Housing supply… another fake inquiry

Dwelling assets are being repriced globally, as expected by central banks who have sought to achieve this with their interest rate policies.


Part of political theatre that comes with rising dwelling asset prices is to fake concern for the non-homeowners. In the past two decades, this has taken the form of blaming supply and town planning for the fact that investors arbitrage returns and leverage into housing when interest rates fall.

It is nonsense from top to bottom.

We know this because the most recent of many UK reviews into housing supply concluded that it was not desirable to implement any new incentives for housing developers to build faster if that meant they had to accept lower prices.


We know this because a 2004 Australian review concluded that the stock of housing changes by such a small amount each year that even very large changes to the rate of new supply will have small price effects.


We know that it suits vested interests in the property market to focus the debate on non-solutions that provide them windfall gains in the form of rezoning.

Housing markets are quite easy to understand. The difficult part is first unlearning all the nonsense that fills the newscasts and journals.

Australia’s latest inquiry into housing supply has begun. I took the chance to make a submission outlining my views on the housing market and writing a document that I hope provides some lessons about how to understand housing.

Please enjoy it here.

The following summarises
  • There are more, bigger, better, dwellings per capita in Australia in 2021 compared to any point in history.
  • Multiple government inquiries at all levels over the past two decades have ostensibly sought to find the cause of house prices hidden in the pages of local zoning laws.
  • Dwellings are assets and are priced based on financial market conditions.
  • Density (dwellings per unit of land) and the rate of supply (new dwellings per period of time) are conceptually different but often confused in housing supply discussions.
  • This submission argues that market housing supply has exceeded household demand. State planning systems have flexibly accommodated new supply while regulating the location of different types of dwellings.
  • Compared to household incomes and rents, the cost of buying a home (measured by mortgage payments) in 2021 is historically cheap. This is due to lower interest rates and is why intercensal homeownership is expected to rise in 2021. However, asset price adjustments will mean that this situation will not persist.
  • Taxes on property are efficient and fair and do not add to housing costs but rather subtract from property values.
  • Affordable housing is cheap housing. Cheaper housing means lower rents and prices. Any “affordability” policy that reduces market prices will remove billions in landlord revenues each year, transferring that value to tenants, and trillions in housing asset values, with that value transferred to future buyers.
  • Fostering parallel non-market housing systems, just as public healthcare provides a non-market medical system, can be an effective way to improve housing affordability.
  • There are no local, international, or historical examples of planning reforms leading to cheaper housing. Indeed, a Productivity Commission review concluded “given the small size of net additions to housing in any year relative to the size of the stock, improvements to land release or planning approval procedures, while desirable, could not have greatly alleviated the price pressures of the past few years.” (p154)

Dr Cameron K. Murray is a Post-Doctoral Research Fellow in the Henry Halloran Trust at The University of Sydney. He is also co-author of the book Game of Mates: How Favours Bleed the Nation. You can find Cameron’s work at Fresh Economic Thinking.

Comments

  1. Cameron,

    Imagine there is an island with 7 houses and 10 families each wishing to live in their own house.
    1a) How many families will be able to afford a house? 1b) What will the price of housing be?

    Now Imagine there is an island with 15 houses and 10 families each wishing to live in their own house.
    2a) How many families will be able to afford a house? 2b) What will the price of housing be?

    Answers
    =======
    1a) 7 will be able to afford (barely)
    1b) Ignoring sharing, price will be just above what the 3rd poorest family can afford

    2a) 10 will be able to afford (easily)
    2b) Price will be on the margin what is required to encourage the 5th unnecessary house to be bought for whatever marginal purpose that is.

    Supply matters.

  2. Thanks, Cameron.

    For me, as an engineer of complex, real systems, it’s quite simple: the tension or pressure (money demand) can, and does, basically always expand faster than the relief (supply). Hence, prices go up, basically always, and basically always faster than wages – unless we crimp demand. Simples.

  3. There are more, bigger, better, dwellings per capita in Australia in 2021 compared to any point in history.”

    Enough said.

  4. There are no local, international, or historical examples of planning reforms leading to cheaper housing. Indeed, a Productivity Commission review concluded “given the small size of net additions to housing in any year relative to the size of the stock, improvements to land release or planning approval procedures, while desirable, could not have greatly alleviated the price pressures of the past few years.

    The above paragraph deceives the reader about planning regulations.

    There are plenty of examples of relaxed planning leading to plentiful and cheap housing. All of Australia circa 1970 is an example, and parts of USA (such as Texas) in more recent decades.

    However once a terrible shortage has been caused by bad planning and (for example) excessive immigration. And once this terrible shortage has lead to large price rises. And once these large price rises have lead to a lot of speculation with borrowed money – which has caused even larger prices rises. Then it is quite possible that fixing the bad planning and building a few extra houses will not solve the entire problem in an instant. The Sydney housing disaster took several decades to create, and likely won’t be fixed in a few short years.

    But to me the most important part to look at is this.
    small size of net additions .. could not have greatly alleviated the price pressures of the past few years

    The author is saying that building a few thousand extra houses would not change prices much. Correct. But if the author is a decent human being who wants as many people as possible to live in a good house, then price is not the main thing.
    Building a few thousand extra house gets a few thousand extra families into a home of their own. That is a good thing regardless on short-term effect on price. Who cares about price if we are meeting the human need of shelter?

    • You also miss the real point, building a few thousand might not fix it but building a million definitely would.
      The problem is no one wants to fix it because the consequences will be too large.

  5. The thing that should be front and centre of any such inquiry is the amount of empty houses in any given jurisdiction. Parts of Brisbane that I am aware of have increased vacancies simply because the perceived shortage of housing encourages people to buy and retain vacant for future profit. It used to be just developers and builders land banking, it now has surpassed that and house owners are similarly house banking. When prices are increasing by upwards of $1,000.00 per week, why wouldn’t you? When the ponzi collapses, as it surely will, these are the people that will be the latest victims of the corrupt system we have developed.

    The other thing that should be investigated (but won’t be) is the amount of income support that landlords get via the rental assistance program. Take $100 plus off the expected return of a rented property per week and see what the price drops to.