The great housing shortage myth

The claim of an Australian land and housing shortage is a myth of epic proportions, perpetuated by vested interests across the media landscape. An Internet search for the phrase ‘Australian land shortage’ produces a deluge of pronouncements confirming this view.

Those with an intimate knowledge of property-related data, or with experience in the development industry, can tell you that the alleged housing shortage is fiction. It is in the developers’ best interests, however, to remain quiet and reap windfall gains from beneficial rezoning (surely betterment taxes should be imposed on that?). The imagined scarcity of housing is promoted by think-tanks and other vested interests, and follows a familiar script:

Australia is not producing enough new land for housing due to policies pursued by state and local governments that prevent land supply and land use from responding to price signals. In fact, the supply of new land for housing has declined over the last decade, with the average number of lots produced in the five largest capital cities declining by 21%. The decrease in the supply of new land has not surprisingly seen an increase in land prices.

Everyone is familiar with varying forms of this argument that are ceaselessly promoted by think-tanks and housing lobby organisations. Unfortunately for the vested interests, it is nonsense. For an abnormal surge in housing prices to be attributed to supply constraints that arise from town planning regulations, the following events must have occurred:

  1. Rents must rise relative to household income (the rent to income ratio), for if fewer homes are built, tenant bidding wars for scarce shelter must result in a higher ratio.
  2. Real rents must increase (the nominal rent to inflation ratio), as supply is squeezed by regulations that restrict the number of new dwellings.
  3. The occupancy rate must rise, as a lower dwelling construction rate results in more people per property.
  4. The council approval rate for new dwellings must fall.
  5. The rate of new construction must decrease. If government meddling prevents developers from building, the ratio of new housing construction to recent arrivals in a town, city, state, region and/or country must rise.

The following data tests these assumptions taken for granted by most economists. In the figure below, the top panel shows the mean housing rents and prices in five of the larger Australian states, while the bottom panel displays mean housing rents and prices relative to incomes. In these states, the rent to income ratio during the 2000s is approximately the same as throughout the 1990s, but the price to income ratio has risen.

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RBA statistics reveal the rent to income ratio actually fell during the late 1990s through to the mid-2000s, despite the unprecedented inflation in housing prices. After 2007, the ratio increased, but has remained under the peak established in 1999. Furthermore, the rent to income ratios for all income quintiles has remained steady during the housing price boom, except for a slight increase in the lowest income quintile.


Regarding the second criterion, real rents were trending close to zero during the late 1990s, and even turned negative during the early to mid-2000s as housing prices boomed, invalidating the assertion that supply shortages were squeezing the number of new dwellings.


The third criterion of the mainstream account also withers under scrutiny, for the occupancy rate (persons per household) has continued to fall during the boom, hitting a record low in 2007 at 2.72 before flattening out. This trend is in line with similar developed nations and has persisted, despite the average size of residential dwellings increasing to a record high.


The ratio can only fall so far, constrained by the social dynamics that affect family households and shared housing arrangements. The ratio of dwellings to people will never approach a one to one ratio, even when considering the surplus housing stock comprised of long-term vacant properties, second homes and holiday houses, and the extremely large size of the average Australian home.


Available data to assess the fourth criterion (housing approvals) also paints an interesting picture. For instance, South East Queensland provides an excellent measure – ‘Stock of lots approved by Council’ – that covers the early 2000s boom. Between 2000 and 2004, annual approvals increased from around 10,000 to 24,000, while the stock of approved but undeveloped lots surged from 25,000 to 46,000. If councils and planning controls really constrained development, the pattern should in fact be inverted.

Finally, in relation to the fifth criterion, the methodology often employed by economists when examining dwelling construction is faulty. New dwellings are sometimes compared to the existing population base, resulting in a downwards sloping trend. One could just as easily generate a rising trend by comparing the flow of new population against the existing dwelling stock (see here for an example). Further, measurement of the absolute and relative change in the number of dwellings constructed is pointless, for it says nothing about the change in population.

Flow to stock comparisons are occasionally valid, but it is nonsensical in the case of new supply. The existing (housed) population cares little about the availability of new dwellings, whereas it matters a great deal to the new net inflow of persons migrating into a city, town, region, state, or country. Australia has a relatively high home ownership rate of 68 per cent, with owners moving every decade on average.

Contrary to common perception, Australia has experienced a blistering rate of dwelling construction. From 1981 to 2013, Australia produced an average of one new dwelling per 1.76 new persons. Over the course of the housing price boom (1996 to 2013), the ratio is still a remarkable 1.93 – still way below the average 2.7 persons per existing household.


Due to moderate volatility a 2-period moving average trend line has been applied to smooth the series. The ratio is actually overstated, because it compares the new estimated residential population to new construction. A more appropriate measure would only include adults because children don’t purchase homes, make mortgage payments or pay rent, and it ignores increasing size of existing housing true to renovations and extensions.

Over the long-term, the post-WW2 ratio exhibits less volatility as a consequence of implementing stringent town planning regulations, perhaps by reducing uncertainty (a ratio of 2.0 between 1946 and 2012 compared to 3.8 between 1881 and 1945). This era also has a lower average ratio than pre-WW2, though this may be partially explained by more accurate data post-WW2. The supply of new housing has improved dramatically and remained responsive in the post-WW2 era in defiance of stricter planning regulations.


In contrast to the conventional supply argument, Australia has even out-built Texas, typically advocated as the ideal of supply-side efficiency. Between 1990 and 2012, where comparable data are available, the Australian and Texan ratios averaged 1.85 and 2.86, respectively. Over the course of both housing booms between 1996 and 2006 (the peak of the US bubble), the Australian and Texan ratios averaged 1.88 and 2.20, respectively.


When Australia and Texas experienced downturns during the GFC, the ratios in both countries increased, though more significantly in Australia’s case, leading to a sharp peak in 2009. Australia’s housing bubble failed to burst, following banking and housing interventions by the Rudd government. Consequently, the rate of construction has resumed its long-term average.

The comparison of the ratio of new population arrivals to new dwellings has some interesting implications for those blaming developer land-banking and other non-competitive practices on restrictive supply-side regulations. If the supply of new housing is being artificially constricted in Australia, how many new dwellings should developers be constructing? Should it be one new dwelling per new person? Ten new dwellings?

Fortunately, developers are run by businesspersons who are finely attuned to the real world functioning of property markets. Quaint notions of neoclassical equilibrium theory are discarded; such as the assumption the real estate market should operate in a perfectly competitive manner, with plots of land and dwellings modeled as if they come off a factory assembly line like candy.

In reality, developers carefully assess market conditions and make future trend estimates in an environment of uncertainty. They will certainly not imperil their future profits by constructing an absurd amount of dwellings in response to high prices. Rather, land banks are used strategically, in spite of the clamor against these practices.

The totality of the data discredits the mainstream housing shortage argument. In particular, the rent to inflation and rent to income ratios provide compelling evidence, alongside the occupancy rate. Apart from a few years during the GFC, both ratios have remained steady and/or even fallen for the most part during the housing price boom between 1996 and 2013. The data reveals the supply of dwellings has remained responsive and generally fulfilled the needs of a growing population, even as regulatory burdens have increased.

Conventional economic theory makes no allowances for private debt, land rent, speculation, bubbles, irrationality, instability and uncertainty – the characteristics of real world property markets. Yet, this has not prevented a number of economists from claiming that accelerating private debt results in greater volatility in restricted land markets.

This schizophrenic approach is inherently contradictory: on the one hand accepting that markets operate (correctly) according to disequilibrium price dynamics, but simultaneously modelling real estate markets as if they operate according to equilibrium price statics. Markets must be modelled with one or the other, not mixed and matched when convenient.

As equilibrium econometric modelling does not account for the role of accelerating private debt on asset (land) prices, a causative relationship cannot be established between supply factors and prices, only a tentative correlation. Even then, a thorough analysis of the data leads to misgivings about the role of restricted supply, with a strong rate of dwelling construction over the long-term in the midst of a supposedly strict town planning system.

The same cyclical pattern is found in the stock market, evidenced by the recent Dot-Com bubble which was the largest of its kind. What supply-side factors generated that enormous bubble in the virtual world? For centuries, developed nations have experienced recurring stock market bubbles irrespective of the regulatory environment. Thus, in a manner analogous to the real estate market, it would be absurd to blame high share prices on regulation, for instance, the government curbing the supply of new stock via IPOs.

Australia suffers not from a lack of supply, but high housing prices – seemingly contradictory if one abides by conventional economy theory and the standard account of town planning. Housing prices are abnormally high due to a bubble generated by financial deregulation and generous tax expenditures.

Even with plentiful supply, concerns over affordable housing, however, are still valid. The bottom 40 per cent of households by income has always struggled; it is not a recent phenomenon. Higher social welfare payments, rent controls and a greater supply of public housing would help to ameliorate affordability issues for the poor.

In conclusion, Australia has built a persistently responsive supply of new dwellings, relative to the flow of new net population. There has neither been a housing construction boom nor crash, but a healthy rate of supply at around one new dwelling for every 1.8 persons in recent decades. Assertions of a housing shortage and/or restricted supply are not supported by long-term data and a host of metrics.

Comments and data provided by Paul D. Egan and Philip Soos


    • Lorax must have commissioned it…

      Man the Brits are hypocrites! So the UK MUST stay together, the EU not so much…

      • How dare they contradict the words of Saint Bob Day!

        BTW Mig, has he got back to you on your questions about NG?

        There’s another South Australian Senator who said this last week:

        why not tweak negative gearing to encourage affordable new housing. It’s crazy to have a blanket tax code that rewards debt over equity.

        The Grattan Institute estimates that $2 billion could be saved if negative gearing was slowly phased out. In the interests of full disclosure, I should say that a phasing out of negative gearing would impact on me personally, given the four properties I own. But if it means a balanced budget and a more affordable housing market for young Australians to enter into, then that is a price I am very willing to pay.

        And this Senator isn’t some God-bothering right-wing loon who wants to impose his idea of morality on Australia. Jesus mate, Bob Day is from the same party as Steve Fielding!

      • Wake me up when someone raises rates by 300 bps.

        No one got back to me yet, I deliberately sent from one of my work addresses, I figured one of the most prominent hospitals in Australia would make it past the spam filter.

        They may just have been inundated…

        And Julia Gillard is from the same party as Richo, what’s your point?

      • Lorax doesn’t need to commission this sort of stuff from Cameron Murray; Cameron is a fellow member with Lorax, of the Clerisy of the High Church of Gaia neo-paganism angling for the establishment of a theocracy with them in charge. We can take their appeals to their own authority with the same pinch of salt that we would apply to pronouncements from Rome in around the year 1300.

    • The opening of the article is definitely bait of some type

      “..The claim of an Australian land and housing shortage is a myth of epic proportions, perpetuated by vested interests across the media landscape..”

      What nonsense.

      Most who assert there is a housing shortage do not claim they want more houses built but that the restrictions that make it expensive and time consuming to do so should be reduced.

      What the shortage deniers repeatedly fail to do is address this very simple proposition.

      Instead they come up with long lists of reasons why it unnecessary to do what is obvious to anyone without an axe to grind.

      For the shortage denier the real objective is not the stated objective. The reason they work so hard running arguments that encourage politicians to take NO action to reduce the restrictions and limit the expense of building new houses is because they HATE new housing – especially new housing on previously undeveloped land.

      What have they got against new housing on new land?

      You name it – the list is long and they all have their personal preferences and many are quite understandable.

      The bit they always miss though is that their real enemy is population growth as without that there would be no need for new housing on new land, no need to tear down heritage in the inner city for dog boxes, no need for more highways, no need for fat guys wearing white shoes etc.

      I have plenty of sympathy for all of these concerns but the fact remains that until we win the argument on population growth, running arguments designed to encourage politicians to maintain the artificial and unnecessary (some are of course) restrictions and costs imposed on land development when the population is growing does nothing more than punish the lowest income earners and those least able to bear the costs of a war of passive aggression.

  1. If you’re a foreign investor, the pool is endless with developers and agents exclusively catering to your whim, locals though are pushed out, neglected and extorted. Supply is not being created for the benefit of the local buyers who simply want a home.

      • In terms of supply now it is being created for the sole benefit of foreign investors, it is not even being marketed or designed for the local purchaser. Even house and land packages are now circumventing local buyers.

    • Demand for property to be used as housing is very finite. Demand for property as a store of value is infinite – there will never be enough supply. It is essential to have a limit on how much property can be sipohoned out of being used investors for pure speculation or value store and not used as housing.

      • I’ve got second life for all those investment whores. Build and bid up as many virtual apartments as you want!

      • Spot on. The foreign (read Chinese) purchase of Melbourne housing stock has nothing to do with shelter. They tend not to be rented and may as well be demolished as far as the local inhabitants are concerned. The price of those remaining that are used as shelter must rise. The finance figures do not take into account those who pay cash. The indices that were once used to measure housing are inadequate in the face of huge foreign purchases.

      • Demand for property as a store of value is infinite

        Not quite. In the majority o cases, this is just demand brought forward. Someone still needs to pay those loans, even at 0%. And as Japan found out, when the demographics turns (pushed further by the bad economics), suddenly the perceived value shrinks.

      • Well ‘infinite’ is hyperbole, I admit. Demand for property as a store of value is ultimately limited by the amount of money in circulation, and in practice a good deal below that.

        But I don’t see that people using house ownership as an alternative to putting their money in a bank, are bringing demand forward in any way. It is a separate demand on the available housing stock, largely uncorrelated to demand that originates due to household formation.

        To me, it’s kind of an investment fad, and fads have a habit of ceasing suddenly for reasons which appear quite obscure at the time. So there is a danger in trying to meet both kinds of demand, as the sum may prove to be far more volatile than expected.

  2. In the case of Cameron Murray and the few other theoretical holdouts on this matter, I pose the question:

    would you accept regulatory reform that would allow a local equivalent of George P. Mitchell to build a local equivalent of “The Woodlands”, a master-planned community of 120,000 30 miles from Houston?

    If not, why should we believe any of your contorted theoretical exercises that attempt to prove that regulatory differences of this nature are NOT the crucial point?

    It is not a controversial principle in economics, that you can have a quota system, theoretically “adequate” supply, and still have extractive economic rent being sucked out of “labour” and the producers.

    It is the presence or absence of a quota system that makes the difference. The free market really does not bring prices down and create consumer surplus, without there being superabundant supplies of something able to be tapped into by any new entrant to the market.

    NZ had a quota system for car imports in the 1980’s, that was set at “adequate” quantities – only car importers had to bid against each other for share of quota. This had the effect of causing an “imported car bubble” in NZ – the “adequacy” of supply was irrelevant to the existence of a gouge at one vital juncture of the system.

    • Off with the fairies… Find me 120k people here that want to move 30 miles from Houston…

      Around Melbourne that basically describes Cranborne

      • Have you heard of jobs-housing balance? The average job in “The Woodlands” pays slightly above Houston average, and there is about the right number of them.

        Manufactured excuses are all we hear all the time from some people on this issue.

      • Huh? I’m willing to bet most people living in Cranbourne work around there. What nonsense are you peddling?

      • Who isn’t understanding who around here? The Houston region does not have unusually long commutes to work.

        “Splatter development, because it is freely allowed, means that functioning a la carte spatial economies form all over the place. You get a job somewhere, you have a home somewhere sensible. There is very little of the “pricing out” effect anywhere, so if you get a job centrally, you also live centrally. If you get a job in The Woodlands, you live in the Woodlands or at least somewhere near it.

        Travel between the splattered and very-low-density fringe residences and jobs occurs at very high speed, so someone could easily live 30 miles from Houston and have a job located almost anywhere within a 40 mile radius that they can get to faster than someone can get to a Melbourne CBD job from any home that costs them less than $700,000.

        The kicker in the Houston region is that whether the home is exurban, fringe suburban, or mature centrally located suburb, it will cost well under half what anything in Melbourne will. Or if you want to spend $700,000+ on a house, you can get something really palatial instead of a streetcar era villa or a clapboard McMansion.

      • The price of labour isn’t cheap.

        If Australia didn’t have lower wages that 25 years ago, nominal housing prices wouldn’t be so distressing either.

    • NZ had a quota system for car imports in the 1980′s

      Yes. I believe this to be true. Do you know of any articles that were written on the problem?

      • I wish I did! I would be in the same position as you, trying to find anything now.

        I personally knew a guy who went bankrupt after being highest bidder in the quota auction in the last year it operated. The government ditched it after that, having seen the light about quota schemes.

    • I often lie awake at night wondering why Victoria hasn’t discovered their oil yet, and how it would affect the industries and employment around Melbourne.

      How would Melbournites react to fuel at the bowser below $1 per litre, would they be happy to drive further, would the state of Victoria be happy to spend some of their oil revenue on better infrastructure?

      So many questions keep me awake at night.

      • Supposing that additional oil production occurred in Victoria, I suspect it would have the same effect on the price Victorians pay for petrol as the expansion of LNG production is about to have on the price of natural gas in Queensland and NSW.

        Hence, I pray that no one tries to produce oil here in Victoria.

        In the meantime, I think that the horror that is driving anywhere within Melbourne means they would not be happy to drive further even if petrol was 20c/L.

  3. Stephen Malpezzi, one of the most authoritative urban economists on the planet, has a saying: “house price is the sufficient single statistic to discern whether supply response is adequate”.

    • What rubbish. So in PhilBest world, high prices are all the evidence needed to point to a supply shortage. Move to Houston mate, you are way behind the eight ball.

      • Not “to a supply shortage”, but to an absence of freedom.

        Of course village idiots don’t care who they mock.

      • MM, don’t bother with Phil. He’s a grumpy old man from New Zealand who doesn’t get out much and spends much of his time in the denial-o-sphere.

        I didn’t realise he was a shortage spruiker, but it doesn’t surprise me. There certainly seems to be a left-right divide on the shortage issue. I’m guessing because the natural inclination of wing nuts is to develop every square inch of land they can, and lefties push back against that.

      • An absence of freedom?! Turn it up Braveheart.

        More like an absence of intellect. I’ve come to the conclusion that reasoning with the unreasonable is a pointless exercise. While we are quickly labelled ‘shortage deniers’, given the evidence at hand (and no, prices are NOT evidence of a shortage), the denial is firmly with the supply siders.

        Read Cameron’s article again, and if you still don’t get it, move to Houston.

      • Not at all – it makes perfect sense. Prices are too high – look for problems with supply.

        Would you bother with any other course of investigation if we were talking about the price of bread, or shoes?

        Of course the problem with supply does not have to be “regulatory”, there are other potential reasons that a nation might have to find ways to surmount. Actual lack of land, as in Japan and the Netherlands, has justified direct government operation in urban land markets, owning large portfolios of property and compulsorily acquiring land for development under the “plans”.

        The people who insist that the planet must be saved with urban planning, need to explain why they never advocate similar approaches to ensure the planning is actually effective, instead of having a whole lot on unintended consequences that defeat their purpose. The stink of the potential for a deliberate racket to benefit the rentiers is overwhelming.

        Of course village idiots don’t care who they mock.

  4. It is balderdash that rents need to rise in tandem with prices to prove there is a shortage.

    The disconnect is a widely-accepted evidence that there is a bubble.

    Population per dwelling does not need to rise at all – young people being priced out of co-habitation and child-bearing altogether takes care of this.

    What you do see at the margins, quite likely unreported in the official statistics, is illegal crowding in parts of the rental market.

    Australia is just in a transition stage – growth containment absolutism requires several decades to turn housing into a crisis like the UK has. Why would Australia want to not learn from their mistakes?

  5. A big thanks for challenging my long held views Cameron. I still believe in the shortage but not due to zoning regulations. Instead I tend to believe in a buyer inertia due to consistently rising prices with buyers questioning the future of the market.

    I also know that developers and construction companies can’t and won’t produce if they don’t believe that there is a profit to be had at the end of the project.

    Just quickly on the rental yields over time chart – That’s largely determined by landlords who may be quite satisfied with lower returns during periods of low interest rates, as their net return would be better during a low interest rate period even though the gross yield is lower.

    In addition new investors are comparing the returns they could receive in a term deposit to a rental return. Right now even though rent yields are low they still look attractive in comparison to bank deposit.

    You have provided a lot of information and questioned some entrenched beliefs, which is good.

    • Spot on Peter. And when they see the returns they get on the stock market in the next year and beyond, you don’t want to be standing in the way at an auction or a listing. It will be every SMSF for themself.

    • You have provided a lot of information and questioned some entrenched beliefs, which is good

      Good to see you have an open mind Peter.

      Its this chart that has me shaking my head:

      The parabolic rise in house prices between 1998-2002 came at a time when the new resident to new dwelling ratio was falling. I’d really like to see that explained in terms of a shortage.

      • That was the GST. Prior to the introduction of GST (01/07/2000) buyers went a little crazy because they knew that all land and housing post GST would rise by 10% so the market boomed with home builders.

        Post GST it initially fell as I recall, and then as the GST was felt in actual prices it rose again.

        After that we had the stimulus due to 911.

        Simultaneously the First Home Owners Grant was introduced and it took effect from 01/07/2000.

        I don’t think all issues can be explained as just a result of a shortage. It’s a factor but not the only one. In any market if demand is stimulated then a shortage will be created, but that shortage may not last.

        FWIW I think we are rapidly moving to an oversupply in apartments in most cities, but we still have a shortage of available detached suburban homes close to the CBD. Australians will have to change their ideas on what is a home in the 21st century. Maybe a 3 bed townhouse with communal space will be the norm by 2050, and not the exception.

      • Peter,

        1mil 95% investment loan (RE) based on my income and the “rent income”. HSBC. Though I don’t recall ever mentioning it here.

        Btw, landlords can push REAs as much as they like, rental demand will be the sole determinant on that. I’d also say you must know some very generous landlords, funny that rents went up with low IRs when vacancy rates went low!

        Can’t say much about your financial advice, must be why you’re a broker, tie up your clients money in an investment likely to go nowhere over the next five yrs, possibly down.

      • @ dennis – LOL
        Yep you did mention it and it’s still completely untrue unless you have additional security to offer, in which case it’s not a 95% LVR loan.

        If you insist on talking BS then don’t do it with someone who has a better understanding of lenders and LMI policy than you.

        I could explain the technicals but with your level of sophistication I doubt that you would understand.

        Have a nice day.

      • Peter,

        Well, that is exactly as they gave it to me over the phone, I bank with them. I’ll call them tomorrow to see if there were crossed wires for whatever reason and there was no talk of requiring any additional security other than LMI. On the OO side if the coin they said I’d need to bank with then for 6 mths unless I had some credit history to show them (I haven’t had any debt in well over a decade and no CCs), otherwise the amount would be somewhat lower (of which I don’t recall).

        I don’t understand why you find that outlandish as I have work colleagues on 60% of my income who have loaned 500k on 95% LVR.

      • @ dennis – ah I see, you must have been talking to someone who didn’t know the banks requirements. Certainly $1M loans are possible and 95% loans are possible, but $1M loans at 95% LVR are not available, the mortgage insurers won’t unsure them. They have dollar caps on high LVR loans and to complicate that more it’s also dependant on the postcode.

        I see now that it’s a genuine error, but it’s one that might be troublesome for you so you need to clear that up with HSBC. BTW they do very little lending in housing in Australia, I would talk to other banks if I was you.

    • Peter,

      Seriously? Landlords will let increased rental demand go by due to low IRs? I doubt it, for starters my experience over the last 7 yrs is that it’s the REAs who are the driving force to increase rent, if demand is up when your lease comes up for renewal expect an increase in the asking price.

      How can you refer to people who’d compare an investment like housing, which is long term against a term deposit for yield with the risk on housing. How’s risk being priced on that?

      • dennis – weren’t you the guy who made up that story about being offered a $1M 95% LVR home loan by his bank?

        I laughed for weeks over that corker.

        Are you speaking from experience as a landlord?
        Perhaps not.

        Yes REA’s are the driving force behind rent rises, but when a landlord is under stress with high interest payments he puts pressure on REA’s to do something about it.

        When interest rates are low then the REA’s are left alone.

        Yes I do compare housing with Term Deposits, although when held over time I regard houses as much safer investment options. Short term my view is different.

        I’ve watched a lot of seemingly wealthy people retire with a mountain of cash in the bank even during times of high interest rates, and watched as the real value of that mountain was turned into a little pile of nothing.

        If that is your financial plan, then I can tell you that it stinks in the long term.

  6. Good to see someone has finally said it. The shortage arguments don’t hold up. If there is a shortage of a consumer durable which has no close substitutes, the price of the durable has to increase as a % of income.

    The reason it matters, is because people like Bob Day are suggesting we de-skill the labour force (even after it has already been de-skilled by the mining boom) shift labour into construction, spend taxpayer money financing infrastructure to service urban sprawl simply because they can’t admit that the price isn’t being driven by government interference.

    • That’s Saint Bob Day.

      people like Bob Day are suggesting we de-skill the labour force (even after it has already been de-skilled by the mining boom) shift labour into construction, spend taxpayer money financing infrastructure to service urban sprawl

      Thanks. You’ve distilled the epic stupidity of Bob Day’s speech.

    • Good to see someone has finally said it. The shortage arguments don’t hold up. If there is a shortage of a consumer durable which has no close substitutes, the price of the durable has to increase as a % of income.

      That is what did happen.

      Take the example of Sydney a house that used to rent for 1/3 a normal wage in the 1970’s and was affordable to say a schoolteacher with a stay-at-home wife, now rents for 1/2 an ordinary wage and is unattainable to the schoolteacher unless the wife also works. That is the dramatic rise that shortage-deniers deny.
      An increase from 1/3 wage to 1/2 a wage is a HUGE increase. This is a 50% increase. And it is a 50% increase on a family’s largest expense. Ordinary families simply cannot afford to pay this much extra rent.
      In response families of ordinary means have been forced to compromise on size, quality, backyards and on commuting time and/or send the wife to work. In other words the family cannot afford to pay $800 per week for a house like their parents had, so they rent a unit for 40% of a wage, or rent a house with no backyard for say $500 per week AND commute much further paying more in petrol.

      Shortage-deniers do no wish to see the dramatic rise in rents for what was once a ordinary home. Since there is a shortage of these ordinary homes, the market rations them by forcing price up beyond what ordinary families will pay. A simple cottage on 1/4 acre 20kms from the CBD is no longer ordinary. Due to shortage of such it is now considered a luxury.
      Ordinary families now are forced to pay a higher rent + higher commuting costs for a dwelling with less utility than previous generations had.

      • That is not due to a shortage. Thats the floor being lifted because dual incomes are a norm. that is demand!

        If you put another zero at the end of everyones wages, suddenly almost everything costs 10 times whet it used to.

      • That is not due to a shortage. Thats the floor being lifted because dual incomes are a norm. that is demand!
        The working-wife explanation fails to explain why Sydney prices doubled in the late 80’s whereas other capital cities doubled decades later. If that was the explanation then house prices would have risen in concert as women increased their workplace participation.

        If you put another zero at the end of everyones wages, suddenly almost everything costs 10 times what it used to.
        You are now refering to debasement of the currency unit. What you say is correct, but I was refering to “an increase from 1/3 wage to 1/2 a wage”. So you can put as many zeroes as you like whereever you like, but the rise I noticed is in real terms.

      • The working-wife explanation fails to explain why Sydney prices doubled in the late 80′s whereas other capital cities doubled decades later. If that was the explanation then house prices would have risen in concert as women increased their workplace participation.

        I didn’t say it was the only explanation but if you look at data, Sydney has had a higher proportion of women working than other capital cities and only recently (Brisbane in mid 2000s for example) caught up. I am not one to deny the supply side factors but there is a lot of land for sale in many capital cities (another Brisbane example at ridiculous prices because developer are allowed to charge that and the banks will lend you the money. Simple! It is price fixing, not a shortage.

        If you are arguing for shortage of infrastructure etc, ok, I will give you that. BTW rents have gone up to half of one income or less than 1/3 of two income. To be more precise half or one income is 1/3 of 1.6 incomes (which is the commonly used multiplier).

        Compare all these ratios to household incomes and suddenly, they are all static (expect house price).

  7. What chance do we have for adequate housing supply when we have the billionaire landbankers choking it at one end and misguided do-gooders attacking it at the other.

    The bootleggers and the baptists

  8. You are partly right Cameron, but also wrong, You are right about the supply side being pushed by vested interests, Not just here but in the US as well. But you are wrong about there being no supply shortage. There always has been, and that is why post war governments kept the lid on housing finance.

    Lets start with your points 1 and 2 (real rents must increase). The problem here is that the major consumers of new housing are not renters but buyers. Their imputed rent has gone up massively in real terms since 1990 – look at the National Accounts. This is not entirely due supply drip-feeding, but it is a contributing factor.

    Opening the financial floodgates to investors has poured new rental accommodation onto the market which has kept rents right down.(The rental market is a different but derived market) It does remain peculiar that they stay low while urban vacancy rates are so low (2-3% next to 9-11% in USA) but I think this is due to high price elasticities of demand by renters compared with owners. Renters cant take higher rents, they will drop out of the market and share given the low utilisation of our stock, but buyers can take higher prices and they will pay them..

    The crucial argument for high supply elasticities is the almost complete unresponsiveness of Australian housing supply to higher prices.

    • Oh – and I found that occupancy rates (persons per household) rose for the first time in eighty years in 2000-2005 . That was one of the scary statistics that got me back into this game. You can bet they are still rising.

      Theres a long piece in Chapter 2 of my

      Sure it’s nothing much next to New Zealand, it was partly tempered by therise in real incomes otherwise it woudl have been much worse.

      • Yeah I already saw that one, ABS havent put out much lately. They seem to be far more interested in the 0,5% who are homeless than the 99.5% who are not.

        Looking back at my report – it is household formation rates that have suffered the big decline. The number of households with reference person under 35 actually fell nationally between 1996-2006.

        The ABS graph shows household size bottoming out in 2006, as the relative loss in younger households became greater than the gain in older households due to ageing population. Flat overall household size means the trend in loss of younger households is continuing.

        The inexorable rise in renters speaks for itself – all the worse because rental should be falling as the population ages..

        All this is a pretty serious sign of housing market pressure. Not spectacular, but a bit like Greenhouse – creeping up on us.

      • Good points.

        I only knew about that ABS because I quoted from it earlier today.

        My takeaway from the changes to the age structure of the rental market is that the erosion of home ownership is likely permanent or as good as.

      • Sort of, statsailor. But in response to that I always say that if government created the problem, it can remove the problem. Postwar governments lifted homeownership to 70% in 15 years by a couple of simple policies. These policies are anathema to free marketeers but they worked. Like a beauty.

        By blindly following the neoliberal agenda we reversed the whole postwar thrust and we are headed back to something like the 30% home ownership rate of the 1930s. Really.

        Funnily enough, this trend can also be partly stopped by neoliberal prescription too – tax away all the externalities. But you will never hear even a mention of that from the right-wing think tanks as it does not suit their constituencies.

        The real problem is – there is no such thing as a level playing field.when one group has more money than another. Investors will always outbid first home buyers in a “free market” and they always have

      • Hopefully somewhere between here and 30% home ownership a politician decides there could be more votes in increasing the proportion of home owners than in enriching the existing (and declining numbers of) homeowners and property investors.

        EDIT: I’m very sceptical of the claim that the 1 million odd NGers is really an electoral barrier to dismantling NG, for example. Seems like there are quite a few more renters than NGers.

    • Joe,

      Imputed rents are calculated using average market rents. Therefore actual real market rents are a clear indicator of the cost of housing for owner occupiers. Likewise changes in market rents as a % of household income are the clearest and most accurate measure of changes in affordability for tenants and owner occupiers.

      Re. The national income accounts: is that true? Are you talking about the housing component in final household expenditures? Pretty sure that includes costs not related to the supply and consumption demand of housing – water and utilities etc. would be keen to see if that is right. Intuitively I can’t see how housing consumption in the national accounts can have grown as you say it has while rent (actual and imputed) as a % of household income has barely moved since mid 90’s.

      • You may be right Sweeper I need to go back and check that one out. For very many years it was calculated at 4% of market value less costs in most National Accounts, and in many datasets it is still calculated that way (eg CNEF), but I believe sometime in the late 1990s Australia switched over to a private rental comparison, as you say. Very convenient.

        At any rate, the fact is that the “price of housing” in the market is the real estate price, Whereas the price for “housing services” (ie rents) is set in a different but somewhat connected market, involving a fraction of the population only, They used to stay more or less in parallel, but recently we have seen how far the real estate market and the rental market have gone out of whack.

      • Fair enough.
        In terms of the “price of housing”, I would say the reverse:
        The price of housing is the market rent. It is set in the rental market. The rental market is the primary market where the underlying forces of supply and consumer demand interact to set the price.

        The “stock/asset” price of housing is set in a related but derivative market where investors trade titles to residential property based on perception re. the present discounted value of current and future rents. Underlying supply and demand forces are a factor in this market via the current rent, however so to are expected holding costs, expected changes in rents, the risk free components of the discount rate, the risk premium component of the discount rate, tax rates and other non-fundamental like herd behaviour and stupidity. Similar to the way the spot price of a commodity reflects supply and demand for its production/use whereas the forward price also reflects holding costs opportunity costs etc.etc.
        The price of housing, in any question relating to underlying supply and demand, must be the rent.

      • Sweeper, the “price of housing” is something I have been arguing with other housing economists about for thirty years and I do not agree with many of them..

        To some extent it’s semantics. Quite clearly the “price of a house” is the real estate price. There are buyers, sellers and an orderly market. Everyone can understand this.

        The rental market is secondary. It takes a particular house and delivers a set of rights to occupy which are quite different than what an owner has. The producers in this market are the consumers in the real estate market, and that is how the two markets are tied together, The consumers in the rental market are the renters, and they do not participate in the real estate market.

        Now the problem comes if you want to “impute an annual value of owner occupation” using the estimated private rental value, rather than taking a user cost of capital approach, which is the method I and others used to prefer.

        You would first have to presume that the rental market is uniform viz if all the millions home owners were suddenly thrown out and their places put up for rent, would rents change? You would have to take account of the very different taxation treatments of owner occupiers and landlords here.

        Second you need to take account of all the extra rights enjoyed by owners – right to occupy continuously, right to alter, right to dispose, right to keep pets etc – and cost these, which is difficult because there is no separate market for these things. And as well subtract the extra costs of ownership – repairs, rates etc. Because what owners are getting and paying for on a recurrent basis is not what renters are getting and paying for.

        Thirdly – and most important in the current context – rents can be driven down if properties are converted from home ownership. This has very little effect on the real estate market, but it has an effect on rents. The real estate market might have excess demand, while the rental market might have excess supply. The two are not particularly connected because of change-of-tenure.

        Herd behavior, capital controls and all those things that are staples of real estate are largely irrelevant to the rental market EXCEPT to the extent they produce excess or inadequate supply. Nobody rushes in to become a landlord because they think rents might go up.

        And I disagree with you, residential investors do not buy because they do a present value of rental stream calculation except maybe a very few sophisticated ones. Every study says they do it for the perceived capital gain, and only use the rents to cover costs.

        If what you say were correct, no-one would be negative gearing. In fact – at present rates of return no rational person would be a landlord except maybe in mining towns Yet you cant stop them pouring onto the market, they are squeezing out the first home buyers everywhere.

      • Hi Joe,

        You almost touched on a behaviour of some landlords that I have observed as a tenant, but never seen analysed, which is that some landlords are too optimistic in their assessment of the ability of rental cash flows to cover costs, become disenchanted and leave property investing. Happened to me a couple of times as a tenant in the last five years.

        My question is, how would landlords behave if a surge in unemployment eventually leads to deflation of rent/ bigger gaps between tenants? My experience leads to the impression that there are plenty of landlords whose cash flow doesn’t actually support being a landlord as it is – any deterioration could be severe.

      • If what you say were correct, no-one would be negative gearing. In fact – at present rates of return no rational person would be a landlord except maybe in mining towns Yet you cant stop them pouring onto the market, they are squeezing out the first home buyers everywhere.

        Amen! You have a few here that beg to differ (on flawed maths and logic, but differ none the less).

      • Joe,
        I think I definitely see it differently:
        The rental market is the primary market where producers and consumers set the price of housing. Producers (builders) produce housing services and follow a standard production function – this is the supply side of the housing market.
        Consumers are the tenants and follow a household consumption function – this is the consumer demand side of the housing market (owner occupiers are tenants to themselves as landlords).
        “Housing” is an annual flow of services. The price of housing is the competitive rental rate for housing services – the market rent.

        The “housing” market is a derivative market where buyers and sellers (investors) trade amongst themselves the legal rights to the income related to the current and future flow of housing services. There are no producers or consumers in this market, only buyers and sellers. Owner occupiers operate in two different markets the primary market (as tenant) and the derivative market (as investor). The stock/asset “house price” in this market is a derived price which should vary by location in exactly the same proportion as rents vary by location (assuming investors expect uniform changes in future rents by location)

        I don’t agree that an owner occupier has more rights as a tenant than a tenant has in the private rental market. The right to alter and dispose are not the owner occupiers rights as tenant, they are the owner occupiers rights as landlord. The only difference between an owner occupier as tenant and a tenant in the private rental market is that the owner occupier doesn’t sign a lease.

        In terms of the discounted cash flow calculations. I agree with you that 90% of investors wouldn’t have a clue. But the discount rate, risk premium, growth rate are all implied by investor’s behaviour (even if they don’t have a clue what they are doing). The only known explicit factor in the valuation is the current market rent at time 0 discounted at a discount factor of 1. The only time the assets price can’t be equal to the present value of current and future rents is when there is an implied bubble premium. To your point about negative gearing all I can say is “yep”. No rational person would be an investor at these yields. That is why you shouldn’t change the whole structure of the economy by building more houses, simply because housing investors are irrational.

      • I don’t agree that an owner occupier has more rights as a tenant than a tenant has in the private rental market.

        You’ve obviously never been a private rental tenant who wanted to hang a picture.

        Yes, I know your next sentence discusses the owner occupier as having additional rights as a landlord, but in reality its tenants who want to hang pictures, not landlords, just as its tenants whose agency is curtailed by the possibility of being evicted before they decide to move, not landlords.

      • Landlords want to maximize their rent. if a tenant is willing to pay a higher rent for pictures on the wall, why wouldn’t the landlord want the pictures?
        On the other hand, the interests of the landlord will never be the same as the tenant even when they are the same person. Eg if the owner occupier as investor can no longer finance their investment so has to kick themselves as tenant out.

  9. OT, but sufficiently amusing to pass on. I was spammed yesterday with an email from (Clearly I am moving in the wrong internet circles).

    There are lots of good lines used, such as:

    Land Tax Hurts People

    Land Tax kills jobs – because it makes it much more expensive to build new homes, shops and factories.

    Land Tax raises rents – making it harder for families and small businesses to make ends meet.

    Land Tax hurts first homebuyers by making new housing more expensive to build.

    Having both logic and facts working against you must be quite taxing. (Pun intended).

  10. ‘In reality, developers carefully assess market conditions and make future trend estimates in an environment of uncertainty. They will certainly not imperil their future profits by constructing an absurd amount of dwellings in response to high prices. Rather, land banks are used strategically, in spite of the clamor against these practices.’

    And in these above words lies what is wrong with the present system as used in Aussie, NZ etc.

    Given that Mr Murray quotes Houston, Texas, and having developed in both NZ and Texas, and made comparisons from a developers perspective of why houses cost what they do, I can make these observations.

    It all comes down to value-added and non value-added costs, remembering that one person’s cost is another person’s revenue.

    Because there are no development controls (as we understand it) in Texas, development land can be bought at or close to the rural land price and more importantly this land can be bought on the fringe or further out at about the same price. This makes land banking far less necessary – you buy the land when you need it, and if you do land bank, because you purchased at rural land value, the property covers the holding cost based on its rural productivity ie there is no residual debt the holding of the property carries forward or is passed onto the end purchaser when it is developed. Thus there are no non-value added costs in purchasing the land in Texas.

    Of course the opposite of this is true in places with restrictive zoning. The restrictive zoning limits supply and gives an increase in price to these properties without adding any value. This is a non-value added cost.

    Further the rural production on these properties can never cover the debt created by the non-value-added extra cost of purchase so this debt has to be carried forward and recouped from the end purchaser. Some specialist land bankers play a futures type market were they go far enough out so they can buy property at the rural land price and then gamble on how many years it will take the market to grow out to them and/or see by sector lobbying if they can convince local councils to up zone their property sooner rather than later. This up zoning happens independent of what the market demands as paper value is created just by the fact it is up zoned, irrespective of whether it ever gets developed now or in the neat future.

    Further, when it comes to developing the land in Texas it can be developed at the rate the market demands, supply can almost equal demand in real time. I estimate that a developer can bring land to the market about 10 times quicker in Texas than can be achieved in NZ and I would guess, in Australia. However more importantly, if the market suddenly is not there anymore, a developer in Texas can stop just as quick. It is far easier in Texas for a developer to lay the supply curve almost directly on the demand curve, whether its up or down. A Texas developer is less likely to get caught by the market, there is less risk in developing in Texas, thus on top of lower initial land prices, the developer can afford to take a lower rate of return.

    Creating extra risk for the sake of it is just another further non value-added cost.

    There are further factors and other non value-added costs that combine with the above that make land and housing cheaper in Texas but until people understand that not all costs are good ie non-value added costs, then any further explanation I might give will go right over their head.

    Mr Murray is arguing for those for whom non value-added costs are revenue to them, and as they say it is hard for people to understand something when their income is dependent on them not understanding.

    • A comment from someone who has developed in both NZ and Texas. That has got to beat looking up data on the Internet.
      Your contribution here is very valuable and appreciated (by me at least). And no, I am not a developer in case you wonder.

      Do you think that removing the restrictive zoning in NZ would bring their prices down to Texas multiples of income?

      • Steve is a mate of mine. I think he probably meant House price/income median multiple, he was one of the two World Bank originators of that concept along with the late great Steve Mayo.

        Yes – After looking at this stuff critically for more than 20 years, I think they are probably right. You cant have a high multiple without a land shortage, and vice versa.

        HOWEVER this isnt a bubble, it’s a structural weakness that has been affecting Australian property since at least 1972 and probably a damn sight earlier. In 1978 we wrote a paper in CSIRO showing 50 steps and 5 years in the land development process. It is better than that now.

        What was different about the 1970s was
        1) households in the 4th decile could compete on an equal footing with investors because investors couldnt get cheap housing finance
        2) the whole community was paying for new infrastructure, not just the marginal buyers
        3) Spec housing was about a third of the market. It doesnt exist any more in Australia, everyone sells off the plan, eliminating risk but therefore trailing demand
        4) There were more owner built houses under way at any time than project built.This was a nice extra steam valve for supply

      • Not necessarily. What everyone forgets is that Texas has a lot of restrictions on housing finance that go way back to the formation of the state, Everyone agrees they exist but no-one seems to know exactly what they are, I have been asking for years. The restrictions on housing finance are probably more important than the planning free-for-all, if our own history is anything to go by.

      • Not by themselves as there are other factors that need to happen in tandem with the non-restrictive use of land to get prices down.

        And it needs to be the Texas definition of non-restrictive use, not the NZ/Aussie version where they release an amount of land to satisfy a theoretical future demand.

        IF you achieve TRUE non-restrictive zoning, you will by default achieve in removing all the other blocks because the biggest block of all is a mental one.

    • @Dale Smith

      Thanks for you input. Quite concise. Would you agree that the restrictive planning and landbanking are essentially creating a monopoly on large rural developments?

      Small developers don’t have enough cash to burn through and smaller developments can’t easily amortise the costs. The larger developer developers can then increase their revenue…

      • yes I would agree, but small rural landholdings in multiple (lifestyle blocks) create the same effect and in fact can make it harder to develop at a future date as it is harder to amalgamate the smaller blocks due to multiple ownership, if that is necessary to achieve economic viability.

        And yes smaller developers who buy from land bankers take on high risk as they have paid the land banker the highly inflated price for the land and then have to develop and sell within a small financial window before their holding costs eat their margin. These guys are the canary in the mine and the financial failure of these guys precipitates by about 12 to 18 months a coming greater industry failure.

  11. 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 changing the 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 essentialL

    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 seems as weird as it sounds, it doesn’t matter as they make sense anyway in the interests of creating a responsive and efficient market for land and shelter.

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

    And for those shortage deniers who are really just desperate for any excuse to rationalise their disdain for an expanding human footprint and an understandable concern for the environment, please direct your energy towards measures that limit population growth as that is your true enemy when it comes to human population impact.

    The idea that high minded town planners should use zoning to drive everyone into cramped housing as population swells is the sort of attitude that gives middle class technocrats a bad name.

    The shortage deniers prescriptions drive the land and housing industries into the hands of well connected and well heeled rent seekers and home owners into the hands of debt merchants and assorted tickets clippers.

    Their policy recommendations provide the kindling that allows ponzi finance and excessive debt to burn out of control.

    Shortage deniers are usually well intentioned but inadvertently are driving up the cost of shelter for those least able to afford it.

    • “If they have no impact on house prices, which seems as weird as it sounds……”

      Not that weird. You know, the land prices of one of the most densely populated nations on the planet with acute shortage kept falling for the last quarter century.

      So, based on the >20 years’ worth of hard data, one may conclude that a land shortage actually leads to falling prices in a wealthy nation!!

      • What nation are you talking about?

        If you are talking about Japan they have no shortage at all.

        If anything as their population is shrinking they have plenty of empty houses that they cannot find renters to rent.

        If they would let you in, Japan would be a very low cost place to retire from the perspective of housing costs. A mate who lives near Osaka has been filling me in on the prices of houses that would make a local in Houston jealous. Most of these are not advertised in English on the web so you need to know a local to find them.

        The clue that most ‘shortage deniers’ are really just anti-housing (which itself is just a proxy for a dislike for human population growth and development generally) is that they seem to think that having a buffer stock target of empty housing (ie a rental vacancy rate of at least 4%) is a price too high to pay.

        I don’t have much time for the mindless population ponzi growth dynamic but at least I accept that until I win that argument I should not drive up the cost of shelter as some sort of passive aggressive counter attack on the Big Australian fans.

        A strategy that boils down to

        “Scare the migrants off with the high price of housing and starve the others into not breeding”

        A good test of this is to ask a shortage denier?

        “If too many houses actually get built why not just invite some refugees or migrants from other countries to move here and rent or buy them at low cost”

        They immediately foam at the mouth because they believe that is what is behind any calls for reform to the current constipated neo liberal infused land and housing market.

        Build houses and suck in more “humans” into mother Australia.

        Housing migrants and refugees is such an obvious solution to the imagined horrors of too many houses being built that the arguments of ‘shortage deniers’ collapse into a heap.

        None of the above is inconsistent with also attacking the FIRE sector and the debt frenzy dynamics of neo-liberal finance deregulation.

        Which of course is one of my preferred past times.

      • @Pfh007

        If all doctors suddenly decided to stop bulk billing and charging patients $50 a visit, is there are shortage of doctors?

      • ff,

        Yes – of course there is if you cannot afford $50.

        That is what the shortage deniers don’t understand.

        It does not matter how many houses there are if they are not available and those that are are in short supply.

        Not once have any of the shortage deniers offered any explanation as to why the so called abundant supply of land and housing has resulted in a rental vacancy rate across the nation and in most capital cities of less than 2.5% and often much lower.

        That is tighter than a cats port hole and has been that way for a long long time.

        Shortage deniers become efficiency fanatics all of sudden and tell us that every time a house lies empty an angel cries.

        The best they can do is either claim the figure is a lie or that we just need to set the bedrooms free and force people to sell up and downsize.

        I wish them good luck and when they succeed and the rental vacancy rate has a 4 or 5 in front of it I will congratulate them on their sterling efforts.

        But why bother with that bit of social engineering, when all that anyone is asking is that the restrictions and neo-liberal dogma imposed costs on building new housing be reduced.

      • There is a shortage of affordable medical care, not a shortage of medical care per se. An important difference.

        Similarly, if we build more, release more land etc, it will only flow into land banks because these are the profitable avenues for developers.

        The solution to the problem is not necessarily to build more or develop more land but to bring the cost down.

      • “Similarly, if we build more, release more land etc, it will only flow into land banks because these are the profitable avenues for developers.”


        That happens because of two things.

        1. Drip feeding the rezoning of farmland using ‘town planner’ projections/models of expected demand. If a farmer wants to sell to home buyers or Landcom et al – let them – unless there is some special reason or desire to reserve that land for agricultural purposes for perpetuity.

        2. Governments turning their land departments into gouging land bankers – instead of selling blocks of lands direct to home buyers at cost.

        If your concern is land bankers, that is easily addressed.

      • Australia has become a nation of landlords: in 1988-89, 608,000 taxpayers reported rental income; by 2007-08 1,765,000 taxpayers did – 13.5% of the total. I don’t have the number for 2013-2014, but I bet it is even larger.

        Now, that is a large proportion of the whole.

        How many properties does each of these investors have? One, two, three, five, ten, twenty?

        Of course, there will be a “shortage” if you try to meet all these demands.

      • If we have a nation of landlords why do the rental vacancy rates remain so low?

        There should lots of rental vacancies as all those landlords hang out the ‘for lease’ signs and fight for tenants.

        And by fight for tenants I mean cut rent and try to induce tenants to move by offering new carpet, longer leases, polite managing agents, working aerials, etc.

        We have little if any of that.

        Everyone has become so used to a tight market for rentals that people think a 2.8% vacancy rate in Melbourne means they are living in a ghost city like Ordos in China.

        When the vacancy rate is at least 4-5% there will be a real change in attitude on the part of landlords especially when it comes to things like the rents offered to attract a good tenant.

        At that point many more people would be more than happy to sit out the ponzi frenzy and let the capital gain speculators burn themselves out.

        But then they may not find themselves waiting for long as vacancy rates of 4-5% will be a bucket of cool, if not cold, water for many aspirant landlords.

  12. Cameron, I agree that there is no “shortage” in a sense that there are enough houses to house everybody. After all, you can always buy a house. You just need to pay more when somebody else is willing to pay a lot of money for the same house (if you think that is a wise thing to do).

    “The same cyclical pattern is found in the stock market, evidenced by the recent Dot-Com bubble which was the largest of its kind. What supply-side factors generated that enormous bubble in the virtual world?”

    Supply in the shares is most unresponsive. In fact, it is even worse; companies not only refuse to issue new shares during boom times at inflated prices but also issue new shares at heavily discounted prices during busts. Silly? Absolutely! Nonetheless, the supply side factors in share markets are clearly present, it is just that the constant number of shares during boom times is taken for granted. That is why the behaviour of an unresponsive housing market resembles that of a share market. See here for more;

    “In contrast to the conventional supply argument, Australia has even out-built Texas, typically advocated as the ideal of supply-side efficiency.”

    You are confusing the meaning of the term “efficiency”. As I had detailed elsewhere, the importance of supply side constraints is that they change the investor behaviour. The perceptions that there is a shortage of land, or that there is significant lag in the supply response, would encourage investors to pile into the market, which in turn would lead to FOMO and out-of-control frenzy. Once 15% or so of the tax payers become landlords, each of whom owns God knows how many properties, no amount of construction activities can possibly satisfy the gigantic demands.

    Because of the sheer number of the investors, combined with the fact that owner occupiers rarely transact, lead to the conclusion that our housing market is pretty much exclusively set by investors (owner occupiers are irrelevant in price setting).

    As I stated before, markets are relentless. How many property investors have the iron nerve to enjoy a banquet under a sword of Damocles? I guess not many. Thus, once the tide goes out, it goes out quickly. Then the gigantic amount of properties will hit the market at once, and the owner occupiers just become collateral damage.

    For those who need reality check, a good analogy is the gold market. In a bear market, owner occupiers will cling to their houses and do their best to keep their assets no matter what. Just like everybody will do their best to keep their wedding ring during a recession or even a depression. Heck, even the Europeans in the failed PIIGS cling to their wedding rings.

    But that did not prevent gold, the ultimate safe haven, from falling by 40%.

  13. PS

    I posed this before but may be worth reiterating.

    Did the filthy rich Chinese pile onto Houston real estates and own millions of houses there?

    If the answer is no, a question has to be asked as to why.