RBA reiterates tired housing defences

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By Leith van Onselen

The RBA’s head of financial stability, Luci Ellis, has delivered a long-winded speech today, which is effectively another thinly veiled defence of Australia’s exorbitant housing costs.

According to Ellis, Australia’s cities are low density and supposedly geographically constrained, which in part justifies our high housing values:

If buildings are fixed in place, their arrangements in space will change only slowly. So we come to the observation I made at this conference last year, that Australia’s cities are unusually low-density (Graph 3). Only New Zealand comes close. This low density is all the more remarkable given that many of the cities in both countries are geographically constrained. They cannot expand in all directions: oceans, mountains and national parks block some sides. As we will see, both the low density and the geographic constraints matter for the dynamics of this market, and thus they could matter for financial stability.

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I fail to this as an adequate defence. 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) would only just scrape into the top 10 of largest urban 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).

Ms Ellis also claims that the concentration of jobs in the inner city, as well as rising commute times, has forced-up inner city housing costs, driving-up over all capital city house prices in the process:

…survey data suggest that average commute times have risen since 2006 in at least some cities. That choice between space, place and price can be made a little less stark either by bringing the jobs to the people, or by bringing the people to the jobs. It is clear from the graphs I have just shown that Australia isn’t doing much of the first response…

The cumulation of individual decisions and government policies over many years has given us comparatively low-density cities that create large price premiums for the most convenient districts in those cities. If prices rise beyond people’s comfort levels, it is not always feasible or attractive for households to respond by voting with their feet, and moving to cheaper areas – especially if that means moving out of a state capital and further away from work…

Sure, while homes with a positional advantage will always demand a price premium, how does Ms Ellis explain the massive escalation of land values on the fringe of Australia’s cities? Surely if demand for outer suburban homes is falling in a relative sense, then fringe land values should not still be escalating.

Yet, the latest HIA-RP Data Residential Land Report showed that fringe land prices continue to rise, with the weighted median fringe land price hitting a record $207,000 as at December 2013 ($326,000 at the capital city level) implying that it is land prices that comprises the majority of the cost of newly constructed housing:

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In a similar vein, data from RP Data shows that vacant land prices per square metre have risen by an incredible 564% over the past 20 years:

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Hence, it is difficult to reconcile Ms Ellis’ view that Australia’s exorbitant housing values are predominantly demand driven, with constraints on the supply-side equally, if not more, pervasive.

Oddly, the RBA’s former head of economics, Anthony Richards, made these same supply-side observations during testimony in 2008:

…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.

To her credit, Ms Ellis did warn that prolonged rapid housing growth is likely to be a thing of the past, with prices more likely to cycle around income growth, with periods of price falls also more likely:

As we have said many times in the past, the 15 years or so to about 2005 saw housing prices rise noticeably faster than incomes. This was in large part a transition to a new equilibrium of lower inflation and interest rates, and thus higher debt and housing prices relative to incomes. That transition is over now. Housing prices are therefore going to be cycling around a slower trend than they did in the past. There will be more periods where prices are falling a little in absolute terms.

At an individual level, this means that there is less scope for rising markets to cover over your mistake if you fall in love with a property and overpay for it. At an aggregate level, it means there is little room for another round of property exuberance of the type we saw just over a decade ago, in 2002 and 2003.

Nevertheless, unlike her counterparts in the Reserve Bank of New Zealand, whom are renowned for frank and fearless assessments, nowhere did Ellis explicitly admit that Australian housing is overvalued or stress the risks to financial stability arising from Australia’s high household debt and a potential house price correction.

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Unconventional Economist


  1. mine-otour in a china shop

    Yes the RBA still in phase 1 denial, and they role out Luci to tell us the problems are largely elsewhere.

    The salaries of top RBA and APRA execs should be paid fully in Genworth LMI stock, and the execs made to hold onto those stocks for 10 years.

    If they believe so devotedly in our largely risk free economy, then they should reap all the rewards that Financial Stability has to offer whilst sharing some of the risk.

  2. intertubernet

    “nowhere did Ellis explicitly admit that Australian housing is overvalued or stress the risks to financial stability arising from Australia’s high household debt and a potential house price correction”

    So are they corrupt, incompetent or just a vested interest?

    • Intertubernet … put bluntly … clearly the RBA is in no hurry to admit the Australian housing market of in excess of $A5 tn has more than $A2.5 tn of bubble value in it.

      Flowing on from this the quantum of bubble mortgage value and the capital base of the Banks, is just too unpalatable for the RBA to contemplate.

      • intertubernet

        Too unpalatable to contemplate…

        Yes. That’s a solid fourth option – a fact (privately acknowledged) that is too scary to talk about.

      • migtronixMEMBER

        Not to mention, what with the government “paying down debt” and removing it from the banking system, what else is suppose to keep it afloat if not more consumer leveraging?

  3. Hugh PavletichMEMBER

    About 0.13% of Australia is urbanised … about 0.70% for New Zealand.

    Australian cities are by no means the lowest density internationally … refer the Demographia World Urban Areas Directory …


    … with some of the world’s most expensive housing, as this years Annual Demographia Housing Survey clearly illustrates …


    Ms Ellis of the RBA needs to be asked why the Australian metros are not normal and affordable housing markets, like those in Texas, as the 1St Quarter Housing Report by the Texas Real Estate Center A&M University clearly illustrates …


    The numbers speak for themselves.

    • Hugh PavletichMEMBER

      There is oodles of land available internationally for normal urban expansion. As cities become more affluent, they expand. Professor Shlomo Angel of NYU explains with his book “Planet of Cities” …


      Australia of course is one of the least populated geographics in the world.

      It will be quite some time before dykes are required in the Gulf of Carpentaria to cope with the teeming masses Ms Ellis !

  4. So no stomach macro prudential controls then.
    Would love to know how many of the board are making using of NG.

    • All of them, be sure. And their steak is times cheaper than ours. For just $5 you can get a lunch, which costs in a restaurant minimum $35. Bon appetit!

  5. And on a more localised note – property prices in Darwin are starting to ease and rents are dropping.

    Three months ago there were no houses for rent under $700 a week. Now there are numerous ones under $600, something I havent seen since January 2012. Some of these properties are even habitable.

    In the properties for sale, the amount stock on the market has literally doubled since Christmas and real estate agents are casually knocking $50 to $70,000 dollars off the initial asking price. Properties that were $650k are now $579 – $599K

    So the worm is finally turning. All the initial Inpex work is complete and the workers village is now full of 457 visa’s. The dredging of the harbour is almost complete and Broadsword Marine (a UK company) is about to let go 500 staff.

    If you own property in Darwin or know someone who does – sell now or be prepared to hang on to it for 5-10 years. Things are going to be very messy here for investors from 2015 for 2-5 years.

    • Locus of ControlMEMBER

      All those apartments coming onto the market have helped…

      For long-term locals any let-up in cost of living is a relief. This is a good thing!

      • So true. The cost of living up here is hideous for several reasons. One being the transport costs – 3,500km from anywhere – and the lack of competition.

        Part of the lack of competition is caused by the expense of commercial property, it’s just as ridiculously priced as residential. Small businesses simply cant afford to start in Darwin.

        There is also a lot of corruption here, government contracts are often afforded only to a select few. Everyone knows about it but no one seems to be able to do anything about it.

  6. This is one of the most bullshit arguments RBA has ever come out with, they are losing their edge and frankly dont know wtf they are talking about. This is a subject I have worked on for the government on several occasions.

    First – Australian cities are not particularly low density at all, especially Sydney. Sure – if you take a humungous area like Sydney or Melbourne SSAs and divide by pop, you get a low gross density. Try doing the same in Paris or London, stretch out the boundaries to 100 miles and see what density you get. Woman is an idiot

    Second – lower densities ALWAYS have cheaper land prices – urban ecs 101. Constraining the boundaries will double the land price inside.

    Finally – there is something to be said for the lower interest costs argument – but why should it take over 20 years to kick in, That isnt it. Under constraint, real land prices always rise at 1.8 times real effective income increases in Australia, ceteris paribus, and that is the cause. No effective income increases no house price increases

    • +many. Sensible points and well argued. The ToT and mining capex boom made sure the incomes were ballooning …