RBA drops the ball on housing supply (again!)

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By Leith van Onselen

Last month, RBA Assistant Governor, Christopher Kent, gave a speech entitled Recent Developments in the Australian Housing Market, which contained a number of erroneous statements about land/housing supply (click to read my critique).

Yesterday, the RBA’s Head of Financial Stability, Luci Ellis followed up with a speech entitled Housing and Mortgage Markets: The Long Run, the Short Run and the Uncertainty in Between, which contains a number of factual errors and mis-diagnosis of land/housing supply constraints across Australia’s various housing markets. Lets take a look.

Australia had high population growth during the post-war era (Graph 5). Since then it has slowed, but with some bumps along the way. During much of that period, growth in the dwelling stock outpaced population growth. Household sizes were shrinking, partly because the population was ageing and partly because people were having fewer children than in the past.

Graph 5

 

Graph 5: Dwelling and Population Growth

Population growth surged in the years after 2004, largely resulting from immigration. It was not immediately recognised, because part of the increase came from students and former students, whose long-term residency wasn’t immediately obvious. It’s fair to say that the fact of this acceleration in population growth wasn’t fully appreciated at first. As such, it was therefore not planned for. So at least in some cities, we saw strong demand for housing and rising prices, even though the credit boom had ended, because construction did not rise to meet this surge in demand.

The housing and credit boom of 2002/03 was clearly demand driven, but even it sparked concerns about constraints on housing supply. Those concerns only intensified afterwards, when the pressure really was for more dwellings to accommodate the population, rather than just nicer ones to absorb the extra borrowing capacity. My colleague Christopher Kent spoke about this recently. He noted that if constraints on land supply were the most important factor explaining high housing prices, we would see prices rising fastest where those constraints were most binding – the greenfield sites on city fringes. But that is not what we see.

The RBA’s claim that land prices have not risen quickly in greenfield sites is not backed-up data. As shown in the below table from RP Data, land prices in each and every capital city surged in the decade to 2012:

ScreenHunter_07 Apr. 23 16.17

In fact, the land cost per square metre more than tripled in all capital cities, with the exception of Sydney, where vacant land prices were already expensive (see next chart).

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If the above data is not proof of rampant inflation in fringe land costs, I don’t know what is.

Ms Ellis’ suggestion that the pre-2003 price boom was solely demand driven is also questionable. While credit was undoubtedly the fuel behind the surge in house prices, the RBA’s own chart (above) shows that the rate of dwelling supply contracted sharply from the mid-1990s, just as Australian house prices began their decade long run. If housing supply was responsive (‘elastic’), such an increase in price would have elicited a supply response, which would have mitigated further price rises. This clearly didn’t happen, hence the conclusion that Australian housing supply has become increasingly unresponsive (‘inelastic’).

Back to Ms Ellis’ speech.

Part of the perception of supply constraints comes from our view of Australia as a big country. Yes, we have a lot of land. What we don’t have much of is land where people actually want to live. In general, desirable land is the land within or adjacent to existing settlements. Australia’s population is heavily urbanised compared with other developed countries, let alone most emerging countries.

It is also quite concentrated in a couple of large cities (Graph 6). So the range of acceptable locations is actually more limited than the map would lead you to believe.

Graph 6

Graph 6: Urban Population

Perhaps more to the point, part of the reason why land seems in such short supply is that we each consume so much of it. As this graph shows, Australian cities are the least dense, in terms of population per square kilometre, than the cities of any other sizeable country, developed or emerging (Graph 7). Only New Zealand comes close, and that is partly because its cities are smaller. (Smaller cities tend to be less dense on average.) This is not even a case of comparing Australia with crowded European cities, or the megacities of developing countries. At around 375 people per square kilometre, Sydney is only 40 per cent as dense as Toronto. Melbourne is a bit more than half as dense as Toronto. And of the 276 US cities and towns in these data, only eight have lower densities than Sydney; the largest of those eight cities has only a little more than half a million inhabitants.

Graph 7

Graph 7: Urban Population Density

I fail to see the point of Ms Ellis’ remarks. Australia has a relatively small population of only 23 million people, or roughly 1/14th that of the United States. Moreover, none of Australia’s cities are large by global standards. In fact, Greater Sydney (population 4.4 million) wouldn’t even rank in the top 10 of largest metropolitan areas in the United States. Yet our residential land prices are absurd by global standards, running well above most other countries where land supply is genuinely scarce (rather than made scarce through regulation and lack of infrastructure provision).

Back to Ms Ellis.

If land availability were the problem, we’d expect land costs to dominate the costs of producing a new home at the city fringe. But that’s not what we see (Graph 8). Neither do government charges dominate total costs. Rather, it turns out that construction costs are the largest contributor to the total costs of production, and they seem quite high compared with the total cost of a newly built home in some other developed countries.

Graph 8

Graph 8: Construction Costs

This is nonsensical analysis by the RBA. The latest HIA-RP Data Residential Land Report showed that the weighted median fringe capital city land price was $223,000 as at December 2012, implying that land prices comprise the majority of the cost of newly constructed housing.

Further, according to the ABS, the cost of building new project homes (i.e. the cost of constructing the physical dwelling, excluding land costs) has been lacklustre when compared against the growth of house prices (which includes land costs), suggesting that the bulk of the cost escalation of new homes has been in land prices, not construction costs (see next chart).

ScreenHunter_09 Apr. 23 16.51

The above charts are broadly supported by aggregate land and dwelling values data produced by the ABS and RBA, which shows land prices roughly doubling against GDP since the mid-1990s, whereas the value of physical structures has flat-lined (see below chart).

ScreenHunter_11 Apr. 23 16.59

Back to Ms Ellis.

What are the long-run implications of our demography and geography? I am not a demographer, but it seems reasonable to me to conclude that long-run population growth will be slower in future than in the decades following the Second World War. It also seems reasonable to expect that the decline in household sizes has come to an end. The expansion in the housing stock needed to accommodate any given population increase will therefore be smaller than past data relationships implied.

Even with slower population growth, the price of our low-density life has become unaffordable for some. It therefore seems likely that our cities will become denser over time. If so, the mix of residential construction will be tilted more towards medium-density and high-density dwellings than in past decades. We have already been seeing this shift over the past decade or so (Graph 9).

Graph 9

Graph 9: Apartment and Medium-density Housing

What Ms Ellis fails to mention is that the recent uptick in average household size (see next chart) has likely been caused by the increasing cost of housing, rather than demographic change or consumer preference. That is, many who would like to enter the housing market simply cannot, due to prohibitively high housing costs caused, at least in part, by rising land costs from supply constraints.

ScreenHunter_13 Apr. 23 19.38

Indeed, according to the 2011 census, the percentage of group households increased to 4.1% from 3.9% in 2006, whereas the percentage of single (lone person) households declined to 24.3% from 24.4%, suggesting that higher housing costs have worked to increase occupancy rates.

More broadly, Ms Ellis’ and Christopher Kent’s testimony on the supply-side contradicts a 2008 speech by the RBA’s Anthony Richards, which properly diagnosed the issues around Australian housing supply:

…supply-side factors should have a much greater influence on prices towards the fringes of cities, where land is less scarce and accounts for a smaller proportion of the total dwelling price. In principle, the price of housing there should be close to its marginal cost, determined as the sum of the cost of new housing construction, land development costs, and the cost of raw land. And in the absence of any restrictions on supply, the price of raw land on the fringes should be tied reasonably closely to its value in alternative uses, such as agriculture. So unless there has been a marked increase in the value of this land when used for other purposes, the availability of additional land towards the edges of our cities should have limited increases in the cost of housing there…

So if we are looking for explanations why housing is not as affordable as we might like, it may be necessary to look at factors on the supply side as well. One obvious place to start is the cost of land for building new houses near the edges of our cities…

There are no doubt a number of factors that could be contributing to the observed level of land prices… One factor that has been widely mentioned is the existence of various constraints on land development, including growth corridors and boundaries. Another factor that has been mentioned is the existence of a range of government charges, including developer levies or infrastructure charges. More broadly, concerns have also been expressed that zoning policies and building approval processes have hampered in-fill development closer to the city centres.

Both economic theory and international evidence suggest that housing prices can be boosted by land usage policies (which can create artificial scarcity of residential-zoned land), problems with the complexity of the development process (which creates rents), and the fees and charges imposed on development. Accordingly, the fact that higher prices for housing have not resulted in a more significant supply response could be a reflection of various supply-side costs that have represented a wedge in the cost of bringing new housing to market.

…the fact is that real price increases in the outer suburbs have been quite large as well.

Ms Ellis’ and Mr Kent also seem to contradict the Productivity Commission’s 2011 planning report, which found that the land supply system is slow and unresponsive, caused in part by slow approval and planning processes, as well as poor infrastructure delivery:

Based on a sample of 20 residential developments in greenfield areas across Australia’s five largest cities, it can be 10 years after the commencement of rezoning before a subdivision of that land is completed, infrastructure is installed, and building can commence. If processes outside of planning are included, it can take up to 15 years between site assembly and building construction.

Across all jurisdictions, the most common causes of delays and extended timeframes in land supply processes are associated with rezoning and planning scheme amendment; structure planning; and overcoming community concerns and objections. The substantial length of time associated with rezoning and structure planning processes (up to six years) is not surprising given the complexity and absence of statutory time limits in most jurisdictions.

Perhaps the underlying reason for the RBA’s new found supply-side obtuseness is because it has become the Australia’s key defender of high house prices. Not only has the RBA seemingly changed tack on the supply-side, but has offered cherry-picked analysis of other markets that concludes more responsive housing supply increases financial instability.

These arguments are not supported by the weight of local or international evidence or economic principle.  We should expect better from our central bank.

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Comments

  1. Excellent work yet again!

    “Perhaps the underlying reason for the RBA’s new found supply-side obtuseness is because it has become the Australia’s key defender of high house prices”. Yep no doubt about that.

    Ms Ellis is Head of Financial Stability – a rather uncomfortable position to hold in the event that house prices start to seriously revert to mean and place Megabank under pressure.

    No surprise that she sees no problems with the current level of household debt ( no platypus sightings) and refuses to provide any guidance as to what might be a level of household debt that would cause concern – 160% of disposable income? 200%?

    Lucky for Luci the MSM (and most pollies) are clueless of the topic of household debt – they are still suckered in by public debt squarking.

    The single best indicator of future RBA interest rate policy is what is happening with credit growth. When that softens and places house prices at risk expect interest cuts – chop chop chop.

    The RBA must be watching with some interest what some state governments are up to on the land supply front. If they actually deliver on their promises to drive higher quantities on the market at lower cost to feed their revenues and state economies, the RBA may find the asset values supporting MegaBank under attack.

    Of course if that happens they will send word to the Fed Govt – pump up population and fast (and nudge nudge wink approvals for foreign buyers of established dwellings).

    My goodness isnt a Big Australia what Gillard is suddenly rabbiting on about – even though unemployment is coming under pressure as the mining boom fades?

    What a coincidence!

    How predictable.

    They really do take us for fools.

    • GunnamattaMEMBER

      Magnificent work……..Once again let me say this needs to be done in a video format. Everyone here knows what you are on about when it comes to real estate, but the punters dont read economics related websites much.

      ‘Perhaps the underlying reason for the RBA’s new found supply-side obtuseness is because it has become the Australia’s key defender of high house prices.’

      They would take on that role one assumes largely because of the risk that real estate and price movements in it would pose for Australian banks, which transmits directly to the sovereign.

      They would have the sovereign (of either political bent) telling them they dont want that risk.

      Presumably what they dont have is a sovereign telling them to help find a way out of a high real estate cost economy and population addicted to housing investment, or a public increasingly aware of the costs of high real estate costs in terms of their job security or disposable income/mortgage stress.

    • Pfh,

      You’ve hit the nail on the head. Prime the population pump and damn the torpedoes.

      Disgraceful work by the RBA.

      So their only answer is we pump up prices and debt in our Ponzi because to do anything to unwind it would cause pain?

      My oh my, when TSHTF it is going to be a horror show for the ages.

      • Unless you are a top banker. Or a (retired?) RBA governor. Or a (retired?) politician.

        No problem for any of these folks. None at all. In fact, more of an opportunity than anything.

        Think about it.

  2. Here is the ultimate example illustrating the need for a code of ethics for economists, as Cameron Murray was arguing yesterday.

    I think a case for the prosecution, going by Leith Van O’s data pack above, would have little trouble securing a conviction of Ms Ellis before any judge.

    Who and what has got to the RBA? Is it the same “who and what” has got to other prominent Australian flip-floppers on this issue? (Apparently some of them are touchy when I mention their names on this forum).

    • The RBA’s actions in recent years are in accord with Dr Ellis’ position. Their sorely mistaken base is clearly revealed – thank you Leith.

      Low land costs are critical to prosperity, household formation, consumer debt levels and economic freedom.

      The price of land should be frog-marched by government to this superior position by rebasing taxation and lifting the government rationing of land on the outskirts. Debt would follow. Govt could even do some socialist subdivisions themselves to correct this obvious market failure.

      The RBA wants residential construction to take over from the mining construction boom. Fine. Just stiff the landbankers.

      Don’t Buy Now!

      • Secure a conviction for the entire RBA, then….

        If there was a code of ethics for economists, quite possibly Stevens and Richards would have stuck to their pre-2010 commonsense.

  3. Christopher Kent appears to have learned very little from his stint at the IMF working on the Italian desk, otherwise he would not be sprouting the misguided views that he does. Luci Ellis, as I have noted before, is Head of Financial Stability. Her job is to ‘to be right’, about anything. It’s to keep the sheep, calm. Whatever it takes applies here as much as it does, there.

    • Typing, like revenge, should be done cold! Edit: ” Her job is not to ‘to be right’, about anything.”

    • I recall a choice comment in a Michael Lewis essay on Ireland, where he dates the start of the crash to when a central banker or some crucial regulator was cross-examined on TV by someone like Leith Van O….

      “……. In McCarthy’s view, the dominant narrative inside the head of the average Irish citizen — and his receptiveness to the story Kelly was telling — changed at roughly 10 o’clock in the evening on October 2, 2008. On that night, Ireland’s financial regulator, a lifelong Central Bank bureaucrat in his 60s named Patrick Neary, came live on national television to be interviewed.

      The interviewer sounded as if he had just finished reading the collected works of Morgan Kelly (Ireland’s Leith Van O). Neary, for his part, looked as if he had been dragged from a hole into which he badly wanted to return. He wore an insecure little moustache, stammered rote answers to questions he had not been asked, and ignored the ones he had been asked.

      A banking system is an act of faith: it survives only for as long as people believe it will. Two weeks earlier the collapse of Lehman Brothers had cast doubt on banks everywhere. Ireland’s banks had not been managed to withstand doubt; they had been managed to exploit blind faith. Now the Irish people finally caught a glimpse of the guy meant to be safeguarding them: here he was, on their televisions, insisting that the Irish banks were “resilient” and “more than adequately capitalized” … when everyone in Ireland could see, in the vacant skyscrapers and empty housing developments around them, evidence of bank loans that were not merely bad but insane. “What happened was that everyone in Ireland had the idea that somewhere in Ireland there was a little wise old man who was in charge of the money, and this was the first time they’d ever seen this little man,” says McCarthy. “And then they saw him and that’s when everyone panicked……..”

      http://www.vanityfair.com/business/features/2011/03/michael-lewis-ireland-201103?printable=true&currentPage=all

  4. My early morning comment/rant ( yes it included reference to platypus) did not make it through moderation so I will be brief.

    One wonders what discussions take place over morning tea and bikkies at the RBA amongst the rank and file.

    If walls could speak.

    Like all up and comers they surely must marvel at what passes for wisdom amongst their bosses.

    Is Macrobusiness a forbidden favourite? Does it get redacted in the daily compilation from media monitors?

    • Unless like at another large Govt. Department I know Macrobusiness is actually on the list of Forbidden sites.

      • Can you name and shame this department that prefers to bury its collective head in the sand?

        The RBA and government can run away, but they cannot hide from their own policy failures.

        MB has been remarkably prescient about the end of the mining boom, the crippling latent effect of the high AUD on industry, politico-housing bubble complex dynamics and the ballooning structural budget deficit… something that our highly paid (by taxpayers) mandarins at the RBA and the Treasury can never claim credit for. All they have come up so far are ridiculous excuses to explain away their own failings .. and as I posted earlier.. not many are buying these excuses any more.

      • Fabian AlderseyMEMBER

        Noting that at a lot of Government agencies, all websites are “Forbidden” unless a business need has been established for access – it’s not a case of choosing to “Forbid” MacroBusiness for any sinister reason.

        It’d probably be as easy as someone at the relevant department putting in a request to be able to access this site.

  5. It seems that the RBA’s premise is that the problem is not too few houses, but rather a population that pays (borrows) too much and feels entitled to too much space. I fail to see what is wrong with this.

    While I accept the supply side solution, it doesn’t seem to address the underlying cause of the problem. What is the end point? A stable population and no more land release? Or do we just forever decrease density until we run out of land?

      • That urbanisation ratio changes drastically if we use “desireable area’

        We have plenty of available land, but not necessarily where people want to live. They want drinking water, shops, amenities, jobs, infrastructure etc.

        We need new cities, but where, and what would people in those cities do. Most states are very centralised and that doesn’t encourage population distribution away from the Capital city.

        The urban sprawl is unstoppable and that begs the question, do town planners have a policy to accomodate that? the cities can’t expand outward forever. Our population hit 23M last night and it will keep expanding regardless of which political party is in power.

        Is there a big picture or just a whole lot of postage stamps with no long term planning solution?

      • You are right Peter, the last time a new city was determined and not actually just an existing town enlarged was 1913 with the creation of Canberra.

        I believe that regionalisation of the existing states has to be pushed, Sydney is too big and cumbersome now.

        Twofold Bay at Eden which has a decent harbour and plenty of space, water etc is one place but it would take a hell of a lot of money to develop infrastructure. Land is still relativly cheap about <100k for 600 m2 block.

        What would it do though is the question ?

      • Well I’m not against an existing town or regional city being expanded. Town planners are responsible for planning their own cities, I just wonder if states have planners who have a “big picture” plan of how they want or expect the overall state population to grow.

        Just asking the question.

      • “The Woodlands” near Houston is the perfect model for replicating 20 times around Australia near existing major cities. Google it.

      • I accept the statistic, but I would question the conclusion. We probably could double the land area but whether or not it makes a difference is dependent on where that land is. For example, we have already built on some of the most productive farmland in the country, that’s why we settled there in the first place. I might suggest that productive agricultural land will be strategically more important than low population density in the coming years.

        However, as suggested by others, I am not opposed to new cities built on less productive land, but how do you make that happen?

        You also didn’t respond to my question about the end point of this supply side focussed solution. What does you equilibrium world look like?

      • we have already built on some of the most productive farmland in the country, that’s why we settled there in the first place. I might suggest that productive agricultural land will be strategically more important than low population density in the coming years.

        Vanadium might become even more important than that. Perhaps vast areas of Australia should be set aside to meet the future vanadium situation.

        Do you agree Nogen? If not, why not?

      • I can only assume you are suggesting that there is no point trying to predict the future and act in the best interest of that future.

        I have not suggested that “vast areas of Australia” be put aside. I have suggested that the most productive areas for certain strategic industries should be protected. Food, water and energy (and perhaps the net total of human knowledge) are more important than any other industries. Everything else just exists to support these pursuits and that job is set to get progressively more difficult in the coming years.

      • Great. Then since water is more important than food, let us ban farming on 99.9999% of Australia and use that land as water catchment.

        Ridiculous eh? Just as ridiculous as your suggestion if you think about it.

        There are already hundreds of thousands of acres being used for national parks, horses, cows, sheep, wine grapes and leisure that could easily be used for intensive staple food growing such as potatoes and carrots. Where is the shortage of farmland and why is it so important again?

      • I haven’t made that mistake at all. If you think it is a good idea to live in the desert so that tomatoes will be more comfortable growing near the coast, then please do so.

        I believe there is some value in economics and markets and in price signals. They are screaming shortage of housing land and surplus of farmland.

      • At what point did I advocate that? Please show me. It seems like you are misinterpreting my statement of “be very careful how you do it” for “don’t do it”. And ignoring my question of “This way might work, but what other ways are possible?”

        And although it is most likely in the realm of science fiction, there could be circumstances where reclaiming current residential land for agriculture might be necessary. One should not dismiss this, just assign it a very low probability.

        I also believe there is value in markets and price signals. But I also believe there are situations in which they can have no value whatsoever. I work with sensors every day. If they give me numbers that don’t make sense then I investigate further because the sensors could be wrong. And I need systems in place to handle that eventuality.

      • Look, if the price of land goes from $10,000 per acre to $1,000,000 per acre when it is rezoned from rural to urban, how much time do you need to spend faffing around checking if your sensors are correctly calibrated?

      • Niiiice, we must try that with the supply of land for wheat growing and dairy farming for the domestic market, and then tell families complaining about the prices of bread and milk, that prices are “just a matter of perception of value” anyway, stop grizzling.

        Housing happens to be a necessity and an expense. It therefore matters very much if people are being forced to pay the most they can possibly spare for the very least they can live with, rather than actually having some discretionary choice in a world being improved by economic and technological development.

        Matt Ridley points out very early on in his book “The Rational Optimist”, that housing is the one thing that in most places has NOT become steadily better in value – thanks to government interference in free markets. We would not even be having this discussion, there would not even be an internet with highly democratised (low cost) access, if government had done to that what it has done to housing.

      • And in making that statement, Phil, you have made assumptions about “all future world scenarios”, and about what objectives you are designing your system of economic management for (which is what exactly?).

        Shelter is a necessity. But a tent in a field with many other tents provides shelter. Anything else is entirely discretionary and its value suitable to be questioned when compared to other options.

        If I am to define a different future objective to you, or make a different assessment of likely future factors or events, it stands to reason that my perception of value might be different. The truth of these matters cannot be determined by a majority of people.

    • Nice army of straw men you have there, buddy!

      You might consider actually making a point and refuting the original case instead, with well thought out arguments, not half baked ideas and straw man cases.

      • I fail to see how seeking how offering an opinion from my understanding of the world on a high level concept and requesting more detail is considered so offensive. Why do I need to “make a point” or start an argument in order for my comment to be welcome?

        I could have easily said “way to respond to a request for information with condescension and vague references to logical fallacies”. But I wouldn’t because it would be rude. Ask yourself really, what did you just contribute to the discussion beyond “you’re wrong”. You could have used far fewer words.

  6. reusachtigeMEMBER

    Again, here’s another reason why I am a proud crashnik and want it all to come crashing down, as hard as possible. I seem to be growing more proud every day. Thank you.

    • The people in Spain and Ireland don’t feel particularly proud of their crash. Do you ever stop to consider the actual repercussions of your hopes and desires?

      As your wishes won’t affect the market, do you ever consider a plan “B” if we have already had our correction?

      Sorry if this appears confrontational, but i struggle to see the logic of crashniks. It’s kind of like wishing for an earthquake in the hope that it will bring down your neighbours house, but leave your house intact.

      Is is bragging rights at the next family BBQ or is there another goal?

      • mine-otour in a china shop

        Maybe he is hoping for a crash because he his waiting to buy a property on the dip, or he has already paid off his property and is fed up with property and other high costs? There are always people looking at both sides of the market. That said you are right the effects of a crash are not nice with neighbours and friends losing jobs and other social costs.

        Irish people are not proud of their crash. In particular some are not proud of:

        (1) The rampant greed which fuelled demand by buyers and lenders

        (2) Rampant and reckless lending by banks which went unabated by banks, policymakers and regulators.

        (3) Continual spruiking by estate agents and pro-property lobbyists and economists which fuelled demand on the assumption prices will rise forever.

        (4) Inept politicians many of whom were investors and has feet in two camps.

        (5) Failure by the majority of the mainstream press to see the other side of the picture.

        (6) Failure to have a clear policy for population growth and analysis of supply side issues also (several reports failed).

        I wonder if the market does crash here how many of these points would be true here?

      • +100, Mine-o-tour

        Now I don’t need to say that.

        Exactly, it should be absolutely clear what behaviour society should be damning here.

      • reusachtigeMEMBER

        Of course you don’t see the logic, your income depends on not seeing it. By the way, I have lots of family and friends in Ireland and they are doing rather well thak you very much. Things are so much cheaper. House prices are rarely mentioned anymore, which is a great thing. Sorry, your logic is weak.

        Bring on the crash!

      • Calling my reasonable question “weak logic” is really the height of stupidity, but I guess that you can’t see that.
        You are correct that I do make money from housing, but it’s much the same in an up market as it is in a down market. In fact in a down market I can very quickly turn into a predatory buyer and make a hell of a lot more money, so it’s a fairly shallow and unsophisticated accusation. For example I am currently buying an apartment for $865 per SQM which is a better price than anything that you will have ever seen.

        I don’t think that you have thought out your plans, and I think that you should re-evaluate them. I have sympathy for the “rebel without a cause” type, but you seem to have tossed reason out as well.

        I was hoping for a “38DDD” answer that made me rethink my own position, but you haven’t even provided an “uplift bra” answer.

        It’s time you put your theory under the knife.

      • Yes I gathered that. It’s kinda like banging your head against a wall and expecting good things to happen, when concussion is as good as it gets.

      • Peter
        You have stated that you favour a slow deflate and that prices should not rise beyond the CPI/wages growth.
        So do you think that the pain felt by a slow deflate is more or less than the pain felt by a quick detox.

        Let me just give you a hypothetical…
        We had a crash…
        1. Would construction be better or worse than it is now?
        2. Would our dollar be where it is?
        3. Would our manufacturing and retail be in better or worse shape?
        4. Would the initial loss of jobs be negated by an economy on the mean and spending again, albeit into a depressed market?
        5. Would we have peaking emigration still?
        6. Would more of the renters elect to buy after prices drop 30/40%?

        Not sure if that is your 38DDD, but I do hope it is boobs for thought….

      • PF, you are hoping for the continuation of the status quo (because you do benefit from it immensely, despite your protestations)

        .. where as reusachtige would like the current system to collapse sooner under the weight of its own internal contradiction and a fairer, freer economy with less debt to rise in its place.

        Setting aside the emotional arguments that you made, on the balance of probabilities, reusachtige will be right, because it is impossible for the status quo to continue.

      • With respect Mav, you are only guessing about my circumstances, and so far your guesses haven’t been anywhere near the mark, but you’re not alone in that.

      • GunnamattaMEMBER

        Without wishing to get too involved…

        Just on those people in Eire and Spain:

        …….What they dont feel particularly proud of (indeed as someone who talks with people in both places on any given week, including in the case of Eire, a large number of people still underwater with mortgages, and dealing with the blight that a failed government response to a real estate/finance system failure has created and is creating in their nations, it is often a very very intense hatred) is the bubble that preceded the crash.

        And if you would really like to get right up some noses in Dublin or Madrid slip the following sentences into a conversations.

        ‘There has never been a better time to buy’
        ‘There is unlimited demand’
        ‘The safest investment you can make’
        ‘There is no downside’
        ‘There is a shortage of residential real estate’

        or (my personal favourite)

        ‘If you dont get in now, you may miss out……’

        Lots of people in those countries arent too fussed about bragging rights at family barbecues. But you could interest them in burning rights when it came to real estate, mortgage broking, bank lending valuation types…..

        Just for those who may not know too much about Ireland and Spain.

      • Peter, your argument “do you have no shame hope for a crash, do you not think about consequences” is utterly ridiculous unless you acknowledge the damage current high housing prices are doing to the economy and the society.

      • reusachtigeMEMBER

        Clearly, there is no shame held by those wishing to keep the scam afloat at the expense of many a young person.

      • Well that’s not true, I have sons and daughters of my own and it is a concern, which is why I have clearly defined plans to cover exactly that.

        I just think that hoping for a crash is like the guy with a lotto ticket in his back pocket thinking that he has a financial plan.

        You can do whatever you like, but would making some plans for plan “B” be such a bad thing?

      • @PF 10.14 This Crashnik is very aware of the need for a plan B.

        It is possible Australia will fail its citizens and maintain these ruinous land prices. The politic-housing complex is determined on this course.

        My advice to excluded FHB’s is to save the difference between renting and repayments for a giant deposit (it can never be too big) progress careers to secure and stable employment, and to protect and elevate that personal credit rating.

        I see nothing to stop revert to mean as the mining construction boom fades. My advice will be of profound assistance even if the criminal racketeering in the land market continues.

        Don’t Buy Now!

      • Oh I don’t think that you are a crashnik David. I agree that it’s best to save as much as possible for a deposit, the more the better.

        The issue that I have though is that sometimes prices move upward faster than you can save, but if that’s not the case for you then follow your plan.

        As for reversion to mean, well prices can only revert to the cost of production. Sure in a crash prices will move below production cost, but the supply will be limited, and so only a few lucky people will be able to take advantage of that, and unfortunately that is usually cashed up investors.

        I don’t have to tell you that there is so much cost in contributions and compliance for developers, that bargain discount prices are not possible in a meaningful ongoing supply for the future, until those issues and costs have been significantly reduced. If developers can’t make a profit, they won’t develop, and nor will we see new market entrants come into development.

        Until governments make some genuine changes, I don’t see any lasting changes to the market. Even a crash will have limited effect. The median cost of a new build in the USA is now about $245,000 and the median price in the over $100K range is moving up faster than the broader market.

        Should we ask the USA to have another crash?

        People focus on how we arrived at this point, but really only future solutions matter, and I don’t see them on the table in the offices that matter.

      • dumb_non_economist

        Peter, and are you happy to see young home buyers indebted to the eye balls or forever locked out of the market?

        I don’t know if you see it this way, but you’re the polar opposite of a crashnik.

      • I keep saying, the same people repaying excessive debt will be BETTER able to pay it if the economy has reset, construction is growing, employment is growing, etc etc. It is all very well wanting to protect your equity but if this means less and less people have jobs, how sustainable is this?

      • What do Spain and Ireland have to do with anything? Surely you must be aware that we’re different here!

        Somehow, I doubt you’re sorry at all about being confrontational.

    • Fair enough Peter a crash will be painful for a lot of people, and the ones who get hurt most will be those who can least afford it – as always.

      However, the alternative seems to be the never ending death by a thousand cuts we are experiencing at the moment where demand is siphoned off from all other sectors to pay for ever increasing land prices.

      Something needs to change and the goverment (with RBA complicity) are determined not to let that happen. How long they can keep blowing into the baloon remains to be seen..

      • Thank you for a well thought out respectful reply.

        I’m not a “house prices to the moon” guy, I expect orderly rises more or less in line with wage growth, and I feel that in the current market house prices are elevated, although the extent of that elevation will depend on which city you are discussing, it varies.

        I don’t quite buy the money being siphoned off from other investments, but perhaps that’s a discussion best left for another day.

        Thank you.

      • Peter,

        Yes the market is elevated. By a moon shot. Prices are way way above long term trends and value ratios.

        Only question is whether prices can sustain themselves at this level for a considerable number of years while the trend catches up. Or if it goes back down and even below trend because the expensive lifestyle we live is unaffordable as we run out of music and deck chairs to shuffle on our Titanic economy.

      • Well I’m in Brisbane, so if you are in Sydney, your views will be a little different to mine due to the market conditions.

        I can’t tell you what house prices will be like in one year, ten years, or twenty years. All that I know is we live and work on a fairly short time frame, so decisions usually have to be based on current or short term market conditions.

      • “I don’t quite buy the money being siphoned off from other investments, but perhaps that’s a discussion best left for another day.”

        Granted – but if there’s a finite amount of money in an economy then the more that goes into residential housing, the less that is therefore available to go into:
        – Consumer discretionary spending
        – Loan to business to invest in growth and efficiency

        And the more onerously indebted the household sector is, the less willing they would be to spend in the domestic economy right?

      • Well that’s the thing, there isn’t a finite amount of money. Supply is being continuously created.

        But the supply can’t go out of balance. Really this is for another day, not today.

      • There isn’t a finite amount of money but without massive growth in wages individuals only have to spend what they earn currently.

        The big argument boomers give us “Gen Ys” is that we need to sacrifice to buy a home, well that sacrifice comes out of the revenue of all the other industries that could be supplying us with goods and services..

        You mention further up that prices can’t fall below cost of production for long, however the largest cost by far in a new home is the land. The land price can crash and builders would do quite nicely I imagine (those not holding large amounts of land that is) as their product becomes much cheaper.. It is the developers that would be in trouble..

      • Deenominator – the land was what I was referring to mostly, house construction costs have roughly kept pace with inlation, which is quite good when you consider that build quality has gotten higher.

        Land developers have to pay high costs, and most of that cost is either directly paid to government, or caused indirectly by government.

      • russellsmith – If you paid someone $200,000 for a house, then although you are $200K poorer, the vendors are $200K richer, and that money will go back into a bank as a deposit.

        You might be financially constrained due to your loan payments, but others are not. Only about one third of people own money on their homes, so only one third have various stages of indebtedness. Roughly speaking.

      • And that indebtedness is grossly unfairly shared in society, with the young carrying massive debt and being knife-edge vulnerable financially.

  7. “Population growth surged in the years after 2004, largely resulting from immigration. It was not immediately recognised, because part of the increase came from students and former students, whose long-term residency wasn’t immediately obvious. It’s fair to say that the fact of this acceleration in population growth wasn’t fully appreciated at first. As such, it was therefore not planned for.”

    What an admission of an absolute gross failure in planning/govt policy. Who is responsible for this? Why are we letting it happen again?

    • I recall a choice comment in a Michael Lewis essay on Ireland, where he dates the start of the crash to when a central banker or some crucial regulator was cross-examined on TV by someone like Leith Van O….

      “……. In McCarthy’s view, the dominant narrative inside the head of the average Irish citizen — and his receptiveness to the story Kelly was telling — changed at roughly 10 o’clock in the evening on October 2, 2008. On that night, Ireland’s financial regulator, a lifelong Central Bank bureaucrat in his 60s named Patrick Neary, came live on national television to be interviewed.

      The interviewer sounded as if he had just finished reading the collected works of Morgan Kelly (Ireland’s Leith Van O). Neary, for his part, looked as if he had been dragged from a hole into which he badly wanted to return. He wore an insecure little moustache, stammered rote answers to questions he had not been asked, and ignored the ones he had been asked.

      A banking system is an act of faith: it survives only for as long as people believe it will. Two weeks earlier the collapse of Lehman Brothers had cast doubt on banks everywhere. Ireland’s banks had not been managed to withstand doubt; they had been managed to exploit blind faith. Now the Irish people finally caught a glimpse of the guy meant to be safeguarding them: here he was, on their televisions, insisting that the Irish banks were “resilient” and “more than adequately capitalized” … when everyone in Ireland could see, in the vacant skyscrapers and empty housing developments around them, evidence of bank loans that were not merely bad but insane. “What happened was that everyone in Ireland had the idea that somewhere in Ireland there was a little wise old man who was in charge of the money, and this was the first time they’d ever seen this little man,” says McCarthy. “And then they saw him and that’s when everyone panicked……..”

      http://www.vanityfair.com/business/features/2011/03/michael-lewis-ireland-201103?printable=true&currentPage=all

  8. mine-otour in a china shop

    Will the RBA be publishing the excel spreadsheet of the data that they use for this analysis?

    Some of the “RBA” sourced data and analysis seems at odds with other sources as pointed out by the article.

    Maybe it would be better to let the ABS/APRA collect the data, and have any analysis peer reviewed externally with all data published afterwards?

  9. notsofastMEMBER

    I don’t envy Luci Ellis and Christopher Kent trying to sell these stories. The practice of using economic theory to explain what should be economic policy has not just become difficult, it has become impossible.

    Which leaves everyone guessing what are underlying reasons for these policies?

    What ever the underlying reasons are I am sure that they go well beyond the powers of Luci Ellis and Christopher Kent or even the all powerful Glen Stevens to influence or change. This situation is a little disappointing because it is difficult to judge the mettle of Luci Ellis and Christopher Kent under these conditions.

    • I agree. Stevens and Richards talked sense up till about 2010 and obviously know better. Who and what is “getting to” these people?

      • notsofastMEMBER

        I don’t know. But having been in positions myself where I have had to not only justify the indefensible but also own it, I do have some sympathy for them.

  10. UE, not sure if anyone else has noticed this, but Graph 8 (the one that shows that construction comprises the majority of the cost of new homes) is stated as assuming “a 2 bedroom apartment in an apartment block of 50 aparmtents”. No wonder the land component is so low – they’re talking about 1 apartment in a block of 50, as opposed to an actual HOUSE!

    Now, I assume that a) people want to live in houses rather than apartments and b) more houses and/or units generally get built as opposed to apartments, particularly in greenfield sites.

    As such, this would appear to be either willfully misleaading, or so outright incompetent that it should be consider negligent. Frankly, to draw broad conclusions from a very narrow assumption is just disgraceful, and it’s made worse by the fact that UE has been able to very easily draw a clear picture of what is actually going on. There was a time when I aspired to work at the RBA – now I’m not so sure, if this is the shoddy analysis that goes on.

    • DrBob127MEMBER

      Nice pickup,

      you are right that the land component of a “a 2 bedroom apartment in an apartment block of 50 aparmtents” is going to be much smaller than for a free standing house.

      Deliberately deceptive or incompetent?

      I’m not sure which is worse.

      • In the interests of full disclosure, after going over the graph again it appears the greenfields figure does appear to be in relation to a 3 bedroom house.

        However, I still have a big problem with it – a quick search of realeastate.com.au looking for land priced at even $100,000 on the fringes of Melbourne (twice what the RBA says the land component of a greenfield construction on the city fringe costs) turns up virtually nothing. Certainly nothing in the range the RBA thinks land is.

    • WHAAAAT?

      That absolutely does it. What a pack of crooks. Bring on the prosecutions.

      Well SPOTTED, Snagard.

  11. The data and analysis the ABS is using to draw their supporting conclusions on urban population and density are pure crap.

    The UN data that they’re drawing on for the country comparisons is based on non-standard definitions of cities and urban areas.

    For example, in Australia, for a place to be counted as an urban area, it need only have a population density of ~300/km^2 (IIRC). In Japan, urban areas must have populations of 4000/km^2 plus.

    That’s why Australia is always one of the most urbanised countries in the world in this sort of stat, our definition of what is urban is much, much lower than other places, and as such any sort of direct comparison is completely useless.

    The two largest cities comparisons are equally useless, because they’ve used metro areas in some countries, and strict city definitions in others. Again, for example, the Tokyo and Osaka metro areas together are well over 50 million people and in excess of 40% of the population of Japan, but it doesn’t show up in their graph because they’ve used the technical, governmental area definition of a city.

    I wont go in to any more detail here, but I can guarantee you comparisons of density between cities in different countries are equally as pointless, due to differences in definition.

  12. RapperWithABaby

    Apologies if it’s already been suggested but I think a crowd-funded documentary on this topic may be feasible. I would definitely put money towards it.

  13. I still cannot see how a crash helps anyone but the richest (who I dare say are not reading this blog). They are the only ones who would have the means to capitalise on a crash. The poor who lose their jobs, those who are recent buyers wouldn’t have a hope.

  14. Here is a very simplistic 25% Crash Scenario for a recent home purchaser just say;

    Original Value 100
    Appreciation/Depreciation -25
    Current Value 75
    Owners Equity -15
    Owners Borrowed Funds 90
    Lenders Equity 75

    The effect of this with foreclosure;
    Borrowers Position (sum lost) -10
    Lenders Position (sum lost) -15

    this takes money from the lender and the buyer how can that be good for an economy? or is there something wrong with my mathematics?

      • I keep saying, the same people repaying excessive debt will be BETTER able to PAY it if the economy has reset, construction is growing, employment is growing, etc etc. It is all very well wanting to protect your equity but if this means less and less people have jobs, how sustainable is this?

        The important thing is to avoid Irelands biggest mistake of the lot – nationalising the losses and bailing out the finance sector’s shareholders.

      • I already know that you are a patient person phil testament to all the explanatory highly regarded comments made.

        I know you will be equally patient when i ask how does a crash induced recession give more jobs, how does this not help more the cash and asset rich who can capitalise on the cheaper prices? and, once past the initial bust how long before new jobs would be created and those who have lost everything in a foreclosure recover?

      • The thing to consider is how long it takes for a recovery to occur, versus maintenance of the status quo in perpetuity IF that is possible and does not end in the biggest possible crash anyway.

        I would bet everything on Australia being far ahead in 20 years time with a crash now, NO bailouts of bank shareholders and bondholders!!!; a reset, regulatory reform to avert a repeat of the bubble, and everybody sadder and wiser. In comparison to actually keeping urban land prices permanently pumped up over that time.

        The UK would be miles ahead now had they tackled this same problem in the Thatchernomics era, it is the one thing she DIDN’T attend to and it has undermined the gain of everything else she did do. She did the right thing selling all the State houses to their occupants at affordable prices (one third of the UK was in “public” housing at that time; a legacy of the planning system and the unaffordability of housing); this reset the market at affordable levels temporarily.

        Look at the UK now to see the result of perpetuating the inflated urban land prices – bear in mind that Aussie is starting from a different position. I do not rate the Aussie economy’s chances anywhere near as high as the UK’s at sustaining this distortion.

      • Thanks for you honest reply Phil.

        My personal opinion is that 20 years is too long to wait. That means another generation misses out.

        All we have is time and if we are going to say people that lose there homes now and people in there 30’s may never have a home for their families because of a “Reset” is not a reasonable planning solution.

        Ideas that generate affordable housing are welcome but must offer a solution that addresses the problems for people now as well as those that come after us