When demand ain’t what it used to be

By Leith van Onselen

‘Underlying demand’ (or ‘pent-up’ demand) is the common methodology used in calculating whether there is a housing shortage. Put simply, underlying demand estimates what the demand for newly-built housing might be given the growth in population, trends in household size, demand for second (or holiday) homes, and economic conditions (e.g. employment, interest rates, etc). Underlying demand differs from ‘effective (actual) demand’, which is the quantity that owner-occupiers, investors and renters are actually able and willing to buy or rent in the housing market.

In the lead-up to the US housing bust, underlying demand was running strong. Unemployment was low, the US economy was motoring along, credit was readily available, and a record 1.7 million households were formed in 2005 – 500,000 more than the long-run average of 1.2 million household formations per year.

The surge in household formations led to numerous suggestions that the US was facing a housing shortgage, especially in areas where strict land-use regulations were in effect, such as California.

The rest is history. The US housing bubble popped, the economy tanked, and the rate of household formation fell to around half the long-run average (see below chart), leaving a vast oversupply of homes, even in supply-restricted markets like coastal California.

Five years after the bubble burst in the US, rates of household formation finally appear to be returning to long-run norms, with 1.15 million households added in the US in the year to September. From the Wall Street Journal:

Americans are setting up house at the fastest rate in more than six years, an indication that recession anxiety, which prompted adult children to move in with their parents and single people to postpone marriage, is starting to ease.

The nation added 1.15 million households in the 12 months that ended in September, according to the most recent Census Bureau data. That is a significant rise from the past four years when an average of 650,000 households were formed annually…

Rising household formation, which is tied to employment growth, means more students are finding jobs when they leave college, more adult children are leaving their parents’ homes and more couples feel confident enough about the future to tie the knot. It could also mean that immigration is picking up…

“In the depths of the recession, three households would turn into one.…We’ve been waiting for this unbundling to happen,” said Ara Hovnanian, chief executive of Hovnanian Enterprises Inc., one of the nation’s largest builders of single-family homes. “Demographics is destiny, in the end.”

The key lesson from the US experience is that the demand for housing is highly changeable depending, largely, on prevailing economic conditions. And while Australia is in some respects fortunate that it has not experienced the types of over-building experienced in some other nations, it could equally be argued that there is significant latent capacity (excess bedrooms) in the pre-existing housing stock versus persons per dwelling (see below chart).

Should economic conditions deteriorate significantly, such as via a disorderly unwinding of the mining boom, the number of Australians opting for group accommodation (or the number of young people moving back into mum and dad’s) could rise significantly, turning a perceived housing shortage into a surplus.

There is also the risk that any reduction of housing demand arising from deteriorating economic conditions crimps the rate of new home construction, in turn shattering the RBA’s and Treasury’s plans for housing to fill the void as the mining boom unwinds.

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

 

Leith van Onselen
Latest posts by Leith van Onselen (see all)

Comments

  1. Great article – captures the dynamic nature of demand very well.

    When imbalances build up to the extent they have in Australia residential housing – managing a resolution is very difficult.

    There are several forces all in operation at the same time and it is very difficult to predict the strength of any at each point in time in the future and the result of each mix.

    1. There appears to be some belated desire on the part of state govt to reduce some of the sand in the gears of the supply chain. This is not about boosting supply, though that may be the result, it is about reducing some of the factors that made supply non-responsive. The speed of these changes and their effectivess remains unclear.

    2. State govts are increasingly concerned about drivers of employment as the mining boom declines. Housing is an obvious opportunity as a post boom job generator.

    3. state govt are also feeling the pinch from declines in state revenue.

    4. The RBA meanwhile is worried about the ‘wealth effect’ and is trying to prop up the value of housing with interest rate cuts.

    5. However the RBA is also worried about employment post mining and they also think housing might be a good source of replacement jobs.

    6. Buyers are currently not keen on the amount of debt required to buy at current prices and are dragging their heels – and while they should be willing to buy if prices fall – rising unemployment might negate that impact. The desire to form households could very unpredictable.

    7. The rate of population growth is high currently but this may be unstable if unemployment rises.

    This is a powerful cocktail ‘the housing mohjito’

  2. Leith,

    1.The RBA’s Jonathan Kearns sets “underlying demand” at 150k to 200k new dwellings per year.

    Do you agree with his assessment?

    2.What is your estimate of “actual demand” for new dwellings? How do you measure it?

    • Underlying demand is only useful as a measure when the economy is strong, so yeah 150k to 200k housing units per annum is probably about right when economic conditions are sound. But obviously, if the economy were to hit a significant speed bump, then it is completely irrelevant as a measure, as shown in the USA.

      Actual demand is whatever is transacting in the market at this time. When interest rates are low and the economy is moving, then actual demand is high. When the economy tanks, it isn’t.

        • Yes. The 150k dwelling being built includes demolitions and replacement of the pre-existing stock, so a fair chunk is not actually new supply.

          Further, rents have risen strongly over the past five years indicating a lack of supply, and we have had zero increase in construction over the past decade or so as house prices boomed – a classic sign of a dysfunctional market.

          • I don’t believe in “targets”. Rather, I would prefer to see the Texas-style approach to housing supply & infrastructure financing developed and then let supply adjust to changes in demand (i.e. set by the market). This approach would: 1) mitigate “panic buying” and speculative demand; 2) promote price stability; and 3) make housing more affordable. Replacing transaction taxes with broad-based land taxes would also help.

          • Problem is that some of these statistics come from dubious private sector sources with vested interest.

            Can we really trust these stats on rent and underlying demand?

          • UE, I thought a recent report by RPM or APM indicated that rents are reported as advertised rents rather than real rents signed on the rental agreements. Is that the case or am I mistaken? What if advertised rents are not the reality in a market where it’s easy to negotiate a lower rent? Reported rent increases could then overshoot estimated for the need for new dwellings. As usual misreporting distorts everything!
            I have personal experience and market observations on lower than advetised rents.
            Correct me if I am mistaken with this though. If they do report actual rent agreements then what I wrote is irrelevant.

          • APM phrases it as “asking rent” .. They probably extract it in house from Domain listings.

            ABS CPI calculation does include rent, but I don’t know the weightage given or if it can be deconstructed. I’ll need to see if their rental inflation matches with that from APM.

          • The ABS rental inflation measure has also risen strongly, but less so than the market measures. The ABS measure is adjusted via hedonic regression, which reduces the rate of inflation compared with the median measures used by APM, RP Data, etc.

          • Asking rents are a reasonable proxy for rentals. The data can be obtained easily by using a scraper. I was going to have one built myself but I can’t justify the cost. It would be interesting though.

          • The last two places we rented, we offered (and were accepted with) around 20% under asking price. Both in Melbourne inner-east around the $7-800 advertised rent.

            With the second one, the agent even suggested we offer less than the asking price as he was obviously sick of showing the property at an inflated rent.

          • Leith, you say – “rents have risen strongly over the past five years indicating a lack of supply”

            Supply has been running at ~150k for the last 5 years.
            An alternative explanation for the “rent growth” is the “price floor” theory where supply continues but prices don’t fall past the floor to meet demand, creating a growing pool of would-be buyers who then compete for rental stock.

          • Further, rents have risen strongly over the past five years indicating a lack of supply

            Well not necessarily.

            All that indicates is there isn’t an oversupply.

            The supply could be in equilibrium, and all the suppliers are herding with setting their (rental) price.

            Easy to fathom when the MSM keeps talking about FutureBoom!

            High prices are what triggers an oversupply… if allowed to happen.

            Homelessness at the extreme… but people compromising on forming ideal households is the symptom of high priced rent, but equilibirium with supply, and i think we see that.

            What will be punished isn’t people without a roof over their head, but parts of the economy that rely on discretionary spending… even more so now that credit issuance is not growing as it once was.

            The BCA should be decrying high priced housing, so that customers can empty their wallets in their constituents shopfronts, rather than high interst payments.

          • @UE
            One thing to keep in mind WRT Texas RE is that businesses often move with the work force.

            Look at new housing areas like Plano (north of Dallas) and see all the companies that have in effect colocated to be near their employees. The whole Telecom corridor (Alcatel, BNR, Lucent…) which was replaced by JC Penny, Lays….corporate head-quarters

            So Plano offered proximity to a big city (Dallas) with all the positive aspects (huge DFW airport, shopping, entertainment) over and above this Plano gave people the ability to escape the completely dysfunctional Dallas school system, not to mention avoiding the local Dallas Real estate taxes (typically about 3% of the developed property value).

            There are a lot of reasons why Texas could expand housing in ways that are physically impossible in SF, LA or Sydney.

  3. All long term trends at the extreme ends of the spectrum should invoke in the ‘rational agent’ a strong avoid behaviour… maybe an adjective to describe these is… ‘a bubble’!

  4. I dispute the fundamentalist economic view of “demand” and “supply”.

    Goods and services brought to market are what create “demand”. How so? The producer of same needs to obtain a sale. Why? Because his goods are always deteriorating. Whether that be literally (eg, fresh produce) or more figuratively (eg, new models/improved tech/better branding/marketing techniques applied to competitors’ versions of essentially the same product) or both, the only essential differing factor is the relative rate of deterioration.

    That “demand” for a sale .. of an ever deteriorating good .. is met by a “supply” of “money” currency.

    So … when the Supply of “money” (which, under a debt-at-usury monetary system is ALL DEBT) is increased … h/t Merchants of Debt offering electronic bookkeeping entries at interest as “credit” in exchange for Your Signature on a loan debt-slavery document … the producer of goods can “demand” a higher price for his goods. Prices go up.

    When the Supply of “money” is reduced, as (eg) loans are called in, people choose to “save” (ie destroy “debt”/money), the producer of goods must “demand” a lower price for his goods, in order to achieve a sale before deterioration of that good renders an achievable sale price unprofitable.

    In summary, the common (mis)understanding of Supply and Demand that has been propagandised into society via the “study” of economics, and paying homage to the alleged wisdom of economists, serves only to obscure the truth, and the real ultimate cause of the so-called “business cycle”.

    It is the Merchants of Debt who create SUPPLY.

    It is the producers of goods and services who create DEMAND.

    NOT the other way around.

    Nothing will fundamentally change in our world and society, and all the discussion of the myriad symptoms of the economy is so much futile noisemaking, until a majority of folks wake up to the basic fact that the debt-at-usury “money” system is at the heart of all those symptoms under discussion.

    And realise that it is a dis-eased system.

    • Jumping jack flash

      In a system such as ours, savings is simply hoarded debt that during a time of deleveraging must be brought out of the bank and given back.

      I am wondering what mechanism will force savers to spend their “savings” during a time of deleveraging? Inflation and increased costs of living caused by an abundance of debt that allowed the hoarding in the first place?

      We have seen phenomenal increases in essentials over the past 5 years, such as food and energy prices, which I believe is a direct result of the massive debt bubble. Everyone has too much debt, so those that are able to are gouging like mad to scrape together some money to pay it back, and at the same time maintain lifestyle.

      Perhaps it is forcing savers to unearth their hoarded debt, pay it to someone else so they can use it to pay down their debt?

      • “Everyone has too much debt, so those that are able to are gouging like mad to scrape together some money to pay it back, and at the same time maintain lifestyle.”

        Exactly right. And it is these types of behaviours that have been seen time and time again, and exemplify why the dis-eased system itself must be changed, else nothing will change. Per your example, and there are countless others, the dis-eased debt-at-usury “money” system causes human beings to behave little better than animals, and often, far worse –

        “Some of you, we all know, are poor, find it hard to live, are sometimes, as it were, gasping for breath. I have no doubt that some of you who read this book are unable to pay for all the dinners which you have actually eaten, or for the coats and shoes which are fast wearing or are already worn out, and have come to this page to spend borrowed or stolen time, robbing your creditors of an hour. It is very evident what mean and sneaking lives many of you live, for my sight has been whetted by experience; always on the limits, trying to get into business and trying to get out of debt, a very ancient slough, called by the Latins aes alienum, another’s brass, for some of their coins were made of brass; still living, and dying, and buried by this other’s brass; always promising to pay, tomorrow, and dying today, insolvent; seeking to curry favor, to get custom, by how many modes, only not state-prison offences; lying, flattering, voting, contracting yourselves into a nutshell of civility or dilating into an atmosphere of thin and vaporous generosity, that you may persuade your neighbor to let you make his shoes, or his hat, or his coat, or his carriage, or import his groceries for him; making yourselves sick, that you may lay up something against a sick day, something to be tucked away in an old chest, or in a stocking behind the plastering, or, more safely, in the brick banks; no matter where, no matter how much or how little.

        I sometimes wonder that we can be so frivolous, I may almost say, as to attend to the gross but somewhat foreign form of servitude called Negro Slavery, there are so many keen and subtle masters that enslave both North and South. It is hard to have a Southern overseer; it is worse to have a Northern one; but worst of all when you are the slave-driver of yourself.”

        – Henry David Thoreau, Walden; or, a Life in the Woods, 1854

  5. The underlying demand impact is so much more complicated now. My feeling is that huge chunks of that ‘demand’ are so tied to the concept of residential housing as a speculative investment it doesn’t make sense to try and talk just household formation demand.

    Appreciate that your perspective is we could take out this speculative component if we freed up land use – but treating that as theoretical (because its unlikely to happen) – then it feels like the only driver of demand is the availability of new debt in combination with sentiment.

    • Thanks Leith. Great read.
      +1 O8R “Goods and services brought to market are what create “demand”.”
      +1 aj “it feels like the only driver of demand is the availability of new debt in combination with sentiment.”
      We have moved way beyond the point where demand derived mostly from the impulse to house oneself and ones family in sufficient comfort according to ones income. For me the greater “demand” drives are:
      1. Speculative intent.
      2. Easy credit and the “buying power” sentiment fostered by it.
      3. A lack of motivation to bring stock (new or otherwise) “to market”.
      An unprecented period of freedom from recession makes this an especially toxic mix.

    • Any debate revolving around no.’s of dwellings built/being built, land availability, population growthetc is pointless wherever it is based on misinterpretation of what “supply/demand” is actually about. And that is, it is NOT fundamentally about supply/demand of goods (in this case, houses). It is all about supply of / demand for MONEY (debt).

      None of it is complicated. It’s all very simple.

      Along with Life, Love, and Happiness, the one thing that virtually all human beings have been increasingly conditioned to desire, is “Money”.

      We have permitted a (dis-eased) system to grow and dominate society, and every aspect of human relations, wherein a tiny minority are given the exclusive “licence” to create ex nihilo and at usury the Supply of something that everyone else in the human race Demands.

      This is self-evidently irrational, illogical, and immoral.

    • Could some of this demand which is sustaining high prices be the well off squeezing out the less well off who have squeezed the poor and unemployed out of homes completely?

      We always hear about government squeezing out the private sector, but as incomes become less equal (Gini coefficient) the wealthy can buy assets and the less wealthy (middle classes) get squeezed and stop accumulating additional assets.

      Increasing the incomes of the lower middle income earners would enable them to buy houses if the income of those above them on the pay scales was decreased a bit to stop them from squeezing out the lower income earners.

      The excess bedrooms is partly a timing difference, like those who have resigned and traveled and are now looking for work are in the unemployed. Some potential downsizers won’t do it until the kids have houses, or won’t do it while they have kids who might come and stay in the holidays etc.

      Part of the excess bedrooms could be overcome if there were incentives to mobility. A Baby boomer in a large home might be happy to go and live in a 2 bedroom modern unit near the beach for a few years but not want to sell their house and land until they are really settled in. But. There rental income from their house is assessable and their rental expense is not deductible so it is not economic sense.

      • A Baby boomer in a large home might be happy to go and live in a 2 bedroom modern unit near the beach for a few years but not want to sell their house and land until they are really settled in. But. There rental income from their house is assessable and their rental expense is not deductible so it is not economic sense.

        It’s worse than that. Collecting rent jeopardises the capital gains tax free status of the home.
        There should be a “no disadvantage” override when an oldster tries to rejig their living arrangements.

  6. Spot on Leith. There is also a major flaw in the “cheaper to buy than rent” stream of analysis. It generally assumes that the same household type is maintained between renting and buying. The reality is that a large proportion of young people will rent in share/group households to lower housing costs and increase their saving potential. As a result, Gen Y will rent and save for longer than their parents did and delay the purchase of a first home until economic conditions and/or housing affordability improves… which could be a while!

    • “Which could be a while.”
      The longer the better, perhaps.
      By fostering a generation of potential FHBs who have aggressively saved, might not the extent of any “crash” be softened (the catch being its hands may be tied by concomitant unemployment)?
      I think the Japanese experience might be very informative in this regard.

  7. Don’t know why states are so reliant on duties still – stamp duty needs to be removed. While I’m never a fan of tax I do believe land still has a role to play in the tax base and would rather a tax on land than on labour. At least tax take would be more stable.

  8. I demand a brand new Ferarri every year.

    The fact that I never get one is not a function of the manfacturing capacity of the Ferrari factory, however…..

    • I demand a brand new Ferarri every year.

      Excellent point. I can SUPPLY you with 10 photos of such, or 100 if you so demand.

      Now do you have something intelligent to post about the housing situation?

      • Ouch. Being the owner of such rapier-like wit must make it dangerous for you to pick your own nose.

        How about this;

        When discussing an asset primarily purchased by leverage, “demand” actually is more to do with “availability of affordable finance” and much less to do with “desire to purchase”.

        Hope that helps and doesn’t prompt further PWNing of my poor self.

        • Nice point.
          Shortage determines how many families miss-out and credit determines the price at which they miss-out.
          Are you more concerned by the price? or the number missing-out?

      • Alternately …

        “I have produced 10 photos of a Ferrari, and I demand $XX for them. What’s that? You have no Supply of $$ to pay for them? Oh dear, I NEED to sell my photos, as they will soon be superceded … won’t anyone Supply me with some $$?

        If you have failed to comprehend the meaning of the illustration SUPPLIED by TNA, then I would politely venture to aver that perhaps that says something more about your own capacity to SUPPLY “something intelligent to post” than it does about TNA’s.

        • Instead of Ferrari nonsense, how about we measure if housing is getting better or worse over the years?
          Can a young teacher today in Sydney obtain a better house than there father (teacher) obtained years ago?
          If not, why not?

  9. The surge in household formations led to numerous suggestions that the US was facing a housing shortgage, …

    The rest is history. The US housing bubble popped, … leaving a vast oversupply of homes

    This is interesting and true. There was a shortage of toilet paper in my bathroom so I opened a 10-pack and then had an oversupply.

    However was there enough housing in California for everyone who reasonably should have obtained one? Could a schoolteacher always rent a decent house a decent commute from their school, for a decent portion of their wage? Could a cleaner in silicon valley afford decent housing near their job?

    This is a better way of measuring the shortage if you are trying to measure actual suffering and need for more dwellings.

    • Oh Claw. This is the developed world.
      Actual suffering arising from the lack of material things, doesn’t really occur, does it?

      • You’re right.
        My rent:income calculation is good for measuring the decline in living standard of the average person in Sydney.
        It does not measure extreme suffering.

        • Actually, in distorted housing markets, “extreme suffering” IS caused down at the bottom of the socio-economic heap.

          It is misleading to focus on middle class young people who are stretched to the max to buy a decent first home.

          Consider the difference between those at the bottom of the socio-economic heap, in an affordable market in Southern USA where middle class young people pay off their first home in a average of 7 years, or in the UK or Australia where the middle class only just make it with 20 to 30 years of debt servitude.

          It is a factor in the UK’s social instability, riots etc, that such a high proportion of the population are excluded from a normal life of marriage and family raising, and are lifelong renters of poky and substandard accommodation.

          It has also been noted that the main link between socio-economic status and health outcomes, is the kind of housing occupied by the people of each socio-economic level. Of course poorer people and their children suffer more from health complaints related to cold, damp, continual close proximity to others, and local air pollution.

          • When you practice growth containment planning as the UK has, the impact of the “rationing” of space falls mostly on the lowest income earners, who have to make do with less and less space, of lower and lower quality, at less and less congenial locations, and/or not even have life choices such as marriage and family to exercise in the first place.

            Refer to Gibbons, Overman and Resende, “Real Income Disparities in Great Britain”. They describe the urban planning system as a “multiplier” of the actual worse life outcomes that result from income disparities.

          • Rent to income has been flat since 1994 in all States.

            I don’t believe you Rumplestatskin.
            As a sanity check can you give me a list of say 3 Sydney houses and what they rented for in 1994 and what they rent for now.

            Remember: The average person has one tit and one ball.

          • The 2011 Census disagrees. It showed a 50% increase in median rental payments across Australia in the five years to 2011, well in excess of the 20% increase in median household incomes. Accordingly, median rental payments to median household income rose by 25% over the five year period.

  10. Actually, it is a point worth noting, that “demand” for housing can fluctuate so much relative to supply, with minor changes in the rate of household formation and young people staying at home with parents, and people living at greater numbers per dwelling, especially immigrants.

    I prefer to regard this phenomenon as another distortion due to supply constraints. These people are NOT “removed from demand statistics”, they are “PRICED OUT”.

    Ferrari analogies are unfair in this particular point. These people are effectively being priced out of a 15 year old Toyota Corolla. If new cars were forced up in price by steep taxes, used cars would rise in price and suddenly a whole lot of people who currently can pick up something cheap and cheerful, could not afford one.

  11. MAV raises the point earlier in this discussion about “vested interests”.

    I say there is thousands of times as much money to be made by “vested interests” under urban growth constraint, as there is to be made by developers of fringe suburbs under genuine competitive conditions. The latter are making modest and fair profits supplying actual products that people want. The former are doing nothing except sitting on their fat arses watching the capital gains roll in.

    It is just sickening that activists point the finger in the wrong direction all the time on this issue, and get away with it. People like Mav should not be able to live with their consciences once this distinction has been pointed out to them.

    • Everything is in italics but why?

      A big +1 to all of PhilBest’s comments. The shortage I worry about, the decline of living standards for our young, and extreme suffering of the poorest are very strongly related.
      Statistical quakery can remove the victims from the counting. Averaging a fatty with an anorexic gives you a healthy population, etc.

      • Thanks, Claw, and I love what you just said –

        “…..Statistical quakery can remove the victims from the counting. Averaging a fatty with an anorexic gives you a healthy population, etc……”

        Worthy of going into a lexicon of great quotes. Is it original to you?

        • Phil I made that one up.
          The old one is the statistician with one foot in boiling water and one foot in ice. On average he should be quite comfortable.
          Since we have these comments to ourselves today, I would to compliment you on the quality of your commentary over the years. I have kept quite a few of your posts for later reference.

      • Everything is in italics but why?

        It wasn’t closed off in a previous post, I think from due dilligence.

        A big +1 to all of PhilBest’s comments. The shortage I worry about, the decline of living standards for our young, and extreme suffering of the poorest are very strongly related.

        Statistical quakery can remove the victims from the counting. Averaging a fatty with an anorexic gives you a healthy population, etc.

        No one denies high prices exist.

        You however assert they exist because of a shortage, and there can be no other reason they are high.

        The pricing mechanism is broken, but its not due to a shortage.

        A bout of oversupply would fix the problem, but just because an oversupply is the remedy, it does not mean undersupply is the fault.

  12. It is also worth noting that a disproportionate amount of the “demand” activity in grossly inflated markets, is speculative; “investors” gearing up from their existing portfolio. First home buyers have dropped out long ago, and those who “buy in” at heavy debt levels are heading for personal fiscal tragedy. I am distressed for their sake; their elders should have given them better advice.

    I am not distressed for the speculators who are the main drivers of the last few PSI in the bubble; the greater their eventual ruin, the better, as far as I am concerned.

  13. If we look at each unique housing situation in Australia we can find things that might (or might not) happen that would cause a collapse in demand.
    Take Sydney. I meet many younging migrants who have come here for the weather and work and don’t gives a rat’s about our culture or declining living standards. These mercinary types have no real affinity for Australia. If (I stress if) the job situation was to collapse here, and improve elsewhere, then those buggers are likely to shoot thru.
    Another thing is I read that many high rise apartments are being bought by Chinese and kept empty. If (I stress if) these Chinese were to all decide to sell, this would have a dramatic effect.
    Unlike many posters here I cannot predict things with 100% certainty. However I just wanted to mention these possibilities.
    Also a collapse in the mining boom could affect Perth and Karratha real estate.

    • “Also a collapse in the mining boom could affect Perth and Karratha real estate”

      I’m convinced it is beginning to get a head of steam in Perth. In the suburb where I live I see people selling out all over. Some I know are distressed sales and these are not , to my knowledge, mining job related.Small business is also showing more signs of distress.

  14. Another interesting insight that can be gained from the writings of urban experts like Saskia Sassen and Richard Sennett:

    Much of the “increase in urban density” that occurs in certain prosperous cities in the West, is recent immigrants crowding in at 3 families to the modest home, or worse. This is especially notable in London, NYC, and Vancouver.

    Meanwhile, native-born people won’t move in to these cities to take the low paid jobs that these immigrants take. People stay in Manchester or Liverpool on welfare; the effective marginal tax if they got a job and lost their “social housing”, is well over 100%.

    Way to go, socialist “planners”.

  15. No one denies high prices exist.
    You however assert they exist because of a shortage, and there can be no other reason they are high.
    The pricing mechanism is broken, but its not due to a shortage.
    A bout of oversupply would fix the problem, but just because an oversupply is the remedy, it does not mean undersupply is the fault.

    This is a fair comment, except that many other factors can, do, and have caused high price.
    If it looks like a duck, walks like a duck and quakes like a duck, then it probably is a duck. Ditto housing shortage.
    I have come across many different shortage-deniers who give me many different excuses why there cannot be a shortage. Each of their definitions is different.
    Some say there is no shortage because in future demand will evaporate.
    Others say there is no shortage because many houses are now empty.
    Others count empty bedrooms.
    Some use census numbers, other use hedonically adjusted rents and other statistical crimes against humanity.
    Some say that quality, location and travel costs don’t matter. Look there is an empty humpy near Uluru – therefore there is no shortage of housing in Australia.

    • This is a fair comment, except that many other factors can, do, and have caused high price.

      If it looks like a duck, walks like a duck and quakes like a duck, then it probably is a duck. Ditto housing shortage.

      Except in this case, it doesn’t look like a duck.

      A shortage exists when 10 families are chasing 9 houses.

      Outside of Sydney, this doesn’t exist.

      What we have is 10 families chasing 10 houses… but 5 of those families are baby boomers with 5 houses of their own, and competing with the 5 non-home owning families to buy the 5 remaining houses.

      The fact the 5 baby boomers get a bunch of tax breaks and negative RAT interest rates means they have a fiscal advantage in affording it.

      Then once they become IP owners, they are hearding the rental price to extremely high prices.

      IN a supply sense, 10 houses offer shelters for 10 families, the proper level of resources have been allocated to shelter.

      Extraordinary high rental prices means there should be a rational response to put an 11th house to market and make extraordinary gain by arbitrage. Thus the symptoms would be resolved by oversupply.

      This response is not allowed to happen due to planning laws, and there is no other way to resolve the pricing mechanism.

      I have come across many different shortage-deniers who give me many different excuses why there cannot be a shortage. Each of their definitions is different.

      Some say there is no shortage because in future demand will evaporate.

      Yes, a credit shock can make them 5 baby boomers no longer afford their IP’s, or 5 non-owning families can emmigrate.

      That is a plausible outcome.

      Others say there is no shortage because many houses are now empty.

      Yes, or more accurately, resources allocated to the purpose of shelter are not being used.

      I would say more glaring is still vacant blocks of land, even in 15 year old estates.

      We raze crown land, or purchased farm land, for the purpose of shelter. If not used as shelter, it implies there is economic (perverse) gain just by holding the land, but applies to empty houses, and not issuing it for its intended utlity.

      The fact that these perverse incentives exist means there is a non-shortage of supply element affecting the pricing mechanism.

      Others count empty bedrooms.

      Well that points to poor prudct matching. I don’t agree with that.

      Some use census numbers, other use hedonically adjusted rents and other statistical crimes against humanity.

      Some say that quality, location and travel costs don’t matter. Look there is an empty humpy near Uluru – therefore there is no shortage of housing in Australia.

      No one makes that assertion in isolation. You’re taking people out of context here.

      • Few commentators are prepared to make as nuanced comments as I have constantly made on the “supply” issue. I say it is possible to have oversupply AND price inflation. Spain and Ireland both had it.

        The mechanism is a “quota” system for “supply”.

        New Zealand ran a kind of auction quota system for import license for cars, in the early 1980’s. The result after 3 years was oversupply as well as overpriced cars, and a market collapse with major importers going bankrupt.

        The reason is that they had all been so busy out-bidding each other for “quota” share, they lost sight of the ability of the consumer to pay the price needed to sell cars at a profit. Exactly the same phenomenon can occur with “housing” supply when you have local government urban planners and State governments running a kind of quota system, and bidding wars for “land banks” taking place between developers and speculators.

        This is why quota-based oversupply of housing is a national calamity, but oversupply in a near-lassez-faire market (like Atlanta 2000-2007) is just a matter of a couple of years adjustment in household formation rates and in-migration and people per dwelling and of course, a slight drop in house prices that never inflated in the first place.

        I often pose the question: what is most damaging to the economy; a few thousand too many houses at $180,000 each, or every one of the millions of houses in the whole country, being inflated in price by around $250,000 each?

        Of course having a few thousand too many homes AND the price inflation is the worst situation of all because the volatility on the downside is greater. Ireland’s median multiples went from around 6, to below 3, in 2 years flat. Spain probably did similar, but I have not seen analysis of Spain that is as good quality as what Demographia does for the Anglo world.

        Of course most of the “oversupply” at the inflated prices is bought by speculators. The lassez-faire markets, in contrast, are marked by prices that remain low due to genuine competition between “vendors” of land (just as when NZ abolished import restrictions, anyone could import a car and prices came down) and the houses being built are roughly being filled just as fast as households are formed and in-migrants arrive. A bit of “overshoot” occasionally, only takes a year or 2 to work through the system, and it is NOT accompanied by massive debt overhang and destruction of equity and finance sector systemic risk.

      • Nice pwning of The Claw RP. His one-track record is simply boring and has no basis in reality.

        Phil – insightful comment.

  16. When Southern European immigration was intense families would live two to a half house dwelling. They would hot bed, with one family working days and the other working nights, each sleeping vice versa.

    The equivalent these days is the 20 somethings moving back in with mum & dad after having bought their apartment with a FHB grant and completing their obligation to live in it.

    PS Some of those spare bedrooms are also for when the divorced dad has the kids on the weekend or in the holidays.

  17. If you look at the cost of buying and renting from 1997 to 2011, you see a very interesting pattern. Roughly speaking, house prices rose rapidly for 6 years and then slowly for 9 years, while rents rose slowly for 9 years and then rapidly for 6 years. I wonder – is it a predictable consequence (from negative gearing, etc.) that prices will rise rapidly in the early stages of a bubble but rents will rise faster in the latter stages?
    I constantly hear the argument (from housing hawks) that the ratio of house prices to rents is the same today as it was in 1999, therefore, if it was a good time to buy then, it must be a good time to buy now. Is there any economic theory predicting that this ratio should either stay fixed or vary depending on the “phase” of the housing cycle?

    • Good question; economic theory is quite woeful on the mechanisms of house price bubbles. Alan W. Evans’ 2 books published in 2004 are probably the best there are.

      A ratio of house prices to rents, where house prices are far too high relative to rents, is one classic evidence of a bubble. But there is considerable variability between different bubbles, in both price volatility on the downside, and in price-to-rent ratios.

      Things will be considerably different in a nation experiencing its first ever serious phase of modern bubble mania, compared to a nation like the UK where they have had several cycles already with house prices trending relentlessly higher and higher relative to incomes. Rents tend to be less of a “bargain” at all times in the UK.

      I believe that when a market is “supply constrained”, as Australia is, it will tend to track the UK’s experience – that is, rents will “catch up”, downside volatility on house prices may not be rapid, and in the future, both prices and rents will “cycle” around an upwards trend relative to incomes.

      I do believe that in the long term, these distortions destroy an economy’s international competitiveness. I believe the UK is a “yesterday nation” with its urban planning system being the primary reason for this.

      I have been banging on about this on this site and elsewhere, for a while.

      https://www.google.co.nz/search?q=macrobusiness+philbest+mckinsey+institute&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a&safe=strict