Banker makes housing sense!

Today, the ANZ Bank’s CEO of Australian operations, Phil Chronican, gave a superb speech on the state of the Australian housing market to the American Chamber of Commerce in Australia (AmCham). In his speech, Mr Chronican touched on a number of important issues, including: inadequate housing supply; negative gearing; housing’s poor investment fundamentals; and the folly of using demand-side policies to improve housing affordability.

Of course there are some significant ommissions from the speech too, including the role of easy credit in inflating Australian home values, as well as an absence of discussion on risks facing the Australian economy and housing market, such as a hard landing in China or GFC 2.0. But overall, it’s a well-balanced speech that is free from spin and bank propaganda.

Below is an extract of Mr Chronican’s speech, separated-out by sub-headings that I have added. I have also included some commentary and data for extra context.


Today I’d like to share a few of my own thoughts to the discussion about what we’re seeing in the Australian housing market and why… and what we might see in year ahead…

Australian house prices have risen significantly over the last 30 years, well in excess of either inflation or incomes growth…

In recent times, we’ve seen price growth ease in 2010 and flatten in 2011 and in the last quarter marginally decline…

This has been the result of a range of things including:

  • The removal of the first home owners grant
  • Rising interest rates
  • A re-tightening of foreign investment rules; and
  • Slowing population growth – with a near halving of net-overseas migration.

Prices, which are still very high in a historical sense, are also having an impact, particularly on affordability for new buyers.

We’re seeing this play out in reduced demand such as lower auction clearance rates.

This decline in demand is impacting the banks too with credit growth for housing at rates lower than we have seen for 30 years…

In the current environment, people and businesses are lending less and saving more.

We’re also likely to see further increases in interest rates in the coming months, as the RBA looks to manage rising inflationary pressures in the economy…

It is house prices that remain the flashpoint in the market.

Housing affordability:

The Economist magazine sparked enormous debate recently by publishing the results of a survey that estimated Australian houses are ”overvalued” by 56 per cent – the highest in the world.

It did so using a historical ratio of rents to house prices. This put Australian housing comfortably above the second-highest, that of Hong Kong.

The survey result was contentious as everybody has a different view of what constitutes the appropriate benchmark. Measuring by rental yields assesses housing as an investment, measuring against incomes looks to affordability or you can simply look at the price of a similar piece of real estate in two locations and compare.

However, looking at where average house prices have gone over the last 25 years – from $100,000 to above well above $500,000, its reasonable to say prices are high.

The question of affordability is a little more complex as you need to take into account not just prices but interest rates and incomes.
Some argue that the decline in interest rates somehow offsets the higher prices, although this relies on a convenient start date for the comparison.

However if you look at the last twenty or so years we have seen incomes rise and interest rates fall. This means the average person’s effective purchasing power is much greater than it was.

Trying to justify house prices by looking at incomes, affordability – however you choose to measure it – and relative yields seems to me to miss a large element of the debate.

After last year’s infamous investor presentation by CBA, which misinterpreted Australia’s house-price-to-income ratio and painted an overly rosy picture of the Australian housing market, as well as previous reports by the ANZ claiming that Australian house prices are not overvalued, it’s nice to hear Mr Chronican admit that home prices are high.

Back to the article.

Supply-side squeeze:

If we were discussing car prices or the price of plasma TVs we wouldn’t be seeking to rationalise price increases as being due to interest rate falls!
The missing part of the house price equation is the supply side.

For all intents and purposes, a house is a consumer good.

Everything in a house, including the materials and labour embedded in it, are tradable commodities.

As such, there’s no reason why they should cost anymore in Australia than they do elsewhere, for anything other than short periods.

Of course you need somewhere to put a house, so it is the value of residential land that is the only real driver of house price differentials.

Prices for inner-city residential apartments in Australia look similar to those in Hong Kong and Singapore. Does that mean we face the same issues regarding the supply of land for housing?

Obviously when you look at Australian cities, there are far greater opportunities available for medium to high density living in inner-city areas or for lower density living on available land on city fringes than there are in Hong Kong or Singapore.

People are paying a price for land that is many multiples of its alternative use and many multiples of what people in the US and Europe are paying for residential land in similar sized cities.

Absolutely. Australia’s rationed land supply is a key reason why Australia has topped the latest Demographia International Housing Affordability Survey, holding 9 of the 20 most unaffordable housing markets out of the six countries surveyed (see below chart).

It also explains why Australian fringe land prices have risen so strongly at the same time as block sizes have shrunk in size (see below chart).

And residential land values to GDP have risen so strongly:

Back to the article.

To an economist – and as you know that’s where I started out so you’ll have to forgive my indulgence – the issue is obvious: constraints on the supply-side have artificially steepened the supply curve for residential housing which has meant that as demand has increased it has been directly translated into price increases rather than additional supply.

In most industries, if demand increases, supply responds. Again using the car industry, if demand for new cars increases, car manufacturers supply more cars for sale and prices remain relatively stable.

In housing, we don’t see the same response in terms of demand bringing on an adequate level of supply.

In fact, under the status quo, the Australian housing market is clearly losing the battle to keep demand and supply in check.

The supply of housing will become even more critical in the coming years as Australia lifts its intake of skilled migrants to help fill shortages in the labour market in order to support our growing economy – as was foreshadowed in the recent Federal Budget.

Responsibility for many of the controls relating to the supply of residential land and housing rests with governments at the federal, state and local levels. They include:

  • Land release and zoning
  • Planning and building approval processes
  • Infrastructure planning and costs, including development levies
  • Existing transport infrastructure

The Productivity Commission Inquiry on First Home Ownership in 2003-04 found governments have an important role to play in facilitating efficient housing outcomes.

And we’ve seen what can happen when they get it wrong in the case of the first home owners grant. In practice, these grants were capitalised against house prices so quickly they didn’t so much benefit first home buyers but rather people selling to first home buyers.

We saw last month the Federal Government launch its National Urban Policy – Our Cities, Our Future – which put supply issues and affordability issues under the spotlight…

For housing at the lower end of the market, on the fringes of metropolitan areas, infrastructure planning and costs have been a major disincentive to build new housing.

Public transport from outer suburbs in most Australian cities is generally of fairly low quality, limiting the distance which people can productively live from the city centres

[And] large proportions of the costs of new houses are absorbed by local, state and federal government taxes and charges. This lowers the return on investment for developers and creates greater risk for their projects.

The supply of housing is further influenced by the large proportion of government revenue that is based on property values. For example:

  • Capital gains tax at the federal level
  • Stamp duties at the state level
  • Property rates at the local level

As such there is a financial disincentive for governments to make major changes.

As a result of these kinds of issues, we’ve seen the level of new building approvals trail off since 2006.

If we’re going to continue to be a stable, growing country and we don’t want housing to become more unaffordable, the supply side issues need to be addressed.

We have seen increases in land being released in some cities, such as Melbourne in the last 12 months, which is encouraging – however more needs to be done.

We need reform back on the agenda to address supply side issues – I’ll come back to this point later on.

Certainly, the responsiveness of Australia’s housing supply to booming demand has been disappointing. Over the past decade, new housing construction has more or less flat-lined in most states despite rapidly rising prices. The exceptions are New South Wales, where construction levels have been falling, and Victoria, where construction levels bounced from 2008 (see below chart).

In a well-functioning housing market that was free of supply constraints, construction levels would have risen strongly after prices began rising in 1998.

Back to the article.

Poor investment fundamentals:

I want to now talk about housing as a national obsession and, perhaps controversially, lift the veil on it as an investment.

Australian’s have a strong affinity with property as an investment… as well as a place to eat and sleep.

As a nation, we hold a significant proportion of our wealth in property. Of total household wealth in Australia, we hold around 60% in real estate. [Whereas] in the US they hold around 25%.

There’s no doubt the capital gains made by most people buying, selling or investing in property over the last 15 to 20 years has added a new dimension to the Great Aussie Dream. It has created an unsustainable perception of housing as an attractive investment vehicle.

As humans, we are innately emotional beings. As such, our investments decisions are not always completely rational.

So let’s take a clinical look at the merits of property as an investment option.

On the whole, any investment should be judged by the total cost versus the total expected return and the risks involved.

With housing you have:

  • Significant upfront costs relative to other investments, such as stamp duty, other state fees and legal costs.
  • The cost of capital improvements and maintenance.
  • Risks in terms of what happens around your property such as being built out or re-zoned. You could look at this as being the lack of diversification achievable in housing as opposed to financial assets.
  • Risks in terms of market movements in prices and interest rates.
  • Rental yields at roughly 3.5% gross, before outgoings, depreciation and any periods without tenants. Plus the costs and inconvenience of finding tenants and collecting the rents on time.
  • And when you come to sell you have costs such as advertising and agents’ commissions plus the uncertainty of not knowing how long it will take to sell. In some parts of Australia houses are remaining on the market for six to nine months on average.

The only way you could make sense of housing as an investment is if the capital gains were sufficiently material to offset these disadvantages.
While I expect prices to hold at near current levels, and later continue to rise in line with growth in incomes, we’re not likely to see them double and re-double any time soon.

The major structural changes that occurred in the 1990s, such as the RBA’s more assertive management of inflation and interest rates and the explosion in our access to credit, are not about to be repeated.

So with this in mind, if you compare housing to any other form of investment it looks weak on most criteria…

Housing does need to be owned by someone, but that doesn’t support an individual having the majority of their net wealth tied up in one or two individual properties.

It is an excessive concentration risk in an investment with poor income returns and high transaction costs – particularly in the slower growth environment we are now in.

Get it. Housing is currently a very poor investment, offering pathetically low yields, high transaction costs, and little prospect of capital growth. Of course, most of us knew these facts already. But it’s great to get such candor from a bank CEO.

Back to the article.

Future direction:

So where is the market headed?

Much of the more energised commentary has focused on the Australian housing market as a bubble waiting to burst. I do not subscribe to that view.

Housing markets collapse when demand collapses. It is the same steep supply curve working in reverse. The worst affected areas of the US market were those where overbuilding was the greatest. Similarly the most difficult market in Australia is also where oversupply is present.

That is not the case for Australia’s capital city housing markets. Continued population growth – including the current lower rates of net immigration – means we continue to have strong demand for new housing.

I don’t entirely agree with Mr Chronican on these points. Unresponsive housing supply makes home prices more volatile, resulting in boom/bust cycles as demand rises and then falls. This relationship is clearly evident in the UK housing market, which has experienced four asset boom/busts over the past 40 years as a result of its highly restricted supply (see below chart). The rate of new home construction in the UK has also been well below that of Australia.

Home prices in supply-restricted California, which has also experienced lower rates of home construction than Australia, have also been highly volatile:

The point is, although Australia’s unresponsive housing supply explains part of the run-up in Australian home prices, should demand ever fall, say through a contraction of credit (credit shock) or a sharp fall in commodity prices (income shock), then home prices would likely drop sharply.

Mr Chronican seems to believe that housing demand will stay elevated indefinitely on the back of continued solid population growth. How realistic is this? Sure, Australia hasn’t experienced a technical recession in 20 years, but we have experienced several shocks that, in the absence of demand-side stimulus, would have made the history of Australian house prices look much more like the UK. Mr Chronican’s already noted skepticism of these measures is part of a broadening recognition that such schemes should stop. If that’s the case, and the FHOG doesn’t return, the next shock will be telling.

Back to the article.

For the first time in more than 40 years, we have seen the number of people per household in Australia increase over the last two years. Years of smaller families, children leaving home, retirees living longer and sometimes alone for long periods, family breakdown – are now being reversed as subdued supply and the affordability limits of high prices finally bite.

The weakness in prices is likely to continue. If interest rates continue to rise and the price of other essential services rise, we are likely to be in for a sustained period of low house price growth as a function of affordability, but with latent demand ready to pounce if prices come back to more reasonable levels.

What does all this mean for home buyers?

It means they need to assess housing on its merits. They need to ask themselves:

  • Is it where I want to live?Will I be happy with it for seven to 10 years?
  • Can I afford it?
  • If there were no capital gains for the foreseeable future would I still be happy to buy it rather than rent?

For investors it means they need to rationally assess questions such as:

  • Is the yield really sensible?
  • Will the negative carry – if there is one – be worth it?
  • What sort of capital gain do I need to achieve to make sense of the investment after all the costs?
  • Is this realistic in the new economic paradigm?

And for banks it means there is even more need for a disciplined approach to managing risks:

  • Are our lending practices as prudent as they should be?
  • If we can’t rely on capital gains to cover high loan-to-value-ratios will the loans look as good?
  • Are investors really able to withstand extended periods of negative cash flows?

Solutions for housing affordability:

Before I close, I want to comeback to the supply side issues in the housing market and my comments about the need to get reform back on the agenda.
Most people would agree that issues concerning affordability have got to a point that letting market forces attend to them is not going to work. In fact it would lead us into a worse position.

What we need is a real, ideally shared, political commitment for reform and the discipline to see a long term plan through to completion. A broader public discussion about the issues should underpin this.

As part of this plan we need to look at:

  • How we free up more affordable land and housing on our urban fringes for first time buyers supported by public infrastructure which supports communities and broader urban planning objectives, including social demands for more public space.
  • How we encourage medium and high density development in areas where demand is high and existing infrastructure can support further development.

We also need to refrain from pursuing short-term policies that add to demand side pressures. If we really want to help people into homes, we need to address the supply side issues, not add to the demand pressures that drive prices up.

And governments might want to look at whether the current extent of negative gearing tax breaks are fostering an unhealthy focus on housing as an investment, thereby compounding the affordability issues.

There’s no lack of challenges in the Australian housing market – be it high prices, slowing growth, affordability or what the future may hold.
And as such a central piece in our economy and way of life, the housing market and these challenges will have an influence on us all in some shape or form.

The good news is that we are facing these challenges at a convenient time, when the fundamentals of the economy are strong and supportive and there is every prospect of benign and subdued conditions ahead rather than a crash.

The benign and subdued economic conditions that Mr Chronican alludes to would require uninterrupted growth in China, Australia’s commodity prices to remain near record highs, and the global economy to avoid another financial crisis. That’s a leap-of-faith in my view.

  • However if we don’t address the structural issues now, we could face a very different outcome in the face of the next major economic downturn.
    We have seen in the US and UK what can happen when demand falls sharply and excess supply becomes evident…
  • While I am not a subscriber to the “inevitable crash” hypothesis, I do feel that we need to:
  • Take a mature attitude to the state of the housing market
  • Ask the question of what’s really in our best interests; and
  • Remember that the primary purpose of a house is as a place to live in and raise your family, not a speculative investment

Despite some minor points of difference, these are refreshing words from one of Australia’s leading bankers.

Cheers Leith

[email protected]


  1. Wasted Opportunities

    I think macrobusiness has probably had a strong role in swaying the consensus of the bankers. Leith’s MSM appearances such as in business spectator have been particularly compelling. Well done all.

  2. This is encouraging…..

    One could be even more blunt in stating clearly that people should not be required to pay any more than 3 times their annual gross household income to house themselves, with mortgage loads of 2.5 times.

    There is nothing at all clever about loading households up with grossly excessive mortgage debt at 5, 7, 9 and through to where California got at 11 times, before it crashed, triggering the Global Financial Crisis.

    Its not the road to wealth creation, but instead is an unnecessary debt sodden road to poverty.

    The Banks have a responsibility to the wider public, to inform people of the risks and consequences of these unnecessary housing bubbles.

    Mr Chronican of the ANZ is to be applauded for his responsible contribution to this important issue.

    • Hugh I agree in essence, however!

      “Mr Chronican of the ANZ is to be applauded for his responsible contribution to this important issue.”

      Mr Chronican’s appearance at various well publicised speaking/interview engagements is in my view MORE SPIN.

      It only reflects the reality of the situation a little more than the previous head in sand approach.

      This is without doubt ANZ approved ‘logic’ and at the highest level I expect.

      The idea that housing prices will only go up remains imbued in the messages.

  3. This may sound stupid but after reading the above article and commentary I thought it reflected the common sense view a lot of people I know hold.

    A further investment property driver that I never see highlighted is that the onerous requirements on financial planners in terms of issuing advice. Financial planners dole out ‘financial advice’ but because their compliance requirements are extensive they resort to what they know, or what is easy to recommend. Open template, recommend property, save. The same goes for people who listen to their accountant.

    • I think Dominic it is a little misguided about the role of a professional FP in recommending property. I think the most damage done is by so called professions that do not have the onerous compliance such as Real estate salesmen and so called Investment Companies.They are successful salesmen because of the lack of financial knowledge of the average punter. TO you the above may be common sense but the average joe has no idea. Most people understand bricks and mortar and are easily sold the lie that it is safe as houses and never goes down.
      As a fp myself I let clients know the pros and cons of all investment classes. In speaking with a client recently they wanted to know about property investment. I pretty much summed up the pros & cons as indicated in the article, particularly, the high debt levels, the high transaction costs, lack of diversification and lack of liquidity. The clients had worked hard to pay down there mortgage to a low level. I asked them were they willing to take on a new $300,000 loan after working hard to reduce the loan on their principal residence. They did not have much of an understanding of property and is was clearly the wrong choice for their situation. I’m not saying that property is always a poor or wrong investment it is not the right choice for many.
      Gets back to our requirements as FP’s with respect to know you client rule and reasonable basis for advice. Maybe Dominic was burnt by a dodgey company that claimed to be FP’s. They were just cheap salemen by the sounds of it.

      • I had cause to research the Financial Planners qualification as required by the regulating body.

        A 6 month off campus part time TAFE course. And once qualified and working with accounting firms demanding.

        $400 per hour.

        Sounds unbelieveable but its fact.

        • I’ll agree with you Tonydd
          It is a joke how little qualification you can have and call yourself a FP. I myself have 8 years of Tertiary Education (full and part time)nearly a Masters Degree in Applied Finance majoring in FP and will look to do a CFP when my experience is up. Some dealer groups are putting in place higher education standards, ie min uni degree which will wean out the cowboys and ensure the industry gets a better rep

    • Dominic,

      Let me assure you that VERY few financial planners out there are in a position to recommend direct property investments, The wealth industry generates revenue from selling financial products, not real-estate! (which is a whole other issue I know.)

      Let me give you a real life (seriously just last week!) example.

      BB meets with client to discuss various FP issues, SMSF’s, tax planning etc. Client was quite conservative in nature, excellent home/business cash management (i.e. a week by week full budget).

      After spending some time optimising super contributions, business income & trust distributions we explored the idea of her adding to the property portfolio as they felt in the current market they might pick up a barging (client’s words) They have a home with a small mortgage and a small investment unit around $300K also with debt but is almost cash flow neutral.

      Their intention was to find a similar property around the 300K mark that she could get a good rent for and worst case scenario would not cost her a great deal to hold if growth was subpar. I supported the course of action and happily offered to run the cash flows for anything they found so we could answer those very questions in the article! i.e. what does this thing need to grow at to justify the purchase.

      4 weeks later I receive a call from said client, in her travels searching for a property they came across a “specialist investment group”. They attended multiple meetings in which this group explained the benefits of new properties among other things (and I’m sure it included the real estate classics of property never falling, better than shares, this is how you own 50 properties in 10 years etc etc.)

      The result…… This previously conservative client has now purchased 3x $450K new properties from this firm (using home equity of course), and apparently there numbers indicate the weekly cash flow cost to be only $500 (this client is not a top marginal tax payer by any means) Why such a turn around you ask “now is the time to be aggressive” (direct quote).
      So there you go mate, the classic 01 example of how the average mum and dad falls for the property dream…. and all organised by an “investment adviser” that will make at least $40,000 in commission from this deal without a single shred of legal liability for its outcomes (UNLIKE) a financial planner.

      • BB I have seen this many many times. every time this happens I ask the clients to get in writing from the sales man what % they are making and a copy of the accounts of the company premoting. the company refuses and i have my clients worded up to reply that they are a reporting entity if a “user” requests accounts. They normally weasel their way out of declaring how much they are making and I then use this to go back to client saying with info already gathered on these parasites showing a $400,000 new build = $15,000 payment to referrer. I would be suggesting that in the scenario mentioned they would have made $55k from your clients, all for 8 hours work … not a bad hourly rate with no disclosures
        it makes my blood boil

      • Another Great example of Boganomics !!!
        Essentially people are GREEDY !!!! BTW I used to work in casino’s before becoming a FP.
        They want to believe the dream that they can become rich through property investment. All they will get is a massive amount of DEBT!!!!
        Wait til one of them is off work sick for an extended time or an adverse event happen and they have to liquidate their assets.
        They will then blame it on BAD LUCK!!!!
        Well all say to them in advance is it is your own fault you didn’t listen to your professional fp or use any common sense. GREED IS GOOD!!!!

  4. One policy that tends to ramp up the cost of new housing are the various levies and charges that are imposed on the development of new lots. Sometimes these costs can be more than $100K

    While I have no issue with the concept of user pays and that the person benefiting from the services available to the lot should contribute to the majority of their costs there is no particular reason it needs to be by a single lump payment up front that the purchasers must cover with a larger mortgage.

    The cost of providing the services to a particular lot could be paid by the government/local council and then recouped by higher quarterly rates on the lot for a period of 20 years.

    Liability for paying the high rates is attached to the title of the property.

    It would not be difficult to offer a pay up front option if a purchaser wished to buy the lot and not pay higher rates for 20 years, but I think many first home buyers might prefer to get in a new home with a lower mortgage and then pay for the services component of the property over 20 years as their income level rises.

    What then is the difference between the home owner borrowing the money to pay for the services and the government, who presumably would issue bonds to pay, the lower borrowing costs available to the government.

    This lot levy time payment approach would avoid the problem that purchasers of ‘existing’ dwelling often avoid any contribution to lot levies simply because the lot was developed at an earlier time before ‘user pays’ principles applied.

    Of course there is always the option of just getting rid of lot levies altogether but I think there is a substantial case for arguing that the cost of developing land should be reflected in the purchase price or rates attached to the property.

    • Alex Heyworth

      The contrary perspective would be that buyers of newly developed blocks are not getting any more in terms of amenity and services than occupiers of established properties. So why should they pay more?

      It is in the long term interest of the community as a whole that new housing be made available at affordable prices.

      • The occupiers of established properties were lucky and managed to get everyone to contribute to the cost of their services. But that is not a good reason against having people in future pay for services they are getting the benefit of.

        In principle I can see no reason you could not retrospectively seek to have the owners of existing dwellings pay for the services if they got them for free but I suspect that politically that might be a bridge too far.

        Completely agree that it is in the interests of the whole community that housing be delivered efficiently and at the lowest possible price.

        Though simply socialising all the costs of services for new blocks of lands is more likely to lead to mal-investment, higher service costs and higher housing costs.

        • Alex Heyworth

          Nobody is saying that the cost of services to new block owners should be subsidized. Those services are paid for through council rates, water and gas supply charges etc. What the charges to developers do is get the developer (and indirectly the new home buyer) to pay for the cost of providing the infrastructure, which the council then owns and charges rates for the new home owner to use. It’s as if I demanded that my tenants paid for the water heater before they could use it, then charged them for the hot water.

      • Previously utility suppliers provided the infrastructure power water and sewer, and that cost was amortised across the whole market.

        With privatisied utility companies this will be far less likely.

        • LandDeveloper

          Not necessarily. Take for example UC’s favourite compartor state of Texas. In Texas many utilities (especially communications providers) actually “bid” or tender to install the necessary infrastructure to new land developers on the basis that they get X-hundred new subscribers. This greatly reduces the cost to the developer and hence the price to the home buyer. In AU Telstra partly subsidise their “Velocity” service which is fibre-to-the-home and they recover the subsidy costs through subscriptions.
          More utility competition may help afforability. At the moment we have to pay whatever the quasi government-corporate utility tells us to pay or you simply don’t get a water service or sewer service or power service….

  5. And in Auckland this morn , we have ” …Auckland’s largest real estate agency group, says house prices fell …in May versus both April and May last year as sales volumes increased….The real estate agency said May’s average price .. was down … 2.8%, on April’s … and 2.5% below the May 2010 average.” Followed by : “The trend for building consents for new homes hit another record low in April…Stats NZ’s trend series for new homes authorised has fallen nearly one-third since April 2010, to the lowest level since the series began in 1982…”
    So we have lower sales prices coupled to an increasing turnover of established houses, all into the teeth of a construction slow down. Looks like the “end of the beginning’ to me!

  6. The debate over the role of housing in our society is now becoming mainstream…there now is some hope the govt distortions of the market, negative gearing and FHBG will be reviewed and then removed.

  7. Like the drug addict who finally admits that someone else has a problem, PC is only half way there. Not until these guys aka banksters, publicly admit to their own addiction will any voluntary solution be possible.

    PC is one of the leaders who can say NO!

    • Come on Deep T, Credit where credit is due.
      I am usually vicious when it comes to banksters. But in this case, short of a full confession and shooting his employer’s brain’s out, PC has been refreshingly honest.

    • The_Mainlander

      Damn, and I thought DT was an Economist for the ANZ in the press recently!


  8. “In a well-functioning housing market that was free of supply constraints, construction levels would have risen strongly after prices began rising in 1998.”

    This point has be made many times on this site. I’d like to clarify whether you are making in purely economics terms, and if so how do you separate the economics of unfetted supply with the social negatives or such a policy (real or imagined).

    Modern cars would be much cheaper if they didn’t have to adhere to safety and pollution standards, but I don’t think that would be socially (and probably economically) acceptable.

  9. I think Mr Chronican did well on a number of fronts including supply side constraints and explaining the risks in housing investment. The two things conspicuously absent were any discussion of house prices being linked to the availability of credit, and the subsequent effect of Australia’s massive private debt on our economy. As Leith pointed out, the UK has seen several boom bust cycles despite having a very high population density & consequent demand for housing. You borrow today what you would have spent tomorrow, then wait a few years before you can borrow again. A perfect formula for an economic sine wave – boom/bust. We are now just on the descending side of the highest positive wave in many years.

  10. PFH007 – Your comments above are most helpful.

    This is why the focus of researchers / economists should be on the Texas market, with its (a) open land policies (b) Municipal Utility District bond financed infrastructure model and (c) sensible Mortgage Consumer Protection legislation.

    Housing overall in Texas is about 2.5 times gross annual household incomes and around 6 in Australia. Just go and have a look at the Houston Association of Realtors Monthly Reports by clicking on “Homes for Sale” and you will find these down the right of the screen.

    Those who own the infrastructure should be reponsible for its financing – then charge fees / rates for its use. The way its down currently in New Zealand and Australia is hugely inefficient. The home owner cops the capital costs of the infrastructure, plus subdividers and builders margins.

    This whole housing affordability / bubble stuff really is a nonsense.

    Bill Levitt, the father of the modern production residential construction industry figured out how to supply $US8,000 new homes for families on $US3,800 – 2.1 times annual househiold earnings – some 60 years ago.

    There is no mystery at all about how to supply affordable housing. The real problem is that too many have simply forgotten history and lack the wit to research normal and affordable markets.

    • Or is the real problem, that State and local governments, rely on the income from the current system. Even if it was thoroughly researched, presented and spelt out in bold capitals, its going to be tough to change the current system..

    • indeed. There are some very nice homes in great areas in Texas for incredibly good prices. A million dollars in Houston buys you an absolute top class manor in a vibrant city. In Australia a million dollars buys you a run down shack.

  11. Too little too late. Bank’s easy credit and hardly any deposit requirements got everyone into obscene amounts of debt and now there is noone left to borrow – banks are becoming ‘wise’. This has been going for way too long for me to buy the story banks didn’t know what was going on. A lot of bankers cashing in on this ‘assets always go up, borrow as much as you can’ scheme. And what is worse, we in Australia had 3-4 years to analyze what the hell went wrong in the US and rest of the world, but easy debt printing didn’t slow for a second by the banks. Why people like Mr Chronican didn’t come to these conclusions after the US housing crash. Ok, in US the sub-prime loans were the problem. What about after the UK? Or maybe they knew all along but why speak up now? Maybe it is a PR exercise in saving banks image as they realise they could be the main player identified as responsible for the very likely economic downturn. Just ask average American what they think about their banks and Wall Street.

  12. A few words on negative gearing and lending, but not too many. That indicates to me the elephant is still not being seriously looked at.

    Good points about investment returns, but come on, “the explosion of credit” is not going to be repeated? Can Australia even begin to fathom a retrenchment of mortgage credit to levels of decades’ past? Not from what I read in that transcript.

  13. Very clear and insightful speech by Mr. Chronican.

    However, regarding the question of a pottential steep fall on house prices – does Mr Chronican, or any other banking executive for that matter, have the incentive to publicly say prices may fall steeply in the future? I think not. So what are banks thinking ‘in private’? Can we get any indication from their actions? Personally I dont know – but curious if anyone else has thoughts on this?

    Being a young pottential first time homebuyer myself, and an economist to boot, I have a big dilemma. Do I follow the wisdom of crowd – and buy a first home ‘like everybody else’ OR be an economist about the issue, and wait and see what happens in the macro world over 2011/12?

    • I agree. Banks know a lot more than communicated in public. Let’s just talk about the supply side and nobody mention the dirty words ‘easy credit’ and how much that has pushed the demand up.

      As far as buying a property, I am delaying this for a few years and just focusing on living a life and saving. Booking my skiing holiday. Very expensive in Aus, but no debt around my neck so I can afford it. Not buying into poverty lifestyle sold by banks. We work too hard for that. If property always this expensive, well I will never own one – personally not the end of the world.

    • If we can believe the MSM (and its hard to sort spin from fact)…. it appears banks are ramping up their competition for customers in the mortgage market by offering incentives (paying the other banks exit fees) and discounts on the mortgage rates….that doesn’t fit with a more cautious approach to lending.

  14. This is a pure political positioning speech because the ANZ (and all the other banks) know they will be cap in hand at the repo desk very soon when alot of working families are negative equity.

    ANZ knows it will be politically unacceptable for the Government to bail out NG specuvestors at the repo desk whilst large numbers of working poor are spitting vitriol at the Banks, the Government, the NG specuvestors.

    NG specuvestors… You have been warned… The shell game is over, you are about to be slaughtered!

  15. Very few people are thinking through rationally, the options confronting banks and mortgage lenders under conditions of supply-side-driven land price inflation. They are meant to compete with each other and make a profit. They are NOT allowed to COLLUDE. IF they ALL agreed to stiffen lending criteria to avoid a destructive house price bubble – “playing reserve bank”, or “self regulating”, if you like, the “anti-trust” lawsuits would fly thick and fast, wouldn’t they?.

    This whole “blame the capitalists” thing is just a further example of the many in modern economic history that used to get Ayn Rand really ranting. (Read “Capitalism, the Unknown Ideal” at least, if you, like me, can’t stomach her fantacized, “objectivist” stuff). Like anti-trust actions against one business for keeping prices too high, and against another for keeping prices too low. It does indeed invite the paralells Miss Rand made, between the status of Jews in Nazi Germany, and “business men” in the modern “democratic” world.

    The only honourable thing banks CAN do, is shut down altogether. As long as there are still banks “not shut down”, and still “competing”, the problem of house price bubbles will exist wherever there are regulatory-induced supply inelasticities.

  16. Even the role of “derivatives” in the Wall Street mortgage meltdown, is very poorly understood by most.

    Look at it this way. The derivatives were “insurance policies” on mortgage backed securities. The RISK of mortgage default was not “underpriced” by a few alleged experts, quite so much as the fact that there was so much DEMAND for these instruments. There were 100 times as many people taking the “long” side as there were taking the “short” side. So of COURSE they ended up “under-pricing” risk.

    Disaster Insurance would be under-priced, too, if 99% of investors were convinced that “disasters can’t happen”, and therefore mortgage underwriting was a safe investment. The REAL underlying cause of the WHOLE crisis, was this one sentence:
    “House prices can’t fall”.

    If you sneer at Wall Street greed and unreason, yet think yourself, “house prices can’t fall” in your city or country, you are a hypocritical idiot. Especially if the prices in your city or country have doubled relative to incomes within a few years. There is actually very little correlation between the LOOSENESS of credit, and these bubbles. The IRON correlation is between supply inelasticity and price bubbles.

    The simple counter-examples, are “heartland USA” where they had easy credit and no price bubbles; and South Korea where they have always had very tight credit, and volatile cyclical property prices. South Korea DOES have a “planning” system modelled on the British one……

    Between these 2 extreme counter-examples, are numerous highly varied examples through which NO correlation line can be graphed, between “ease of credit” and house price volatility. “Supply inelasticity” IS proving a much better fit, as this is BELATEDLY being examined by the economics mainstream.

    • Alex Heyworth

      Good point about too many people on the long side. The Big Short is a classic read detailing the experiences of those who took the opposite view.

  17. The physical housing supply demand argument is rubbish with zero correlation in the data. This is a specious argument the bankers want the world to believe.

    The credit supply demand is highly correlated in the data to the price of housing.

    The settlement price of most house transactions is up to 95% credit, so the supply demand of credit determines the price of houses.

    I could fly 1600 people to the island of Niue (pop 1600) and instantly double the population of Niue, all of them with a 5% house deposit in their pockets, but unless I fly in one banker with them, the credit money simply does not exist on the island of Niue to change the price of housing despite instant massive new demand.

    • Totally agree. Housing shortages are constantly referred to – Look at the increase in number of houses for sale over the last 12 months and the argument for a shortage of housing just does not stand up.

    • Alex Heyworth

      PETER W and Stacks, it is not so much a shortage of housing as a shortage of housing at an affordable price. Supply side issues (particularly the raft of charges on land development) definitely have something to do with that. Although I agree that easy credit made it easier for these charges to be inflated.

      • Alex Heyworth, if there is no shortage of housing, but there is a shortage of affordable housing this says to me that the problem is housing is over valued and unaffordable.

        Im not convinced on the continual supply side reasoning given the increase and resulting additional housing stock for sale. Pretty simplistic view, but makes no sense to say there is a shortage of affordable housing when there has been a massive increase in for sale stock – To me this seems this indicates the problem is this stock is too expensive.

        I guess my biggest problem reconciling this shortage argument is (from what Ive seen and please let me know if peoples experiences are different) I havent seen too many examples of people having to live rough or in caravans because there are NO houses available.

        I have however seen these things happen due to people not being able to afford a home. This to me is a massive distinction.

        The affordability problem is not a shortage of housing, or even a shortage of affordable housing, there must be enough houses, it is that current housing is too expensive

        • Stacks. You have missed the point. When housing supply is unable to respond quickly to increases in demand, the extra demand feeds directly into higher home prices rather than increased new home construction. This increase in prices and perceived housing shortages then pulls in the speculators and first-time buyers who seek to purchase before prices rise further and they miss out.

          It’s a positive feedback loop on the way up, but also on the way down as well. Hence, my argument (backed-up with evidence) that unresponsive supply leads to increased house price volatility and boom/bust cycles.

          Whether you believe that there is a physical shortage or not is irrelevant. Just the perception of shortages due to the lack of a supply response is enough to trigger a housing bubble, provided credit is also freely available.

          • I understand your point and fully agree that the slow response to increased demand has definitely contributed to the (perception of) housing shortage our current high prices.

            And as you say ” Just the perception of shortages due to the lack of a supply response is enough to trigger a housing bubble”

            Which has been done.

            However I think we have moved on from this dynamic and are at the point where this perception of supply shortage should not be part of the argument any longer.

            Just my thoughts (not backed up with any evidence)

          • Spot on Stacks. Once the perception of shortages fades, prices can then collapse and ‘surplus’ stock suddenly appears on the market. This is what happened in many of the supply-restricted states of the USA, Ireland and Spain. That’s why unresponsive supply makes home prices very volatile and prone to boom/bust cycles.

            The exception in Australia, in my view, is Sydney which likely does have a genuine housing shortage due to decades of supply-constraints (both geographical and regulatory) and anemic construction.

    • Peter W – Go check out Atlanta Georgia where housing is currently 2.3 times annual household earnings and had been 2.1 as the Demographia Surveys illustrate.

      Instead of bubbling it overbuilt, because of liberal lending there.

      In contrast – Texas with open land markets, but sensible Mortgage Consumer Protection legislation did not bubble or overbuild.

      Scarcity or percieved scarcity is the trigger for housing bubbles – finance is simply the fuel.

      • “Scarcity or percieved scarcity is the trigger for housing bubbles – finance is simply the fuel.”

        This is well put. Do we have examples of an area with tight credit conditions and tight supply side constraints that has experienced a speculative bubble? No fuel, no fire, no? Honest question because I don’t know of any. Maybe Austin TX?

        You cite Atlanta. Their “bubble” was overbuilding. The massive advantage here is that someone not wanting to take on large debt loads and wanting to own could do so comfortably. That’s certainly a good advantage because, coming from Vancouver BC area, many firms are seeing high-skilled applicants turn away due to high housing prices. High prices should be a result of, not a reason for, a strong economy.

        • “Do we have examples of an area with tight credit conditions and tight supply side constraints that has experienced a speculative bubble?”

          Yes, South Korea. I already said this.

          I will post links to articles and papers later in the thread.

        • G’day Jesse. The UK had two bubbles in the 1970s – a large one in the early 1970s and a smaller one in the late 1970s (click to view chart). Both occured before the UK financial market was deregulated under Thatcher in the 1980s and before credit was ‘loose’.

          Easy credit just makes bubbles a whole lot worse when supply is constrained. Hence the bigger bubbles in the UK in the late 1980s and the 2000s.

    • Peter W, you contradicted me totally without any backup evidence. You are totally wrong. There is no correlation between “ease of credit” and house price inflation, otherwise South Korea would NOT have house price inflation and Georgia, USA, WOULD.

      I repeat my last sentence:

      Between these 2 extreme counter-examples, are numerous highly varied examples through which NO correlation line can be graphed, between “ease of credit” and house price volatility. “Supply inelasticity” IS proving a much better fit, as this is BELATEDLY being examined by the economics mainstream.

      Deal with the point, please; don’t just make an opposite statement that is unsupported by the facts. Deal with how South Korea has house price volatility under conditions of extremely strict credit, and Georgia, USA, has extremely loose credit and no house price inflation. I am waiting.

  18. Everyone I know who owns property is relaxed and comfortable. Everyone I know who doesn’t own property is in a state of perpetual anxiety. I know where I would prefer to be.

  19. “Do we have examples of an area with tight credit conditions and tight supply side constraints that has experienced a speculative bubble?”

    Yes, South Korea. I already said this.

    One of the things I have noticed recently, is that Korea has always had very strict “downpayment” criteria – 50% recently, even higher in the past; yet they have been having house price bubbles and economic crises ever since the 1980’s.

    I haven’t had time to do a lot of research on this, but try the following:

    The government tweaks mortgage loan-to-value requirement ratios from 50% to 60% and back, according to boom/bust conditions, and they STILL have volatile property price trends……..

    The following is huge, but extremely valuable, I know of no other work like it. There is a chapter on Korea as well as Japan and other Asian countries.

    This 1993 paper on Korea was already fairly damning: the title says it all:

    Kim, Mills and Hannah: “Land Use Controls and Housing Prices in Korea”

    Back then, even under conditions of 90% down payment, median multiples in Seoul had gone as high as 15 by some measures. National savings ballooned as young Koreans worked their butts off saving money and delaying marriage, chasing a rising target house price.

    • Thanks Phil (and Leith above). I’d add there can be asset bubbles when incomes are growing quickly or if there are sudden population increases. I think that’s one consideration. The Aveline and Li paper shows house prices and rents increasing in tandem, so while house prices did fluctuate so too did rents. This is an example of true supply distortions that caused an increase in living expenses for both owners and renters alike. That is not necessarily the same problem as what the developed world has recently faced.

      In Vancouver Canada, where I am, rents and incomes are simply not tracking prices. Now in Calgary Canada, there has been a large runup in prices but at the same time incomes have increased faster due to a booming oil and gas industry, so in terms of price-income ratios it’s not as overvalued (though still overvalued by the price-income measure).

      The big red flag, in my view, is when incomes and rents are not increasing along with house prices. I too haven’t run the numbers on Korea but from a cursory glance, fluctuating rents can explain some of the price fluctuations.

  20. UE to further this there is real evidence with your argument about Sydney.
    The home prices have dropped the least in Sydney compared to the rest of the country. Say no more!!!!

  21. UE to further this there is real evidence with your argument about Sydney.
    The home prices have dropped the least in Sydney compared to the rest of the country. Say no more!!!!

  22. Yeah the shortage arguement…

    So the ever growing shortage is why prices are down -9.0% – 0% and -2.0% Australia wide???


    Prices are down because there is $55 billion of new credit money created this year vs $80 – 90 billion over the past few years.

    Less new credit money = lower prices
    More new credit money = higher prices

    New credit money = price

    • You are not making a lot of sense???

      When a product is abundant price equals cost of production. When a product is scarce price is the buying power of the strongest loser.

      Therefore the shortage explains why price is determined by credit/buying power.

      The shortage can worsen and more people miss-out. But if credit is tighter then price can still fall. What is more important? Low prices, or decent housing for all?

    • Peter W. Constraints on housing supply steepen the supply curve. This makes housing prices far more sensitive to changes in demand, making home prices both more volatile and prone to boom/bust cycles as demand rises and then falls.

      Like you, I was initially sceptical of the supply-side argument and believed that credit was the main driver of house prices. While it is certainly an important factor, credit has only a limited impact on pricing where supply is highly responsive, as any extra credit demand feeds into new construction instead of higher prices.

      Looking at only the demand side of the housing equation and ignoring supply is about as helpful as eating Chinese food with only one chopstick.

      • UE, I don’t agree… ‘responsive or unresponsive supply’ is the is only a derivative of the underlying arguement/problem.

        The main game with housing is that 60% of all monetary measured national wealth is housing and to transact this asset it overwhelmingly requires the creation of NEW credit (NEW credit = increase in new credit outstanding minus existing credit extinguished by the new credit created = balance of newly created credit = NEW credit money created)

        The creation +/- of physical housing is totally overwhelmed by the national desire/psyche to create increasing debt thus creating increasing deposits which somehow equates to increasing psychic feeling of wealth.

        Nationally, in aggregate, we have been creating an unprecidented quantity of money…. FULL STOP

        I occcurs due to something like this logic… ‘Theoretically, I can sell my house for $500,000 so I will borrow $500,000 and buy an investment yielding 2%, with debt costing 7.5%, and in 7 – 10 years my asssets will have increased from $1,000,000 to $2,000,000’

        If NEW credit creation growth is 7 – 10% p.a. due to this belief then the asset price will follow.

        The asset price is totally liked to the creation of the credit money.

  23. Chronican eludes to ‘investor credit’, i.e. negative gearing not making much sence for most people…

    If new investor credit follows Chronicans advice i.e. to zero, total annual new credit will only be (owner occupiers) $40 – 45 billion. Roughly a 50% fall in new credit money c/w the past few years.

    The aggregate price will fall by a similar amount.

    Oh, and for the record, there will still be a shortage of houses just like the example of the 1600 new arrivals who flew in to the island of Nuie with a deposit and doubled the islands housing demand.

    The proof is in the price B21, and credit D02, data at the RBA.

    The banksters just don’t want people to know this.

    If banksters, mortgages and credit money did not exist, houses would change hands as a percentage of total deposit money.