facto monopoly, there is no way they are going to sell their farm just as if it was a farm, at farmland values. Developers then have to bid against each other in a kind of gladiatorial contest, to get land for development.

    The reason there are thousands of sections with no buyers, but prices of them are not falling, is that the developers are the meat in the sandwich. They have already paid so much for the raw land, that they CANNOT cut the prices without making losses.

    The market is rendered very much more volatile by the fact that eventually greenfields land and many other classes of property investment may HAVE to be sold, as forced sales, because the developers and other investors cannot pay their ongoing costs, and the whole market can be tipped into a crash.

  18. PhilBest says:

    Secondly, Cameron Murray (and the other deniers) are willfully blind about the “choices” represented by the trade off of property price and location efficiency. Yes, of course people will pay more for a convenient, close-to-the-cbd property. But the AMOUNT they will pay “more” in COMPARISON TO, is the price further out, say 10 km further out. This in turn is affected by the price another 10km out, and so on ad infinitum until farmland is reached.

    The reason a city has a median multiple of THREE, is simply because the “location efficiency premium” 10 km IN FROM THE FARMLAND AT THE FRINGE, is THE PRICE OF FARMLAND PLUS THE COST OF DEVELOPMENT, PLUS MODEST DEVELOPER PROFIT, PLUS THE PREMIUM REPRESENTING THE SAVED TRAVEL.

    The premium 10 km in from this, has a further “cost of travel saved” added to the price, and so on until the CBD is reached.

    It really MATTERS for real estate prices in the ENTIRE urban area, what is the land price in which all the others are anchored, at the FRINGE. Location premiums are “added on” to THAT.

    In the median multiple THREE cities, the classic economic land rent curve has a nice gradual slope from farmland values beyond the fringe, up to the centre. Cities with regulations distorting the supply at the fringe, have a flippin’ great STEP UP in the prices at the fringe. The LSE economists call this a “price discontinuity”.

    The prices FROM this “discontinuity” IN to the centre are correspondingly higher throughout. Hence a median multiple of quite a lot higher than three.

  19. PhilBest says:

    Thirdly, Cameron and the other deniers completely miss that the so called “important contribution to the property market in Sydney, from apartments etc” is a CONSEQUENCE of the strangled land supply and people having to “trade down” space drastically to be able to get a roof over their heads at all.

    All “affordable” markets have affordable prices for much larger average amounts of space per person, while unaffordable markets have an affordability problem regardless of how high their density goes. – there is nil example that the utopian planners can point to, of “intensification” in a city providing affordability, and they need to be challenged at every opportunity on this. “Where is the evidence”? “Where is the evidence”? “Where is the evidence”?

    The exact opposite is true – every city with truly affordable housing, is low density. Ironically, the cheapest high density housing in the world, by a wide margin, will be found in the truly affordable cities that are made up mostly of low density suburban housing. But in these cities, there is such genuine choice of “affordable” separate homes, “ultra affordable” townhouses and row houses, and “cheap as chips” apartments, that hardly anyone, not even the lowest income earners, needs to trade off space. In fact, older depreciated separate houses are so cheap, because the land value is so low both in real terms and as a proportion of the “total housing package”, that these “trickle down” homes are the preferred option for lower income earners.

    It is like a distorted market for cars, where if all cars were so highly taxed and hence expensive, and depreciated so slowly that lower income earners could not afford even 15 year old Toyotas and Fords, it might be worth importing some Tata Nanos for them, even if these were still grossly expensive Tata Nanos and a lot more expensive than used Toyotas and Fords should be. This is what “higher density” housing in unaffordable cities is like. As Patrick Troy (Australian National University) said years ago, “Urban consolidation is just code for reduced housing standards for everyone who can’t afford to buy their way out of the rationing system”.

    High density housing actually does not have “economics” going for it all that much when the land is cheap. As a rule, building “up” is more expensive than building “out” to get the same amount of floor space. And the more separate entrances and exits that need to be provided in a given space, the less cost-efficient the use of space gets. Of course inflated land costs changes the equation in favour of higher density.

    The dilemma the planners face, is that if they do not force up the cost of land, the choices people make will involve greater consumption of land per person. I say some other incentives to reduce consumption of land need to be found, NOT the blunt instrument of growth boundaries that force up the cost of all land, increase zero-sum/ negative sum economic rent and wealth transfers, and have a whole lot of negative unintended consequences, even on productivity.

    • Rusty Penny says:

      there is nil example that the utopian planners can point to, of “intensification” in a city providing affordability

      To be fair, I don’t think that’s the argument in terms of cost effectiveness.

      Not so much that the dwelling is cheaper, but the provision of civil services and utilities is cheaper.

      Intensification enables a critical mass better.

      Technically, intensifiaction should equates to cheaper dwellings, but in a place like, I have no faith in the populace being anything other than too stupid to direct there policy makers to ensure this outcome.

      We are still caught up in the ‘rich dad, poor dad’ mode of aspiring to be rentiers.

      Having someone else bring product to market, and a method of capturing a claim for no exertion…. petty bourgeoisie.

      • PhilBest says:

        All right, where is the evidence that civil services and utilities ARE cheaper under conditions of intensification? There is actually no data analysis that finds correlative proof of this argument.

        This might be true IF the area targeted for intensification had been planned and built in the first place with that in mind, and has had spare capacity for decades; but this is NEVER the case. In fact, attempting to add service capacity in old, “grown up like Topsy” mature central parts of cities is a logistical and fiscal nightmare.

        Councils are perpetrating a fraud in claiming that it is cheaper to “better utilise existing infrastructure”. In fact they gouge developers just as heavily in fees, for “intensification”, as they do for Greenfields. The reason they prefer intensification, is that the fees they gouge represent DOUBLE DIPPING. Local taxes are SUPPOSED to have covered the cost of maintenance and renewal of local infrastructure, including depreciation, and the Councils have blown the revenue on other boondoggles. Therefore, they try to capture developers as an alternative source of revenue for this work, by forcing them away from Greenfields and into mature urban areas, where they can be gouged for the infrastructure depreciation under the pretext that “their development has required an expansion of capacity”.

      • Rusty Penny says:

        All right, where is the evidence that civil services and utilities ARE cheaper under conditions of intensification?

        There are 100,000 seat stadiums in intense capital cities, and 2,000 seat stadiums in Bendigo.

        That’s what I mean by critical mass.

        Like to fathom what ticket prices would be for the 100,000 seater bendigo cricket ground?

        Less copper reticulation pipes are laid for water supply, less wire cable is laid for electricity supply, less tar is laid for roads,less pavers for footpaths, when dwellings are built with greater intensity.

        I’m not denying there are lifestyle trade-offs, but consumer choice can dictate this.

        No denying councils are frauds, they are ripe for capture.

      • PhilBest says:

        Yes, but are tickets to the game in the 100,000 seat stadium in the capital city cheaper (INCLUDING SUBSIDIES….) than the ones to the game in Bendigo?

        Often, economic land rent and congestion cancel out the “big city advantage” in terms of COSTS. The advantage is in agglomeration economies and higher productivity, as long as the dis-economies of congestion and economic land rent do not end up outweighing it. I suspect that this can be the case in particular sectors of heavily-planned economies.

        One of the most misguided notions abroad today among planners, is that “because agglomeration economies are so good in London and Manhattan, we can make our economy gain from agglomeration economies just by forcing density up to London or Manhattan levels”.

        This is physical determinism, or worse, cargo cultism. London and Manhattan just HAPPEN to have the head offices of Goldman Sachs and Lloyds and a whole lot of other stuff like that; the reasons for which go back over centuries of path dependent urban evolution. I like to point out that the UK with its growth containment planning system happens to only have ONE “London”; it also has Liverpool, Sunderland, Newcastle, Sheffield, Birmingham, Manchester etc etc etc; which multitude of examples are FAR more likely to be what you will turn YOUR local economy into by pursuing the same policies.

        By the way, economic land rent is an absolute KILLER in ALL English cities; Cheshire and Hilber estimate in “The Political Economy of Market Revenge”, that economic land rent is higher in virtually all English cities than in virtually all European cities, which in turn have higher economic land rent than virtually all US cities, including Manhattan (the most expensive). THIS, Cheshire and Hilber argue, is like a “regulatory tax” burden on your local economy. It is certainly nothing to do with local amenity or productivity or agglomeration economies, if CBD rent per square foot is quite a bit higher in Liverpool than in Manhattan, which in turn is quite a bit higher than Houston, which is a several times more prosperous city than Liverpool.

      • Rusty Penny says:

        Yes, but are tickets to the game in the 100,000 seat stadium in the capital city cheaper (INCLUDING SUBSIDIES….) than the ones to the game in Bendigo?

        Yes.

        The critical mass of Bendigo means smaller crowds. greater revenue per customer has to be drawn from a smaller base that Bendigo offers.

        The rational market response is of course the 2,000 seat stadium in bendigo, ergo my point.. the critical mass that melbournes population density permits, enables the 100,000 seat stadium to be viable.

        I should have used the world viable instead of ‘cheaper’, but in this case they are essentially they are the same thing.

        Often, economic land rent and congestion cancel out the “big city advantage” in terms of COSTS.

        But population in the drainage areas improve viability. Population density increases the population in a facility’s repective drainage area.

        The advantage is in agglomeration economies and higher productivity, as long as the dis-economies of congestion and economic land rent do not end up outweighing it.

        I don’t refer to all civil services as purely economic, some are social.

        Art Galleries, Stadiums, institutes of tertiary research, for example. They are effected by critical mass.

        I suspect that this can be the case in particular sectors of heavily-planned economies.
        One of the most misguided notions abroad today among planners, is that “because agglomeration economies are so good in London and Manhattan, we can make our economy gain from agglomeration economies just by forcing density up to London or Manhattan levels”.

        I agree with your previous contributions here.

        This is physical determinism, or worse, cargo cultism. London and Manhattan just HAPPEN to have the head offices of Goldman Sachs and Lloyds and a whole lot of other stuff like that; the reasons for which go back over centuries of path dependent urban evolution. I like to point out that the UK with its growth containment planning system happens to only have ONE “London”; it also has Liverpool, Sunderland, Newcastle, Sheffield, Birmingham, Manchester etc etc etc; which multitude of examples are FAR more likely to be what you will turn YOUR local economy into by pursuing the same policies.

        By the way, economic land rent is an absolute KILLER in ALL English cities; Cheshire and Hilber estimate in “The Political Economy of Market Revenge”, that economic land rent is higher in virtually all English cities than in virtually all European cities, which in turn have higher economic land rent than virtually all US cities, including Manhattan (the most expensive). THIS, Cheshire and Hilber argue, is like a “regulatory tax” burden on your local economy. It is certainly nothing to do with local amenity or productivity or agglomeration economies, if CBD rent per square foot is quite a bit higher in Liverpool than in Manhattan, which in turn is quite a bit higher than Houston, which is a several times more prosperous city than Liverpool.

        Again, I do not dispute your theories here.

        I just assert that critical mass does effect some the realisations of certain institutes, infrastructure and the like.

        This critical mass may require increased population densities.

        I would argue that offering choice is the market place best determines this.

      • Alex Heyworth says:

        I would argue that offering choice is the market place best determines this.

        Exactly. Which is why we have the problem of overpriced urban land – the central planners decided they knew better than the market how to allocate land. Hubristic meddlers.

  20. PhilBest says:

    Fourthly, Cameron is willfully blind to the fact that one of the broadly accepted EVIDENCES of a BUBBLE, IS prices rising far faster than rents.

    Firstly, most rental property owners bought their properties long ago for peanuts in today’s money, and there is an element of competitive pressure meaning that those who CAN keep good tenants by not putting the rents up, may well do so.

    Secondly, many speculators are so blindly chasing capital gains, that they leave their speculative properties empty, or at best rent out at an operating loss. There is literally an internal distortion in the property market, in that the RENTAL market is “over supplied” while the BUY-TO-OWN market is being swamped with speculators who outbid genuine first home buyers and shut them out. IF “supply” to the WHOLE market was elastic enough, this would not become a problem in the first place.

    • PhilBest says:

      http://www.businessspectator.com.au/bs.nsf/Article/residential-property-house-prices-housing-mortgage-pd20130115-3Y4BY?opendocument&src=rss

      A plague on Aussie housing
      Philip Soos
      Published 8:33 AM, 16 Jan 2013

      “……The latest housing boom provides one piece of the puzzle: rising asset prices. The next aspect to consider is whether investors are running current income losses. Figure 2 indicates that this is indeed the case as aggregate net rental returns are negative, with losses escalating from $1 billion in 2000-01 to $5 billion in 2009-10. Losses peaked at $9 billion in 2007-08 when interest rates were relatively high, though rate cuts during and after the GFC relieved some of the pressure.

      There are more than 1.7 million investors with an interest in one or more properties, owning close to two million rental properties. Absolutely and relative to the total housing stock, this is a large sample. If investors are running current income losses of this magnitude, the imputed rents on the stock of owner-occupied housing would bear a similar resemblance, though owner-occupiers treat their properties as security rather than as an investment.

      The reason for the sustained net income losses is the combination of rental costs and interest deductions outweighing gross rental income. The ATO does not provide data on principal repayments as they are not deductable against rental income. Accordingly, the rental losses would be larger if these principal repayments were included as they must be funded out of current income…….”

      “…..A troubling fact is that almost 60 per cent of investor loans are interest-only (25 per cent for owner-occupier loans), signifying the speculative motive of property owners.

      Lastly, a classic sign of a bubble is the price to rent ratio. The reason why this metric is often used in housing analysis is because debt speculation affects capital values, not rental incomes (the latter is determined by wages and population growth). Given that the denominator (rents) tends to remain stable over the long term, it is the numerator (housing prices) that comprises the deciding variable. The following figure illustrates the uptick in the ratio commensurate with the boom in housing prices as shown in figure 1. From the trough in 1997 through to 2011, this ratio indicates an overvaluation of 44 per cent, similar to the figures that were recently released by The Economist.
      ……”

      “…..The speculative financing phase likely corresponds to the 1996-2000 period, as housing prices steadily increased but rental income still covered mortgage interest repayments and rental expenses. This relationship, however, broke down from 2000 onwards as housing prices rapidly escalated. Investors were then dependent upon rising capital values in order to realise a profit at sale and to cover the cost of mortgage debt.

      This resembles the terminal Ponzi phase, where housing prices and the household debt to GDP ratio have boomed while net income losses have escalated. Accordingly, by these measures, the evidence suggests that the residential property market is currently experiencing a bubble, with prices detached from fundamental valuations. This appears to be the largest bubble on record, orders of magnitude larger than all preceding bubbles. When it does burst, heavily indebted property owners (recent home-buyers, negative gearers) will experience financial trouble, including the economy at large.”

      Philip Soos is a researcher at Deakin University’s School of International and Political Studies.

  21. PhilBest says:

    Fifthly, Cameron and his ilk are willfully ignoring the range of “disproof” evidence from around the world.

    The UK has had possibly the first world’s most volatile property price cycles since they introduced urban growth containment planning 60 years ago. Their monetary policy and mortgage credit policies have been models of responsibility for most of this time. Their “supply” response to each demand cycle has become weaker and the outright shortage of homes greater and greater as population has risen. Dilapidated old homes remain in use long past sensible ages.

    South Korea has had such tight mortgage credit policies that SAVINGS have increased as house prices rise, rather than debt….! This is because young people desperately save a deposit that many of them never get to use as prices rise ahead of them. Median multiples end up well over 10.

    Then there are the numerous markets in the USA that had just as loose credit as anywhere else, yet prices did not bubble. Atlanta had appallingly loose credit, to such an extent that defaults have been high, yet without median multiples rising above 3.2….!! We are talking about masses of cleaners, shelf-stockers, checkout operators and beneficiaries defaulting on $100,000 loans – not yuppie couples defaulting on $500,000 loans. Atlanta also grew in population from 3.2 million to 4.2 million from 2000 to 2010 – without house price median multiples rising over 3.2.

    But there were about 190 cities out of the 260 US ones covered in the Demographia Reports, that did not have price bubbles. Some people argue that these cities did not price-bubble “because no-one would want to live in them”. This is ridiculous: as if the UK does not have its “undesirable” cities too, all of which remain unaffordable; or AS IF Australia can flatter itself that ITS cities have superior “amenity” in comparison to dozens of US cities, that justifies median multiples of over 6. Is Australia closer to California or closer to Texas, in climate and flora?