House prices, interest rates and land supply

ScreenHunter_15 Mar. 05 15.42

Cross-posted with permission from Dr Alan Moran at Catallaxy Files

It is astonishing the disconnect between those looking at housing from the financial market perspective and those of us looking at the regulatory barriers.

Christopher Joye in the AFR today discusses a debate he has been having with fellow self-proclaimed housing guru Gerard Minack.  Apparently these two are sparring partners on the financial advisory circuit and now, as usual, give contrasting views about the direction of housing prices.  Their views seem to be dictated solely by interest rate movements.

Interest rates are clearly highly significant to house prices.  Lower rates mean cheaper mortgages and with supply only able to shift gradually, housing become more affordable and prices rise in response to the consequent demand surge.

Well that’s Economics 101.  But like all theories it needs to be tested empirically.

And here we find some discordant outcomes.  In the US interest rates like elsewhere are set nationally.  But some markets (California, Miami, Seattle) see price booms and price busts.

Here are the Case-Shiller indices for San Francisco and Dallas.

ScreenHunter_06 Sep. 12 15.44

Prices almost doubled in San Francisco between 2002 and 2006 then almost halved to 2010 and have since increased by 40 per cent.

Prices in Dallas rose 10 per cent 2002 to 2006 then fell 5 per cent to 2010 and have since increased by 10 per cent.

It is almost as if they were different countries.

Joye is certainly right to warn of the RBA seeking to accommodate the boom in housing prices – the San Francisco trend is testimony to what happens when central banks do that.

But missing from his analysis is the factor that has driven the different outcomes seen in Dallas (and most of the south, and mid west) and San Francisco (and most of the west coast and east coast).  And this is the land supply to allow flexibility of new building.  In places like Dallas, land supply is not regulatory suppressed by the government.  In California, the land supply is strictly controlled and prices are high so that new home prices are also high and these levels are reflected throughout the urban areas.  The price oscillations when demand softens are considerable.

Australian urban areas are like San Francisco.  Governments have bent to a Baptists and bootleggers alliance.  The Baptists are environmental activists against urban sprawl and productive uses for land; the bootleggers are speculators and developers (boosted by recent buyers of new over-priced properties) wanting to maintain prices.  The would-be new home owner is crushed between them being forced to pay $100,000 to $200,000 more for a new house than its underlying value.  State governments in Victoria and NSW are seeking to tilt the balance back to the consumer but the interest groups and the residue of regulations and bureaucracies assembles over several decades may make this difficult.

Joye barely recognises the supply side issues stem from land supply.  But he does finish with:

“A final concern is Australia’s housing supply challenge. We do need to build many more homes to accommodate the circa 15 million additional residents that will live here within 35 years.

 ”Developers do require positive price signals to commit scarce capital to constructing new supply. If our mounting supply-side deficiencies are allowed to accumulate we could see an even more exaggerated housing market cycle.”

Leith van Onselen


  1. An inconvenient fact for land supply and slow land release theorists is that the house price boom in Australia took place between 1998 and 2004 (a little later in Perth).

    Developer approvals also were very strong at this point – well beyond population growth (about 1% at the time by memory).

    We also experienced significant drops in the number of persons per dwelling (which only flattened out from 2006 onwards).

    All other things equal I agree that supply can make a difference but in the case of oz house prices the main cause of price increases is most likely demand driven through low interest rates, strong economy, easy money, tax advantages and exuberance and expectations of price gains.

    • Yeah whatever. As usual, focus only on demand and not land supply and planning, which have become significantly more restrictive as the “smart growth” nutters have taken hold across Australia.

      So how do you explain away the fact that dwelling construction never increased in response to booming prices, lower interest rates, and rising population growth? Or the massive escalation of fringe serviced land prices since the late-1990s?

      I have never claimed that the huge surge in Australian house prices is solely due to restricted supply. However, nor do i claim it is solely due to credit and taxation (e.g. negative gearing) either. Both factors have worked hand-in-hand. It’s about time you took your blinkers off and admitted that both factors are responsible.

      Unfortunately, most people recognise the role of demand-side factors, but are blind to supply. This is why I focus more on the later, in order to educate.

      • “…most people recognise the role of demand-side factors, but are blind to supply. This is why I focus more on the later, in order to educate.”

        Well said UE, and hearty applause from this reader and subscriber for your taking this position. This is why I love MB — smart insight from bloggers (and commenters) that seeks to thoroughly assess all angles, and importantly, offer a rebalance of emphases where imbalances exist in mainstream commentary and analysis.

        It’s the same sincere and well-intentioned rationale that drives my own relentless banging on about usury. Because very few others are.


      • Hey! no need to be rude and arrogant!

        I’ve acknowledged there is a role for land supply I just suspect this time around the main driver is demand.

        I suspect prices got to a level where they were out of line with the fundamentals and hence became a poor investment. The two went together early last decade. A simple check on will show that. the capital growth game had to end somewhere and buyers were no longer prepared to pay those sorts of prices so the music stopped.

        The reality is that none of the fundamentals explain clearly the price increases early last decade. The supply stream was running WELL ahead of population growth demand. Peeps just fell in love with housing. Whether you built 250K per year of 100K per year would not have mattered at that point.

        In any case when it comes to planning it’s more complicated that just letting rip with developments.

      • Ecostatsnerd,

        The crucial difference with US cities with perennially stable housing prices, is that their supply response to demand spikes is so rapid that expectations of endless capital gains never get a chance to even get underway.

        There are a couple of good academic papers that attempt to devise a formula to explain the behaviour of all markets within the USA; and they can’t do it without making “speculative demand” ENDOGENOUS to inelasticity of housing supply.

        If supply is rising as well as prices rising, the supply response is simply coming too late to stem the price increases. And it ultimately comes back to the elasticity of supply for LAND; it is all very well to have houses being built, but if developers have had to pay 1000% and more price premium over and above normal rural land values, there is definitely regulatory obstacles that are empowering land bankers to hold out for top dollar.

  2. Thanks Leith,

    I’m persuaded by your analysis that restrictions on land supply have a significant impact on housing prices.

    The questions I’m left with are:

    : to what extent are these restrictions sensible, and to what degree are they over-the-top? eg restrictions on building houses on flood plains or on the edges of crumbling cliffs might be seen as sensible, restrictions on development because it affects others’ views might be seen as less so. In practice, this is a political judgment – one person’s Baptist is another’s heroic planet saviour. But even then it’s helpful to know that heroic planet saving comes at the expense of people trying to get an affordable roof over their heads.

    : what would need to happen to separate the regulatory wheat from the regulatory chaff? ie if your analysis is correct, what to do?

    • Hi Ian. My position is as follows:

      If land needs to be preserved from development for environmental, safety, amenity, or social reasons, by all means do so. But don’t exclude all other land from development via some arbitary regulatory barrier (e.g. and urban growth boundary). The important thing is that landholders and developers are allowed to openly compete against each other so that competition and contestability is maximised, and market power is reduced.

      The government also needs to stop taxing development to kingdom come and bogging down the planning system via cumbersome (and costly) development processes.

    • In fact, Ian, arbitrary “boundaries” to growth result in a lot of development that would NOT happen if unsuitable land could be simply “leapfrogged”.

      “Planners” calculating “years of supply” have never once yet to my knowledge, anywhere in the world, done a fine grain analysis to see which land within their proposed boundary might not be the wisest to expect development on. This is slowly becoming the scandal it should be, in New Zealand, where the public debate is getting into finer details than elsewhere in the world. This has a lot to do with the tireless activism of Hugh Pavletich for years now.

      The arbitrary boundaries forcing the cost of land up results not just in unsuitable land being developed, but a lot higher site preparation costs as slopes and unstable ground get utilised, including within individual developments. And developers become more and more reluctant to sacrifice space to any non-saleable purposes at all; even footpaths and intersections; let alone parks and bike paths and all that.

      When developers are paying $40,000 per hectare or less, as in affordable US cities, they actually deliberately sacrifice space to create “amenity” because they know the return is higher that way; they can sell a smaller number of houses for a higher price at a higher net return.

      And less suitable land simply gets “leapfrogged” and perhaps put to some low value use or purchased by local government to use as nature reserve or playing fields.

  3. house prices in Dallas fell 33% in nominal terns following bust in mid 80s. They are still 10% below peak 30 years ago.

    No changes in land supply rules but boom and bust still happened in Dallas. There must be something else to the price movement beside land supply.

    • Typical misleading percentage reporting. Same could be said for Atlanta, where land supply is also flexible. What you fail to mention is that Dallas fell from a median multiple of just over 3 times incomes to just over 2 times incomes. That is, from affordable to seriously affordable. Now contrast this to the supply restricted markets, such as in California, which fell from median multiples of eight or above to five (i.e. a similar percentage amount).

      Now tell me which scenario is more devastating and which one resulted in a much greater loss of housing equity? You might want to read here for a thorough debunking of your argument.

    • IMHO, it’s one of MANY gears in the machine.

      That said, I think UE and MB focus too greatly on this particular cog, but it is definitely *A* factor… *THE* factor? YMMV 😉

      • It is the one factor that means “price volatility – or not”.

        All the other factors merely determine “how much volatility” and “how much economic and socio-economic damage in the long term”.

      • @ PB if we are talking about volatility than 30% fall from 3 times to 2 times income is equally volatile as fall from 6 times to 4 times income.

        Clearly, volatility is not only reserved for places with land supply restrictions.

        BTW. comparison between SF (city surrounded by ocean, full of rich people who prefer urban living, …) and Dallas (city in the middle of flat prairie, with median household income almost half the SF, full of rural and redneck people who prefer living isolated far from everything and everyone)

        It is clear to me why SF is more expensive, it is also clear that both cities at some point of time had easy credit driven boom and bust – there is nothing so special about free land supply. What makes Dallas cheaper is poor quality of urban life.

        • “What makes Dallas cheaper is poor quality of urban life.”

          And yet, Americans are choosing to flock to Dallas en masse. Meanwhile, the Inland Empire in California, which is nowhere near the coast and whose economy is depressed, continues to have more expensive housing. It also hit an epic median multiple of 7.6 times incomes in 2006. Wonder why? Planning maybe?

      • “…..30% fall from 3 times to 2 times income is equally volatile as fall from 6 times to 4 times income…..”

        Not when the fall from 6 times to 4 times was preceded by an inflation from 3 times to 6 times.

        The debt expansion is many times greater, including equity withdrawal mortgages. These also artificially boost economic turnover and government tax receipts.

        The fall from 3 to 2 involves a lot less equity loss, especially relative to incomes. And the market quickly resumes norm via a bit of increased household formation and in-migration. In fact the extremely affordable prices are a cause of economic recovery.

        This is even going to be true of Detroit, in my opinion. Contrast this with Liverpool, which is just as much of an economic and demographic disaster, but with house prices that remain unaffordable regardless, clear evidence that supply distortions disconnect housing markets from the real economy.

        If it was all about climate and local living conditions, the UK should have a good few affordable cities. It doesn’t.

        California was affordable in the 1950s and 60’s and grew about twice as fast then as Texas is now. Was the climate worse back then, or did they not have anti growth regulations back then?

        And check out page 42 of THIS paper:

        24 cities ranked for “comfortable climate”.

        1. Barcelona A (3.6)
        2. SanFrancisco A (3.8)
        3. Los Angeles A (4.4)
        4. Madrid A (6.6)
        5. Dallas A (7.5)
        6. Tokyo A (7.6)
        7. Shanghai A (8.8)
        8. New York A (10.0)
        9. Boston A (11.5)
        10. Sydney A (13.3)
        11. Chicago B (16.0)
        12. Seattle B (16.4)
        13. Hong Kong B (17.8)
        14. Milan B (19.0)
        15. Paris B (20.6)
        16. London B (22.6)
        17. Vancouver B (23.1)
        18. Calgary B (23.5)
        19. Halifax B (24.4)
        20. Toronto B (26.1)
        21. Montreal C (28.1)
        22. Berlin C (36.4)
        23. Oslo D (39.0)
        24. Stockholm D (49.0)

        Hmmmmm, where’s the correlation there with housing affordability?

      • I get the “supply and demand” aspect of this; less supply in an environment of high demand leads to price increases… massive ones. But again I believe the view here is too laser-focused on this as a primary cause.

        “Wha… why!?” you ask?

        We have enough homes here in Oz to fill the NEED of housing. What we do not have is so many homes as to stamp down the PRICE SPECULATION – and this is the part that I agree with in regards to the “supply and demand” argument. But in my opinion, in order to stamp down the inordinate demand we’ve seen in Oz since circa 2000 we’d need a MASSIVE OVERSUPPLY of housing.

        So for me, the more pertinent question is “what’s driving and supporting the speculation?”. IMHO, this is what is causing house prices to outstrip their functional values FAR more than our inability to dump housing on-market fast enough to drop prices. In short, “speculation” is not necessarily equal to “demand”.

        This other issue I have with the laser-focus is say we embark on a freewheeling open development approach… I believe we’d have to have a massive oversupply in order to stamp down the demand that is being supported by cheap money and bad federal policy. And thus would swing the pendulum too far in the opposite direction.

        This too would be folly as we’d have too many homes (as many cities in the US now have) that simply sit and rot as there are not enough people to fill them. This has massive environmental impacts as well as long term down trend potential for home prices below their functional values.

        “We can fill those with immigrants!” you say? Likely true… you do have me there. But it that the best idea? NOTE: I’m a dirty-dirty sepo-Australian myself 😉

        It seems like opening development restrictions (while a damn fine idea in moderation) is simply another can of worms that would cause it’s own entirely predictable set of problems.

        And so the pendulum swings wildly…

      • Dallas house prices jumped from 2 to 3 times income in a few before crash in mid 80s. Not much different that SF’s 4 to 6 and back. Volatility is exactly the same.

        BTW @ “comfortable climate”

        if you have ever been in Dallas you would never post BS like this (Canadians doing studies on “comfortable climate”:).

        Dallas has much hotter and more humid summers (average high temp in 3 summer months is 35C) than in Sydney (25C), much colder winters (average low in 3 winter months 4C) than Sydney (9C). And somehow climate in Dallas is more comfortable than in Sydney.

        in 29 years between 1978 and 2007, Dallas had 2500 days with apparent temperature (feels like) above 35C (86 days a year – almost 3 months above 35C) and 352 days above 40C (12 a year).

        * not everything you find on net is true

      • @ campbeln

        You are right, if we want to prevent speculation from supply side we will need to waste so much money and agri land to build so many unneeded homes (homes not needed for living).

        instead we can just prevent speculation from demand side (abolish NG, limit credit and increase CGT). That will cost us almost nothing.

        this is the same as saying that the best way of preventing price increase in water supply is to build parallel system of reservoirs and pipes that will at the end stay unused because existing pipes are large enough.

        People are not aware that land is natural monopoly that is almost immune to market forces. We need to regulate it like we do with other natural monopolies.

      • Governments should by all means compulsorily acquire land for development so that unearned gains do not make the entire market unaffordable and volatile.

        Good luck getting that into law.

        It is extraordinary how many people set up straw men arguments about “what if” this, “what if” that, if land was not rationed by planning, and they never look at how vastly better markets actually function where this is a reality.

        A risk of a few too many houses and a bit too much infrastructure is a pathetic excuse for forcing costs of several times larger magnitude on society in return for precisely NOTHING. Tens of billions of dollars of bubble debt could have paid for a lot more new houses and a lot more infrastructure; but it has “paid” for precisely NOTHING.

        A “few too many houses and a bit too much infrastructure” is something that is going to be useful anyway within a couple more years; more and more debt in return for nothing, is not of any use to anyone.

        You have missed most of my points and I am quite happy to leave others to decide who is right.

      • Canadians probably know first hand about freezing, windy and wet conditions – Toronto – the fact that this city has seriously unaffordable housing kind of blows the theory away about “pleasant climate”.

        There’s no correlation in the international data, between pleasant climate and housing affordability.

        Aussies actually flatter themselves regarding the causes of their own housing bubble. Pleasant climate, relative to cities in Texas? Strikes me as the most similar comparison in the whole data set.

  4. 1. You can’t explain the divergence of prices from rents by supply restrictions.

    2. Planning rules are more relaxed than ever. I have never been shown a single example of a new planning instrument that restricted total residential development capacity of a city (only be shifting scope from one area to another).

    3. Alan Moran gets paid to sell these idea so that his land-banking clients make money for nothing. I’d be happy to rezone their land if they would pay for the value gain from it – oh, what’s that, they don’t want the increased zoning anymore. Mmmm.

    • Yeah right Cam. Once again, playing the man (Moran) instead of the ball (his arguments). In your world, supply-side economics counts everywhere, except in the land/housing market.

      I cannot be bothered wasting my time arguing anymore with you on this issue – we have been going at it for years – so let’s just agree to disagree.

      • Leith,

        you keep sticking your head up on this one and getting totally pwnd, (Along with philbest) normally by Cameron Murray. (I notice you didn’t respond to his first argument.)

        To win your argument you would have to show that supply constraints actually constrained supply. You can’t.

        Since June 1982, if every new addition to the australian population lives in a 2 person household then there have been approximately 600 thousand excess homes built.

        No supply side constraint exists if there are 600 thousand excess homes. C. Murray has shown this in more detail for other cities.

        Texas house prices are low because they have property taxes.

      • Rash5290;

        You don’t follow the arguments very closely, do you.

        It is quite possible to have “adequate” supply quantities making it onto the market, but the supply chain is a “quota” system and the price is inflated.

        And there are people at the bottom of the market missing out altogether.

        You could conceptualise this with staple food items too. We wouldn’t accept it there (I hope) and we shouldn’t accept it in housing.

        And the excessive payments made for housing – a necessity – by more and more people as time goes on (those who have had to buy their first home in an inflated market), means reduced spending on numerous other things during their entire lifetime. Including spending on children, such as education; orthodontry; sports and hobbies; music lessons; and possibly even essentials such as footwear and warm clothing.

        Another horrible effect that I see all the time, is young people maxxed out on debt for an absolute shit-box of a home that cost half a million dollars (the same thing would be $50,000 in an affordable city), and they (and their kids) will spend a lifetime putting up with leaks, rot, drafts, damp, etc because they have not a cent of spare income to do anything about them. Especially if and when interest rates have to go up.

        It is just morally repugnant that anyone would put forth arcane, abstruse and contorted economic theory to justify all this. “Baffle ’em with bullshit” is the appropriate saying here.

      • “In your world, supply-side economics counts everywhere, except in the land/housing market.”

        supply side economics counts everywhere except in areas with natural monopoly (land is natural monopoly).

        If somebody releases for development all the land 100km from SF (btw almost all usefull land around SF is already developed), that will have no effect on prices in SF because it will not increase supply in SF, not even by 1 sqm. People will still pay premium to live there, and if allowed people will speculate on the house prices because they can be sure that nothing (except a volcano) can increase land supply in SF

        • “If somebody releases for development all the land 100km from SF (btw almost all usefull land around SF is already developed), that will have no effect on prices in SF because it will not increase supply in SF, not even by 1 sqm. People will still pay premium to live there, and if allowed people will speculate on the house prices because they can be sure that nothing (except a volcano) can increase land supply in SF”

          Dumbest comment I have ever read. Haven’t you heard of the “substitution effect”. If the lower priced land further out was made available, rather than being excluded via regulation, many buyers would shift from the expensive SF Bay Area into the cheaper (now available) areas and prices in the Bay Area would fall.

          And no, all the useful land in the Bay Area is not built-out. Only the land within the permitted area is.

          Also, how do you explain prices in California’s Inland Empire – which isn’t exactly a highly desirable coastal area but is afflicted by planning restrictions – hitting an epic 7.6 times incomes in 2006.

      • California has a State-wide problem. There is such a thing as “vent” markets. LA region has not run out of land, however I agree with you that releasing the most adjacent bits between the sea and the mountains would not bring prices down. But if the surrounding districts up and down the coast and over the mountains were not anti-growth for no valid reason apart from enviro mania and exclusionary tactics, there would be “options” in the region that would keep LA cheaper.

        California did not have affordability problems for decades, Neil Diamond sang “palm trees grow, and rents are low”, in the early 1970’s. The affordability problems came when a tipping point was exceeded in the proportion of municipalities that became anti-growth. Growth was diverted to a few willing municipalities which were quickly swamped.

    • “1. You can’t explain the divergence of prices from rents by supply restrictions.”

      But an absence of supply restrictions correlates with a lack of this divergence. How much evidence do you need?

      I agree with you on consultants (I don’t know if Moran is guilty of this, I tend to give him the benefit of the doubt) lobbying for an extension of a growth boundary just far enough to allow their clients to extract maximum profits.

      The solution is to abolish the growth boundary altogether. Otherwise you are complaining at the capital gains that will be made by land owners just outside the existing boundary if you shift it, but you are acting as a useful idiot for the landowners inside the existing boundary.

      Incoherent, both intellectually and morally.

  5. If you want to help get more stock to the market simply reduce the GST rate to 5% when selling a new product.

    This would encourage more developers into the market as they can now make a project stack.

    Below are the numbers on a development I am running a feasibility on.

    Purchase Price: $3,500,000
    Stamp Duty: $180,000
    Council: $350,000
    Holding Costs: $100,000
    Marketing: $150,000
    Legals & Strata:$100,000
    Bank Interest @ 6%: $252,000
    Construction cost exc GST: $3,500,000

    Potential Gross Realisation of sales = $11,000,000

    Less GST = $1,000,000!!!!!

    The GST is by far the biggest tax on a development. Council fee’s stamp duty and other costs are tiny compared to the GST.

    GST is the cause for making so many developments infeasible.

    Green tape is an issue as it is not necessarily a cost but it can reduce what you build but that’s another discussion for another day.

    • Do you think the initial purchase price of 3.5M has been distorted from fair value, ie. manufactured scarcity (zoning, limited release etc)?

      I presume the stamp duty, bank interest, GST and perhaps others are also compounding any distortions in that initial purchase price.

      • Absolutely….!!

        If the raw land cost is equivalent to the construction cost, this is way out of whack.

        Let’s assume $3,500,000 is the cost of building 20 McMansions. Farmland can be bought for $40,000 per hectare; how many hectares do you need for 20 McMansions?

        There’s most of the explanation for the difference in house prices between Dallas or any affordable US city, and Australian cities.

    • Umm, don’t you use this feasibility to work out your bid price for the site?

      Why don’t you bid $2.5mill if that’s what you need to pay to make money?

      PS. The GST is not a good way to raise taxes compared to many alternatives.


        Do read the whole thing, but these paras are directly relevant here:

        When Portland established its “20 year UGB”, the price of land began to inflate just 4 years later. Here is the basic flaw with the idea that “X years supply of land has been zoned” on greenfields beyond the existing urban fringe.

        The zoned amount is NOT the amount that NORMALLY WOULD COME TO MARKET ANYWAY on the normal rural land market, within that zone, IN THE NEXT “X” YEARS. It is the TOTAL quantity of land within the zone. To REALLY have “X years of supply”, it would be necessary to include in the zone, enough land that the quantity that IS “X years supply” WOULD come up for sale anyway in a normal rural market, at normal rural prices. This would mean a zone with about ten to twenty times as much land as “X years supply for urban growth”.

        The land comprising “X years supply” by the planners standards, is being used for something already and no owner of it has any inducement to sell it at the value that it is worth IN ITS PRESENT USE. But having become aware that they are part of a newly created oligopoly holding of the next “X years supply of land for urban growth”, they cease to think in terms of rural land values at all, and start thinking like investors/speculators in bullion. None of them will be satisfied with a 10% capital gain, or even 20%. Expectations of gains become a reason to HOLD land and NOT sell it. So the planners “X years supply” becomes a LOT LESS than “X years supply” purely because of typical investor psychology.

        The planners have REDUCED the likelihood that any one land owner within the zone will in fact sell the land within the “X” years at all. Then developers not only have to door-knock and persuade “attached” owners of land to part with it, they need to offer greater than the present value of what the owner thinks the price of the land MIGHT yet inflate to……!

        This is why there is no middle ground, “moderately unaffordable housing” cities. Containing urban growth and rationing the land supply is not like a “flow control valve” over house prices as planners like to think it is, it is like an “on” switch for a nuclear chain reaction.

      • To put it another way (this came from Dale Smith)

        Once you lock yourself into a land development where you have paid too much for the land, you have to build at the rate of demand that YOU need to be successful, not at the rate of demand that BUYERS need. Naturally this could be the same rate at a moment in time, but this is more good luck than good management. I have seen a lot of successful builders get into trouble doing this.

    • nobody sees a problem with the fact that someone with almost no personal money can make 20% (almost 2 million) profit in just a year or two with borrowed money

      Not to mention that builders will make at least 0.5-0.75 million profit, council, marketing, REA, strata, banks, … will make additional half a million in profit.

      Total profit (excluding land owners) will be at least 30% of the the sale revenue in just year or two.

      What other businesses can offer profit like this? drugs, prostitution, ….

      There is enough room there to make homes 20% less expensive, without even looking into land prices

      • But when you have supply being rationed, all slack will be taken out in prices, by gains to the original site owner.

        The market is a two-tier one. Developers need to outbid each other for sites before they can sell housing. The lower their costs of development, the more they will bid for the land.

        The relationship between supply and demand, sets the “price”. “Planning gain” is then shared out between whoever gets it. It is the original land vendor who gets anything that anyone else doesn’t.

        This is quite clear from UK research based on decades of experience there.

  6. Just to not take the status quo, I am going to (with the utmost honour for Leith who I have great respect for) take the side of Ecostatnerd for a moment.

    I do agree with most everything that is presented on Macro Business in relation to supply side, so not to take away from that either…

    However…I think this is for the most part (perhaps 70-80%) a demand driven speculative bubble, driven by greed and the expectation of perpetually higher prices.

    Which has worked since 1991 simply on the back of an unprecedented worldwide demographic boom off the back of WW2…and the debt splurge that ensued.

    Call me simplistic, and I probably am, but the Australian property market resembles almost every financial market I have traded over the years (albeit at a much slower pace).

    All the mainstream language out there resembles bubble talk…and from the data we are getting now…it appears that it is the opportunists levering up again (at many multiples more than professional stock investors would let a listed property trust away with).

    While the supply side manipulation argument certainly has merit, where I feel it falls down is in the household formation size discussion…

    Currently I live in the Northwest growth belt of Sydney, right amongst all the “big” houses. If you take a supply side argument to it’s logical conclusion, you would expect to see people everywhere here crowding into the streets – not very quiet neighbourhoods, with hill upon rolling hill of two story Mcmansion’s with 2-3 people living in them for MILES…

    Though the main arterial roads are busy, I live in a very quiet main street 500 meters from the centre of Castle Hill. There would be three empty houses on our street at least.

    Compare that to most of Asia, Africa or major cities like New York.

    Sure, there is a shortage of gambling chips for the spec bubble, but really a shortage of houses in Sydney??…Come on…all it would take is a couple more percent rise in unemployment and every second 20 something will be back in the McMansion with mum and dad…who are probably thinking about downsizing…

    If the economy continues to weaken, and the property market does start to slide (as it did in the ninetys…and the GFC)…and the RBA runs out of rate cut bullets (IMO there is buckley’s chance Australian OCR interest rates are rising significantly in the short term in this deflationary environment)…there is not going to be much that can be done to stop a significant property fall IMO

    • Good post. I have to agree with you Andrew1234 and UE at the same time (if possible). We do have supply side issues as well but frankly this is a purely speculative bubble that is going due to the (possibly misguided) confidence of investors, the fact that we haven’t had a major recession in the last 20 years and the two booms.

      Add to this the general mentality of investors chasing CG (thanks Johnnie!!) as clearly shown by the article re Melbourne property and it is almost a self fulfilling prophecy.

      I was recently talking to someone who bought their own place but could only afford to do so a fair way out. And then they went on to explain their ten year plan to pay down the place etc etc and of course the price will go up substantially and they can pay more than the minimum because rates were low.

      I questioned them on the rates staying low and their demeanor just changed. After this I didn’t push them but it is amazing how people get into the swing of things once they have a house.

  7. I would like to ask “Eco Stats Nerd” if he is familiar with the “Index of Leading Environmental Indicators” produced by Steven F. Hayward.

    Bjorn Lomborg is another literal “eco stats nerd” who converted himself to a “skeptical environmentalist” by simply collecting the facts.

    Lester Brown, Paul Ehrlich et al have been wrong all their lives and are basically charlatans.

  8. The Dallas / san Fran Graph says it all really.

    When housing exceeds 3.0 times household income, it is a sure sign of dysfunctional governance impeding the normal supply of new housing. Refer Demographia Survey .

    Go compare the detailed fringe starter house costings of Dallas and Sydney … and there is your answer.

    We are doing this in New Zealand by comparing our costs with those in Houston. I have just released excellent analysis Thursday evening by Simon White, a former CFO of a number of our major Corporates here. Simon held senior positions within the Banking sector as well.

    Talk about a horror story !

    Hugh Pavletich

  9. I can’t recommend more strongly, that people do a bit of their own research on the following lines.

    Find cities in the Demographia Reports with a median multiple of around 3. There is no need to use a busted-arse city like Detroit; some of the median multiple 3 cities are the economically strongest and fastest growing cities in the first world.

    Then Google Real Estate sites for those cities, and apply search filters at various price levels.

    I have posted links to RE ads before, but it is good to do this yourself so you know I am not cherry picking.

    If all young people struggling to save for a first home in Australia did this and woke up to how badly they are being ripped off and betrayed by the older generation, something might start getting done about it.

  10. Leigh, I don’t think anyone sensible denies that supply (and demand) affects house prices. However, I think it was largely demand that drove house prices, fairly uniformly, higher through the 2000s. The house price gains in the capitals was too uniform to say that supply-side was the key. In fact, from the around 2003 Sydney — which arguably has the clearest supply-side constraints — has lagged other capitals.

    In addition, the most egregious part of the housing boom, in my view, is coastal holiday homes. Hard to argue there’s a serious shortage: 22mn people with 20Km of coastline. Of course, that bubble has well and truly popped, with many areas seeing falls of ~50%.

    Oh, and I am not Chris Joye’s sparring partner — we appeared on a panel where my focus is global. And I’m certainly not a ‘self-proclaimed guru’ on housing. On anything, in fact.

    I did make the point, however, that I was wrong 2008 on housing. My view is that to pop the bubble we needed to see broad-based job losses. I expected to see those job losses. As it turned out,we avoided that. Hence my comment that is was a garbage in/garbage out forecast.

    For the record, I think house prices, helped by low interest rates, will rise in line with income, or perhaps a little faster, while rates are so low. I still expect a major correction if/when we see a serious downturn. I doubt that supply changes alone with produce the required correction to a fairer value. In any case, I can’t see any signs that supply-side is changing substantially.

    Cheers, Gerard