Doing the housing supply maths

Laurence Murphy is a top property economist at the University of Auckland. I met him last week after a presentation in Sydney where he took on the myth that planning constraints are a major determinant of current home prices in Australia and New Zealand.

He said it is very easy to demonstrate mathematically how little impact even a large increase in the rate of supply would have on prices. But when he shows this analysis to government officials, planners, and engineers who have bought into the supply-side narrative their response is often

“I see you calculations. I follow the logic. But I don’t believe it!”

So I wanted to try the ‘basic supply-side maths’ for myself on the blog to see what sort of effects radical changes to the rate of new housing supply could have, and see if I generate some of the same responses.

Here’s how the maths work. I take the number of new dwelling completions from the ABS for the past 20 years, which is shown in quarterly figures in the blue line of the chart below. Since 1995 new housing supply has been 146,546 dwellings per year on average, which is about a 2% increase in the stock annually, though this moves with the business cycle.


I then add 10% to this number every year to generate a counterfactual world where supply has been much higher over a sustained two-decade period (green line). Then I add 20% just to take an extreme scenario (yellow line). Note that in this exercise I don’t ‘elastify’ supply, which would have higher construction in boom periods, and lower construction in slump. When I run the numbers of more elastic supply that responds to both booms and slumps more I get fewer home built compared to what actually happened! This is because when completion rate falls, it falls faster, offsetting all of the gain from the previous boom. I show a twice as elastic scenario in the next graph in red, which actually results in 8,000 fewer dwellings built in the past 20 years. ‘Elastifying’ supply can’t really be what is desired by those advocating for supply-side reforms.


Any goal of supply-side initiative in housing should simply be seeking more homes built, year in, year out. This is I capture in my counterfactual scenarios of 10% and 20% higher construction over two decades.

So here is question. How many more houses would there be now in these counterfactual worlds? And what would the price impact be?

Well, if we had built 10% more new home each year for the past 20 years Australia would have around 300,000 more homes, and 600,000 more at a 20% higher rate of completions. Sounds terrific! That must have a MASSIVE impact on prices.

Well. No.

You see Australia’s current housing stock is somewhere above 9million homes. Around 8.8million occupied, and many second homes, holiday homes, and so forth that are traditionally about 8% of the housing stock. Let’s pluck a number out there and say that there are 9.3million dwelling in the country right now. These additional homes in my 20 year supercharged supply scenarios represent just a 3.2% and 6.4% increase in total stock respectively.

The price impact of a 3% increase in supply is 3% reduction if demand elasticity is unity. That’s it. The price reduction could be less if there are countervailing income effects that lead to outbidding for superior locations. So somewhere between 0% and 3% price reduction for twenty years of supercharged supply suggests to me that focusing on the supply side is getting close to a waste of time. In the 20% supercharged scenario the effect is somewhere between zero and 6%. About the same as two and a half years of rental price growth.

To put it another way, after 20 years of a 10% higher rate of new supply, rents today would be then same as they were in early 2014.

Obviously the composition of households would be slightly different with 3% more homes. So if we look at raw measure of the gains to the amount of floor space per person, we can take the average floor size of homes, which is about 180sqm, and add 3%, and assign it to the 2.6 occupants, to get an additional 2sqm of floor space per person.

Or alternatively we can think of it in terms of occupancy rates, which would be 2.51 instead of 2.6 with the same size homes under the 10% higher supply scenario.

That’s all you get for 20 years worth of sustained housing supply stimulus. And you get none of that simply from more elastic supply only.

The point being that current massive price increases, in the order of 17% per year in Sydney and Melbourne, simply cannot be explained by anything like unresponsive supply. Not only that, any supply-side effect on prices takes many decades and flows through from supply to rents, then to prices.

If we want cheaper housing we need to reform legal structures to shift bargaining power to tenants from landlords, curb speculation through financial controls (and keep stamp duties!), and stop rewarding political parties who capitalise on the business cycle to show how they delivered housing supply. Using these reforms would can simply shift the bargaining power away from current property investors to home users – the renters and owner occupiers.

To be clear, very few people and politicians actually do want housing to become more affordable. Around 70% of households are homeowners, around 30% are property investors who come from the wealthier part of society, while most politicians also have a huge share of their wealth tied up in residential property.  It suits all of these interests to point the finger at supply because they know it sounds attractive in a naive economy way, but won’t actually reduce the value of their housing portfolios.


  1. So how does the above analysis reconcile to the assertions in other MB articles such as “Melbourne faces the mother of all apartment gluts” where supply appears to have spiked in recent years but presumably has a fairly muted impact relative to total stock

      • The Traveling Wilbur

        Concur Mr H. Asuming an increase in stock is directly inversely proportional to price is just silly. The supply model for housing is more like the supply model for illegal drugs. Seriously. Someone should take the existing info from large police busts of say herion (large enough to move the market up) to model the effect in supply reduction on price, apply it to housing, and work it backwards. But not for crystal meth. Methheads can’t afford a mortgage.

      • H&H and Phil below … thank you for your comments. And too for giving the Murphy / Murray perspectives an airing … and encouraging public discussion. For those (Skippy et al) who think I’m some sort of patsy for big biz / special interests … the copy General Email below I have just sent out internationally may be of interest …



        … Pavletich comment on thread …

        Hearty congratulations to the sensible people of Hawkes Bay … and Wellington and Northland too … sending a clear message the days of playtime bureaucratic bloat in the local government sector are coming to a close.

        There are two types of local government on this planet … the small and the bad.

        I have posted extensive material on this Kiwiblog thread, NBR readers may find of interest … NO AMALGAMATION FOR HAWKES BAY …

        As Stephen Franks made clear back in February with BANAL BUSINESS NAIVITY ON POLITICS ( AND THE RMA AND COUNCILS ) …

        … it is well past time business organisations ( and professionals as well ) dramatically lifted their public policy research and advocacy … so that they are CLEARLY SEEN acting in the wider public and consumers interests. They need to think long and hard about the political and social consequences of the public losing trust in business.

        To illustrate ( there are increasing numbers of others now … thankfully ) I was very proud of the honest and grounded business / property guys responsible behaviour on the recent important TV3 3D INVESTICATE … ARE WE PAYING TOO MUCH FOR HOMES ? …

      • I think Cam’s analysis is brilliant and certainly needs to be debated. I like his insight about the centrality of rents – real or imputed – and the idea they would remain unchanged after his mathematical torture.

        The answer lies in the interplay of planner rationing, debt apppetite and tax bases.

        I note the commenters below admiring land tax, but dismissing it as politically impossible. I invite them to flesh out their arguments beyond asserting this would be unpopular with landowners. Look back at the debates, election stances and government interventions around the introduction of the GST – it was hard.

        Simply exchanging Stamp Duty for universal nil-exemption State Land Taxes would end the spilling of tens of billion of dollars on the ground in deadweight losses and lift national incomes. There is enough value there to cruise through another (normal) recessionary era without a downturn. I know Cam likes SD, but it fills me with revulsion.

        Don’t Buy Now!

      • Sadly … it was the Housing Industry Association (HIA) in large measure, that derailed the serious housing issue back in 2007.

        2005 through 2007 Australia was the global leader in progressing the solutions to the housing affordability problem.

        The HIA certainly “got it” from me late 2007 … as THE NEED FOR CLARITY illustrates …

        I am actually heartened in how the property industry guys in Australia (including the HIA) are finally waking up, if the communications from Australia to me are any guide … as they are learning about the political progress being made in New Zealand.

        One great cultural strength Australia does have, is its “can do” attitude.

        And your national pride is at stake guys !

        Why let us Kiwis beat you ?

      • David Collyer …

        Check out the recent speech by RBNZ Dep Gov Grant Spencer (specifically Fig 6 Page 9) … and too … the current rental / pricing trends for Christchurch due to the increasing supply.

        The fringes are the inflation vent. Note too Andrew Atkins THE REAL DEAL poster via the link on this thread. Where is the Australian version ?

  2. Perhaps this analysis is missing the true link between supply and demand. It’s not the number of houses VS demand. It’s number of houses on the market vs demand. I think that makes a lot more sense. In this case, building more houses is unlikely to do much as demand can quickly soak them up. However, when there is a loss of purchasing power and/or increased selling, we get a significant boost in supply / significant drop in demand which cannot be soaked up as easily. Then you have the psychology of houses always go up…

    Also, it would seem that policies targeting demand are likely to be more successful than those targeting supply. If you slow construction today, there’s still people buying and selling houses. But if you increasing gearing limits, or give every investor a tax break, that effect is multiplied across everyone like helicopter money.

    If true, then new policies crimping Chinese investors’ style are likely to have a huge effect. Not only taking out demand, but high bids. It’s easy to argue that with so many billions in fleeing capital, building more apartments would have done nothing in the face of this tsunami of money.

  3. You lost me at “He said it is very easy to demonstrate mathematically ” .. Economic modelling is not a science, even though career economists would like us to believe it is. You need to read Yves Smith’s book ECONNED.

    PS: Skippy, Please don’t post the whole book in here .. LOL 😛

    • Mav I think you need to ping Hugh on that point, see below, a direct threat to his pet hobby horse.

      BTW I think you should understand the difference between economic models and statistical analytical tools, IS-LM [prescriptive] et al vs historical data used to corroborate a theory.

      Skippy…. personally I put RE price down to increasing financial liberalization, use as a tax minimization vehicle, and a ideologically captured regulatory – political system [revolving door].

      • Skippy…. personally I put RE price down to increasing financial liberalization, use as a tax minimization vehicle, and a ideologically captured regulatory – political system [revolving door].
        +1. Don’t need a complicated formula to follow some simple logic.


      For metropolitan areas to rate as ‘affordable’ and ensure that housing bubbles are not triggered, housing prices should not exceed three times gross annual household earnings. To allow this to occur, new starter housing of an acceptable quality to the purchasers, with associated commercial and industrial development, must be allowed to be provided on the urban fringes at 2.5 times the gross annual median household income of that urban market (refer Demographia Survey Schedules for guidance).

      The critically important Development Ratios for this new fringe starter housing, should be 17 – 23% serviced lot / section cost – the balance the actual housing construction.

      Ideally through a normal building cycle, the Median Multiple should move from a Floor Multiple of 2.3, through a Swing Multiple of 2.5 to a Ceiling Multiple of 2.7 – to ensure maximum stability and optimal medium and long term performance of the residential construction sector.

      • Housing Bubbles And Market Sense | Scoop News

        … extract …

        Michael Lewis, author of Liars Poker wrote recently within a Portfolio com article The End of Wall Streets Boom – most within the finance and investment sector, appeared to be oblivious to the existence of housing bubbles and even less aware of their consequences. As Michael Lewis explains – during late 2004 – only a few, such as Steve Eisman, Ivy Zelman and Meredith Whitney understood that the core problems were the inflating housing bubbles –

        “At the end of 2004, Eisman, Moses and Daniel shared a sense that unhealthy things were going on in the housing market. Lots of firms were lending money to people who shouldn’t have been borrowing it. They thought Alan Greenspan’s decision after the internet bust to lower interest rates to 1% was a travesty that would lead to some terrible day of reckoning. Neither of these insights was entirely original. Ivy Zelman, at the time the housing market analysis at Credit Suisse, had seen the bubble forming very early on. There is a simple measure of sanity in housing prices, the ratio of median house price to income. Historically, it runs around 3 to 1, by late 2004, it had risen nationally to 4 to 1.’All these people were saying it was nearly as high as some other countries’ Zelman says ‘ But the problem wasn’t just that it was 4 to 1. In Los Angeles it was 10 to 1 and in Miami it was 8.5 to 1. And then you coupled that with the buyers. They weren’t real buyers. They were speculators’. Zelman alienated clients with her pessimism, but she couldn’t pretend everything was good. ‘It wasn’t that hard in hindsight to see it’she says ‘It was very hard to know when it would stop’. Zelman spoke occasionally with Eisman and always left these conversations feeling better about her views and worse about the world. ‘You needed the occasional assurance that you weren’t nuts’ she says. She wasn’t nuts. The world was.” … read more above …

    • Hugh Pavletich: (He’s not biased folks….)
      Former President – Urban Development Institute of Australia (FDIA)
      Southern Division – Property Council of New Zealand
      Co author – Annual Demographia International Housing Affordability Survey

      • And unpopular with the majority in his own industry, because they have gone along with the racket and become land bankers. One crucial difference with Hugh is that he has quit the business in disgust and gone lobbying. This makes him a saint, not one of the sinners as you are unjustly implying.

      • Hugh once posted a link to an article that opposed LVT with his added comment that it was a ‘bad idea’. Since then he has repeatedly refused to engage on the simple question ‘why do you oppose a LVT?’.

        Credibility may also rise with a full disclosure of property and construction interests.

        It is one thing to bombard this site with loony-right spam, another to wilfully obscure or run from the issues. Hypocrisy at its finest. A smooth operator though.

      • @ Rage. Interesting isn’t it. Phil(Best) also has some curious views when it comes to tax. From memory he’s a fan of NG (it boosts supply of course! LOL).

        NOTE: I’ve expressed skepticism over LVT but not because it is theoretically flawed, purely over pragmatic concerns with getting it implemented. With 70% of voters ‘homeowners’, it’s got Buckley’s. NG on the other hand impacts only 10% of voters…..

      • yes, the political minefield is an inescapable difficulty with LVT (or any other rent tax). I support LVT though not beholden to it but rather would like to see informed debate i.e. not from the likes of NaturalTroll. Who knows, maybe Hugh has something worthwhile on the subject.

      • Phil,
        Maybe he has quit the business. But his arguments are standard developer lobby propaganda. As Rage also said, he never engages any other viewpoints – which is a classic spruiking technique. Get your lobbyist line and talking points out, ignore criticism, keep repeating.

  4. More semantic smokescreen from the eco-Taleban fundamentalists favourite “intellectual” apologist Cam Murray, the underlying problem being a belief system that is appalled at insect and mollusc colonies being disturbed to make way for human habitation.

    It is not “quantities of housing units supplied” that matter, it is the elasticity with which those quantities are supplied.

    There is an undeniable correlation between US cities in studies that have a housing supply elasticity of greater than “1” (in authoritative Harvard Uni studies), and systemic affordability; i.e. a median multiple consistently around 3 regardless of demand pressures, credit, interest rates, population growth etc etc.

    On the other hand, all the price-bubble cities suffer from an elasticity of below 1.

    In some cases, it has been quite possible for a city with a lower elasticity of supply, to end up building disproportionately too many houses as the prices ramp up and attract speculative activity like a magnet, while a city with a very high elasticity of supply, builds only “exactly the right amount of new housing” for the given demand, under exactly the same conditions of credit, interest rates, population growth etc.

    Elasticity relates to the response of supply, to “price” – hence a city with an elasticity of around “2”, will tend to build just the right amount of houses as demand requires, without the price moving much from a median multiple of 3; while a city with an elasticity of say 0.8, in a city where the median multiple rises to, say, 8, actually has a likelihood of a supply response that will build too much, often of the wrong sort of housing in the wrong place. It all depends on the nature of the supply constraints – in the UK they relentlessly impose shortages, which has the “advantage” that no oversupply occurs.

    In fact some of the fastest-growing cities in the USA have had the most stable house prices, thanks to their elasticity of supply.

    There are UK cities that are glaring evidence of just how supply constraints and inelasticity of supply can screw up the market, as they have systemic unaffordability even as the population is static or shrinking – and even as the average house size is something like 1/4 of a typical US affordable city and the average section size more like 1/10.

    • Phil (Best?),
      Explain to me how it could ever be possible for quantity supplied to be perfectly elastic in respect of the stock/asset price of housing?
      Ignore interest rates, credit etc. like you said. imagine a scenario (like we have now) of greater fools valuations. The asset price doesn’t reflect a realistic estimate of future cash flow, and the bubble becomes self reinforcing, so people pay increasingly ridiculous prices. How is it possible for a developer (who competes with business for labour and capital) to suddenly go on a development bender in order to keep the median multiple at 3 times or wherever you think it should be?

      • Actually I would hesitate to claim that liberalisation of land supply would “cause a developer to go on a development bender in order to keep the median multiple at 3 times incomes” under a status quo of a systemic gouge and speculative bubble.

        However, it would stop a price bubble from recurring once the crash that has to happen, has happened. It certainly bubble-proofs all significant regions that do have it i.e. unrestricted de facto supply of land, whether lassez-faire, or government being an enabler rather than an obstructor. The latter is what worked fine for decades in most Anglo New World markets.

  5. Don’t you just love the cherry picking by people like eminent Professor!

    “Professor Murphy. “In Ireland, from 1995 to 2006, more than 500,000 new dwellings were built. Yet prices increased by more than 350 per cent during that period.”

    Cool! But what happened the very next year Prof? Irelend 2007….Run that past me and tell me again that overbuilding doesn’t affect price….However buried deep in his view is the real reason that we have what we have today in our property markets:

    New Zealand’s mortgage market has also helped create the problem because “20 years ago you had to almost beg to get a mortgage”. Increased bank competition and declining interest rates mean people take on more debt – again encouraging house prices to go up.

    • Ireland is an excellent illustration of the point I was making: regulations make it impossible for the market to bring supply of the right kind of housing in the right places, forward in response to demand pressures rapidly enough to keep prices stable; prices ramp up, speculators are attracted in and demand pressure increases from this factor; then local government notices that housing “supply” is now a good source of fee revenue (because the price of housing has become “extractive” – people are having to pay what they can stand, not the price that a competitive market can bring them products for). So the local governments start permitting quantities of development that ultimately turn out to be excessive; but all this was only possible under the totally NON “liberalised” regulatory framework for housing supply.

      Any QUOTA system is NOT “liberalisation” – a quota system can be gamed, and gamed, and gamed for a LONG time as the “quota” is increased incrementally. “Liberalisation” involves a market where anyone can enter the market for supply of something, becoming another conduit among many, between the superabundance of resources that exist, and actual people demanding actual product. Cars in New Zealand, for example.

      Land in non-urban use is the parallel example of superabundance when it comes to housing markets. As soon as it is possible for “The Woodlands” to be created somewhere in Australia, Australia won’t have a housing affordability and bubble problem anymore.

      That is, a developer and an urban designer can buy cheap farmland somewhere in the general region of an existing city, and literally build a satellite city on it, self-funding the infrastructure.

      I would not be dogmatic about the need for Texas-type lassez-faire – what worked fine in most Anglo New World housing markets for decades, was simply departments of government that were there to help and co-operate with planning and doing infrastructure; rather than being there to obstruct and proscribe, and to protect a racket in favour of a coterie of lucky land and site owners.

  6. “…It suits all of these interests to point the finger at supply because they know it sounds attractive in a naive economy way, but won’t actually reduce the value of their housing portfolios…”

    Yeah, that is why they all point the finger at urban growth boundaries and actual LAND supply – NOT.

    Funny, isn’t it, in the universe I inhabit, in contrast to Cam Murray’s one, I see the constant emphasis on upzoning – yes, “more housing units”, just not that dreadful “sprawl”. And most of all, not freedom to convert superabundant quantities of land in low value rural use, to housing and urban use.

    Funny, isn’t it, that upzoning and building “up” and more intensely, results in site values going up rather than the value of “housing units” going down; I wonder why the vested interests support this….hmmmmmm……..

    Look at the evidence – where is the city where higher density has resulted in more affordable housing?

    Hong Kong, 26,000 people per square kilometer, median multiple 17? Yeah, looks really convincing.

    Is there any median multiple 3 city where the density is “high” or even “medium”?

    • More ‘thinking’ from the Prof ( from the link above)

      “If you release land at market prices, when house prices are booming, you won’t get affordable houses.Swamping the market with land would also not work: Even if more land is made available, it’s in the interest of developers not to over-supply the market as this would cause prices to fall and adversely affect their viability.”

  7. ‘It suits all of these interests to point the finger at supply because they know it sounds attractive in a naive economy way, but won’t actually reduce the value of their housing portfolios.’

    Top stuff Cameron. I’ve been saying that on here for years now. No one wants to hear it. Supply is a convenient distraction from REAL action. It’s a diversion. A con. Just ask Joe Hockey, NAB, CBA, Westpac, ANZ, DOMAIN……all advocates for the supply side. If that doesn’t tell you something’s up, nothing will.

    • Nonsense, see my point about the difference between “supply of housing units” – involving continued regulatory quotas, upzoning and building “up”; VERSUS liberalisation of land supply. NONE of the vested interests are arguing for the latter, which SAYS IT ALL.

  8. Surely the comparison needs to be new supply vs stock on market, not total stock. To me this is like defining the market supply of iron ore as all of the ore on earth, rather than just that which has been mined and is for sale.

    • Spot on! And when the total stock number is appropriate (“We need 250,000 per annum to soak up the new arrivals!) it’s forgotten about. (The number of new arrivals DOES go into the existing + yet to be developed stock via dwelling numbers so the actual amount of new stock needed is actually much lower than is hysterically touted)

    • Yep. Increasing completions by 10% per year would mean that there are 10% more units to be moved, not 3%-6%. That is supply.

      • Investors believe prices will go up and they go up! Investors believe they will go down and they will go down!

        There is a reasonable body of evidence to support the idea that supply is a minor factor as this creates more affordable investments.

        It data will become visible in rental price changes as owners can not occupy all of the supply.

        Another presumption of the model, that loss making investments will dampen price growth, but it is also possible that makes viable lower density housing.

        Conclude, could have so many possible outcomes as to be completely useless.

  9. I’m far from any kind of expert, but I tend to agree with a couple of commenters already that there’s something fishy about the assumption that a 3% increase in total stock leads to a 3% decrease in price. Surely it’s stock on market vs demand that most affects price? I don’t know what the exact numbers are but if most of the increased supply was going onto the market then that might be something like a 50-100% increase in stock on market vs demand. I imagine that would have a tremendous impact on prices. Happy for someone more knowledgeable than me to point out something I’ve missed here.

    • You’re right. Price is determined at the margin – by Effective Demand and stock on market.

      Also worth cosidering is whether the policy is changing elasticity ( tilting the supply curve), or lifting supply at all price points ( shifting the supply curve). I expect some policies would do both.

      Also noted in other comments is that the market is psychological in nature. Shifting the supply dynamics would change the demand curve, because expectations (and present experience ) would also change.

  10. Ok So Cam says ceteris paribus an extra 300,000 dwellings will not reduce the price.
    Lets test his theory. Let’s build them (capping NOM at 100k) and see what happens.

    • I would love to see an army of 3D house printing robots smashing out a new base house every few days, followed by the services/fitout over the couple of weeks or so by local Australian tradies. Hopefully the rapid and widespread use of this technology is not too far away so we can see this theory of adequate supply tested.

  11. If you want to understand the determinants of house prices, better to head to the School of Psychology than the School of Economics.

  12. gibber_blotMEMBER

    Cameron, what are the assumptions in your model? Specifically, are you assuming that buyers are rationale?

  13. Isn’t the “insufficient supply” argument that the problem is responsiveness and suitablility rather than raw number of dwellings ?

    • insufficient supply is about stock on the market. Only things that drive house prices in Sydney are:

      1. Lower interest rates (better to own and refinance your house than pay rent. This means that less people put their property on the market).
      2. When there are fewer properties on the market and debt is cheap, the price goes up.
      3. People see the price goes up and see that the returns in property are greater than other investments and continue to speculate on future capital gain.
      4. Stock on the market is now so low that people who want to move out of necessity have to pay exhorbitant amounts of money because they psychologically do not want to rent

      When stock on the market rebounds thats when you’ll see the decline in property prices

      • Only things that drive house prices in Sydney are:

        Difficult as it can be to imagine sometimes, there is a whole country also called Australia outside of Sydney.

      • You can’t talk about the property market as a whole. The markets are VERY different. When talking about housing supply and lack thereof, they are usually referring to Sydney. Its ok, i know you don’t have anything intelligent to contribute so you have to nitpick my comment

      • Housing is unaffordable across the entire country, not just Sydney. I’m pretty sure there isn’t a single “market” in Australia where property is reasonably priced.

        That’s the point. You can’t refute an argument being applied across the entire country with “well, in Sydney it’s actually this”.

  14. While Maths don’t lie (unless it’s an excel spreadsheet about government debt ratio), the numbers is somewhat meaningless. Notes that the 10% increases in supply is not much in actual term, and occupancy is not dictated by floorspace but number of bedrooms. 180 square meter new build? you have to be dreaming.
    I do agree with his observation about supply though. In Sydney, people don’t buy houses to live in them. They buy houses as investments, so as long as the prices goes up and credit is available, every single house will be bought regardless of supply. This happened in Ireland, Spain, and the US. The price also completely crashed once the price stop rising and credit is tightened. The availability of credit at low interest rate is creating infinite demand.

    • For the same reason that the marginal business survives because of very low interest rates, the marginal banks also survive.
      The marginal employees in the businesses and the banks do not.
      Barclays is cutting 30,000 jobs.
      Deutsche Bank is cutting 23,000 jobs.
      Unicredit is cutting 10,000 jobs.

  15. Fabian AlderseyMEMBER

    The assumptions in the post seem very simplistic. It’s really easy to draw lines on charts and say “see, this would have happened/ will happen” and try to pretend that the lines aren’t a work of fiction.

    Let’s take the argument that the “elastic supply” situation would have resulted in 8000 fewer dwellings. Is that a bad thing, in terms of dwellings being available for people to live in? Take away 8000 tiny dogboxes which were never going to be lived in – is that really a bad thing? But psychologically, if investors know that supply can rise to meet any level of demand (that is, nobody will ever need to buy your speculative asset from you), you’re saying that wouldn’t have an effect on prices?

    There are many factors influencing the high prices we see today. And yes, there may be some negative consequences in trying to deal with them.

    On some level I’d like to see “unlimited” supply of dogboxes on the outskirts of our cities to deal with all speculative demand. Then we can let the market actually correct, let the speculators actually lose their money, and tear the dogboxes back down. (Obviously, I haven’t thought this scenario through in great detail and could quite easily be persuaded that it’s not a good idea).

  16. DrS – correct. That’s why I explain that responsiveness does not increase the housing supply on average, and hence it is a stupid argument.

    gibber_blot – All I do is add up the extra dwelling that would arise in a 10% higher completion scenario. Then, the question is how those extra dwelling are utilised. Assuming they are, and household ‘melt’ into them, the occupant rate drops to 2.54 from 2.61 and everyone gets a couple of extra sqm of home on average. But there may even be zero price effect if people choose to outbid each other for superior locations up to a specific share of their household income. We could be paying the same, just with a couple of extra sqm per person.

    But I also am talking here about rents only. The only way supply can affect prices is via rents. Since rents are basically the same share of household income as always, I have a hard time believing that supply is any significant determinant on prices.

    Given the passion of some of the comments here, some readers might also be interested in this article of mine arguing that developer infrastructure charges don’t add to the price of new homes.

    • But there may even be zero price effect if people choose to outbid each other for superior locations up to a specific share of their household income. We could be paying the same, just with a couple of extra sqm per person.


    • Since rents are basically the same share of household income as always, I have a hard time believing that supply is any significant determinant on prices.

      But household incomes have proportionally increased dramatically over the last few decades with the increase in dual-income families, childcare subsidies, etc.

    • That’s why I explain that responsiveness does not increase the housing supply on average, and hence it is a stupid argument.

      I said “responsiveness” but in hindsight that was probably a poor choice of word as it comes with connotations.

      What I meant was the regulations that overly restrict ability to build – UGBs, etc.

    • Since rents are basically the same share of household income as always, I have a hard time believing that supply is any significant determinant on prices.

      What nonsense!
      So now 1/3 of mum’s and 1/3 of dad’s wage go to rent a 2 bedroom dogbox 1hr’s commute from work. Whereas before 1/3 of dad’s wage would rent a decent house with large yard 20 minutes from work.
      Forget about adding in the extra petrol, parking, high train and bus fares and necessary childcare. Everything looks identical to Cameron “compare two numbers” Murray.

      Cameron, do you actually pay rent out of an ordinary wage?

  17. I dont really have time to go into this now but from just a quick look the whole analysis and so called math is BS. Makes me wonder when economists will forget their Equilibriuml shite and adopt the tools and methods used by engineers to analysis dynamic systems. Dynamic Control systems theory is a fascinating field but we all need to get an education in the basics before it’s worth while even discussing application to systems as complex as Aussie RE.
    1. In most efficient markets the housing price control mechanism is hysteretic NOT linear, meaning that the system is stabilized through VERY non-linear overshoots /undershoots, Australia’s RE system is more akin to a higher order Sigma Delta modulator caught in a lock-up state….it just cant ever get to the hysteretic trip point. Something really dramatic must happen to reset the modulator after which point we can see the system in balance…but even then this sort of shite +10%, +20% linear analysis wont cut it.

    2. You can’t begin to model of RE without understanding the dominant Poles in the system . From my own models the dominant pole in Australia actually results from the availability of construction labor and building material availability and the desire for land holders to act competitively in the market. so long as holding onto undeveloped land “aka land banking” is the most profitable development method you’re @#$%ed
    Unfortunately I’ve got no time for this today

    • Agree with you on the dynamic bit, but, not on the free market comp bit.

      Skippy…. nothing happens in a vacuum…

    • Cameron at least acknowledged, in his linked article that “….it is based on an incorrect notion that prices are determined by costs.” . He’s right on that score! Price is based on the capacity to pay – the cost of money and its availability. People don’t look as ‘costs’ other than, How much do I have? + What can I borrow? = What Can I Buy!

    • Is anyone REALLY interested in understanding the math/simulation of a complex control system like Sydney housing?

      • Steve Keen tried to make a modelling tool called Minksy trying to do economic modelling similar to how circuits and control systems is done, it was however hard to use and kinda went nowhere after that.
        To model something like the Sydney housing market, it probably will require computer simulation of the various actors rather than a dynamic mathematics model.

      • Thanks Ronin, I looked at Steve Keen’s work about 3 years back and thought it was a hopeless mess.
        The problem is how to divide up the sections of the problem so that each of the feedback loops can be kept reasonably simple. I dont have much experience with modeling complex economic systems but I have got over 30 years experience modeling complex electro/mechanical systems some with extremely complex feedback mechanisms. The secret is KISS keep each of the feedback loops simple understandable and most importantly verifiable (as in regression testable)

    • Not wishing to harp on about this but I keep reading statements like 10% extra supply does not immediately produce this or that price response (as in linear 1st order response) so I’ve linked an example of Bicycle Control system
      ….this is a much simpler system than Sydney’s RE market ( it’s riding a bicycle for goodness sake) but it has a very interesting characteristic that’s worth understanding, read the last paragraph before conclusion
      This final plot shows the closed loop step response to a commanded rightward heading angle of 10 degrees. It is clear that one must initially steer about 5 degrees to the left causing a roll to the right to make the rightward change in heading.

      You see even a simple system like riding a bike requires the you go the wrong way before you can actually go the direction you want….it’s esential that people understand this because MOST complex feedback systems not are not linear first order systems and dont behave like linear first order systems. The height of absurdity is to suggest this “math” proves anything other than the author’s ignorance regarding the behavior characteristics of complex multifeedback loop control systems.

      • Dude – they’re economists.
        It’s basically a synonym for ‘incapable of learning mathematics’.

        In the mean time, without getting to the point where countersteering is necessary, it seems intuitive that a system containing millions of irrational humans would have a mighty dead time associated with it – easily years – so naturally no response is seen after this or that change occurs.

  18. ffs when people talk about housing supply, they’re talking about STOCK ON THE MARKET. Its the same with any resource – there is heaps of it in the world but only a certain amount available at one time.

    So all in all, if you want to look at when the market is going to decline, look at the amount of stock on the market and transaction levels. If stock on the market is increasing (starting to be the case) and transactions are level, the market is beginning to moderate.

    Its not that hard a concept to grasp

  19. “”Here’s how the maths work.””—thank you for speaking English, it is not “math.” Just as the short term for statistics is not “Stat.” It is “stats.” Carry on.

  20. I think Keynes once said something like “over the long run we are all dead” referring broadly to the self balancing nature of supply and demand over the long run. From what I’ve seen in the posts most contributors are talking about short run factors of supply and demand, whereas the model is based over a period of 30 years which could be considered to be in the medium to long run. We live in the “now” so our bias tends to inflect on more recent events and so when an empirically based model is thrust upon us it challenges our biases. IMO, the prof and the author are probably correct as the model is not one of those wanky mainstream micro/macro hybrid thingy’s chocker full of assumptions on human behaviour against a mind numbing mathy backdrop. Rather, it’s a simple, quite elegant model built on empirical data with transparent and logical assumptions.
    We suffer the consequences of poorly structured taxation policy, speculative pressure on pricing from historically low interest rates, predatory external demand from exchange rate fluctuations and global politics and fluctuations in the quantity and quality of land stock. Hence the dialogue against a contrarian becomes a tad hysterical, and we lose the context of the long run. Governments must step up and adjust policy to cater for the short term impacts. For me, the article is a necessary contrarian view challenging those on this blog and I see it as an alternative perspective deserving of respectful consideration. So well done you David for putting it up.
    Just a final point on one of the supply factors which has long run consequences and the author IMHO is correct. Stamp duty has no impact over the long run. It doesn’t diminish demand, reduce land stocks, add to prices or improve labour mobility. Land Tax on the other hand does have long run consequences on wealth accumulation which impacts those on the lower socio economic level and/or fixed incomes. So seeking to correct the short run with an improperly applied long run tool has long run negative social consequences.

  21. Cameron Murray wrote: “These additional homes in my 20 year supercharged supply scenarios represent just a 3.2% and 6.4% increase in total stock respectively.”

    But if you’re looking for a place to rent, the relevant “supply” is not the total stock of homes, but the stock of “vacant” rental homes, where “vacant” means unoccupied and available to let. If the vacancy rate rises from 1% to 3%, that’s a tripling of the effective supply, but is equivalent to only a 2% increase in the total stock of rental homes, and a smaller increase in the total stock of all homes (for rent or owner-occupation).

    If the rent-elasticity of the supply of “vacant” rental homes is 1, the rent-elasticity of the total stock of rental homes is much less than 1, and the rent-elasticity of the total stock of all homes is less again.

    Similarly, if you’re looking for a tenant, the relevant “demand” is the number of households looking for a new lease, not the total number of tenant households. If the rent-elasticity of the number of households looking for a new lease is 1, the rent-elasticity of the total number of tenant households is much less than 1.

    So if you plot the total stock of housing as supply, and the total number of tenant households as demand, your supply and demand curves will be very steep, and rents will be very sensitive to small shifts in the curves.

    Cameron Murray wrote: “If we want cheaper housing we need to reform legal structures to shift bargaining power to tenants from landlords…”

    Indeed. And the real-estate institutes tell us that if the vacancy rate increases from 1% to 3%, that makes a huge difference in the bargaining power of tenants. On that point, I believe them.

  22. One might as well argue that the price of iron ore is determined by the size of reserves relative to demand. Of course that is nonsense; supply is what matters. Most of the established housing stock is not for sale at any given time, and furthermore, the turnover does not increase with price. The supply available to a buyer is effectively the turnover rate of existing stock + new construction.

  23. The main problem with type of economic exercise is that if the system is wrong to begin with, then all your assumptions are wrong. If you add more wrong things into the system, you get more wrong results. Do the wrong thing quicker, get the wrong answer quicker, do the wrong thing slower, or at the status quote , will still get you the wrong result.

    The main reason increasing supply in Australia does not result in a decrease in price is because the supply that is inputted, was previously purchased at the high cost restricted price so therefore will always have a high input price. Australian developers have 25 to 30 years supply of land banked land and will release it to the market when they want to protect this over investment.

    On top of this, it takes so long from identifying the demand to supplying the product (due to restrictive supply legislation), the demand and supply cycles are never matching each other with supply generally lagging behind and over time they become countercyclical.

    Those jurisdictions that have high demand and stable prices also have low land input costs irrespective of the demand and their supply and demand curve almost lie right on top of each other. This responsiveness also allows these jurisdictions to turn the supply off almost as fast if there is no demand, the end result being very little cyclic movement, just a steady stable market.

    • Exactly, excellent assessment, I too am trying to get this through to the “land supply control-istas”, but there is nothing that makes someone so unwilling to learn, as having vested interests, financial or ideological, in the way. I believe that will be the case with every single one of them on this forum.

      In the case of Spain’s bubble, they managed to have massive oversupply that is the reason the crash is so devastating for so long, not because of “liberal” policies on land supply, but because there was a quota scheme and a supply pipeline 7 years long.

      As Alain Bertaud points out, in the elastic-supply markets of the USA, if there is a downturn in demand, a whole lot of small builders just pack up their gear on the pickup trucks and drive back to home base to concentrate on maintenance, joinery, additions, or whatever else they do. The supply pipeline might be 6 weeks long.

      But by the time a crash came in Spain, you had supply ramped up to oversupply levels, and you had SEVEN YEARS of “work in progress” from land banked sites to partially completed subdivisions to partially completed buildings, to completed and unsold buildings. And as you say, it is possible for even 20 to 30 years “supply” of “within growth boundary” land to be regarded as gold in a bank vault, by its owners. It is not so much that it will be changing hands speculatively as part of the bubble (that will be around 5 to 7 years worth of supply), but merely that it will NOT be “for sale” at normal rural land price expectations plus a modest premium for location, based mostly on transport costs saved relative to rural land further away. The latter is precisely how urban land rent curves were understood to be derived, in decades of economics literature, before anti-growth ideology came along.

  24. “To be clear, very few people and politicians actually do want housing to become more affordable.” Journalists seem to think they are brilliant by making overstatements like this. Reporting is what is needed not such absurd hyperbole.

  25. The mathematics in this article by Cameron Murray is quackery.

    Bob Katter, however, knows how to use supply to keep prices down

    We sold land in 1990 in Charters Towers for $6000 a block, and any time the price went over $6000 we’d just dump another 20 or 30 blocks on to the market.

    When that power was taken away from the local Mines Department, that price shot up to $126,000 for a housing block in Charters Towers.