MB presentation: housing supply & price volatility

By Leith van Onselen

Please find below a PowerPoint presentation entitled Housing Supply & Price Volatility that I presented last Thursday to a mortgage risk roundtable in Melbourne.

The presentation discusses how markets with unresponsive (inelastic) land/housing supply tend to suffer from higher house price volatility and bigger boom and bust cycles than markets where land/housing supply is relatively responsive (elastic) to changes in price.

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Housing Supply and Price Volatility (Feb 2013) by leithvanonselen

Unconventional Economist


  1. Stunning work, Leith, I hope you really go places with this sort of work. Anyone who remains a “true believer” in the “soundness of the fundamentals” in Australia in the face of this, is beyond help.

    “Vacant land cost per metre” (Slide 11) would have already appreciated from a much lower base earlier, in Sydney before 2002. It is interesting to see how the other cities data have converged on Sydney. This confirms my belief that urban growth containment policies tend to force people to pay absolutely as much as they can possibly stand as a proportion of their income, for the “land” on which their housing stands (in contrast to cities in which the price is anchored beyond the fringe in rural values, which leads to people consuming more and more land for the same affordable proportion of their income).

    Your insight that the commodity price boom helped to keep Australian house prices strong as household debt leveled out, is interesting (Slide 15).

    Very worrying data on numbers of investors and the proportion of negatively geared ones (Slide 17). Anyone who refuses to be alarmed by this presentation is a true believer indeed.

    Amazing quotes in Slide 20; I bet Aussie developers are paying at least as much as that Las Vegas price, for raw land per acre.

    Re Slide 27, very interesting point about Georgia. I didn’t know that their delinquencies were actually not as high as the PRICE bubble States (Georgia being a construction boom State rather than a price bubble State). I always regarded it as vital that the average mortgage values involved in Georgia were very low; but to have less of them as well, is an amazing confirmation of the benefit of having an elastic land supply.

    The lending mandates re disadvantaged households etc applied nationwide in the USA, but Georgia had the local conditions and the local activism under which the effects were maximised.

    Slide 29 – OUCH. Who knew this before now? Australia outbuilding the mythical “oversupply” States in the USA?

    But I thought Arizona and Nevada had “oversupply” and California had “undersupply”. Arizona and Nevada really are not examples of “overbuilding” at all when population growth is taken into account? This is valuable myth-busting new info to me.

    Slide 30 – if you get earlier data still on the UK, you can show the trend to volatility started well before 1970. They started their growth containment policies in 1947. Peter Hall et al’s 1973 Report “The Containment of Urban England” indicated a serious problem already by that time.

    • Thank you UE, another lance in the boil known as the politico-housing complex.

      Steve Keen says it is Debt! Debt! Debt!

      Leith van Onselen says it is land use restriction.

      Prosper Australia says it is our very bad tax system.

      In fact The Great Australian Land Bubble has it all, which is why I doubt the ‘slow melt’ comforter.

      Don’t Buy Now!

      • David
        Why did house prices rise in those subburbs that had population decline from 2001 to 2011, Brisbane – Rocheale and Jindallee for example?

        • They were the suburbs of the seventies and that’s when they had their children, in the seventies and early eighties.

          Naturally the kids left home from 2001 onwards. It has more to do with the number of household requiring houses than direct population numbers.

          • Peter
            I agree, however why did young families not come into relplace the kids that were leaving. If during 2001 to 2011, the kids left home, then when the death rates boom in those burbs, prices will crash.

          • Yes, population can halve in suburbs that were new developments filled with young families without reducing the number of households or number of houses required as the now young adults move out of home.

            Divorces can mean that the number of dwellings required could actually increase, but those new dwellings might be in different but not too distant suburbs where transport hubs have bought high density.

          • Because Jindalee then expanded to become Jamboree Heights, Middle Park, Westlake, Riverhills, and Sumner – the area grew like crazy but the original residents of Jindalee who were mainly in their twenties and thirties are now in their fifties, sixties, and early seventies – they ain’t dead yet, they like living there and they still need a house.
            I think that the remake of Jindalee, Mt Ommaney, and Jamboree Hts is just starting now, and that will be followed by Middle Park, Westlake, Middle Park and Riverhills over the next few decades. You could still buy vacant riverfront blocks in Westlake a few years ago, and I think that the last of the riverfront blocks in Jindalee has just sold, but there is a small new subdivision in Sumner.

            Desireable area 12 to 15 klm to cbd, great shopping and sporting facilities, quiet, middle class, family friendly with few bogans.

            No gunshots or howling tyres late at night – why would they want to leave?

          • You are deliberately obsfucating, higher demand can mean higher prices, and that demand doesn’t have to come from a household with several children.

          • Peter
            families could not afford to buy into those burbs that have declining population. Something eventually has to give…..

          • Actually Paul yes they can, new families move into thsoe suburbs everyday – you have access to the information – look it up – 4074.

            But if they wish to spend less then they probably look at Forest Lake.

          • Peter
            I have looked through all the 4074 recent sales and I find it hard to find any families.
            What I do notice is that prices have gone up since 2001 to 2011 and volume of sales is 1/3 of what they were.
            I do see a lot of individual name buyers.
            So if families were actually buying into 4074 over the last 10 years, then the population should not have declined. It did and I think you are wrong.

      • So David, what does this trifecta (Debt, Land Use Restriction, Negative Gearing) pay? Seems like it’s nearly time for a maths lesson in negative numbers.

        I wonder what Fibonacci would have to say…

        • UE, overlay Soos dusting off of Ponzi financing units as the theoretical mechanism for ‘irrational exuberance’ exhibited by the property speculators, and the circle is complete.

          That is:

          Ponzi financing/irrational increase in debt + land use restrictions + poor tax policy + government inducements/bait + herding psychology present in the punters (Minsky’s ponzi financing units as described in his Financial Instability Hypothesis) = Australia is stuffed based on the amount of debt that must be liquidated to approach fair price in value of land price to GDP ratios.

          All fits.

      • I agree, David. Choking land supply, easy credit and bad tax design have all combined to give us this glorious bubble. 👿

        • Is why I foresee a price correction over ~5 years just like the USA bubble states. It hasn’t happened yet, but prices are running our of props. The mortgage-free and renters won’t feel a thing, but punters with big debt will be crushed.

          Look at the behavior of the professionals: the big REITs all have their gearing down to ~25% and are ready for anything. They will survive; you may not.

          Don’t Buy Now!

          • Actually in this low interest rate environment borrowers are having a picnic.

            How long do you think it will take the median value of US housing to regain the previous peak?

          • Mining BoganMEMBER

            PF, is there any particular reason why we want housing to reach it’s previous peaks?

            I though inflation to the cost of life’s staples was bad.

          • An economy based on zero inflating house prices, where productivity gains due to innovation, invention and hard work, lead to wage gains which lead to prosperity and increased savings, reinforcing that cycle?

            Instead of paying the excess savings in exponentially more interest on higher and higher mortgages?

            Inconceivable! Impossible! Unimaginable!

          • You raise an interesting point Chris. Technically I think it is very possible for house prices to remain in close touch with wage growth.

            Some of the global results for the measure of price/income are a little strange though. I think that I saw some high readings in countries like Bangladesh and Pakistan which I can’t explain except that in cases of extreme poverty perhaps a place on the footpath might constitute a residence – I don’t know. How is a cardboard shanty treated, and is it fair to suggest comparisons when we live in bespoke buildings that would be a palace to them.

            Too many questions – not enough answers.

          • PF: “How long do you think it will take the median value of US housing to regain the previous peak?”

            Assuming nominal prices: If we use history as a guide? Decades. If we believe in Hopium? Tomorrow!

            If we assume real prices: a saeculum, as it’s always been.

            So… if low interest rates support higher home prices, what happens to home prices when rates rise back to their long-term averages (let alone “high”)? Or PF are you saying that rates are at permanent multi-decade lows to infinity and beyond?

          • campbein – you have framed your questions in a very arrogant way, but if you choose to look at the data instead of playing the man, and if we indeed use history as a guide, it tells us – http://ycharts.com/indicators/sales_price_of_existing_homes
            you will see that a sharp rise is possible.
            The median was $156,100 in Feb 2011 and now it’s $180,800

            Interest rates – I don’t know how long they will stay low, but there is every indication that it will be quite a few years.

            I’m sure you don’t need me to explain how that rewards borrowers and hurts savers?

          • Peter Fraser; two things.

            1) After the Great Depression, one study finds that property prices at the location it studied (in NY) took till 1950 to resume 1929 values.

            2) I have explained before, that societies that lack “automobility” always have far higher economic land rents in their cities. So median multiples, if anyone tries to calculate them, are always very high. There is often also a problem with corruption in developing countries, re controls and permissions. We bowdlerise it as ‘urban growth containment’.

            When there is lower median multiples in a developing country, it will be found that there is a lot of ‘freedom to build’ just about anywhere, even if by default, and they use a lot of motorcycles and motorised rickshaws etc, which is sufficient substitute for the mobility of automobiles.

            But there is unfortunately no good research into this. The World Bank Urban Planning dept did a few good papers in the 1980’s and 1990’s and then got shut down.

          • Oh then those fools who got ripped off back in 1960 will be angry that they paid too much at the peak. The nominal value of their Manhattan apartment would be huge but they have lost in real terms.

            Hmmm – wait a sec.

          • Phil – so it only took 11 years to fully recover from a great depression and WW2 – did they have rent and price controls during WW2 by any chance – well yes they did. They still have rent controls.

            David is not really making fair comparisons.

            It’s still a great city though.

          • Have rent controls prevented property PRICE volatility in NY?

            Is there anywhere that rent controls have existed in conjunction with inelastic supply of land for urban development, and have been the means of preventing a property PRICE bubble? I very much doubt this reasoning, seeing that a property price bubble involves speculators chasing capital gains and completely ignoring rental returns.

            See the quote SeanM has put on the bottom of this thread, about the disconnect between rents and property prices in Ireland during their bubble.

  2. Very nice work!

    Of course even if everyone is persuaded that prices are out of kilter that may not be sufficient to motivate action on the causes.

    It may need a detailed articulation of the ‘costs’ of this state of affairs on our economy to illustrate WHY failing to take sensible action presents a continuing threat to our economic well being.

    To date, there seems to be an assumption along the lines that while the ‘bubble’ in pricing is bad it is better to do nothing and HOPE for a slow melt over ‘X’ years than actually attempt to manage the adjustment as quickly as is possible (i.e. as quickly as the banking system can manage without a complete meltdown).

    And that is among those who actually accept that there is a problem. The usual suspects (cheerleaders for a debt driven economy) will happily argue for household debt growth until a cold day in hell.

    The RBA have done nothing, although with an eye to history there have been some half warm comments over postprandial digestives.

    Some of the state govts have made a few noises in the right direction but at this stage little of substance has emerged.

    If the costs of the status quo are low then a slow melt might be warranted but clearly the blow out in the cost of a fundamental input (land/ housing/business premises) to the economy are increasingly like a sea anchor on the economy.

    A full understanding of the magnitude of those costs and the damage they are causing may be what is needed to make it clear that action not paralysis is required.

    • Hmmm, quantifying the ‘costs’ of an inefficient housing market / asset price bubble to an individual and to the community as a whole is an interesting exercise.

      How do you isolate the income that would be disposable (due to lower rent and mortgage interest) but for the bubble pricing.

      Does some allowance need to be made for generally lower income levels in an economy that did not experience a debt driven period of stimulation?

      It is important to keep in mind that the higher costs due to a real estate asset price bubble affects the costs of goods and services purchased by those without a mortgage. So even those riding the wealth effect are affected by the consequences of that very effect.

      Sounds like something for some keen young research student to sink their teeth into.

      • Pfh007, there are so many flow-on effects of urban growth containment planning and inflated urban land prices. It is this that is finally motivating the NZ govt to do something, not just the social equity side.

        You are absolutely correct about the disposable income question. But productivity is reduced, and the nation’s currency is inflated in value. Monetary policy is rendered less effective. Workforce cost pressures and dissatisfaction are increased.

        The effect “compounds” as it prevails, which is why I confidently predict that the heartland and Southern USA cities which have low, stable urban land prices, “own” the economic future of civilisation. It will become more and more obvious as time passes.

        It is just such a pity that California and other States drag the promising ones down. This conceals the effect I am talking about, because few people bother to dig below “USA aggregate” data. This makes as much sense as “EU aggregate” data; which would lead to no-one discovering that Spain and Ireland had had a particular problem relating to housing and its finance, while Germany had not.

  3. Very good presentation Leith.

    Though once again I note that your own charts demonstrate that the problematic growth in prices has occurred post-financial deregulation.

  4. Great talk. Should send it to in laws. What about effects of foreign hot money inflows into property. That may be compensating for low demand locally although with further interest rate cuts that irrational exuberance may reemerge.

  5. Although we disagree about the major cause of housing bubbles I think that you are doing great job in making people aware of danger that bubbles present.

    We also disagree on solutions. I don’t think we need to waste money on excess supply to prevent bubbles and destroy cities by creating land-waste urban-sprawls Texas style.

    Just few credit rules (maximum LVR and borrow limits) and/or slight change in tax code (speculative property tax) will do the same.

    • Where is money being “wasted”?

      The cost of “excess sprawl” in the form of infrastructure and externalities, is a fraction of “the cost of NOTHING AT ALL” in the case of bubble prices having to be paid by generation after generation – as in the UK.

        • I just published an article proving that an iceberg DID NOT sink the titanic.
          It turns out that the ship sinking is actually correlated to idling the propeller shaft and lowering the lifeboats.

        • No offence raveswei, but I think it has become apparent that due to the government’s vested interest in kicking the housing bubble can down the road for as long as possible in order to run the farcical charade of a “Strong Australian Economy”, wouldn’t it be therefore pointless to believe that governments will try to implement tougher borrowing rules?

          Just let the market burn itself out.

        • No vested interests in the UK would be affected by ending the economic land rent racket?

          It is of course easy to show a correlation of each bubble price phase, to demand, credit expansion, etc. But the inconvenient fact remains that the same factors applied to ANY city where there was total freedom to convert rural land to urban land, would NOT have the same “bubble price” effect.

          It is exactly the same with the price of consumer goods for which there is a competitive free market for the supply of them. We don’t have a volatile price cycle for cars and TV’s correlating to demand phases and credit expansion. Housing would behave in exactly the same way if supply was just as much a competitive free market.

          In fact the UK is famous for its responsible monetary policy and banking regulation going back decades, and these things did not stop the UK having far volatile house price cycles for decades during which other nations at a similar stage of economic development were NOT having such volatile cycles. The difference was that the other nations were devoted to policies of building plenty of affordable automobile based suburban housing, while in the UK the process remained carefully “planned” to such an extent that “planning gain” – and hence all economic land rent – was maximised rather than minimised.

          We severely under-rate the dedication there was in most nations, to the provision of affordable automobile based suburban housing, as a matter of principle. For social justice, health, and sound economic reasons. This dedication has undeniably flipped 180 degrees in more recent decades, with obvious consequences.

          • I don’t claim that credit expansion caused bubbles in UK (it is hard to prove causation because of simultaneous credit and price growth).

            What I showed is that every single property bubble in UK since WWII happened after banking sector deregulation. You cannot deny these facts – see my references.

            You might think that UK has responsible monetary policy and banking regulation going back decades, but the fact is that housing bubble started after every banking deregulation in last 50 years.

            Why you ignoring all the facts and keep repeating the same story over and over? I admitted that land regulation plays role in price volatility but not major one. I claim that easy credit, human psychology and tax laws are much more important rules. I showed why I think easy money is one of the most important causes of bubbles.

            On the other hand you (or anybody else) failed to show any correlation between regulation of land development and house price volatility. There are almost no research that supports your claim, while there are many studies proving mine.
            I’m quite bored with your unsupported claims. Please give us anything that supports your claim, any data … and I will gladly change my opinion.

          • All right, I will re-frame my argument.

            “Financial deregulation” is ONE of the “causes” of house price bubbles IF and ONLY if the supply of land for urban development is constrained. There are many other “causes”, all of which also apply IF the supply of land for urban development is constrained.

            For example, it was certainly not “financial deregulation” that caused New Zealand’s mini-house-price bubble in the early 1970’s – it was politicians throwing State-subsidised loans at home buyers.

            Clearly, population increase, if housing supply does not respond, will cause a price bubble. What has this got to do with “financial deregulation”? All the financial deregulation does is increase the octane rating of the accelerant for the fire.

            But “financial deregulation”, and population growth, and State-subsidised loans and every other demand-side factor, does NOT cause a house price bubble when supply of land for urban growth is unconstrained. This is just the same as no bubble ever being caused in the prices of cars or TV’s. This would certainly change if the supply of steel for a local car manufacturing oligopoly was constrained by, say, import quotas.

            You can interpret this to mean that constrained supply of land for urban development is “NOT the cause” of the price bubble if you like. But can you deny that it is a “necessary pre-condition”?

            You ask for supporting references. Look, I do not know where to START. There is literally months of reading for you to do if you want to. Start with everything authored or co-authored by Paul Cheshire.


          • “But “financial deregulation”, and population growth, and State-subsidised loans and every other demand-side factor, does NOT cause a house price bubble when supply of land for urban growth is unconstrained. ”

            OK. How do you explain housing bubbles in places where supply of land for urban growth is unconstrained? How do you explain housing bubbles in places where land restrictions did not exist: Texas (1980s), Melbourne (1890s), US bubble of late 1890s. How do you explain bubbles in countries with no regulation or no enforcement: South Africa, India, South-east Europe, Middle East, …

            More interestingly, how do you explain the fact that construction boom led price bubble in US in 2000s? In Arizona, for example, construction permit boom led price boom by almost two years. How it’s possible to argue that permit issue (land restrictions) caused the bubble when in fact permits sky-rocketed to all time high before prices event started rising. Arguing supply squeeze argument in this case is silly.

    • I don’t think we need to waste money on excess supply to prevent bubbles and destroy cities by creating land-waste urban-sprawls Texas style.

      That sounds terrible. I would hate to see Sydney lose its current super-efficient compact form. It really is a credit to the town planners how it has turned out.

      Maybe if we wait another 10, 20 or 30 years, affordable housing might appear without all the problems of sprawl and overbuilding that you fear.

      • I meant to also say to Raveswei that there is no proof anywhere that infrastructure provision is cheaper in conditions of higher urban density. In fact the cost of access, land acquisition, and disruption is much higher.

        Trip to work times are in fact longer in denser cities, because of congestion and also because there is stronger “sorting” by income, of efficient locations of households. Wealthy elites walk to work and catch the tube trains. Most ordinary people in fact end up having to commute further, and in worse congestion, than their counterparts in an affordable US city.

        The fact that energy consumption is lower in denser cities, is always simply because there is so much less disposable income after the expensive housing costs are deducted. The correlation is NOT “CAUSED” by EFFICIENCY at all, but by de facto taxation. The “tax” is however collected by land rentiers, not the government.

        This is perhaps the strongest argument we can use to convince politicians to use taxes on energy and congestion charges and so on, instead of blunt instrument urban growth containment policies. There are academic papers that suggest that urban growth containment policies are 20 to 60 times more costly to society than taxes on the factors that are meant to be changed. Anthony Downs suggests in “Still Stuck in Traffic” (2004), that taxes (on energy) and other “pricing” mechanisms would be like shifting the position of a picture hanging on a living room wall, while urban growth containment policies are like trying to shift the wall instead.

    • “I don’t think we need to waste money on excess supply”

      We’d be saving money because less would be tied up in unproductive housing.

      We’d also save money by firing useless planners.

      • “….We’d be saving money because less would be tied up in unproductive housing…..”

        Exactly; and more specifically, it involves whether or not money is tied up in price increases in return for absolutely nothing, the urban land in which the prices are increasing, would be there anyway, and used anyway; AND being forced to use less of it at a higher price actually results in LOWER productivity.

    • But even if there was no credit at all, the same cohort would be locked out of home ownership if land supply was rationed.

      Prices would always go up faster than some cohort at the bottom of the income distribution could save money.

    • More bandaid “solutions”. Why so many continue to believe in taxes as solutions (incl. Tobin taxes) never ceases to amaze. All directly akin to closing the stable door after the usurers’ horse has bolted.

      • Mining BoganMEMBER


        There is only one solution. Shoot one banker a month until they wake up to themselves. Blindfolds and cigarettes are a marvelous motivation tool.

        • Like in the USA, I am not sure why they shoot their school mates when there are so many bankers that are far more deserving of a bullet

          • Corporate propaganda and brainwashing AF. Most people struggle to identify the corporates and the banking enterprises as the totalitarian, undemocratic institutions as the real threat. Hence, in their misguided and frustrated anger, they turn on those around them instead of the true enemy.

            It’s a bit like those people who believe that value is added by financialization of the economy or by those white collar criminals chasing profits in the digital realm with trades of no real substance. Misguided.

            There needs to be a return to ‘real production’ in the economy and a reverse of the influence of the FIRE sector as the global debt bubble unwinds. One can hope.

          • “so many bankers that are far more deserving of a bullet”

            I think Bobby made a good point but overall it appears to be the fact that although bank bashing is almost a cult culture in itself, few people have the ability to closely identify the specific role of bankers that give them that reputation for which they deserve. I mean few people in Australia for instance believe that there is a housing bubble and an even less cohort can specifically link this bubble to extremely lax lending standards and sky high LVRs.

          • The following claim, is from Dr David Evans of the “Science and Public Policy Institute”:

            “……..The profits made in the financial sector (in the USA) increased from 10% of all profits before 1971 to 45% in 2006. The finance industry only employs about five percent of workers, and produces no tangible goods and few essential services, yet it captured a huge share of profit during the financial bubble. That is rent seeking on a monumental scale……”

            I understand that there was once an opinion among classical economists, that “finance is handmaiden to industry”. I do see the above situation, if true, as a case of wealth transfer increasingly dominating wealth creation. But I do see a range of factors affecting this; urban growth constraints are little realised to have contributed. Without these, the “financialisation” of the mortgage market would not have been nearly as significant.

  6. Thanks Leith.

    A couple of suggestions:
    1. Charts of showing growth in a single series should really be presented with a log scale vertical axis. I would like to see the growth rates by decade from 1948 as that seems to be the time when rates of growth broke out.
    2. The resource investment surely did not start at 0 and surely will not end at 0.

    In spite of your (and Steve Keen’s) quite persuasive arguments about over priced housing, I just can’t bring myself to sell any real estate, even though my logic says sell overvalued AUD denominated overvalued real estate and buy fair/undervalued USD fair/undervalued realestate.

  7. There you go again, letting “numbers”, “data” and “evidence” get in the way.

    It certainly is more compelling than the alternative arguments that suffer from a distinct lack of evidence:
    – There is no bubble because there hasn’t been a crash (my personal favourite)
    – Acute shortage of land (they’re not making any more of it you know)
    – Acute shortage of houses (despite what the census says – can’t you see the thousands of middle class people living on the street because they can’t find a roof?)
    – Australia is not America/Ireland/Spain, so it can’t happen here
    – Everyone wants to live here (because everywhere else in the world is unliveable?)
    – Immigration is bringing millions of cashed up people here looking to buy all our houses

    In the future people will be studying this bubble and its aftermath and wondering how on earth anyone missed it.

    • – Acute shortage of houses (despite what the census says – can’t you see the thousands of middle class people living on the street because they can’t find a roof?)

      This is a common shortage-denier mistake. The shortage does not force middle-class people to live on the street. The shortage forces what would otherwise be middle-class people to turn into lower-class people and live in what would have been lower-class housing. Some choose to move overseas.

      The displaced lower-class are then forced to either live on the street or move to other cities or overseas.

      Another mistake made by shortage-deniers is to misuse the Census. It is a collection of facts. It was never intended to measure the housing shortage. The census does not count the number of people forced to leave Australia by the housing shortage. It only counts those who stayed.

      • Got some numbers on that? I’m sure it happens but I’d be surprised if it was materially large, especially given we have more people arriving than leaving.

        In any case, if that is the situation it sounds more like a mis-match between what people want and what is available. The way the spruikers use the term shortage, it refers to a physical lack of dwellings. If there are enough dwellings, there is no shortage. Although it doesn’t mean the system isn’t broken.

        I’m not sure “denier” is the right word – show me the evidence and I’ll believe it.

        • FYI, based on some posts a few days ago, as I understand it The Claw simply defines supply and demand as everything that influences price.

          So if prices are ‘high’, that means there is a shortage by definition and no further evidence is relevant.

          Of course, the law of supply and demand in this form is essentially content-free.

          • Ah there is nothing like a good tribal war.
            Let’s form into two groups – bulls and bears. Now all the crashy bears must abuse all the spruiky bulls, and vice versa. Oh dear, someone mentions a shortage – that must be a spruiky bull.
            Quickly crashy bears, everyone attack the bull.

        • The way the spruikers use the term shortage, it refers to a physical lack of dwellings.
          I am not a spruiker, rather a student of our housing disaster.
          There is a physical lack of dwellings. There are not physically enough dwellings of acceptable quality in acceptable locations for both the IMMIGRANTS and the LOCALS to live according to the standards that prevailed 10,20 or 30 years ago.
          As a result rich immigrants are forcing poor locals out.

          In one word – SHORTAGE.

          • Nigel Stapledon, noted researcher in house price cycles in Australia, disagrees with you Claw.

            See Figure 4 – Annual Growth Rates in adult population and housing stock pg 304, “Trends and cycles in Sydney and Melbourne House Prices from 1880 – 2011”, Australian Economic History Review, 2012.

            What you will see is that the stock of dwellings has outpaced adult population growth (considered due to household formation) consistently since the 1950s onwards, except for a short period in the mid noughties.

            What this means is that there is a probable large oversupply, even when considering replacement of old buildings etc. So, it is clear that your supply demand argument is clearly false and also influenced by:

            – ponzi credit
            – artificial constraints in certain markets e.g. some rental markets, because of tax changes and large relative capital gains which have made it profitable to withhold properties from the market
            – land use regulations
            – relative financial cost of squatting on properties/land purely for speculative capital gain versus renting or offloading a property/parcel of land.

            What this means Claw is that you can see a ‘false shortage’ which becomes an oversupply on the flip side of a credit bubble bust, because a ton of supply suddenly comes to market as asset prices tank.

            It has happened in many other jurisdictions i.e. ‘shortage’ becomes oversupply, why would it be different here?

            PS Are you denying Nigel’s stats showing an oversupply of dwellings over the long term?

          • And look at Leith Van O’s “Slide 29”.

            I have consistently pointed out to Claw that it is possible to have oversupply and price inflation in RE markets when the underlying problem is occurring in the sector of the market relating to land supply that must be “demanded” by developers before they can “supply” house buyers. Speculation, once provoked, takes care of the rest.

  8. House prices will rise while interest rates are heading down. Australians still remain very bullish about houses, it seems the only asset class they can really understand.

    Interest rates cannot continue to go down forever, especially with unemployment or inflation is ever so slowly creeping up on us.

    In iron ore and residential housing we trust!

    • it seems the only asset class they can really understand.

      I wouldn’t credit them with that.

      It may be better placed to say ‘the only asset class they have confidence in’.

    • “House prices will rise while interest rates are heading down” – So why after 7 years (since 2006) has the US housing market only moved in a south easterly direction despite the presence of lower interest rates than Australia?

      “Australians still remain very bullish about houses, it seems the only asset class they can really understand” – an investment is a good idea when the underlying asset is fundamentally sound but also thoroughly rejected by market participants at the time. Housing in Australia is like a religion, that in itself will mean that housing prices are too high. The euphoria will eventually die and so too does the hard earned capital of those that climbed onboard too late.

  9. Leith posted a great article here, it is a shame to see the comments degenerate to the tired shortage debate. Anyway, a shortage-denier posted above

    What you will see is that the stock of dwellings has outpaced adult population growth consistently since the 1950s onwards … What this means is that there is a probable large oversupply … it is clear that your supply demand argument is clearly false … Are you denying Nigel’s stats showing an oversupply of dwellings over the long term?

    It is ludicrous to insist that an adult Australian in 2013 should consume exactly the same amount of any good as an adult did in 1950. By your method it could be argued that we are suffering from a terrible shortage of white-walled tires and Bex tablets since their production has fallen so much, per adult, since 1950.

    I am sure Nigel Stapledon has good statistics. I deny that they show oversupply.

  10. Thank you, Leith the level headed. Van the Man. A peoples champion.

    There are cautionary lessons being given above that are not learned or acknowledged.

    Thanks also to Chris Becker for pointing out the difference between a virtuous cycle and swindlers paradise.

    There are also some good lessons from Michael Lewis on Ireland that was quoted here quite some time ago. Here’s a couple of snatches from it:

    Morgan Kelly, Irish Economist-

    ““They were now all bank economists, and they were nice guys and all that. And they were all saying the same thing: ‘We’re going to have a soft landing.’ ”

    The statement struck him as absurd: real-estate bubbles never end with soft landings. A bubble is inflated by nothing firmer than expectations. The moment people cease to believe that house prices will rise forever, they will notice what a terrible long-term investment real estate has become and flee the market, and the market will crash. It was in the nature of real-estate booms to end with crashes”…

    He learned that since 1994 the average price for a Dublin home had risen more than 500 percent. In parts of the city, rents had fallen to less than 1 percent of the purchase price—that is, you could rent a million-dollar home for less than $833 a month. The investment returns on Irish land were ridiculously low: it made no sense for capital to flow into Ireland to develop more of it. Irish home prices implied an economic growth rate that would leave Ireland, in 25 years, three times as rich as the United States. (“A price/earning ratio above Google’s,” as Kelly put it.) Where would this growth come from? Since 2000, Irish exports had stalled, and the economy had been consumed with building houses and offices and hotels. “Competitiveness didn’t matter,” says Kelly. “From now on we were going to get rich building houses for each other.”…

    (Quick Julia, Tony, Treasury, RBA et al, that’s the way to keep the “riches” flowing. Sean sarc.)

    “The endless flow of cheap foreign money had teased a new trait out of a nation. “We are sort of a hard, pessimistic people,” says Kelly. “We don’t look on the bright side.” Yet, since the year 2000, a lot of people had behaved as if each day would be sunnier than the last. The Irish had discovered optimism.”…

    “Their real-estate boom had the flavor of a family lie: it was sustainable so long as it went unquestioned, and it went unquestioned so long as it appeared sustainable. After all, once the value of Irish real estate came untethered from rents there was no value for it that couldn’t be justified.”..

    “The comparisons that sprung to Morgan Kelly’s mind were with the housing bubbles in the Netherlands in the 1970s and Finland in the 1980s, but it almost didn’t matter which examples he picked: the mere idea that Ireland was not sui generis was the panic-making thought. “There is an iron law of house prices,” he wrote. “The more house prices rise relative to income and rents, the more they subsequently fall.”

    “By the time I got to him, Kelly had angered and alienated the entire Irish business and political establishments”

    As it happened, Kelly had predicted the future with uncanny accuracy, but to believe what he was saying you had to accept that Ireland was not some weird exception in human financial history. “It had no impact,” Kelly says of his piece. “The response was general amusement. It was What will these crazy eggheads come up with next? sort of stuff.”


    A rollicking good read as an after thought and cautionary tale for Leith’s wonderful work.

    To put in Flawsian terms- someone’s going to have a Porterhouse Blue -et tu Tokyo Rose aka PF?

    Thank you Leith.