Today, fellow MacroBusiness blogger, Cameron Murray (Rumplestatskin) argues that the latest Demographia Housing Affordability Survey is wrong in its contention that high prices are the result of artificial land constraints.
Regular readers will know that I disagree with Cameron’s analysis. Here’s why.
First, Cameron argues that Australian housing supply has not been restricted because, if it was, there would have been a universal increase in rental costs relative to income:
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.
Fair enough. But there is a better way of looking at this. The 2009 ABS Survey on Occupancy and Housing Costs covers 18,000 households. The Australian Census covers the entire population and is more up to date, last executed in 2011.
The 2011 Census paints an a different picture of rental costs across Australia. First, it showed than median rents nationally rose by a whopping 50% between 2006 and 2011 (see next chart).
And because median household incomes grew by only 20% over the same period, according to the Census, the ratio of median rental payments to median household disposable income rose from 18.5% to 23.1% – a rise of 25% (see next chart).
There is also the next chart to consider, which shows a strong relationship between between the mid-to-late-2000s population surge and rising rental costs:
And the next chart showing minimal supply response to Australia’s growing population:
Using the more up to date and deeper data, it is clear that rental costs in Australia have surged since the mid-2000s due largely to a failure of housing supply to keep pace with strong population growth.
The Census can also be used to counter Cameron’s second argument, that Demographia’s Median Multiple (median house prices divided by median household incomes), is distorted:
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.
Again, the 2011 Census provides us with the answers. The below chart and table, which has been derived from RP Data analysis, shows that Australia’s Median Multiple grew by 40% between 2001 and 2011:
Further confirmation can be found in RBA charts, taken from the December Quarter 2012 Bulletin, which show Australia’s median multiples rising from roughly three times household incomes in the early 1980s to over six times incomes currently:
While these charts aren’t identical to Demographia’s, they are a lot closer than the data produced by Cameron above.
Finally, Cameron argues that the bulk of Australian house price growth has been caused by falling interest rates:
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.
While no one disputes the fact that falling mortgage rates have contributed to Australia’s strong house price growth, Cameron again misses the point. According to the Census, the ratio of median mortgage interest payments to median household incomes rose from 25.6% to 33.7% between 2001 and 2011, representing an increase of 32% (see next chart). Moreover, variable mortgage rates were actually lower in 2001 (average = 6.8%) than in 2011 (average = 7.7% (standard) / 7.0% (discounted)).
While it is true that mortgage rates have fallen sharply since 2011, thanks to monetary easing by the RBA, the ratio of aggregate mortgage interest payments to household disposable incomes remains highly elevated, still tracking some 30% above the late-1980 highs when mortgage rates peaked at 17% (see next chart).
Of course the RBA chart above does not take into consideration the extra principal repayments that must also be paid arising from the significantly higher home values today compared with yesteryear.
In summary, the growth in Australian rental costs, median multiples and mortgage repayments is only partly explained by rising household incomes and/or falling mortgage rates as well as speculation. Structural factors such as an inability of land/housing supply to respond adequately to increases in demand, accounts for the rest.
unconventionaleconomist@hotmail.com
Thanks for this –
Can you put up that chart of the land supply the various land bankers have locked up – can’t seem to find it.
Or a link to the article ?
It is one of the most telling charts I have ever seen.
Thanks
Do you meant the table from this article?
+1 on the developer stockpiles. There is your supply. Right there.
Name another industry where a “manufacturer” is financially motivated to stockpile 33yrs worth of “product”.
These guys don’t seem to have any trouble getting a much supply as they want…and more.
Why not require developers to show their landbanks contain less than 10yrs worth of supply before approval is given for their purchases of vacant land?
More product released onto the open market.
Reduce the power of the landbanking cartel.
Better yet – start taxing it at an appropriate rate to negate the unearned Rent their extracting from everyone else. Watch supply increase then.
+1 Why not do both? The sooner we can bust the dam wall and release the supply, the better.
I suggest the landbank cap because it would immediately compel Lend Lease to double their current land sales before they could buy more land.
Eh? Government interference in the real estate industry?
Never happen.
If there is a general shortage of housing, where are all the homeless people who aren’t mentally ill or drug addicted?
If there is a general shortage of housing, why are around 10% of properties vacant as per the last two censuses?
As stelladallas correctly points out, isn’t it a whole lot simpler to explain as a loosening of credit leading to increased gearing across the market?
“…isn’t it a whole lot simpler to explain as a loosening of credit leading to increased gearing across the market?”
Yes, it is simpler, but not correct. Both easier credit, combined with tightening supply, explain the big escalation in home prices. Cameron is wrong to argue that rising demand (partly due to increased speculation/credit) is the only cause.
But my point is that I don’t see any evidence of tightening of supply other than higher prices.
If there is a tightening of supply, surely we should see a low vacancy rate, more mentally stable and employed homeless people, ‘ordinary’ families living in smaller and smaller houses and having to share bedrooms or even houses.
Instead, we see ample vacancy (to be clear I’m not suggesting 10% is a problematic level, just that its not consistent with a shortage), a long term trend to larger houses and fewer people per bedroom.
There are endless stories in the press and around the BBQ about how hard it is to find a house, which is held up as evidence of tight supply. However, in every case I’ve seen, it turns out the problem isn’t finding a house. It’s finding a nice large affordable house in the particular nice suburb someone wants to live in. I’m sorry, but a shortage of sub-$1mln 4-bedroom houses in Mosman is not a ‘real’ shortage. Just because you don’t want to live in Rooty Hill and commute doesn’t mean supply is tight. That’s just a market.
So a 50% boom in rents in the five years to 2011 isn’t evidence of rising housing costs and inadequate supply?
And the skyrocketting cost of vacant land on the fringes of Australia’s cities isn’t evidence of land supply restrictions?
Again this is all price. I agree that as a general rule, higher prices correlate to tighter supply.
The suggestion here, however, is that a number of fairly obvious distortions (such as tax incentives, changes in lending practices, public perception) have combined to create price behaviour that is disconnected from fundamental supply. (I’m deliberately avoiding the B-word as I think it overdramatises the situation.)
Now maybe there isn’t a distortion, and fundamental supply really is tight – its a legitimate debate. But my point is that you can’t show there isn’t by quoting more examples of high prices.
Of course, if you don’t think such a situation is possible, then you are a true believer in the efficient markets hypothesis, and I guess there’s not much basis for us to do anything other than disagree.
The urban economist Steven Malpezzi repeatedly says that “price is the single sufficient statistic necessary to determine whether supply is elastic enough or not”.
But my point is that I don’t see any evidence of tightening of supply other than higher prices.
You are clearly quite confused on the issue. Try thinking about the world’s food. Think about how some people can starve while other people are fat.
Does a fat person prove there is no hunger?
Would hungry people cause fat people to get thinner?
+1
It doesn’t really matter if there are 10% properties vacant or lots of spare bedrooms not being used.
Unless of course you are proposing laws to seize those properties and force their sale or force the householders to take in housemates.
One look at the rental vacancy rates will tell you that there is a continuing shortage of rental properties (except perhaps Melbourne) and that is keeping rents up.
The non-existence of people sleeping parks is irrelevant. There are plenty of people who are sharing accommodation who would prefer to be in their own place but:
1. Cannot afford the rent
2. Cannot afford get a large enough mortgage to buy.
3. Can get a large enough mortgage but sensibly are having doubts.
Increased supply will lower prices and allow more people to live how they would prefer.
You’re saying, in your first sentence, that the level of unused capacity is irrelevant to the question of whether there is a shortage of supply. I don’t quite know how to respond to such a flat rejection of fundamental economics.
As to the people who would prefer to be in their own place, why are they sharing? Is it because they can’t find a place, or because they can’t afford the place they want? Very different implications.
The three bullets you offer are all simply price-related. The whole point of my original post was that if there is a fundamental supply problem (as opposed to an artificial inflation of price by market distortions or similar), you should see evidence other than just price.
Finally, rental vacancies are typically based on data reported by real estate agents. Forgive me if I’m a little sceptical.
The whole point of my original post was that if there is a fundamental supply problem (as opposed to an artificial inflation of price by market distortions or similar), you should see evidence other than just price.
A smart person does see this:
High rents.
Many young people staying longer with mum and dad.
Many young leaving Sydney and Australia for cheaper places.
Young buying units instead of houses.
Increased travel distance and cost.
Young couples delaying marriage and children.
Note: Granny in a big house with many spare bedrooms does alter the data but does not solve the problem.
DaveC,
I assume you wrote your first sentence before reading my second where I explained that properties listed as vacant in the census or empty bedrooms were irrelevant unless you intended to force them onto the market.
The 10% figure in the census does not refer to properties vacant AND available for rent. Perhaps you were unaware of that.
“Is it because they can’t find a place, or because they can’t afford the place they want? ”
I am not entirely sure what you mean by that but I assume you are referring to people who prefer to share if that means they can live in location A but they would prefer their own place in location A in a perfect world.
I am sure there are people like that but they are not what I am referring to as that is clearly a preference on their part to live in location A but save rent money by sharing.
The rental vacancy rates in Sydney are low across the board. Often they are lowest in the least appealing and far flung parts of the city where rents are lowest.
You said you ‘should see evidence other than just price’ but I am not sure what that other evidence might be. Looking for people sleeping in parks will only be evidence of catastrophic market failure.
In the interim I think it is fair to conclude there is a shortage of supply when rental vacancy rates are so low – albeit not as bad as they have been.
And the best way of testing who is right is to increase supply across the city and see whether vacancy rates or rents adjust.
I think the 10% vacancy figure is very misleading. There are a lot of people, with lots of money, who own lots of real estate.
Holiday homes they visit on the occasional weekend, a house they keep in another city just for when they need it, or simply houses to store wealth, but for people who can’t be bothered with the hassle of tenants. It’s hard to quantify, but I think it’s a big contributor to that figure that shows up in the census.
Actually, the move towards urban containment has been a global phenomenom. Some markets, like the UK (1940s) and California (1960s) began errecting containment barriers early on whereas others, like Australia, have had a significant tightening of planning regimes since the 1990s (all of Australia’s state governments implemented urban containment policies from the mid-1990s). When combined with financial deregulation and lower interest rates, this has been red rag to a bull for house prices globally.
The minority of markets with more open planning (e.g. roughly half of the USA, Germany until recently, and Switzerland) never experienced the big booms in house prices even as credit became more freely available.
Supply restrictions steepen the supply curve causing bigger booms/busts in house prices as demand rises/falls (e.g. via easy credit) – this is economics 101. Restrictions of supply and easier credit are self-reinforcing, which is why both sides of the equation need to be dealt with. It is wrong to focus on only one side, which you and Cameron seem to have done.
Yes Leith, but Germany has tight rent controls, which means that:-
a. 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.
b. Renters stay in the same rented apartment forever to get progressively cheaper rental. That means the new entrants (the young) must pay more to subsidise the elderley residents who have been in the same apartment for 40 years.
The very strict rental controls prevent owners from increasing rents in line with market forces. When the housing market in Germany blows up it will be spectacular.
Is that what we want for Australia – a return to WW2 market controls – what happened when they were lifted after a much shorter period that Germany has had them in place?
why “investors” in Australia are buy homes with rental yield that is half the yield in Germany?
And if Germany has “significant under investment in housing” how rents for new entrants are not sky-rocketing?
your theory is broken.
That is complete rubbish rav.
@ peter
and you have no answer
Why Australians buy investment rental homes with yield 2.5% but Germans do not buy properties with 4 or 5% yield?
maybe because Australians are speculators not investors?
.
When you whole argument is based on smoke and mirrors its not suprising really.
Oh!….DONT BUY NOW!
I buy real estate in Australia and while living in the UK, I considered buying in Germany. The thing that put me off was the rent control – you had very little rights as a landlord to do anything, including putting up the rent.
One of the great things about real estate is the values and rent tend to rise with or above inflation.
That was the killer for me.
steven_pack
yes it is apparently a problem in many countries and has completely warped the real market. When the controls either come off or reflect true market conditions, it will be a social disaster. Portugal is coming to grips with that now.
http://finance.yahoo.com/news/portugal-scraps-rent-controls-alarms-low-earners-070130948–finance.html
What do you expect will happen in Germany – they can’t keep market forces at bay forever, and of course none of those rent controls exist here, so comparisons to our housing market are meaningless anyway.
Interested in your thoughts though.
How major can supply problems be in a country where the population has been falling each year since 2004?
How major can supply problems be in a country where the population has been falling each year since 2004?
That is an excellent question. In theory if there was a place with a severe supply restriction in place and many renters, and a surge in demand, then rich families (which tend to have fewer children) would drive out the poorer families and would cause a falling population of the area.
An example of this happening would be popular tourist areas as they move from normal town to tourist town.
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
You keep asserting this. Where is the evidence?
Well Roger Federer – here are some rental returns for Germany.
http://www.globalpropertyguide.com/Europe/germany/Rental-Yields
Don’t you have a search engine?
Note those returns will be for a new lease, not for one that has lasted 40 years. What are they after 20 years of rent controls?
The apartments are not that cheap either are they?
I wasn’t talking about return, I was talking about the so called ‘supply problems’. You kniw this because I’ve raised in numerous times today.. the ‘lack of supply due to discentives’ issue you keep inferring.
I don’t see wide-scale homelessness or government subsidies.
Don’t you have a search engine?
Look, I know you’ve been slapped around continusouly for 3 days now.
The score is what…
Gunna: 4 – PF: 0
RP: 106 – PF: 0
.. and it’s obviously amplifying your obvious inadequacies. It’s probably best you take the rest of the day off, and don’t worry about your ego… no one with think lesser of you than they do right now.
Rusty if there is a supply issue, then prices will still rise despite the rent restrictions, and they are rising.
Would you like me to link a recent article that was posted here this week stating exactly that?
Why do you do this to yourself Rusty?
Maik is one of an estimated 345,000 homeless people in Germany, according to the Federal Consortium for Aid for the Homeless (BAGW)
http://www.dw.de/germanys-homeless-must-leap-hurdles-to-get-help/a-2194430
Rusty if there is a supply issue, then prices will still rise despite the rent restrictions, and they are rising.
Once again, you are WRONG.
JC pointed it out.
Prices are rising because people are outbidding each other to secure a safe haven.
The utility to shelter someone has matched supply and demand.
I’ve pointed this out, and it is understood by those with more knowledge than you Peter… seriously, it is best you come to understand your limits in this area.
The isn’t homelessness, therefore there is adequate supply existing.
Government isn’t offering subsidies, thus the replacement/new supply price conforms the producers desired levels of return.
All we are seeing is hot money trying to park itself where it can get a relatively stable return in an unstable world.
Price rises do not automatically equates to diminished supply, its one of the very first tenants of economics.. but you don’t know that do you?
RP: 107 – PF: 0
345,000 in a population of how many peter?
my opinion.
low interest rates and easy credit did the following:
1) made a bad situation terrible for those markets where real supply was restricted (Aus, NZ, Canada, parts of the US, LONDON)
2) created a very bad situation in those markets where there was no real supply problem by creating speculative demand. (the rest of the US, Ireland, Spain)
Those in category 2) have fallen by the wayside post GFC as the credit bubble can not be maintained without some level of fundamental support.
Those in category 1)are hanging on by their fingertips, the undersupply allowed them to get a firm grip but now thats slipping.
2) “created a very bad situation in those markets where there was no real supply problem by creating speculative demand. (the rest of the US, Ireland, Spain)”
WRONG about “the rest of the US”.
The 200-odd cities out of 260 US ones in the Demographia Reports, that did NOT have a PRICE bubble, have MOSTLY had a stable or sustained-growth local economy and are in the BEST shape of all. The crucial factor is: did PRICES bubble?
You are partly right about a few unique markets where PRICES bubbled AND distorted supply kicked in strong, too late to stem the tide speculative pressures. What matters is the SHORT RUN elasticity of supply, not the LONG RUN.
There are academic papers that try to devise formulas to explain all markets, and they HAVE to put “speculative” demand in as ENDOGENOUS to short run supply elasticity. It is like a nuclear chain reaction. If you lose control, it is too late to do all the right things that would have stopped a meltdown had you done them earlier.
I find it hard to believe that median rents in Australia were $190 per week in 2006, especially given that the majority of Australians live in metro areas. That was the cost per person to live in shared accommodation in Sydney, not a whole house.
Even a median of $285 per week today is a stretch. Melbournes cheapest suburbs rent for that kind of money and has the weakest rental market. Something is amiss.
Yes, credit is a cause, as is tight planning. There is no way that UK house prices would have risen as far had supply been allowed to respond to demand. The lack of supply response just meant that prices rose further when credit demand boomed. Again, this is economics 101 – if the supply curve is steepened (via tight planning), prices become more sensitive to changes in demand.
To say that the 1997-2007 UK would not have been so severe if planning was relaxed is not the same as saying that planning restrictions were the cause of the UK bubble.
I don’t know anyone who claims that getting planning restrictions right will prevent bubbles anywhere for all time. The demographia report demonstrates a link between restrictive planning and expensive housing, excessive travel, etc.
Eating an apple wouldn’t have saved Elvis. Does that mean you and I needn’t eat any fruit today?
The world wide rising of price/income ratios can be seen in this RBA chart. It seems far fetched that the clear trend would be the result of planning restrictions.
Price/income ratios are affected by things such as interest rates and investor mania.
The median rent:median wage ratio is a better indicator of shortage – ie planning caused shortage.
The UK had been having increasingly volatile house price cycles for decades, while markets where rapid “automobile based development” was the NORM, did not.
OF COURSE there has been a unique new global MANIA for urban growth containment, where have you BEEN for the last 2 decades? On Mars?
I actually think Leith does not go far enough in making supply constraints mostly responsible; South Korea has long had such tight mortgage credit policies that national 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.
But it is highly unusual for politicians in a situation like this, NOT to FORCE a loosening of credit, and perhaps throw subsidies at the young, to “help” the situation. But it seems to me that the prices top out SOONER when there is loose credit, than when there is NOT – going by South Korea as the example.
The diversity of opinion between the bloggers is just another reason to keep coming back
The global aspect of the bubble does seem to point to credit as the cause.
Yes.
Now compare Sydney prices and rents with Dallas prices and rents. Read demographia. This seems to point to planning regime as the cause.
A smart person can see both these things.
Does urban growth containment NOT have a “global” aspect? For Pete’s sake, you’d have to be on a different PLANET not to see this.
Clue: Kyoto Protocol; CO2 emissions reductions; “compact cities”, public transport use, reduce car use, yadda, yadda, yadda.
I have few comments:
1. You ignored changes in renters’ composition. You used median rent and compared it to median income of all Australians not just renters. This does not prove that rents increased by 50%. Rise in median rent could be caused by the fact that more higher income renters are renting more expensive homes. Fact that number of renters is rising (population increase) while number of cheap public housing units is falling. That could moves without actual rent increases.
2. Your rental growth vs. population growth chart seems to be broken now. Over the last two years construction slowed down, population growth increased but somehow rents slowed down. On the other hand, if you compare rents with house prices you will find much better match. That could be used to prove speculative no-supply driven bubble.
3. Market supply response in Australia seems to be broken even before strict regulation was imposed. Regulation did not affected supply response. Even in 80s and 90s supply response was very bad (inverted to population growth).
If supply response plays such significant role how we managed not to have bubbles back than when supply response was equaly bad? In fact, in late 80s when prices sky-rocketed in Australia we also recorded the highest construction rate. How is that possible if supply response is mayor cause of price increases?
4. I in general agree with your median multiple and low interest rate argumnts.
In fact, in late 80s when prices sky-rocketed in Australia we also recorded the highest construction rate. How is that possible if supply response is mayor cause of price increases?
You are very good at making mistakes with statistics. In the late 80′s supply was already choked in Sydney and Sydney was where the prices rose.
Your “highest construction” claim is dodgy. It was probably elsewhere, or not high relative to need.
So, when I read chart, that’s mistake. When the same chart is used to support your opinion that’s fact?
In late 80s we were building 1.2 homes for every new resident – 3 homes for every new household but prices sky-rocketed because of low supply response? really?
BTW. in late 80s most of construction activities were in Sydney. More than 40k new homes were built every year to accommodate less than 50k new residents a year. We were building more than two new homes for every new household and you still claim low supply response was the reason for house price increase?
In late 80s we were building 1.2 homes for every new resident
That is a lie. Many existing residents were building extra houses for themselves. New residents had to pay for their own home – if they could afford it.
What matters is the SHORT RUN elasticity of supply, not the LONG RUN. There are academic papers that try to devise formulas to explain all markets, and they HAVE to put “speculative” demand in as ENDOGENOUS to short run supply elasticity.
It is like a nuclear chain reaction. If you lose control, it is too late to do all the right things that would have stopped a meltdown had you done them earlier.
that “SHORT RUN elasticity of supply” was very strong in late 80s, still prices sky-rocketed. Actually, it even seems that prices followed supply increase.
This seems to debunk “supply” theory.
It is also interesting that interest rates were rising at the same time. They hit all time low just before bubble burst in 89. That debunks even theory that low interest rates cause price increase.
Someone needs to look into the late 80′s episode more carefully. Just how elastic WAS supply, and why did prices rise IF short run supply was “elastic enough”? I say there has to have been SOME sort of “quota” mechanism at work, even if it was infrastructure funding and provision lagging the pressure for development.
Someone needs to explain where is the difference with cities like Houston and Atlanta that manage to add 1 million people to a base of 4 million and 3.2 million respectively, in TEN YEARS, without price inflation – IF the answer is something OTHER than short run supply elasticity.
This short run supply elasticity includes being able to raise funds for, and install infrastructure, with minimal delays; no mucking around with having to connect to some grand planned centralised network and so forth.
the reason why prices stayed low in these cities is more related to lifestyle preferences, than land regulation. People in American south like to live far from city in place with minimal infrastructure (water, electricity and farm road is enough). There is always more available, in every place, land of this kind than inner city land that is preferred by residents in NYC, SF or Sydney.
Let imagine the case without any regulation. Most of people in NYC (or Sydney) prefer to live close to city,so most of them wants to buy limited number of old houses close to city (significantly lower number than number of people who wants to buy) to build new home. This puts pressure onto old house prices and new house prices as well. Everybody is allowed to build but desire to build inside limited area pushes prices up. Vertical subdivision will help keeping prices down if there is no regulation and if people are forced to go into units because they cannot buy expensive houses. If credit is easy and everybody can afford to buy house in inner city prices go to the moon
In Houston on the other hand, majority of people wants to live far from city. There is almost infinite supply of land out there so there is no pressure onto prices. Everyone can buy land for $50k and build house for $100k more.
So prices will and should be higher in NYC than in Houston but the increase in price should not.
Yes, but Australian cities have been “decentralising” in terms of employment and amenities, at a similar rate to US ones (and in fact even many European cities have been too).
Why would there be such high demand for properties near the traditional CBD that it make the whole property market behave differently, if the proportion of employment there has fallen from 50% plus several decades ago, to 12% now?
And see my comment here about the way “location efficiency” premium prices are derived:
http://www.macrobusiness.com.au/2013/01/demographia-confusion/#comment-209310
decentralization does not help much because it just repeats same behaviour couple of times. I’m talking about large areas these US cities cover. They cover area twice the size of Sydney with similar population.
With Sydney CBD decentralization people just added few more suburbs around new CBDs into their favourite list. Areas far from city are still undesirable.
People living in southern cities do not want to live close to CBD, regardless whether that’s main or new one. For them being close to Sydney CBD or Chatswood, Parramatta, or Macquarie Park makes no difference.
If some of these US cities have a nearby area similar to Central coast, it would be by far the most expensive area occupied mostly by people working in city. In Sydney, that is not desirable area for almost anyone who is working in any of the CBDs.
Poor infrastructure amplifies this problem in Sydney. Commuting from just 30km away requires 1h drive in Sydney, but only 20-30 min in US cities.
All of this adds to the problem, but easy credit makes people thinking they can afford house close to city so they are willing to compete to the limit set by bank. The most popular online tool in Australia must be how much I can borrow.
This article, and Rumplestatskin’s on the same subject, are the reason MB is one of my first sources of economics news and analysis. There are strength and weaknesses in Demographia’s report, and these articles address both in a respectful tone, and use data and sound reasoning to back themselves up.
Compare this to the hysterical bleating of Mr Andrew Wilson a few days ago, and it’s clear why anyone who can manage better than a grunt when contemplating property as an investment steers well clear of the MSM.
Keep up the good work, guys.
“Structural factors such as an inability of land/housing supply to respond adequately to increases in demand, accounts for the rest.”
I can’t help but feel that the tired old argument for releasing land to unlock pent-up demand in housing rests perhaps somewhere between erroneous and downright disingeneuous. At the very least, in the inner suburbs of Melbourne where I live, I see anecdotal evidence around me on a regular basis that much land has been freed up for construction of new dwellings.
I would add that much of this additional supply has come at a cost in terms of a reduction in the stock of social and economic infrastructure reflected in countless numbers of factories, businesses, recreational and other facilities torn down to make way for new housing development.
This is Australia, for crying out loud, where land is plentiful! And I don’t subscribe to the view that governments should release crown land for purely speculative purposes, and to feed the insatiable demands of property developers. Crown land is crown land for a reason – ie., to meet the social and other objectives of public policy.
Based on this, I tend to agree with Cameron that rising house prices is perhaps due to a combination of rising speculation, increasing incomes and/or declining interest rates.
The obsesssion with property in this country must simply stop! Only then can we start to correct the distortions in public finances brought on by policies designed to fuel property speculation, lower the dollar, and start re-building the economy for productive, as opposed to speculative, purposes. I know where my priorities rest…
You have neglected population increase in your figuring.
We can’t all live in the inner suburbs of a handful of cities – no matter how much land you notice freed for new dwellings.
At our breakneck population growth we need new cities to be created and supported.
Choking credit, dampening speculation and chopping incomes will not magically make us all fit into those rare suburbs close to our rare CBD’s.
Breakneck population growth?? Really? Don’t make me laugh, please….
http://data.worldbank.org/indicator/SP.POP.GROW
I MAKE YOU LAUGH
You post a link that shows Australian population growing at between 1% and 2% per year. That is approximately 200000 – 400000 extra people for each and every year. Do the maths in your head if you can, or use a calculator.
And you don’t think there is a problem in supplying extra houses for this horde because, I quote you, “in the inner suburbs of Melbourne where I live, I see anecdotal evidence around me on a regular basis that much land has been freed up for construction of new dwellings.”
Who is making who laugh again?
Please tell me that you don’t work for the government and that you have nothing to do with planning for housing or any essential service provision. Please, please, please.
I LOVE quoting the following data:
For the period from 2000 to 2010, there are examples of stable-house-price cities in the USA that grew from 3.8 million to 5 million people (Houston); from 3.5 million to 4.5 million (Atlanta); from 900,000 to 1.35 million (Austin); from 760,000 to 1.25 million (Charlotte, NC); and from 540,000 to 880,000 (Raleigh, NC).
I am enjoying imagining all the brain cells in tiny growth-phobic minds in this part of the world frying as they try to process this information.
Yes, Claw, your maths is spot on but we’re starting from such a low base that, quite frankly, a few more people will probably do the country some good.
And if you look at the data carefully, Claw, you’ll see that the growth rate has actually declined significantly in the past few years, ie., closer to the World average.
But my whole point is that focussing on land supply, or lack thereof, is a convenient way of shifting the emphasis away from more important considerations like the provision and upgrade of new as well as existing infrastructure. This would improve the elasticity of supply of housing in urban areas, Claw, given *current* population growth rates.
And, no, I don’t work for the Ministry of Housing, Claw, so have no fear as I’m not about to launch communal hare kare sometime soon……
Who now would buy on the fringe where future prices will remain subdued or fall. It is the competition for the CBD areas where house blocks are rapidly disappearing where there is real supply issues. This is where the smart investors and renters want to live and invest. Those with money buy big blocks close to the city, transport, education, beaches etc. They build townhouses and reap the tax advantages of depreciation and negative gearing. Thats what I see here in Perth at the mo.
Now we’re getting somewhere… Could it be that a lack of infrastructure on the fringes is contributing to the wild price differentials in urban areas? if so, then this is a separate argument to land/housing shortages. If not, then we really need to ask how our cities can sustain the ongoing encroachment of the property sector, ie., again, without the concomitant social and other costs.
Cost effectiveness would be to bring the tall buildings where everyone works into the suburbs, rather than building railway lines to bring the suburban population into the big buildings.
But zoning laws dictate big buildings.
Slowness of getting the infrastructure in is a definite contributor to low housing supply elasticity.
It is vital for the affordability of the US cities with elastic housing supply, that developers can raise funds and get infrastructure funded and installed just as rapidly as necessary and as efficiently as possible – it is a de facto “free market supply” of infrastructure.
Even if there was no “urban growth boundary”, if significant infrastructure was provided by a centralised monopoly under a centralised and inflexible “grand plan”, and they insisted, for example, on only expanding the network “contiguously”; this would deliver monopoly powers to the holders of the land at the point where the current network ends.
Frequently, such public bodies methods of providing infrastructure are grossly inefficient and expensive, and are more about maintaining a bureaucratic empire, than about efficiency. There is frequently far better sources of water, and routes for disposal of wastes, and so on, than the system that the centralised monopoly insists on developers hooking up to. And the “monopoly land rent” generated is by far the most damaging effect.
FrankC,
How do you explain, that most of the fastest-growing cities in the USA from 2000 to 2010, remained affordable, which was one of the reasons people were moving there. For the period from 2000 to 2010, there are examples of stable-house-price cities in the USA that grew from 3.8 million to 5 million people (Houston); from 3.5 million to 4.5 million (Atlanta); from 900,000 to 1.35 million (Austin); from 760,000 to 1.25 million (Charlotte, NC); and from 540,000 to 880,000 (Raleigh, NC).
The reason for this, is that their regulations regarding housing development are so relaxed, and their means of funding and supplying infrastructure are so “free market”, that the price of new housing is determined by developers in competition with each other, being able to buy farmland anywhere at farmland prices (i.e. $8,000 – $20,000 per acre), and turn it into new subdivisions as cost-effectively as possible.
Here’s a thought experiment:
Let’s provide cheap credit to homeless people and watch as high prices are sustained for a little longer.
Now that the whole population is tapped out, who is left to go into debt?
It’s not just these homeless masses that couldn’t afford to buy – it’s those who won’t be able to service their debt over time.
Blame supply all you want. If easy money is made available in any market, demand will be the culprit in causing a bubble. And that is what we have.
Now that I’ve sorted that out, can we move on to anticipating what damage is going to be done to society as a result of the bailouts to those that caused the problem?
My idea is to introduce a $1 billion FHOG.
The floor price of every property is $1 billion, imagine how rich we would be then!
Blame supply all you want. If easy money is made available in any market, demand will be the culprit in causing a bubble. And that is what we have.
Absolutely clueless.
Harvey Norman has brought easy money to the DVD player market and to the TV market. This HAS NOT caused a bubble in prices because supply has been adequate at the higher demand. Price has remained pegged near the cost of production.
Exactly, and what Cameron Murray and his ilk are constantly in denial about, is that a supply of NON urban land stretching hundreds and thousands of kms into the hinterland from a city is JUST as adequate a “supply” IF it is allowed to be accessed for housing development, as the “supply” of materials to make DVD players and TV’s at ongoing competitive prices determined by “who can make the most price competitive product” using the same vast supply of raw materials.
But Phil there is supply thousands of kilometres into the hinterland.
They call it Dubbo.
Hell of a long drive home though.
I am comparing this supply, to the supply of raw materials for DVD players and TV’s, which stretches millennia into the future. Of course it is not necessary to plunge off way into the distance to access the piddly, piddly bit of the resource you need NOW.
A city might have a diameter of about 50 km, which might have taken 100 years to grow. The circumference might be around 160 km. A DECADE of growth at CURRENT rates might, if distributed evenly around the circumference, involve a 1 km expansion.
1 km is 36 seconds drive at 100 km/h and 60 seconds drive at 60 km/h.
SO, if your land bankers corner the entire supply within 36 to 60 seconds drive of the existing fringe, or even 2 minutes drive; all a developer needs to do is just buy a farm that hits the “farms for sale” column in “Rural News”, at farmland prices, 2 to 4 minutes drive beyond.
BUT in markets where this is POSSIBLE, HEY PRESTO, nobody bothers to land bank….!!!!!!
I woooonder whyyyyyy??????
Forget it Phil, Peter’s trailing commission is dependent on him, and others, not understanding this.
Well Phil if you have a point then make it in a less condescending manner.
Your point though doesn’t mean that it can be exclusive of other factors, did you consider that?
If you do it via genuinely free supply and genuinely competitive processes of development and of infrastructure supply, it is not necessary to consider other factors. This is a proven approach.
I personally like land taxes, period, but I do not believe that they would make housing affordable if the supply of land for urban expansion continued to be rationed. I think land taxes should be substituted for other taxes, for plenty of other good reasons.
I DO think that intelligently designed land taxes COULD be part of a system of incentives devised to constrain urban growth WITHOUT the perverse consequences of blunt instrument rationing of land. Road pricing is another policy tool.
Blunt. instrument. rationing. of. land. must. go. There are truly “smart” ways of getting the desired results without side effects worse than the original problem, “smart growth” is actually one of the dumbest things devised by human minds since Communism.
Please make any new arguments at the bottom of this thread, it is getting skinny here.
Mr The Claw,
The DVD is easily mass produced. Are you suggesting the same for land and property?. Does land subscribe to Moore’s Law?
Perhaps I wasn’t clear – even with the release of more supply, credit can be made available to soak that supply up.
Harvey Norman’s not doing so well lately. Could it be that they too have tapped out their market with too much credit?
When the government wants to raise your taxes, Mr The Claw, to fund the bailout of our financial system what will your response be?
Yes. Extra dwellings are easily mass produced. There is a vast fringe on every Australian city that can take houses on 1/4 acre. Units are easily added by demolishing old houses and units and simply building a little higher than is currently allowed. Similarly China shows how easy it is to create extra cities.
All your other questions are a distraction when you should be apologising to me. Remember your quote.
Blame supply all you want. If easy money is made available in any market, demand will be the culprit in causing a bubble. And that is what we have.
My example shows your comment to be nonsense. Clearly supply is key.
Leith, CatFiles has an article today based on Demographia report: Land regulation the cause of excessive house prices.
Can’t link to Cat! Can’t even write the name – won’t post!
LOL.. Mods have done a good job.
But, Carry on, 3dk1.. Tis but a flesh wound.
I have posted a series of short essays contradicting Cameron Murray on his thread, starting with THIS comment:
http://www.macrobusiness.com.au/2013/01/demographia-confusion/#comment-209301
F(Price) = F(Demand, Supply)
where
Supply = Planning restrictions, release of land, barriers to construction
Demand = Cheaper credit, lower LVR’s, etc
If credit is offset by supply for a given location/market then prices should not rise.
Conversely if demand is restricted given a fixed supply prices will fall.
End of debate. I think Cameron has said how it is on the demand side – but I do know that the supply side is definitely an issue. Well at least it is in Sydney with the kids all staying at home and still 20 people on a rental inspection day.
Credit is an enabler, but not the cause.
As stated before, developers can only put in a sticker price containing extraordinary gain if there is no alternative.
With no urban boundaries, no develop can capture all the available land. I think Phil best said that a concentric ring around the existing urban boundary of Melbourne, 1km wide is around 30 years supply.
Melbourne being a roughly 33km ring, extending out to a 34km ring is no real material ‘loss’ of argicultural land, but endears all the supply requirements.
Say this policy was announced, this 1 km ring would have to promote competition, no one developer can capture it all.
Every white-shoe wearing developer would be left with inventory they can’t shift if they’ve got embedded extraordinary gain.
That is what the supply side mechanism in this case is about.
Extraordinary gain can not be captured because a competitor will undercut them.
At this point, lending can be as loose as it likes, no one is going to pay high prices. This is why LvO and PhilBest keep pointing to Houston, whcih mainteind price stability despite high population growth, and Atlanta which had loose lending and large scale default.
All loose credit does it enable those acting out of fear of ‘missing out forever’ leap in and not exercise downward pressure on prices by exercising a consumer choice of ‘no’.
Philbest has shown the South Korean side with strict lending practices… it was inconsequential, South Korea had poor supply side response.. and ultimately poor supply side response puts in effects a quota system that is in deficit to demand.
Rusty, you have come into a very small and rare group of “the enlightened” on this. Keep trying to spread this message.
There is an English land economist named Alan W. Evans whose two books published in 2004, should have made him famous as the guy who sorted out the confusions that plague mainstream economics on these issues. His clarity, based on observation of the real world, is admirable. I owe a lot to his insights.
Issue is validity and reliability e.g. graph of rent increases vs population growth.
The latter is a very rubbery headline figure which is not understood unless some qualitative research is done.
Over half of population growth is temporary entrants i.e. students, backpackers, 457 temp workers and dependents, who would rent, share etc. but few would purchase.
Take WA out of the equation and Australiaa’s growth rate plummets……
Please only quote population (growth) with a qualification……. other wise misleading, and invalid……
Planning controls are a significant factor, but are exaggerated by both Demographia and Leith!
How about topography (Texas has a lot of flat land!), and low labour costs (Texas has no minimum wage, only uses Federal minimum of $7.25 as a reference). Property taxes are also high in Texas.
Many Australasian cities had fairly tight planning controls before mid 90s, and urban boundaries (but they weren’t called “MULs”)
I think the house price boom was a coming together of a whole lot of factors – demography, credit liberalisation, planning policies etc. I think it is wrong to pull out one factor from the mix
It wasn’t just Texas. 190 cities out of 260 US cities in the Demographia Reports, had no price bubble.
The only explanation that any academics have been able to devise a formula for, is that elasticity of supply in all these cities was high enough to cope with the demand, to the extent that no price increases ever occurred to heighten speculative expectations. Once speculative expectations have been heightened, it is like a nuclear chain reaction that has been lost control of – it is too late to stop it with “supply” THEN.
So you are correct to the extent that some cities might not need particularly elastic supply to cope with the demand levels e.g. the city might not be a very attractive place to live. But there are some VERY unattractive cities, surrounded by flat land, in the UK, and strict growth containment urban planning HAS to be the cause of grossly unaffordable housing there (still of smaller size and lower quality than in affordable cities).
As I have been repeatedly pointing out, growth containment urban planning has been a global mania every bit as notable as “loose credit” . In every city with unaffordable housing, it will be found that a new generation of urban planners have attitudes that it is their job to “save the planet”. This is a total contrast to the older generation of urban planners, who actually were devoted to increasing the supply of urban land via automobile based development, to reduce “economic rent” (i.e. zero sum wealth transfers), democratise property ownership, improve public health, and give the young a fair go.
Ironically, “planning schools” and “specialist” planning courses at universities are responsible for the anti-growth mania; these institutions were entirely set up by environmentalist advocates doing an academic “end run” around the existing schools of architecture, engineering, and economics which actually taught facts derived from objective reality; and from whose graduates local government “planning” staff HAD been drawn.