Wall St was down 94 overnight, its biggest fall in a month, while the local market is down 66.
It’s about the housing shortage, stupid
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There was a marvellous cartoon during the Hawke-Keating years showing Keating peering down into a hole with binoculars. The hole had been made by a line showing Australia’s current account deficit, which had crashed off a wall chart and through the floor. “I swear it’s a J!” Keating is saying, referring to the once-beloved J-curve theory about fixing the current account. Steve Keen reminded me of that on Friday. Even after losing his famed bet with Rory Robertson on house prices, Keen is still trying hard to sell gloom and doom, and reckons that, even as he treks back down Mt Kosciuszko as the price for betting Australian house prices would fall by at least 20% — “Australian house prices will also be losing altitude”. He told the ABC’s Stephen Long something slightly different last month when he predicted he’d be walking from Canberra to Kosciuszko next year but Robertson would be doing it in ten years’ time. In Crikey on Friday Keen suggested those who doubted his long-term analysis thought “Australia is different”. The delusion that “this time is different” is one of the principle reasons why many people fail to spot asset price bubbles. He called it the “We’re different because we have kangaroos” theory. Keen appears to be guilty of a similar delusion, I’d suggest. In his view, “Australia is the same”, regardless of circumstances. Our home prices went up more than the Americans’. The American housing bubble collapsed. Ergo, we have a bubble and it will collapse. There’s two unfortunate aspects to that: it’s wrong, and it would be better for many Australians if it was right. Australia is indeed different, not because the laws of supply and demand don’t work here, but because they do. About our biggest public policy problem is that we don’t have enough dwellings for people who live here, and we’re importing people at a rate of knots. Throw in the fact that Australian households are getting smaller, and we’re actually going backward in terms of housing supply. The Housing Industry Association estimates that in 2008 we had a housing shortage of 34,000 dwellings. They of course would say that, being the industry body for the sector that benefits from housing investment. So if you want some evidence, this is a comparison of ABS data on total dwelling units with ABS data on net immigration.
The “total dwellings” line is the number of total dwellings commenced each quarter in Australia. Notice that it peaked in 2002. After another peak at the end of 2003 it has been in decline ever since, before falling off a cliff last year. The net immigration line is the number of net arrivals from overseas. “Natural increase” – births minus deaths – is currently fairly stable at around 40,000 people a quarter, having shifted up from the mid-thirty thousands a few years ago. For most of the last thirty years total dwelling commencements have been ahead of net immigration. The numbers aren’t important in themselves – we’re not trying to build dwellings for every single individual who arrives – but the surge in immigration from 2005 was unprecedented and our dwelling commencements not merely couldn’t keep up, they were actually declining. That’s why there’s insufficient housing stock. And the problem isn’t going to be remedied any time soon unless Australia slashes its immigration dramatically. There won’t be a huge improvement in dwelling commencements in the next twelve months – the HIA estimates there’ll be a 13% fall in housing starts this calendar year, compared to 18% last year. Even with a return to growth in 2010, the HIA estimates we’ll still be 20-30,000 housing starts shy of what we need. A return to even the insufficient dwelling commencement levels of recent years assumes that property developers – more of them later – can access finance. The vanishing of finance for property development is a key reason for the precipitate decline in dwelling commencements in recent months. It is by no means clear that this will be rectified any time soon, particularly given the increasingly dominant major banks have moved into mortgage lending at the expense of business lending given the collapse of the non-bank lending market. This is why the Reserve Bank is concerned about growth in housing prices and its potential to feed inflation. I’ve quoted this statement from Glenn Stevens before and it’s worth repeating.
Contrary to Harry Triguboff’s attack on the RBA today, the Bank’s concerns about housing stock reflect not a trigger-happy mentality but justified concerns about supply failing to keep up with demand. It doesn’t amount to a lot in terms of overall housing stock, but there’s another, rather sad indicator of just how badly we’ve dropped the ball on housing. This is what has happened to government investment in public housing in recent decades, reflected in the number of dwellings funded by the public sector.
The Government’s $6.4b stimulus package investment in social housing – for 20,000 new units – was a massive step in the right direction to reverse an extended period of neglect, particularly in Victoria and NSW, but it’s a one-off investment – and now $750m lighter to pay for school halls. While the problems of property development finance and the long-term decline in public housing investment are Australia-wide problems, there’s a fairly clear reason why our overall performance on housing has been so poor. While the rest of Australia, on average, has maintained a steady level of dwelling commencements more or less since the introduction of the GST, NSW has performed disastrously, with our biggest state entering a long decline in 2003 which is shows no sign of pulling out of.
If you want to know exactly how the performance of the NSW Government translates into a national economic problem, there it is right there. Tomorrow: NSW and the painful political dilemmas of development. |
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13 Comments
Great article Bernard. However, you seem to be saying that there is no risk of a significant fall in house prices. Bold statement during the GFC.
Good article Bernard. So what are the policy responses that work on the supply side, rather than the poor policy of First Home Owners Grants that work on the demand side (on this point, I agree with S Keen)?
I think the difficulty with supply side policies is that they probably sit in the State Govt domain, and also potentially involve lifestyle and political changes that people are not willing to face up to (yet). For example, suggest we cant afford economically the infrastructure or environmentally to keep expanding the sizes of our cities for the 1/4 acre or 1000m2 block, even though it is politically easier. Besides, expanded supply on the fringes of city does nothing for house prices in the more desireable sub-20km radius.
There really is only one solution to both house prices, infrastructure and (long term) sustainable living. We need bold and aggressive planning policies to go back and carve up the post 1940s house blocks into higher density living. I am not suggesting high rise apartments or dog box townhouses. Simply that if we all lived in modest 2 storey houses on <400m2 blocks, with double the density our cities would now be about half their current size. (If we lived in suburbs with density of Richmond, it would be closer to a quarter!) Perhaps nobody could forsee this 50 years ago, when the developpment of LA style suburbs and car domination looked good. But if they had and limited us to <400m2 blocks, Melbournes extremities would only now be Ringwood (east), Mordialloc (south) Tullermarine (North) and Deer Park (west). A much better commute eh?
From an environmental point of view, the double and triple front brick veneer homes of latter 20th century are appalling. Consider much of the housing in suburbs like Doncaster built in 1960s. We should aim to live in homes with proper insulation on 6 sides, double glazed windows, and smaller water efficient gardens. Planning public policy should be directed towards inner urban renewal.
So, some off the cuff policy ideas: stamp duty concessions, fast-track splitting of Lots and rights of ways, a suite of pre-aproved house plans for subdivided blocks in an area, and infrastrucutre "credits" - (ie, sub-20km house block owner is paid for subdividing as its cheaper than adding to new infrastructure in outer areas); a quota system for developers (eg every new new house they have to do a sub<20km subdivison). Finally - the extremeties and green belts of Melbourne should be set, with no caving in, unlike what has happened recently, and greater support for regionalisation. Cheers
Actually its about innapporpirate housing, supid.
Australia’s low-density car dependent settlement patters have been possible due to huge natural resource consumption rates per capita and externalisation of environmental and social impacts. Just because we have lived like that in the past, does not mean we can live like that in the future.
Yet the reaction of Government is still to throw around land release on the urban fringe for more low density development without public transport. This in turn creates huge costs for servicing these communities.
This is pretty much what I said in a comment here last week. The demand created by an endemic shortage of housing, high immigration and a government determined to keep prices up (for its own survival) by having the 1st home buyers scheme will ensure there will be no crash in prices here. Steve Keen just likes to be provocative and enjoys the publicity.
I feel like I understand a little more about our housing market thanks Bernard.
Just look at that immigration spike..wowzerz, and a the decline in public housing..terrible.
Things make more sense now.
If supply and demand were functioning properly, why haven’t we seen an explosion in supply? The US has a far greater annual influx of immigrants and a far higher population growth - yet their supply vastly outgrew their demand for housing. Why didn’t ours?
Housing in Australia is a form of Tulip-Mania. I’d be interested in finding out what Bernard Keane thinks will happen to housing prices when the first home owners grant is wound back at the end of the year. If his theory of it all being driven by a shortage is correct, we should still see a continued rise right - and should continue to see a rise until housing construction accelerates or immigration levels plummet.
At least Steve Keen is willing to put some predictions out there. What are your predictions Bernard?
Orin, the reason there was no explosion in supply is the same reason Steve Keen was right. Left to its own devices the market would have corrected, shortage or no shortage.
The GFC just added more urgency to a long-term, bipartisan, state and federal, policy of inflating house prices. Swan even admitted this (http://www.crikey.com.au/2009/08/06/housing-is-overpriced-swan-is-making-it-so/ ). There never was any agenda for “housing affordability”.
That’s because (a) more voters own homes than want a first home, (b) banks are are considered more important than builders, and (c) politicians own investment houses too.
The winding back of FHOG will make no difference. If the real purpose of the Grant was what it was claimed to be — to offset the GST effect on the housing market — then a third grader could have designed it better. The winding down of the scheme just makes new homes even more expensive relative to existing homes — and that’s if you can get approval to build it at all.
“Supply and demand” is a conceptual shorthand of the free market, and it shouldn’t be used as the whole explaination. I have always preferred “charging what the market will bear” as a phrase, because it makes clear that prices can only go up until no-one will, or can, pay. After all, a starving child in Africa has about as much pent up demand for food as any human being can be said to have for anything and still a robust grain market does not spring into life to supply that need- because the starving child has no money. So houses cannot rise above the amount of money people can marshall for their purchase. A shortage of supply might well mean they will always be priced at the extreme of what people can afford, but thats really a large part of Steve Keens argument. Since credit is shrinking, the amount which people can afford will itself reduce and so, therefore, will the highest prices the market will bear.
Altakoi: True, but “what the market will bear” has turned out to be a flexible concept as banks found ways of lending more and more to home buyers. The next stage might be shared-equity loans becoming the norm for owner-occupiers.
On the supply side, one statistical series I have never seen but would very much like to see is the number of dwellings listed for sale at any one time. I suspect this has dropped markedly in recent years, independent of the total number of dwellings in existence. That’s because a few years after the introduction of Capital Gains Tax, investors stopped trading homes and started holding them indefinitely, realizing profits by leveraging increased equity rather than selling homes for cash and paying CGT. (Banks lend based on the value they could confidently recover in a repossession, and they do not incur tax on the defaulter’s capital gain when they do so. Perhaps they should.)
After all the number of homes that buyers have to fight over is not the total number of homes on the ground; it’s the number that are on the market at any one time.
Hmmm. Thanks Bernard.
I have been arguing for some time that public housing has been outsourced to the private sector by stealth. It seems no one remembered to put out a media release announcing this measure back in 1985.
If we had known we are all supposed to house people on low fixed incomes, and build houses they can afford to rent, we might have asked a few more dangewous questions about this unannounced policy?
hmm, not sure if there’s a real ‘undersupply’ — after all, where is everybody living?
Kris Sayce of the Daily Reckoning has pointed out recently that Tanya Plibersek’s ‘National Supply Council’ did another 3rd grader job estimating the size of the shortage — by adding up the homeless population — not people known for bidding on houses — and adding a couple of percent to the rental vacancy figure to make a comfortable allowance. Quite an astonishing methodology, and yet another demonstration that the Labor Party (the one that’s been betraying its origins and constituency since the 80s) is simply not taking housing affordability or supply and demand figures seriously.
The reason housing is unaffordable and new building work has slowed down is essentially twofold: liberalised credit from the banks globally, finally culminating in the GFC, has caused people to bid up housing prices exorbitantly — it’s basically land value speculation, nothing to do with the cost of construction or the historical value of housing or even longterm ability to retire the debt. Inheritances are keeping the Ponzi scheme going a bit longer, then after that wages and salaries of the next generation simply aren’t going to cover the asking prices. We should therefore see a long, steady deflation as the speculative fervour and easy credit start to evaporate. The second reason is that neoliberal state governments, utilities and councils have taken the opportunity over the last decade of increasingly shifting new infrastructure costs directly to developers and therefore home buyers in new subdivisions, costs once borne by the entire community through taxation. This in conjunction with easy credit and chicken farmers asking more and more for their land in the boom has lead to an escalation of prices on the fringe and in large scale infill developments. And, somehow or other, people borrowed the amount. Steve Keen’s argument of course is that the chickens (metaphorical this time) will inevitably come home to roost in the form of massive debt repayments on the borrowed money causing household insolvency, much as we’ve seen with ABC Childcare, Centro and so on in the GFC. Some might even say the entire capitalist system is rotten to the core, an abysmal social failure, and is really screwing over the ordinary working man this time.
The role of government over the past decade should have been to do what Whitlam did in Victoria in the 1970s, with the VicUrban initiative — hold down the price of land by fiat in new development corridors and shepherd thousands of families into affordable dwellings. Affordable land means builders will build more and consumers will buy more. I would also control speculative investment in property in such developments much as the FHOB is audited for legitimate owner-occupiers, but without the ‘I lived in it for 6 months but couldn’t afford the mortgage any more so I had to rent it out’ excuse that the Fed govt is accepting these days. Infringers would be shot at dawn.
For accurate and comprehensive analysis of Australian housing news and all related national and international feeders into house prices, visit Global House Price Crash, Australian chapter.
Excellent point Sean: “state governments, utilities and councils have taken the opportunity over the last decade of increasingly shifting new infrastructure costs directly to developers and therefore home buyers in new subdivisions, costs once borne by the entire community through taxation”
Developers actually have been squeezed for excessive infrastructure levies, political donations, and quite frankly bribes, by state and local governments who know that most people think developers are evil and don’t care about flogging them. This is stupid: the more you shake down developers, the more shoddy you force them to become as the more conscientious ones simply leave the business.
And all these costs get passed on to the end buyer. That’s along with GST (which FHOG only slightly offsets, and it gives second-hand homes almost the same boost anyway). In NSW, what do you get for all those infrastructure levies? In public transport terms, you get the honour of contributing to an inner-west Metro, and that’s about it.
By the way Sean many of your good points are made with reference to neo-liberal price drivers. I could also argue that most of these price-drivers are market distortion policies which go against the theories of free-marketeers such as Friedrich Hayek (if Hayek is what you mean by neo-liberal). So we come from opposite sides but we agree on the result and the folly of it.
And your point about the “undersupply” also has a lot of truth in it. The increase of investor-owned rental homes in proportion to owner-occupied homes means the demand pressure is not so much from homeless people as from renters who prefer to buy but have trouble meeting the prices. As I said above, the ratio that really matters is not total dwellings vs. total people, but homes and residential blocks listed for sale vs. buyers looking for a home. Anything that caused a sell-off of investor stock would very rapidly overturn that ratio, even before any new homes were built.