It’s housing that’s killing productivity

ScreenHunter_1150 Feb. 10 08.16

By Leith van Onselen

Business Spectator’s Rob Burgess made the following keen observation over the weekend on the hidden cost of Australia’s housing obsession, which has damaged Australia’s productivity:

Trying to pin Australia’s mediocre productivity on factory-floor wages is just not good enough.

…productivity problems lie just as much on the capital side of the equation.

For 15 years, the Australian media have celebrated the nation’s appetite for pouring domestic and foreign capital into non-productive assets – the housing stock – while many firms have failed to recapitalise to upgrade technology, management techniques or plant and equipment.

We have now reached something of an impasse. Younger Australians can’t afford to live on the wages IR consultants suggest, but if capital were directed back into businesses such as SPCA, and the infrastructure that connects such businesses to markets at home and abroad, productivity would soar. Wages could rise to match our spiraling cost of living.

It must be remembered that though CPI inflation is currently low, it does not capture the costs of home ownership. It captures rents, which have lagged house-price appreciation due to negative gearing and cultural factors.

We’ve been sanguine about inflation, while house-price inflation has hit workers very hard…

Excessive wage claims by unions will stop at the same time as the productivity debate starts to look at all the factor-inputs in businesses, rather than blaming workers already struggling to pay the bills.

Burgess’ observations follow similar sentiments expressed by Business Spectator’s Alan Kohler late last year:

The high price of land in Australia is one of the reasons businesses like Holden and Qantas are uncompetitive and the combination of several recent developments is making the situation much worse…

It is a combination of factors that will tend to make Australia even less competitive as housing costs rise and put upward pressure on wages, and put huge intergenerational pressures on families as first home buyers are priced out of the market…

The inevitable result is higher prices and less affordable housing, putting more upward pressure on wages and making Australian industry even less competitive than it currently is.

Both Burgess and Kohler are spot on in targeting Australia’s housing obsession, which has manifested in inflated land values.

Land is a key input cost for most businesses. So when costs are inflated, it reduces the competitiveness of industry, making it harder for Australia to compete abroad. The associated higher housing costs also places upward pressure on wages.

For decades, resource allocation has been channeled away from the tradable sector and infrastructure investment towards the financial sector, as home buyers have taken on ever-bigger mortgages as they chased house prices higher. It should be no surprise that the finance and insurance industries – which are dominated by mortgage lending – have grown at more than twice the pace of the rest of the economy since financial markets were deregulated in the mid-1980s, due in part to the housing quango operated by the various levels of government (see below charts).

ScreenHunter_80 Sep. 04 18.06
ScreenHunter_81 Sep. 04 18.06

Australia’s housing obsession has also starved productive sectors of the economy of credit. In the early 1990s, Australia’s banks lent nearly two-thirds to businesses, with the balance split between housing and personal lending. However, after the mid-1990s explosion of housing values, these ratios have reversed, with housing lending dominating at the expense of businesses (see next chart).

ScreenHunter_1151 Feb. 10 08.40

To add insult to injury, much of the boom in mortgage lending has been funded by heavy offshore borrowing by Australia’s banks, in turn driving-up Australia’s net foreign debt:

ScreenHunter_1152 Feb. 10 08.50

At the heart of the problem are Australia’s unique mix of tax concessions, such as negative gearing, and the constipated supply system. The former has increased the relative attractiveness of housing investment, boosting demand, whereas the latter has materially dampened the supply response. The end result is too much of the nation’s capital tied-up in housing, which has chocked-off productive areas of the economy.

Indeed, my fellow blogger, Cameron Murray, has estimated that a considerable slice of Australia’s declining multi-factor productivity has resulted from escalating land prices:

The ABS explains that they take the balance sheet value of land from the national accounts to include as the land component of capital stock. We can observe in the chart below the rise in the value of the land balance sheet value against the estimate of MFP, and indeed against an estimate of the land balance if land values simply tracked inflation.  Quite clearly, from about 2002 onwards the abnormal increase in the value of land lead to a flattening and falling estimate of MFP.  More telling is that fall in all land asset values in 2009 lead immediately to an increase in the MFP measure, only for the next wave of land price escalation, especially FHOB stimulated residential land, to cause a deterioration in MFP during 2011.

We can dig a little deeper into the ‘land balance sheet’ in the system of national accounts, and look closely at the type of increases in land value estimated.  The chart below shows in blue the neutral holding gains – that is, the change in the value of land expected if prices tracked inflation.  This measure is the result of In red we see the real holding gains, which are market-based increases in land values.  As the ABS notesHolding gains and losses accrue to the owners of assets and liabilities purely as a result of holding the assets or liabilities over time, without transforming them in any way”. In economic terms, they are pure rents.

When red is greater than blue, we find a significant downward bias in the MFP estimate.  It is really that simple.   And we are not alone in this either.  Spain’s land price boom resulted similar pattern of declining MFP during their land price boom in the early 2000s.

One can only wonder how Australia would have looked if the billions of dollars of excess capital that had been poured into pre-existing housing had instead been funneled into businesses and infrastructure, as occurs in places like Germany. Instead, Australia has been left with non-mining companies that are struggling to compete and an infrastructure deficit that former Treasury secretary, Ken Henry, today claims is hindering Australia’s ability to provide goods to Asia.

Rather than merely denigrating workers pay, the long-term solution to Australia’s competitiveness requires changing the tax system so that it rewards productive investment, as well as liberalising the myriad of constraints on land supply and planning that have forced-up urban land prices, raising business costs and wages.

[email protected]


Unconventional Economist


  1. Thanks UE
    A couple of other points
    If we are going to have investment in infrastructure and business then, unless we just plan on creating more debt, we also need a REAL savings culture.
    Interest rates and our Free and Floating Exchange Rate have played their part in all this. We need interest rates that mean we will save and invest while not sending the A$ to the moon.

    “One can only wonder how Australia would have looked if the billions of dollars of excess capital that had been poured into pre-existing housing had instead been funneled into businesses and infrastructure”
    …..And we had not deliberately run a policy of an over-valued A$ for six decades.

    It’s a big subject that really needs more depth than a few commentaries and thank you for the effort.

      • It would be great if you did a larger piece on this issue and got it picked up by a few other sites like The Drum, etc. It seems to be one of those areas that is intuitively obvious to most people, yet gets very little coverage in the mainstream.

    • rob barrattMEMBER

      Questioning negative gearing and other mal-investment practices is like questioning Big Australia. You might as well piss into the wind. We seesaw between two ineffective political parties (not worth even mentioning the Fairytale Party) whose only commonality is the degree to which they pander to their factional masters. There’s simply no effective forum where the population can call for change. Just turn the sound off.

      • I agree, Rob, but I think that MB and their ilk are having an impact, because Australians are generally intellectually indolent, and anything that appears to be sound policy advice is heard.

        However, on Rob and his analysis, it is pretty obvious. Australians have made a time-preference choice, sucked in by the middle class welfare of housing subsidies for how many years did Eslake state – 50 years?). Why take on risk in a business, when one can earn a decent return on property or shares, both non-productive asset classes which, by the way, do add significantly to inflation (forget CPI here)? Why worry about indebting your future, when house prices keep on rising?

        An opportunity cost assessment switches people’s attention away from productive to non-productive assets. Considering the need for small businesses here in Australia, policy should be directed at removing support for residential housing, and increasing interest rates. The wealth effect is irrelevant here.

        It requires entrepreneurs to assign present goods – debt or equity capital – on capital goods and in employing staff in order to produce future goods to sell at a price higher than their present goods. Why not create greater incentives for that?

        (Residential property prices in Australia are the product of time theft – by the state!)

  2. The anti-speculation laws around property that still exist in Germany today, like full CGT on all property sold under 10 years, inc the PPOR and a heavy land tax have worked for them.

    I read somewhere that 80% of the renters in Germany invest into the mutual funds that own the housing stocks.

  3. I could not agree more with this article.

    During the mining boom the counter-argument was always “comparative advantage”. Where’s that argument now?

    This is the elephant in the room, why are the other media asleep on this.

    I think perhaps because for a lot of old people, the only thing they have is property, so it would be upsetting to print that this is swallowing up our competitive advantage.

    And of course the other reason being that the financing industry has shown to be a more powerful lobby group than the miner and unions combined.

    • The MSM are asleep on this issue because:
      (a) They’re in the pocket of the RE industry so they’re fundamentally conflicted.
      (b) The issue requires more than very basic economic thinking and is easily countered by that weasel JWH’s line: “Nobody ever complained to me about their house price going up”. What, me worry?
      (c) Once you’ve got over the conflict and the ignorance, you have to get over the fact that people do not like bad news. For two-thirds of the population (those who have bought the house they live in), this is very bad news.

      What surprises me is how bad the ABC is on this issue. I’m guess in their case it’s mainly (b), with a small dash of (c).

      • In the case of the ABC, don’t underestimate ideological bias in favour of urban planning, and the possibility of significant personnel owning investment properties.

        I don’t believe that most of the people who claim that urban planning has nothing to do with it really believe that themselves; they know it does; they know reform would be effective; and effective reform is the last thing they actually want.

      • I’m not sure PB, in my case, not an overly stupid chap but just never really questioned the narrative – it seemed to make sense and was pervasive. It was not until i bumped into some strong logic and analysis (on MB) that i needed to reassess my understanding.

        That said, I think that as more and more people understand it they will take a position that protects their wealth if they are heavily exposed. So any solution will effectively have to ‘buy’ them out.

      • Yes, of course there is the additional personal financial interest in the ruling and the chattering classes:
        – RBA
        – Media agenda setters (with notable exceptions of JI and CV)
        – Politicians of all stripes

        All up to their oxters in real estate speculation.

        Turkeys rarely vote for Christmas…

  4. Yet wage share as % of GDP has been falling over the past 25 years.

    Futher, housing finance does not crowd out other forms of investment. You continue to assume the “loanable funds model”, yet it is clear from all evidence the loan creates the deposit. Put another way, any good credit story will always get credit, whether it be housing or business.

    • When was the last time you tried that! A business owning friend of mine has just had the sale fall through. It’s a small business of 40 years in the making ( they are retiring at 65) with a ROA over the last 5 years of 38% and the potential ~ 40 year old buyers have just had their finance knocked back. Why? Their collateral is tied up in their rental properties!? So “any good credit story will always get credit” does not hold true if there is no property collateral available to back it.

      • Yep. And just imagine for a second if any of that piddling amount of capital that backs this mess deflated! No deflation coming other than currency deflation.

      • I’m sure there are lots of people out there who think they are credit worthy and so not get finance. Historic roe does not mean much – banks look to the future when they lend.

        But the fact remains – the loan creates the deposit. So the narrative of crowding out does not stand up to scrutiny.

      • I’ll ask the question again, then “When was the last time you tried that!”. Perhaps you toddled into Institutional last week and they advanced you monies based on the enterprise value of your target business. If so, I’d love to hear that! But from what I see and am told, that isn’t happening! “No property, no loan is more common an answer than you might want to think .

      • B_B with the greatest respect, you obviously haven’t tried to raise capital for a business in the past 20 years, or you are a CEO for an ASX200 business and are completely detached from what it’s like for the average business with turnover <$50m. Banks will NEVER look into the future when making credit decisions unless they are so highly secured by residential and/or commercial property , that there is, in their view, zero risk of loss. All decisions are based in historical performance (last 2-3years).

      • Costas,

        Thanks for your reply (as respect). You know nothing about me, so you should never assume what I have done (or have not done) in the past.

        Nothing either you or Janet have put forward an argument to counter my claim – there is no crowding out from residential lending. The loan creates the deposit. So lending is a credit decision only. The crowing out narrative is false and very emotive – which is why is gets so much support.

        In fact, both your arguments seem to support the idea that rising residential property prices (and therefore rising security) has supported business lending. I would agree with that.

        “all business lending decisions are based on historic information”

        Tell me why Centro Properties lost all of their funding in 2007 after 10 years of +15% ROE?????

        “when was the last time you tried that”

        Not sure what I’m suppose to try? All I am saying is there is no crowding out from residential lending. The loan creates the deposit. So lending is a credit decision only.

      • I certainly never mentioned ‘crowding out’ ! I simply state the fact that anyone putting on their best suit and attempting to find the ‘manager’ of their local bank will find that the first, middle and last question they ask will be “What property can we take as collateral?” Wedged either side of the middle will be questions about the business. It’s like going to rent a residential property. The first box is always “Occupation?” Expect an X against that if for whatever reason you don’t have a job!

      • b_b You assume there is unlimited amounts to lend. There isn’t. The loan doesn’t create 100% deposits. Probably some 30% or more of the loan disappears offshore as spending on imports. The government also gets its fingers into the pie as well but that effect is probably variable.
        Despite the pronouncements of various university professors, Central Bank Heads and Treasury, there is such a thing as the external account. This places a very severe limitation in some countries. A limitation that is now being emphasised as the US tapers. It hasn’t been so much of an issue in our country because we have been willing to sell off any and all our assets to maintain the illusion that we can all have what we want.

        So there are indeed limits to the amount of borrowing and if you have any experience in business you will know that Banks would rather lend you money to buy a house than invest in a business. If they do lend you money for your business it is at interest rates more than double the home loan rate.

      • Flawse – for more information please read: Spot issues his own currency to buy bonds, while being mindful of inflation

      • I agree with b_b that the loan creates the deposit. This means funding is not really an issue… It’s not as if there is 100bn to lend and if we lend it all to people who want a mortgage then businesses will miss out. The amount in the system that is available to lend depends on the credit-worthiness of the applications.

        However it is also a fact that banks use different criteria to lend to businesses than for mortgages. As mortgage lending has become more and more of a one way gravy train to glory, banks have not seen business lending as such a good option. It’s not crowding out as such, just what banks prefer to focus on because it is easier, less risky and supported by a range of ludicrous government policies.

      • Thanks Spleen It works for a short time. It works particularly well where the foreign buyer of the bond can cash it and buy a real mine farm or factory. So as long as we have those to sell it’s all good so far as the average city dweller goes. He just wonders why houses get beyond his ability to buy.
        Unfortunately Herb’s Steinerism comes into play and there aren’t farms, mines, or factories to sell. The Bonds become worthless along with the currency, you cannot afford any imports including farm or mining machinery, and the interest rates become mind boggling.

      • In which case you should track down a French edition: Spot crée un mouvement politique révolutionnaire

      • Yes Spleen that is the outcome. However before we confiscate all the property we need to invest in a whole lot of very capable aircraft, submarines and ‘Tanks’ (not of the water-holding kind) Not sure how we afford them.

        BTW Thanks…Your Spot on the world series is very good! 🙂

      • The “loan creates the deposit” argument misses the following reality on this issue.

        It does not matter what the amount of nominal dollars in circulation are. The actual production of the “stuff” that is wealth, will be affected by the level of economic rent in the system. The more economic rent, the less actual “stuff that is wealth”, will get produced.

        There is an economic fallacy that it does not really matter who gets the money; they will spend it or save it and round it goes. But it does matter what proportion is zero-sum economic rent. There is a closed feedback loop effect which means that actual producers of the stuff that is wealth, get crowded out.

        The people who endlessly argue Keynesian aggregate demand are all clueless about this, from the top Federal Reserve economists down.

    • My three year old loves Spot Buys a House – I read the damn thing every night ad nauseum, she can’t get enough of it. But barely one page into Spot Starts a Machining Business and she closes the book on me and demands the same old story. And so it goes, that same f***ng stupid story every day.

      • mine-otour in a china shop

        Can they write some follow ups which might be in her reading zone?

        – Spot learns negative gearing tricks to boost his property empire.
        – Spot goes to an auction.
        – Spot becomes a banking economist.
        – Spot bores everyone at a barbeque.

      • – Spot’s loan creates a deposit
        – Spot develops a bank credit policy
        – Spot takes a mortgage broker to a titty bar
        – Spot plays golf with APRA’s excutive team

    • B_b obviously wasn’t referring to the crowding out although the banks bias to lend against property, which means if you don’t have it/ or enough of it, you become “crowded out”.

      I write over $100m pa in Commercial , Construction and Bus Loans so I have some insight into theses practices.

      “Any good credit will always get credit” is a statement of opinion not fact.

    • Tell me why Centro Properties lost all of their funding in 2007 after 10 years of +15% ROE?????

      Because they no longer had the commercial property security (LVR) to support the loan….. Banks only lend against security and historical financial information

  5. Great article. I read an analysis of manufacturing business failures over a 10 year period. A leading cause for their demise was that the firms could not get capital – the banks did not lend and the businesses became more uncompetitive until, with the high dollar, they had no other course but to close. The banks bear that responsibility.

    The German model is much more sound. I give not hope at all for a change in this country to tax or any other means of modifying things. The self interest, rent seeking and greed are all inscribed into policy at all levels of gvt..

    • In order to emulate the Germans we would have to overcome our long standing British inherited contempt for all things continental European. Not much of chance of that now Mr Abbott is Prime Minister.

      • The irony is that the UK is furthest down this path of self-destruction of its productive sector. If it didn’t have global finance and media (which Aussie doesn’t have) as weightless primary income it would be Michigan in the North Sea now.

    • The misallocation of Australia’s capital is worse than that. If Australian investors had merely bought BHP and Rio shares instead of residential rentals, we’d own them both outright by now. The investment culture of the country would be different too – much more willing to finance manufacturing. We would be capital exporters, not importers.

  6. “…the long-term solution to Australia’s competitiveness requires changing the tax system so that it rewards productive investment”

    Little better than a bandaid, unless you address the monetary system first. Flawse above points in the right direction, generally. But, as suggested by the first two charts, it is usury-based “money” that is the root cause of all the symptoms so many are complaining about.

  7. One of the best posts ever on this site. It is seriously bizarre that macrobusiness is the only outlet regularly commenting on the obvious. Though it partly explains Fairfax’s shareprice. In my eyes government putting guns to the public’s head saying “you will get into debt and invest in property in preference to productive assets” is the largest example of government incompetence displayed in Australian history. Like it or not eventually ( and it may take decades) market forces will prevail, though the pain will be enormous.

  8. Increase the rate of Land Tax and apply to PPOR.
    Apply CGT to PPOR, with “rolling over” provisions if another PPOR is purchased within 6 months.
    Scrap transactional taxes (stamp duties).
    Allow carried-forward business losses/deductions to be indexed (similar to the old CGT cost-base indexation).
    Introduce an “entrepreneurs deduction” where for the first 2 years of a self-funded single-owner business the losses can be deducted from the owner’s partner’s taxable income (up to some $ limit and only for one business in a lifetime).
    Introduce a tax-free threshold for small business.

  9. It is hard to see any resolution of this problem until there some serious engagement with the problem of the RBA using interest rates to drive economic activity via the residential mortgage loan books of MegaBank.

    Until the RBA’s charter is narrowed to stomping on inflation and not using monetary policy to drive economic activity, the situation will only get worse.

    Fixing the RBA will in turn require the politicians to accept that if they want to ‘drive demand’ they must do so via fiscal policy where the transmission mechanism does not depend on the rate of growth of the mortgage books of the private banks.

    Only when this occurs will the ‘pressure’ to manipulate and drive up house prices be relieved.

    • But how would the RBA drive demand for business and infrastructure investment without driving demand for housing?

      • If housing supply distortions are fixed, that problem is taken care of. You can see the difference in responses to monetary policy stimulus, in different States of the USA with different urban regulatory environments. In California, house prices skyrocket. In Texas, actual productive investment happens and house prices stay where they are. Discretionary income increases too, as people refinance not to increase their mortgage and spend the difference, but to pay it off quicker or reduce their monthly payment size. And they can fix a rate for 20 years +

      • Phil, that’s kind of my point – the RBA can’t fix the problem without other factors out of their control changing. And in my opinion, if those other factors are fixed then the RBA won’t need to do anything.

        The RBA is doing what it is intended to do. The housing / land price issue is for others to solve (primarily the state governments).

    • Pfh,

      + 1.

      The biggest issue is that we have convinced ourselves the budget must be “fixed”. Of course there is no need to balance a budget measured in fiat. But the narrative is hard to change, even here.

      It forces the central bank Into a corner with only one tool to use.

      • @b_b

        What happens when everyone decides we don’t need to balance the budget all at once?

        I think it is time to recognise that the system that we are utilizing was developed under a different set of circumstances (namely high population growth and industrialization) and one of changes which can’t continue forever.

      • “Of course there is no need to balance a budget measured in fiat. But the narrative is hard to change, even here”.

        That depends on other settings within the economy. You do need to have a balanced economy. in the long term that means you have your government sector basically balanced and your private sector basically balanced. That results in your external account being balanced. Any increase in Budget deficits in this economy, with negatiove RAT interest rates in the private sector, fundamentally feeds directly and notionally close to 100% into the external account. So we create stress in that account which forces us to sell up our natural resource assets to foreigners to pay our way.

    • What would happen if a group of baddies somehow gained control of the US Federal Reserve and then lent themselves a MILLION TRILLION dollars worth of liquidity at 0%.

  10. Given up trying to tell people politely so now I will just post this snippet which seems to be shocking enough

    “Since its inception in 1973, the South Australian State Government’s land agency has seen land prices rise from $15,000 per block (in current dollars) to $160,000 per block, more than a tenfold increase. By comparison, the cost of building a 135 square metre house increased from $97,000 in current dollars to just $102,000 over the same period, virtually no increase at all.”

  11. Great Article. Working in the mortgage industry, I see first hand how our banks have geared their entire operation towards secured- property lending. Whether you are a business or an individual borrower, you require property in order to raise capital (unless you are an ASX 200/500 company). The reliance on property security has not only resulted in excess amounts of capital being driven towards this asset class, but banks seem to feel that this form is security is almost “bullet proof”, so much so that they have automated their approval processes and moved much of their credit approval and processing off shore, in the pursuit of higher profits. Many of the business and corporate bankers that you would have met 15-20 years ago, highly skilled in quantitative and fundamental analysis, simply aren’t around as their skills aren’t required. We call it banking but it barely resembles anything like real business/corporate finance anymore. its more like a sweat shop / high volume manufacturer. So as far as lending to businesses, our banks couldn’t start doing this in a big way, very quickly as their staff simply lack the skills and banks lack the processors and confidence to make the move. I also believe that from a risk return trade off, it simply doesnt make sense for them to change the status quo. Of course, the rest of us believe the risks to be much higher than what the banks, APRA and RBA believes.

  12. Well said Leith.

    Six months ago, live on national television Joe Hockey said housing supply was a very important issue and he was going to say more about it.

    He hasn’t.

    What is your plan to increase housing/residential land supply Joe?

  13. Why would a young person want to do anything as troublesome as starting a small business that employs people?

    The easy path to riches is in flipping properties. Thats the true Aussie dream!

    • The easy path to riches is in flipping properties. Thats the true Aussie dream!

      You don’t flip them. That will get you extra stamp duty and pesky capital gains.

      You borrow as much as you can as early in your life as you can and you buy property and hold it. When it rises you borrow more against it and buy more property.

  14. This criticism could be levelled at nearly every country in the World, US, Canada, UK, etc etc. It could also be directed at China, ie miss allocating capital for bridges and cities to no where or for no one.

    whilst I agree with the reality the milk has already been spilt. We cannot undo all the misallocation.

    The question I have is that it is this very Ponzi scheme which has created the wealth effect and the demand to fuel more demand and create more wealth, how do we stop without a complete meltdown. Take away the demand and who cares about productivity???

    As clearly evident on this blog H&H has been on to this for years plus Flawse’s view that the answer lies back in time. What we need is a solution, maybe a DMC with a flux capacitor? Other than that I see pain for all.

    • Not for those who are already feeling the pain because they remain foolish enough not to buy into this madness. Those who pay rent and who’s taxes subsidise the very same house they’re renting and maybe a couple more.

  15. Let’s just pretend we don’t understand how our monetary system and the manipulation of the price of money has an influence on the misallocation of capital and then like a true central planner do an in depth analysis to understand why capital is not productive. Surely a trend will emerge that we can blame and then triumphantly declare “cum hoc ergo propter hoc!”

  16. The comment by Burgess that “if capital were directed back into businesses such as SPCA, and the infrastructure that connects such businesses to markets at home and abroad, productivity would soar” is just a tad naive.
    Do we really think that more investment in tomato canneries is the road to higher productivity?
    SPC is not being starved of capital because we are investing too much in housing. CCA could easily access international capital markets if it thought an investment in SPCA were worthwhile.

    • Pat you’re right but, I think we are talking about a ‘system’ or a culture over time,not so much a one-off event. What a different country we would have had we not indulged ourselves in consumption but instead saved and invested. We’d be on clover now instead of a debt ridden foreign owned struggling mass

      • OK, but I think the overinvestment in housing that arises because of negative gearing, while a concern, is sometimes overstated as an issue.

        Stamp duty is of greater concern because of the way it inhibits labour mobility.

        More generally productivity is inhibited by poorly considered infrastructure spending and the high cost of infrastructure development.
        An emerging issue is the likely increases in gas prices as a result of contraints on new sources of supply.

  17. Hugh PavletichMEMBER

    Leith … many thanks indeed for this most important article.

    It is posted on the comments thread to the Interest Co NZ article “ANZ Economists Caution Against Complacency” with extensive comments of mine …

    The deepening consensus for structural reform in New Zealand is extremely heartening.

    Hugh Pavletich
    Co-author Annual Demographia International Housing Affordability Survey

  18. I have a disagreement with this from Rob Burgess:

    “….if capital were directed back into businesses such as SPCA, and the infrastructure that connects such businesses to markets at home and abroad, productivity would soar. Wages could rise to match our spiraling cost of living…..”

    House prices would continue to rise in tandem with incomes as long as supply inelasticity remained the problem. A surprising lot of people who should know better, seem to ignore this.

  19. Excellent article.

    – But this story applies to other countries (e.g. the US) as well.
    – LIke in many other countries inflation figures have been manipulated downwards.
    – Since say 1981 wages in a number of industrialized countries (not only in Australia) have gone up less than the REAL inflation. And that was a force that pushed interest rates lower allowing the credit bubble to be inflated after that same 1981. The people in general benefited because rising levels of debt is actually good for demand.
    – That’s why rising interest rates is actually VERY good. It helps to reset the equation between housing, production & wages.

    • Thanks Willy! Well said! Negative RAT rates favour capital over labour. They also favour consumption over investment and therefore housing over investment..there is no reward for delaying satisfaction. Not sure why this is so hard to see by those in power…
      Nevertheless, to say the least, the adjustment process would not be without pain

  20. I have changed my mind. The article is actually bunk. Why ?

    Mediocre wage growth has been the reason why corporations were forced to increase productivity. Increased productivity leads to downward pressure on interest rates, and that fuled the housing bubble.

    Increased productivity means producing more with the same amount of people. (=more machines, robots).

    But more robots require larger production volumes. And that’s not possible in Australia with its (comparatively) small population.

    • Yes, inflated land prices is certainly a (major) minus for companies, especially when those companies want to expand their business.

      But to blame all the corporate woes on those rising landprices is bunk.

      Robots are very capital intesive and require therefore larger production volumes to become/remain profitable.

      I think, it’s simply a matter of ALL production costs (combined) being (a little) too high for a profitable production.

      And don’t forget the australian baby boomers are reaching an (average) age where they reduce their consumption.