Choked housing supply is very real

By Leith van Onselen

Earlier today, Cameron Murray, Phil Soos and Paul Egan (the “three musketeers”) co-authored what was meant to be a knock-out blow to those whom believe that Australia’s unaffordable housing has been driven in part by choked supply. Instead they argued that “Australia has built a persistently responsive supply of new dwellings, relative to the flow of new net population” and that “assertions of a housing shortage and/or restricted supply are not supported by long-term data and a host of metrics”.

Long-time readers will be aware that I do not buy the argument that Australia’s housing malaise has been caused solely by a housing shortage, but rather that a combination of demand-side factors and supply-side factors are to blame.

While I occupy the centre of this debate – and sit neither exclusively on the demand siders’ fence nor the supply siders’ fence – I want to provide my perspective on why I strongly disagree with the three musketeers, and believe that Australian housing supply has become increasingly unresponsive, which has added to affordability pressures.

To set the scene, consider the below chart showing the rolling annual rate of dwelling completions since the early-1980s:

ScreenHunter_4107 Sep. 09 23.16

Viewed in isolation, there would not seem to be any problem. Dwelling completions have run more or less in line with the long-term average over the past decade, albeit with apartments (which tend to be smaller) taking share off houses.

However, this chart gives a mis-leading impression of the situation, since it does not take into account Australia’s population growth, which has increased rapidly over the past decade (see next chart).

ScreenHunter_4108 Sep. 09 23.19

In fact, when the number of dwelling completions are compared against population growth, you can see that the rate of dwelling construction has plummeted over the past decade to well below the 30-year average (see next chart).

ScreenHunter_4109 Sep. 09 23.21

Arguably, this chart also understates the situation somewhat, since it does not take into account demolitions, which are likely to have increased in line with the growth in the housing stock as well as the increased planning focus on infill development.

Nevertheless, if Australian housing supply was indeed responsive, as argued by the three musketeers, how do they explain the above chart? Why has the rate of dwelling construction plummeted over the past decade? Their claims are even more spurious when completions are plotted against real house price growth (see next chart).

ScreenHunter_4110 Sep. 09 23.24

As you can see, Australian house prices exploded from the late-1990s, yet there was zero lift in construction rates. Given the price elasticity (responsiveness) of supply is by definition measured as “the quantity supplied of a good or service to a change in its price” how can it then not be the case that Australian housing supply has become increasingly less responsive (“inelastic”), as argued ad nauseam on this blog over many years?

Put simply, the population and construction data does not support the three musketeers’ contention.

But don’t just take my word for it. Consider the below findings from leading economist, Saul Eslake, on Australia’s supply-side stasis, taken from his 50-years of housing policy failure speech last year:

…the relationship between growth in the housing stock and population growth began to change after the early 1990s. Between 1991 and 2001, Australia’s population grew by 11.5% , while the housing stock grew by only 18.3% -less than 9 pc points more than the population. And between 2001 and 2011, while the population grew by 15.9%, the housing stock grew by only 15.2%. That is, over the past decade, the housing stock has grown at a slower rate than the population – for the first time since the end of World War II.

This gradual narrowing in the ‘gap’ between the growth rate of the housing stock and that of the population – to the point of eliminating it entirely over the past decade – has come in the face of demographic trends that would have warranted a widening of this gap:

• average family sizes declined between the early 1960s and the early 1990s, implying that more dwellings are required to accommodate the same number of people;
• family breakdowns have meant that more dwellings are required to accommodate the same number of people; and
• population ageing has resulted in more people living alone, again increasing the number of dwellings required to accommodate the same number of people.

Yet, in the face of these ongoing trends, the average number of people per dwelling actually rose (from 2.61 to 2.64) between the 2006 and 2011 Censuses – for the first time in at least 100 years (since the first Commonwealth Census was conducted in 1911 – see Chart 3). From 1911 to 2006, the average number of people per dwelling had fallen from 4.52 to 2.61. It would seem that the widespread angst among ‘baby boomer’ parents about how difficult it is to get their 20-(and in some cases 30-) something children out of the family home has a sound basis in fact.

ScreenHunter_4111 Sep. 09 23.35

The three musketeers also go to great lengths to try and show that if supply were being restricted, then it should be showing up in rising rents. My view is that it has – rents have increased significantly over the past decade just as supply restrictions have bitten – breaking a prolonged period of relative calm whereby rents more or less tracked inflation (see next chart).

ScreenHunter_4112 Sep. 09 23.42

The National Housing Supply Council (NHSC) in its 2010 report also showed that rents have become significantly less affordable for lower income earners (see next chart).

ScreenHunter_4117 Sep. 10 06.58

The black line is the market in 1996. It shows a huge supply of properties let at low rents (about $150-$200 per week in 2006 dollars). However, the grey line and blue line (2001 and 2006) shows how the rental market has flattened out  and pushed along the scale of rents.

Finally, the three musketeers use a straw man argument to try and debunk my claim that Texas’ relaxed approach to land/housing supply is primarily behind its affordable housing, instead arguing that Australia has actually built more homes than Texas over the period of 1990 and 2012.

Personally, I fail to see the logic here. The three musketeers have done the ultimate ‘apple and oranges’ comparison. For starters, Texas’ demographics are nothing like Australia’s and necessarily require a totally different supply response. For example, the median age in Texas is just 33.6 years old, whereas it is 37.0 in Australia. Moreover, Texas has 2.75 people per household – owing to its younger demographic – versus Australia’s 2.60.

Most importantly, Texas’ housing supply is affordable due to its lack of supply-side barriers, with typical starter homes built for less than three times incomes. Compare that to Australia, where typical starter homes on smaller blocks come in at 5-6 times incomes.

Further, because there is an abundance of ready-to-go lots always available at affordable prices, land values throughout Texas have remained cheap, even throughout the US housing bubble period. This has also helped curb speculative demand, since nobody expects to achieve strong price growth in Texas. Rather, investing is all about yield.

To illustrate, compare Houston’s stable and low cost land values against those of the key bubble cities of California, Florida, and Arizona where various constraints on land supply are in place (see below charts).

ScreenHunter_4115 Sep. 09 23.57
ScreenHunter_4116 Sep. 09 23.58

Seriously, how can the three musketeers even compare the manipulated land supply situation in Australia with Texas? They are poles apart.

Again, in Texas land values have remained relatively stable and affordable, whereas in Australia, the cost per square metre of vacant land has increased by around 500% over the past 15 years, with fewer lots produced in response to the rapidly rising prices – the very definition of unresponsive (inelastic) supply (see next chart).

ScreenHunter_1683 Mar. 14 07.59

As noted previously by the Brookings Institution’s Anthony Downs:

“[Competitive land supply] requires continual attention to land costs. A sufficient supply of land cannot be reliably measured by administrative attempts to match projections of supply with demand (such as a “20 year land supply”) are not fundamentally rooted in the price of land. There is a simple measure of land supply: there is enough if raw land prices permit development of new housing at historic price ratios to incomes.”

Texas meets Downs’ definition of competitive land supply. It is building for home owners exclusively. There is simply no speculation in that market due to their supply and tax policies working hand-in-hand. Therefore, the homes that are sold in Texas are entirely responsive to home buyer demand.

As long as the three musketeers continue to focus only on the demand-side of the housing equation, they will only ever see half the picture. Ditto the supply-side fanatics, who wrongly discount entirely the role played by Australia’s perverse tax incentives, amongst other things.

It is defective government policy – on both the demand and supply-sides – that are the primary cause of Australia’s housing problems. Why is it that I am one of only a few economists – Saul Eslake being another – that sees the full picture?

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Unconventional Economist
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  1. Mate, all you have to do is look at the chart you provide to see houses to population growth is much lower.

    The next charts that would be interesting would be the ratio of flats (apartments) v houses over time.

    Your punt would be flats to houses has grown over time as they are easier to flog (one location chart, one office downstairs, big photo on the internet, you can sell them “off the plan”, they sell well to Chinese) but maybe it hasn’t.

    • Well the picture is very clear to me. If land prices had only risen at the same rate as construction costs there would be plenty of affordable homes available, irrespective of the boom in credit.

      • irrespective of the boom in credit.

        Nonsense!! Ask the Irish or the Spanish, the Spanish are now sitting on DECADES worth of stock…

      • Sounds like they will have plenty of downward pressure on both prices to buy and rent for decades.

        No doubt their economies will benefit as business and workers gravitate to the lower cost environment.

        Agreeing to pay the off shore bond holders for their dud decisions to lend for that construction was a mistake but that is a separate issue.

      • From Irish government’s citizenship website:

        “If either of your parents was an Irish citizen who was born in Ireland, then you are automatically an Irish citizen, irrespective of your place of birth”

        Plenty of Aussies meet that criterion. They may wish to avail themselves of Ireland’s excess housing and recovering jobs market in the medium term future.

      • mig–that decades worth of stock wasn’t built with cheap land. They were sucked in by developers and payed double what it was worth.
        My point is if cheap land was made available to any private buyer they can either hire a builder to build a cheap house on it, or take out an “Owner Builder Permit” and build it themselves, with help from subcontractors they employ. This would bypass the developers.
        The laws need to be changed to strip developers and the land-bankers of their monopoly. And sack the vested interest parasites who run the local government, council and planning departments.

  2. Ok, but if you look at the late 90s / early 2000s episode, when most of the damage to housing affordability was done, you will observe that:

    – Population growth was weak until it took of in 2004-05.
    – Dwelling construction was strongish (apart from the GST dip)
    – House prices went absolutely bonkers.

    I would argue that this was largely due to financial “innovation” and Costello’s idiotic halving of the CGT.

    Now subsequent to that I agree that supply has not responded to rapid population growth from 2005 onwards, and that has maintained the upward trend in house prices, but the really manic phase (1998-2002) was all about demand factors.

    Can we can some agreement on that?

    • While I occupy the centre of this debate

      I’ll give you credit for that. This is a very polarising debate as you know, and I can’t think of anyone else who is saying both demand and supply are a problem.

      • It does not make sense to claim that demand would be a problem if supply was not a problem. All that would happen, is more houses would get built. There is no inherent reason to have a price bubble just because demand goes up. Australia has had much higher population growth without house prices becoming unaffordable, and the same goes for pretty much every western country with a house price problem right now.

        There might be other issues in population growth and immigration, but on their own, these things do not cause house price unaffordability. Neither does loose credit, low interest rates, negative gearing, mortgage interest tax deductibility, FHB subsidies, or any of the other things that used to actually WORK, dammit! to help housing of the population in western countries.

      • What happened in China Phil? They’ve been overbuilding like crazy for decades and prices have been climbing for decades. Millions of unoccupied apartments.

        Surely this is a case of (irrational) demand driving prices higher when there is plentiful supply?

      • and I can’t think of anyone else who is saying both demand and supply are a problem.
        You sir, are clearly a moron. This very site (Macrobusiness) is full of commenters such as myself who point out problems with demand such as excessive immigration and first home buyer grants and tax advantages to speculators, and also problems with supply such as zoning and transport and other infrastructure.

      • You Sir, are a property developer (and a moron)

        By “anyone else” I didn’t mean people commenting on blogs, I meant serious economic commentators who sometimes appear outside the blog-o-sphere (like Leith).

      • @the claw and lorax

        As evidenced by your childish bickering and attempted one upmanship, both of you are clearly morons.

        Fix the supply (price not necessarily quantity) and the demand!

    • It was, and also by the fall in the world real interest rate starting from about 2000 – due to China’s peg. Every other advanced country experienced the same thing irrespective of their zoning laws.

  3. IMHO the solution to all excessive price increases is ALWAYS increased supply, it’s that simple. The only question is: What is truly in short supply? Hint: it may not be the commodity that is seeing the explosive price increases.

    There are plenty of examples in agricultural markets where shortages in water result in dramatic price increases in commodities like wheat and rice. Suggesting that farmers / gov’t need to allocate more land to wheat / rice farming is definitely not the solution, to a water availability problem. Over the last few years I’ve come to the conclusion that the root cause of Australian capital city land price escalation probably also lies elsewhere in the system.

    IMHO the main factor is the lack of viable alternatives to capital city life.
    The contributing factors are:
    – Appalling educational statistics for regional/coastal schools
    – Very unstable employment situation outside cities
    – A culture of dependency bred over several generations
    – learned behavior …its been consistently profitable over several generations to be a part of the same RE ponzi club
    – excessive regulatory costs for regional alternatives (e.g. outrageous costs for new water/sewerage systems)

    If you look closely at the Texas RE market you’ll see that the contributing factors are very different.
    Sure regional Texas has some horrible schools BUT extra-urban Texas has some of the nations best schools (eg Plano/Frisco)

    Job growth is not reserved for the city center (example look at employment effects of the Richardson telecom corridor and associated high tech industry in the 1990’s)

    Finally the big difference is learned behavior because Texas had its own 1970’s RE boom / bust cycle that resulted in the “savings-and-loans” scandal, this resulted in a period of residential RE losses extending from the mid 1980’s till the mid 1990’s.


      • Supply and Demand is a barter theory metric out of antiquity, seriously, multivariate problems can not be boiled down to binary agency.

        Skippy… its marginalist theory at its worst…

      • Exactly.. Its got little to do with the physical asset itself (residential property), its more about the supply and demand of its main derivative. CHEAP MONEY/CREDIT. The more cheaper the money supplied by the financial institutions via the RBA, the more cheap money investors will demand.

        Cheap money encourages the public to invest in commodities that rise in value long term. And the best and most reliable commodity for that in recent history has proven to be residential property. Particularly in areas where it has been fundamentally perceived to have good future capital growth. The key word here is PERCEPTION.

        Areas that are perceived to have neutral or low growth wont experience the good future capital growth, that is, until something fundamentally changes that perception.

        Cheap money is not the only driver, albeit in all likelihood, the main driver of residential capital growth. Others revolve around the economic and political stability of the nation, tax regime, employment, and other factors that make Australia a relatively desirable place to live when considering the other alternatives, too numerous to list here.

    • Ahhh! Texas! The favourite outlier. I invite all to glance at the chart in this Slate article that considers wages, rents PLUS transport costs for various US cites.

      There are hefty assumptions behind this summary and I do not regard it as definitive. However, be reminded we disregard transport costs at our peril.

      Perhaps the land price premium accorded the inner suburbs in big cities for their excellent, amortised civic infrastructure is actually a bargain.

      • Save for the impact of being a small population with its borders pulled down, the real sleeper on the net present value of the benefit you call out David is the shift in the % utility provided digitally and not physically.

    • Actually Bob a number of markets in Texas are showing more than average house price rises at the moment.

      I tend to think that all models work until their limits are reached. The cities in Texas will explore their limits at some point.

      • Lets see how the price holds after the health effects of making it a toxic land fill and water scarcity manifest to the point even the free marketers can’t hand wave it away.

      • Without a doubt there are parts of Dallas that have seen astronomical price increases over the last 20 years. Lakewood comes to mind as does Park cities (University park). Both of these areas are close to Downtown Dallas. University Park interestingly runs its own school system (NOT Dallas schools) and has its own police force council etc. even though it is completely enclosed by the greater Dallas metropolis.

        The other interesting effect is a sort of Nimbyism whereby the outlying extra-suburban areas want to restrict cheap housing options (apartments) from being built in their areas especially if the areas currently have great schools. I’ve mentioned this before its a kind of “white flight” (although these days its probably more Asian) people are simply leaving the messed up inner cities to sort their own problems out. Dallas Independent Schools District (DISD) is a case in point it’s more messed up then you can possibly imagine.

    • @Skippy
      I agree land / RE markets are highly non-linear AND incorporate many memory effects UE’s suggestion that RE markets should exhibit linear time invariant price elasticity is beyond credible….I can only guess its another example of where finance math peters out non-linear time variant math is a whole world unto itself, where few sane people ever bother to tread.

      That said I’m still a committed supply side believer however you must understand the market to know what really needs to be supplied and then you need to be committed to creating that supply even when the free market lack commitment (I believe this is called informed Gov’t policy)

      If you want an example for Sydney.
      The airport is an excellent case in point where regional NSW people are completely reliant on airport connectivity yet under the privatized Macquarie model they allocate most of the early morning late evening slots to high profit high volume routes, this has the effect of regional flights disappearing altogether OR getting pushed into time slots that make them unsuitable for busy businessmen. BTW those few flights that are available early morning late evening often sell for more then many international air tickets.

      The inability of Sydney to create another airport thereby forces commerce into it’s cities.

      If you must contrast this with Texas look at the cheap and readily available Southwest airlines flights from Love Field (Dallas) to Huston Hobby / Austin/ElPaso. This air service enables bilateral business between these areas…where’s Austarlia’s equivalent.

      • China Bob…. decades of experience in the building game both in America and here is Oz, + post grad biz administration, who grew up in a T1 CPA – computer engineer for BoA family.

        I keep its simples… consider applying the credit standards of the 50s to the 70s in order to gain a mortgage to day regardless of demand or supply???

        skippy… finance proceeds every action in the market, now that risk is easily bundled and off loaded, the incentives have changed.

      • In addition where this land supply coming from, bushfire zones, drained mangrove swamps, rezoned flood plains, productive Ag farm land, deals between politicians and developers a la recent public dirty laundry… etc.

        BTW were are the jobs to support all this build out and whats to sustain it after the multiplier effect is over????

        skippy…. supply side – barf~

      • The airport is an excellent case in point where regional NSW people are completely reliant on airport connectivity … The inability of Sydney to create another airport thereby forces commerce into it’s cities.

        Good point. The shortage of infrastructure (regional connectivity from 2nd airport) chokes the supply of regional housing suitable for business people.
        This agrees with my step 1 to a housing disaster
        Step 1 – CHOKE NEW CITIES
        Divide the island into 7 states and create one giant city per state. Force almost all the people into the giant cities with policies such as:

        Insufficient airport connections to smaller cities.

      • @Skippy,
        I have no problem with gov’ts imposing Capital import restrictions, I’m just not sure how you can really do this especially given the modern trend towards deregulated Finance markets.

        Lets say the big four banks are told that they must have a certain total deposit to mortgage ratio, this does nothing to change credit availability because the capital is basically recycled for every $1M borrower there’s a corresponding seller banking a $1M check. There is no internal limit to this cycle, matter of fact it is only limited by systemic leakage (i.e. system imports that remove capital )

        OK so the big 4 banks dont really need foreign capital to support their mortgage books BUT the small banks / mortgage brokers (RAM’s etc) absolutely require access to external capital AND actively use securitization to support their funding. This implies that any tightening of foreign capital import rules would disproportionately effect the newer smaller lenders.

        I dont believe that such a move, to in effect outlaw new banks, is in the nations best interest. the restrictions need to come from average Aussie’s simply refusing to take on such risky mortgages. Again its unfortunate but to date this strategy of mortgaging oneself to the eyeballs has not proven to be risky.

        This takes us full circle….Australia’s obsession with RE is actually just an abhorrent behavioral problem that’s probably best refereed to a psychiatrist

      • Well Bob your last sentence ‘Australia’s obsession with RE is actually just an abhorrent behavioral problem that’s probably best refereed to a psychiatrist” is spot on imo and more a state of indoctrination than of critical long term thinking.

        As far as smaller cap Banks seeking funding, well yeah, where do people think all that money from Singapore came from – unicorns – hell it was a massive umbrella encompassing not only lenders, but, builders too [some mobs competing in the market were owned by the same financial well spring]. All one need was to grab some bloke with a license and it was off to the casino.

        skippy… don’t get me started on build – material quality, suffice to say these things will not stand up to what was built before the 80s.

      • As far as securitization goes its all good until its abused and it was egregiously abused. America is a RE wreak with clouded MERs titles [60+% mid 90s stock], trusts getting their pants sued off. PSA trust law right out the window, three year out foreclosure dates, REITs imploding, bank innovatory that makes car Mfg green with envy putting a floor under prices, et al~

        Don’t know how one can justify crappy due diligence in issuing credit for a corner stone of modern day capitalism, tho we were spared some of the worst outcomes due to title registering and a small market. Lets see what happens when the hyper hot capital flows seek greener paddocks… till then!

        Skippy…. it might just be me but, I don’t know how increased supply fixes criminal behavior and the resulting price inaccuracy. Was rolling my eyes pre GFC and now have a bad case of Déjà vu.

      • In times of recession you will always see governments create jobs despite their political persuasion to do otherwise.

        Public Transport, Roads, Hospitals, Defense, Communications, Schools, all get a massive boost when the government realises [–someone–] they’ve buggered it up.

        Expect a backflip on the NBN (that is already happening even though the government won’t mention it).

        Expect more public transport. Think HSR reservation and prep work.

        Expect more defense spending. Might order a few extra on-shore subs

        Et cetera.

        An airport may form part of that mix, but watch them favour more local companies or alternatives.

        Even on The Block last night they were favouring Australian Made product. Why?

        Because people are beginning to realise we’ve sold the farm, and they want to buy it back.

        Enter the next boom. If you are astute enough you’ll profit from jumping on the bandwagon…..

  4. The hoarding of real estate is not the same as a shortage of real estate.

    If ten property speculators buy every house in Australia there are simply ten owners and millions of renters. If one billion houses were then built all across Australia but those ten property speculators outbid everyone else there would still be millions of renters plus plenty of empty houses.

    The problem is that property speculators are buying multiple properties. As long as renters can pay rent they are being housed.

    There are houses and apartments across Australia sitting empty while some cry we have a housing shortage. What we have is growing inequality where more and more housing and land is being concentrated into fewer hands. The number of houses and dwellings, however, is sufficient to house everyone.

    There is enough food in my local supermarket to feed everyone in my neighbourhood. If I went to the supermarket this morning and bought every single item then the amount of food in my neighbourhood is still the same but now it all belongs to me. My neighbours, however, would be very disappointed and pissed off when they later visit that same supermarket and find the shelves empty. Would my neighbours be correct in saying there a shortage of food?

    • If we accept your argument that the problem is hoarding not shortage, then the question then becomes what is the most effective way to end hoarding.

      You could try to force the hoarders to make their properties available for sale or rent.

      Alternatively, you could try to induce them to do so by adjusting tax policy and other policies that shift the financial incentives such that hoarding becomes more expensive.

      Clearly, one of the most powerful and simple ways of adjusting those financial incentives is to remove the obstacles on those who would supply what the hoarder refuses to supply.

      That does not require any force or coercion – it simply involves removing barriers which can be summed up as:

      1. Reducing the restrictions, red tape and other obstacles to developing and changing the use of land.

      2. Remove the mutant neo-liberal “first user pays all” approach to financing the servicing of new land.

      These two simple measures will have a profound impact on the financial incentives that encourage some in the community to hoard property.

      • And the problem with tax incentives that make “hoarding” more expensive, is that they also generally make it not worth being involved in providing honest affordable rental housing either.

      • Hoarding is partly encouraged via Government Policy.
        – Negative gearing on existing (old) property.
        – 50% reduction in Capital Gains Tax after one year of ownership.
        – High levels of immigration and 457 workers and overall population growth.
        – Relatively low interest rates / cheap credit / banks happy to lend.
        – A dead duck FIRB. Chinese and other international buyers snapping up quality property and either forcing locals to compete with them or more a case of forcing locals to compete with each other on what is left over and available.
        Policies like the First Home Owners Grant started the snowball, now it has become much bigger.

        The phased reduction of immigration over say a 5 year period seems like a no brainer. It would certainly help the current trend in the unemployment figures and the stretched infrastructure.

    • The number of houses and dwellings, however, is sufficient to house everyone.

      Perhaps. So we need to freeze immigration, ban childbirth, and expropriate all housing and redistribute it. That is one way.

      The alternative is to allow extra housing to be built for all the extra people who need it and/or want it.

      There are two approaches that would work. Which do you like?

      • Reducing immigration is sufficient – we voluntarily do not have enough babies to replace the population.

      • ‘The alternative is to allow extra housing to be built for all the extra people who need it and/or want it.’

        What does WANT have to do with it? Surely if the market is in such a parlous state, want doesn’t exist, it’s all need? I don’t know of anyone who collects houses as they do stamps or ragdolls. Shelter is a basic NEED right?

        I reckon you’ve just provided the silver bullet to two concurrent pieces running today. The key word is WANT. As an ex-developer my all time summation of where the market’s at on this issue is there is no physical shortage of shelter for the people, but rather a shortage of housing available for speculative purposes. The market is far more elastic than people think. WANT is the problem, as opposed to need. All enabled by a bunch of credit providing leeches who wouldn’t know what a real job was if it bit them on the arse.

      • Reducing immigration is sufficient – we voluntarily do not have enough babies to replace the population.


        But when there is no shortage facing young families (prices lower etc) you might find that the number of babies increases. Shortage-deniers like to ignore feedback mechanisms.

      • Then by your analysis we need to restrict housing supply further to avoid runaway population growth like some sort of baby making fast breeder reactor.

      • “The alternative is to allow extra housing to be built for all the extra people who need it and/or want it.”

        You will see from the data presented in this post that Australia build more homes per new person than Texas. What more do you want? What measure would prove to you that supply is not constrained? If there is no measure that would change your mind, then don’t bother.

        I’ve outlined the measures I would need to show it here

        I’ve put in the table the evidence that would change my mind. But it simply does not exist.

      • It would be wrong to suggest that no new houses are currently being built. On my way short cycle to work this morning I counted three new houses being built. I also passed two homes that have been sitting empty and occupied for several months.

        I have noticed more rental properties sitting empty and rental asking prices dropping.

        Those without money or good paying jobs are having trouble finding housing they can afford. I also struggle to afford salmon every night for tea–but I never have trouble finding salmon at my local fishmonger.

        The issue is affordability not quantity.

      • The issue is affordability not quantity.

        Exactly. Drop prices at the fringe by stopping developers from drip feeding and charging a kings ransom.

        Edit: The developer quango is essentially running a HFT style price discovery mechanism and price fixing.

      • @ff,

        mos def. You can see it when you visit any new development – the big map, showing how ‘lots are going fast’ except that 80% of the developer’s land is marked as ‘unavailable until 2020’. No answer to why ‘it just is’

        The supply is there, waiting, waiting…

        Don’t they have a rule in China that developers have only 1 or 2 years on which to break ground or risk forfeiting the land?

      • @SS

        I have only ever seriously been to one estate, which was the Waverly one in SE Melbourne. I think we went at three different times and they only had 3-5 props (and none once) for sale. This is a 12 year old development, brownfield, that is still going. It was obvious they were releasing only when they sold existing “supply” to give the perception of a shortage. In the meantime price go from 350K to 850K for the same house.

  5. Sorry – but LVO can no longer be taken seriously on this issue. Clearly he has an emotional stake in his long-held position and is blind to counter arguments. It’s getting embarrassing.

    • Mr Mouse,

      That comment is unhelpful to say the least. LVO has a balanced position.

      Your obsession with putting all your cheese in one ‘demand’ basket detracts from the very good arguments you do make for reform on the demand side especially in relation to the ponzi housing finance model driving the Oz economy.

      • Hear, Hear. It is mouse that is lacking in credibility by totally ignoring the whole supply-side issue. He prefers personal attacks to arguing on the facts, which I have clearly presented. Take your blinkers off and learn some manners.

      • There are plenty of vested interests — Peter Fraser, The Claw, Bob Day — who complete refuse to acknowledge the demand side as well.

      • I did give you credit (above) for saying both the demand side and supply side are a problem, which no-one else is doing.

        I have personal recent experience with rigidities Council regulation, so I certainly understand that frustration.

        On the other hand, I don’t see Texas as a model for urban development, especially when there are other places (e.g. Germany) that have a planning system that delivers lower house prices without adding to sprawl at the edges of already very large metro areas.

        I also agree with MM that fixing the demand side would be faster, easier and cheaper than creating several hundred thousand houses overnight.

    • Gents,

      Let’s get one thing straight. I have, over a period of many months now, made all my arguments against plain to see. To claim I am only interested in personal attacks is absurd – if anything it is UE who has attacked me on a personal level in the past rather than address the points I make.

      But that aside, let’s focus on the main game. Leith’s continued elevation of the supply-side to the same level of importance as demand factors does a great disservice to the cause for lower house prices. As I’ve stated many times, even IF supply side policy measures were effective, they would be the SLOWEST and MOST EXPENSIVE way to end the property madness. As we saw with Mad Adam yesterday, spruikers all too often dismiss the demand side by reference to supply shortage dynamics. Leith’s work only enables this obfuscation.

      As Prosper said, the supply argument is a ‘convenient distraction.’ It is a diversion from true action that could be taken NOW. It’s time MB acknowledged the very real damage that continuing to advocate supply measures does to the cause of ending the bubble.

      • MB actually advocates an “all of the above” approach. You do them an injustice. You are the one focusing on EXCLUDING the supply side reforms, it is not them making excluding everything else.

        The likely motives of most people excluding the supply side, is that they DON’T want prices to fall.

      • if anything it is UE who has attacked me

        Leith does get pretty grumpy if you disagree with his supply-side thesis.

      • Moderate Mouse, you are bloody unbelievable. You conveniently ignore the dozens of articles that I have written arguing against negative gearing, those advocating macro-prudential (tighter credit), and those arguing for land taxes. Not to mention my frequent attacks on the FIRE sector.

        Who in Australian media writes and frequently and often on these issues as me? Come on, name one person?

        My approach is to push on ALL doors that would improve affordability – BOTH demand and supply.

        By contrast, your contribution is what exactly? A few comments (some good some rubbish) on this blog, as well as attacking the only politician – Bob Day – that cares about housing affordability. Yeah, big help you are.

      • @UE

        I don’t dismiss the work you do on the demand side. My point is that supply is NOT as important as demand. Continuing to advocate that it is, as you do, allows the debate in the MSM to be clouded and obscures the very real fixes that should be taken now.

        Elevating supply to the same status as demand in the present market is akin to a yachtsman fiddling with the rudder when the mast has snapped off. It’s about priorities.

      • My point is that supply is NOT as important as demand.

        To what? And what is demand in your opinion?
        One billion of the world poorest would like to come here. Is that demand?
        One million rich Chinese would like to buy (and leave empty). Is that demand?

        What is the problem in your opinion? Is it the number of poor families missing out, or is it that you cannot buy at the price you would like?

        If you are the rich young out-of-touch man I think you are then probably you are thinking of your own situation – your own problem. In that case I agree with you – supply is NOT as important as demand to your problem and your wishes.

      • The housing affordability issue is simply about following the numbers to ascertain the problems and solutions … and Texas is clearly the best example, with its sound land use and infrastructure financing policies.

        The Andrew Akin THE REAL DEAL poster …

        New Zealand has methodically progressed these issues … kicking the secondary and irrelevant stuff in to touch. Are MB readers learning anything from the extensive work of the NZ Productivity Commission?

        Here is Interest Co NZ today …

        Productivity Commission to launch inquiry into how councils regulate land supply for housing |

        … Bernard Hickey of Interest Co NZ interviews Dep PM Bill English today as well …

        Election Double Shot Interview: Bill English argues NZ economy needs the stability of National to keep growing sustainably |

        The issue in Australia sure is a shambles.

  6. As much as this issue of whether supply or demand or tax policy is more or less to blame is very exciting, and keeps keyboard repair men in work, it doesn’t really have much relevance to the urgent need for two key reforms.

    1. Reduce the restrictions on land use that result in the development and changed use of land being extraordinarily expensive and time consuming. In effect a significant barrier to entry for both small builders and developers and first home buyers.

    2. Get rid of the “first user pays all” model for financing the servicing of new land. It was the mutant progeny of 1980’s user pay thinking combined with the obsessive ideology – that govt should rarely borrow or spend. A return to govt funding of services or some type of Municipal Utility District bond financing is essential

    These reforms are essential and should be commenced immediately – regardless of who one believes is holding the “house price” lead pipe in the conservatory.

    If they have no impact on house prices, which I find hard to believe, it doesn’t matter as they make sense anyway.

    So while the battle to finger the house price villain rages on can we at least do something that is non contentious in the mean time.

    • Couldn’t agree more. Trying to prove beyond doubt who or what is to blame for the bubble is largely irrelevant.

      Lets focus on the solutions… and there is no doubt that demand and supply side reforms can both contribute to the solution.

    • Sure, you could get governments to involve themselves in the supply of housing more if you felt there was a rental affordability problem.

      But none of that will change the investor market’s willingness to buy houses at <4% yields. Less if interest rates move down.

      And no one has argued for a rental affordability problem in general, because there is none. I actually expect rents to fall as household incomes stagnate, and this new cyclical construction boom comes on line. All without any changes to planning regulations.

      • CM,

        Actually, I go much farther than that.

        I would argue that it is a fundamental obligation of government to intervene in the housing market to buy and rent to ensure that there is always sufficient supply of both to maintain downward pressure on prices.

        When rental vacancy rate across the nation have been jammed well below 3% for years on end that is all the evidence that is required.

        Even now in the alleged city of ghost apartment blocks – Melbourne – the rate remains below 3%.

        Govt can quite easily ensure that there is always sufficient excess supply at low cost by preferably reducing the barriers to private low cost supply – zoning restrictions and first user pays all neo-liberal ideology or less preferably directly intervening by buying and selling, or building and selling houses or offering rental properties in the market.

        Shelter is about as fundamental as it gets.

      • And no one has argued for a rental affordability problem in general, because there is none.
        You are completely out-of-touch. Let me guess. Private school and still living with mummy and daddy.

        In Tregear (a rough distant suburb of Sydney) granny flats rent for $200pw plus. What is the unemployment benefit again? What’s the basic aged pension?

        THERE IS A HUGE RENTAL AFFORDABILITY PROBLEM IN SYDNEY. It’s worst effect is on the poorest people.

  7. I feel like you are both focusing on the wrong question, particularly The Three Musketeers.

    The Three Musketeers have gone to great lengths to try to prove that the supply side has not been the ’cause’ of the bubble.

    The more important question is whether or not supply side reform can contribute to the ‘solution’… and there is no debate that it can, for two reasons:

    1. Regardless of whether supply has been ‘sufficient’ in the past or is currently ‘sufficient’, there is no denying that it would be possible to induce greater supply through the supply side reform measures noted by UE.

    2. Increasing the quantity of housing would decrease the price, thereby increasing affordability. You cannot deny this without describing an absurd economic model (eg infinite demand).

    Argue all you want over what has caused the bubble, but that is a purely academic exercise.

    Back in the real world, the debate is about whether supply side reform can contribute to the solution… and that debate is over. So, can we all chill now?

  8. As I posted years ago:

    10 Steps to a Housing Disaster

    Starting with only 21 million people and a giant island with 100 acres of land per person, how could we engineer some of the least affordable housing on the planet?

    Here is a recipe to make housing unaffordable:


    Divide the island into 7 states and create one giant city per state. Force almost all the people into the giant cities with policies such as:

    * All business zoned in the centre of the city
    * All government departments must be in the capital city
    * Non-giant cities given terrible infrastructure

    With decent transport this gives 7 areas with 40km radius, approximately 1700 square metres per person. Still too much land to create a crisis!


    Neglect the transportation system so that it is not practical to live more than 20km from the city centre. This cuts us back to 400 square metres per person. Still plenty of space on average, but the largest cities will need some high-rise housing to get by.

    Step 3 – CHOKE HIGH-RISE

    Refuse permission for high-rise in many cases. Old suburbs must be preserved for the old people who still live there. No extra housing to be built for young families.

    Step 4 – CHOKE LOW-RISE

    Much land within range of the city to be kept off the market in the form of national parks, government land and farms without permission to subdivide. If you have 5 acre or 25 acre farms within reach of CBD then declare the area semi-rural and don’t allow extra housing there. With policies like this even low-population cities like Darwin and Hobart can have a housing crisis!

    The first four points will choke-off all avenues of extra housing supply, so now let’s increase the need for extra houses – one house per family – by increasing the number of families.


    In 20-30 years they will leave home to start extra families.


    Why not increase the immigrant intake to record numbers?


    This will result in a declining number of people per household. We need more dwellings for a given number of people.

    Now with the supply of extra houses choked and the need for extra houses increased, price will race upward, as the poorer families are priced-out of housing. Now let’s goose the price even more with idiotic economic “demand side” techniques


    Instead of paying off a $100,000 house at 13% interest, why not service a debt of $500,000 at 7%. Why not use 80% of two incomes and eat poverty food for the rest of your life?


    It won’t create a single extra house, but it might drive existing house prices up.


    With prices racing up, beyond the reach of first home buyers, give more money to those people most capable of driving prices even higher. Use government tax money to encourage rich people to borrow money and buy existing housing to rent-out to poor people. We can pretend that this creates extra cheap housing and is good for the poor people.


    Improper to include in the list of 10, but it doesn’t hurt to mention it.


    Poking Demand and Choking Supply

    Government has done something very bad to the supply and demand of starter homes which has led to outrageous prices of starter homes, and supported much higher prices of better homes. In short, government has poked the demand and choked the supply of starter/marginal/extra homes.

    Poking Demand:

    * Government brings in many immigrants

    Choking Supply:

    * Government rations permission to build extra housing on the fringe or extra units in the city, and new cities
    * Government adds taxes, charges and levies to extra housing
    * Government requires onerous compliance with regulations
    * Government creates delays in approving dwellings.
    * Government neglects transport and other infrastructure which reduces the area in which well-located and well-serviced homes can be built

    There is much debate on which of the five chokers (refusal, taxes, compliance, delays, neglect) is the biggest and baddest. Interestingly, if refusal is the big one, then lowering taxes will give a windfall to developers, whereas if refusal is a small one, then reducing taxes will cause a drop in prices. This debate is fascinating from an academic point of view, but rather pointless if the aim is to solve the housing crisis.

    It is like watching a man being attacked by five dogs and debating which dog has the bigger bite. Far better to chase off ALL the dogs and save the man.

      • So what?

        The Claw’s comments are directed to measures that are likely to lower prices and reduce margins.

        If he has some plan to make it up on volumes by building a nation girt by detached housing that would be some impressively cunning plan.

        Lorax, if you made half as much sense on this topic as Claw you would be doing very well.

      • That’s the first time I’ve seen The Claw mention demand issues, and the first time I’ve seen him deny that he’s in the property game.

    • Exactly. People believe property can only go up (with small, temporary setbacks) after watching it go up and up for several decades. And since our parliaments of Judases are pulling out all the stops to support this, well, you’re basically betting on a government guaranteed investment. The productive economy pays and pays and pays for it as capital is siphoned away by the RE monster until it no longer can.

      Then it will be the ordinary people who pay for it through negative equity and unemployment once this falls over and our economy is revealed to the world as little more than a bankrupt mine and speculative housing estate, with precious little else going for it (relatively speaking for its size).

      • I agree that the heart of all great property bubbles is irrational demand (“land can only go up” etc) but the restriction of the supply of land, most notoriously the urban land boundaries, which force developers into a bidding war to buy up the land between the built up areas and boundary, work to greatly aggravate and extend the bubble. I think UE’s article makes that crystal clear.

  9. The increase in real rents from the mid 2000’s can be explained by the ToT related increase in real incomes over the same period.

  10. I really don’t buy UE’s interpretation of graph of Pop Change vs Dwelling completion. It is logical to expect a lag between additional population – one third caused by childbirth – and household formation. So the series being out of phase of itself doesn’t demonstrate sluggish demand, unless you have a strong and defensible position on what the population change – household formation relation is.

    I also find the use of the dwelling completion to pop growth ratio curious – the mean line is 0.6 dwellings per new capita, which is the inverse of 1.7 i.e. the occupancy rate of the new houses built in the period. In comparison, the ABS’s most recent figure for housing occupancy in Australia is 2.6. The ABS commented that the overall occupancy trend is down. no doubt assisted by the building rate, which still allows for quite a few demolitions.

    In the meantime, only for a brief period at the height of Big Australia stupidity at the end of 2008 has the ratio been insufficient to allow further reductions occupancy. Even with the coalition going full retard on importing slave labour for mine it is unlikely we will see c2009 annual population change for some time (the GFC in the US provided a good example how a poor economy effects population growth in a developed economy).

  11. Securitization of credit is the main driver of developed country’s economy’s now.

    For those that don’t understand modern finance, the only optics, by which they can observe is wonky quasi Ag – Industrial based theory’s and models, by which to blindly grope for an explanation.

    As a primer on this observation I submit Yves Smiths book ‘Econned’ or former Goldman managing director turned journalist Nomi Prins as a starting point to unpack the core issues.

    skippy… Housing is just one asset class amongst many others affected by this dilemma…


    Peter Martin, Economics Editor with The Age (Fairfax) Melbourne outlines the extent of Australia’s housing bubble and vulnerabilities … and asked when the bubble will burst …

    (Australian) house prices are inflated and a fall seems certain – the only question is when … Peter Martin …The Age & Sydney Morning Herald–the-only-question-is-when-20140908-10drmx.html

    The extraordinary bubble behaviour of Sydney buyers (current Median Multiple in excess of 9.0 refer Demographia Survey) …

    Home buyers line up for three days to buy property … Eryk Bagshaw … Sydney Morning Herald

    Local Government inflation (causing them to strangle land supply and plunder the development / construction sector) leads to housing inflation which in turn leads to general inflation … which explains why Sydney families are “struggling” to live on $A245,000 a year …

    Feeling the pinch? Take part in a cost of living survey … News Com Au

    • Housing is going in to “bubble territory” if it exceeds 3.0 times household income or about 1.2 times Gross Domestic / State / Metropolitan Product …

      2014 10th Annual Demographia International Housing Affordability Survey (data 3rd Qtr 2013)

      There is about $NZ400 billion of excess bubble value in the New Zealand housing market and in excess of $A2.5 trillion of bubble value in Australian housing to be wiped out at some stage.

      Irelands overall metro Median Multiples tanked from about 4.7 Median Multiple in 2007 (refer 2008 4th Edition Demographia Survey) to 2.8 Median Multiple (refer 2013 10th Edition Demograhia Survey), wiping a quarter trillion euros out of bubble value out of its housing market and putting its Banks to the wall.

      New Zealand and Australia’s metros are currently in excess of 5.5 Median Multiple (this year’s Demographia Survey … adjusted).

      New Zealand’s Bubble Economy Is Vulnerable | Hugh Pavletich | Scoop News

    • The New Zealand Authorities have started on the path of subduing its housing bubble … while the Australian Authorities have chosen not to …

      NZ shows Australia how to address housing policy | Leith van Onselen | Macrobusiness Australia

      The Chinese are desperately attempting to reform their economy, with a shift from excess investment …

      Credit Crunch Is No Reason to Resort to Old Ways – CaixinOnline

      Will the rapid falls in commodity prices, trigger the bursting of the Australian and New Zealand housing bubbles ?

  13. The immigration into Australia over the past decade has almost ENTIRELY been families. Frequently with more than 4 members.

    They do not need 1 person per house, they need one house per 4 or 5 or 6 people.

    So basically we are over building MASSIVELY.


    • I guess that could be used to explain the 0.3 minimum on the ‘new dwellings per new capita’ chart, given it coincided with an immigration flood.

    • I heard of 20 Indian taxi drivers living in one house and hot-swapping beds.
      I guess they all came from the same family – if your claim is correct.

      (which it is not)

  14. You can build as many houses as you like, but if these homes are overpriced in relation to wages than the only people crazy enough to buy them may indeed be property speculators who are gambling that prices will continue to climb higher. How is that helping a family who wants to buy a house as a place to live?

    Demand for housing is being fuelled by speculators not First Home Buyers.

    The tax system should punish people who hoard land and property rather than reward them with opportunities to lower their taxes with negative gearing.

    Any investment that relies on negative gearing and rapid growth is speculation.

  15. New Zealand Producyivity Commission to investigate urban land supply

    New Zealand Productivity Commission to look at urban land supply … National Business Review

    Productivity Commission to look at housing land supply – Business News | TVNZ

    Productivity Commission to launch inquiry into how councils regulate land supply for housing |

  16. There is no doubt you are right Leith. Supply has been drip fed (always, not just lately) and finance has been poured on, especially for investors.

    There was a reason why our post-war forefathers rationed housing finance so heavily and directed it to mid-income family households.

    What is ever so noticeable on the supply side is why supply has failed to respond to rising prices. Two reasons – 1. no spec building (sell of the plan)_ makes the new market reactive not responsive and 2. because the price rise is actually in land, not housing, and developers are consumers of land, not suppliers. so higher land prices reduce their demand.. The demise of the owner-builder has also had a big effect.

  17. Excellent interview of New Zealand’s Nationals Finance Spokesman Hon Bill English by Bernard Hickey of Interest Co NZX

    Election Double Shot Interview: Bill English argues NZ economy needs the stability of National to keep growing sustainably |

    … and the Interest Co NZ report on the major review underway by the Productivity Commission …

    Productivity Commission to launch inquiry into how councils regulate land supply for housing |

    … within the above interview, the venerable Bernard Hickey let Mr English “off the hook” regarding the National Party initiated Commerce Committee Housing Inquiry of 2007 / 08 (chaied by none other than Hon Gerry Brownlee) … assisting them to win the 2008 election (this writer applauded them at the time) …