Housing policies as a drain on wealth creation

Everybody is talking about housing (Judith had a great piece in the Oz on Wednesday) as the government flies kites on policy and the regulators fret about the effect on the banking system from a possible lancing of the price boom.

I have a piece in the Herald Sun this morning on the issue

Nowadays there is not much dispute that regulatory constraints on supply is the main reason why Australian house prices are up in the stratosphere.  Governments are incapable of unwinding decades of cumulative regulatory controls on housing which have created Hong Kong land prices in a nation with the world’s greatest supply of developable land.  Since the 1980s dwelling numbers have increased 40 per cent and people 60 per cent.  Prices that used to average three times household incomes are now six times that (9-12 times in Melbourne and Sydney respectively).

Some additional froth has been created by foreign demand – perhaps 26 per cent of new build in Sydney and by speculative demand on the back of low interest rates and the “certain” gain from rising prices.

The regulatory authorities are seeking to suppress investment lending. And, far from regarding foreign demand for Australian housing as a valued export and wealth generator, governments are likely to increase taxes and restraints on this to discourage demand.

There will be other meddlings, perhaps including allowing some use of superannuation, all of which are likely to exacerbate the supply problem.

One feature of the house price boom seldom addressed is the syphoning away from productive use of household savings.  Here are the Household Asset estimates of the RBA

Existing policies divert household savings away from productive investment uses.  Over half of households’ $11,000 billion of assets are in dwellings.  Because regulatory measures have doubled their underlying value, this means we are wasting some $3,000 billion of savings.  Placed in perspective, that’s equivalent to ten times the total asset base of the electricity supply industry.

Some might argue that this sum does not represent a drag on productivity since it is simply a monetarily inflated value that has not taken real resources to create. But houses change hands every eight years or so and new buyers reward the fortunate incumbents.  In this respect, the diversion of savings from real income producing venues must have a wealth sapping effect.

 

This entry was posted in Uncategorized. Bookmark the permalink.

99 Responses to Housing policies as a drain on wealth creation

  1. zyconoclast

    Nowadays there is not much dispute that regulatory constraints on supply is the main reason why Australian house prices are up in the stratosphere.  Governments are incapable of unwinding decades of cumulative regulatory controls on housing which have created Hong Kong land prices in a nation with the world’s greatest supply of developable land.  Since the 1980s dwelling numbers have increased 40 per cent and people 60 per cent. 

    Alan
    what happens to the modelling if the population stops increasing by an immigration rate of 150k to 300k per year for the last 20 years?

    It’s not just an issue for housing. Where the population grows the schools become over crowded to point of having no play grounds and sports ovals.

  2. johanna

    This argument has been doing the rounds for years, and not just in Australia.

    There is a puritanical streak embedded in it – instead of spending and borrowing to make a comfortable home, we should be buying shares or starting new businesses, or something.

    Most Australians are already forced to buy shares via their compulsory superannuation, and look how that’s working out for them. Further, most people are not inclined to take risks with their hard-earned when a safer, if potentially less profitable, option is available; especially when that option gives them comfort and pleasure every day.

    If housing was cheaper, it does not automatically follow that a lot of money would be diverted elsewhere. In the US, for example, people just buy bigger and better houses and fill them with more features and toys. Similar trends have been observed here – McMansions, anyone?

    It is true that regulatory frameworks have an effect, but the instinct to nest is a lot more powerful than many economists give it credit for.

  3. Razor

    Nowadays there is not much dispute that regulatory constraints on supply is the main reason why Australian house prices are up in the stratosphere

    Sorry Alan but must disagree with this statement.

    It is in fact much clearer that the monstrous residential housing bubble has most everything to do with the credit bubble from QE and pathetic low reserve interest rates. (American credit flooded the world thru the financial institutions.)
    QE + low interest = credit bubble = debt bubble pouring into the asset class that most in the general population believe they have knowledge in : residential housing. Foreign investors form a bootstrap modus in this market. They have the resources to take a greater risk approach than residents.

    Supply side/demand side cause accreditation is due to the investor class (which would include economists and polis) pushing the barrow to attempt to prevent a bursting of the bubble making a dent in their future savings. The current thoughts regarding super use and tax concessions to down sizers have a similar motive – prevent a bubble burst (be like Japan and allow inflation over 20 years take the wind out of it) and pickup the apartment mkt. Triguboof is screaming for govt action to do something about his coming losses on this mkt.

    I am so sceptical of the motives of anyone who does not publically accept the great wealth destruction coming upon future young homeowners. It is disgracefull for this generation of leaders to hand on a poisened chalice.
    Shame and a pox on their house.

  4. ned

    Mr. Moran all this is true but problem is to identify what is biggest problem in this.

    My opinion is :

    1) interest rate ( artificial )


    2) LVR by banks ( they are not scared of going down –protected species )
    

3) regulatory constraints on supply and demand

  5. Tel

    One feature of the house price boom seldom addressed is the syphoning away from productive use of household savings.

    I can tell you from many years of personal experience, if there’s on thing that siphons away your productive efforts it would be paying rent… and then getting kicked out and moved every few years due to some whim of the landowner wanting to put up a new gazebo or something.

    Home ownership means stability, and that provides the ability to plan, or invest, or raise a family, or grow a garden, or do the things you want to do.

  6. Joe

    The home is the only untaxed capital investment a person can make. Governments have attempted to remedy that via stamp duty. It still remains that the home is exempt from benefit conditions and probably the best investment decision those dependent on benefits could make.

  7. ned

    of course politically speaking it is easier to blame immigrants and rich foreigners ( both are government regulated as well ) than yourself.

    “We have met the enemy and he is us”. ( our leaders last 50 years ).

  8. john constantine

    Lucky Australia is deindustrialising, this means that we can rezone industrial land for housing.

    Who needs an industrial base when you can import enough tenants to demand enough debt funded housing so our elite can get rich quick?.

  9. johanna

    I can tell you from many years of personal experience, if there’s on thing that siphons away your productive efforts it would be paying rent… and then getting kicked out and moved every few years due to some whim of the landowner wanting to put up a new gazebo or something.

    Home ownership means stability, and that provides the ability to plan, or invest, or raise a family, or grow a garden, or do the things you want to do.

    Correct, and I also have plenty of personal experience in that regard. The transaction costs of renting can be very high, given that your landlord can kick you out after six months because a family member needs somewhere to camp, as happened to me. I estimate that it cost me about $1,000, and that was 25 years ago. Another corker was the Labor government’s come to Jesus moment when they abolished negative gearing, and my rent almost doubled in one go.

    The tax advantages are certainly an important factor, but even for people who live in places where capital gains are minimal, you won’t see many of them selling up to go back to renting.

  10. Jeremy

    More work spaces in the central city means more demand for housing within one hour’s travel means more pressure on house prices in the suburbs.
    Any economist who pretends that the massive immigration rate is not relevant is simply dishonest.

  11. stackja

    Placed in perspective, that’s equivalent to ten times the total asset base of the electricity supply industry.

    Sustainable electricity supply industry?

  12. H B Bear

    It is in fact much clearer that the monstrous residential housing bubble has most everything to do with the credit bubble from QE and pathetic low reserve interest rates. (American credit flooded the world thru the financial institutions.)

    Yep Australia (or Sydney and Melbourne really) is right where the US and “Inflate ’em” Al Greenspan were in 2008. The RBA is like the driver speeding down an icy mountain road – tap the brakes and you go straight over the side. They have no choice to hold on and pray they reach the bottom for a soft landing.

  13. Craig Mc

    I keep hearing this “House prices are insane!” discussion at my tiny Melbourne work-place. Yet in an office of six, four have moved here from either the country, inter-state or over-seas in the past two years.

    That’s the situation (whether it’s a problem is another matter) in a nutshell. People and businesses keep choosing to be where prices are expensive for whatever economic reasons individuals choose in the free market, thus keeping pressure on real-estate prices.

    Really, what choice do they have if they’re going to live and work in Australia? There are only five real cities worth talking about, and only two of them can be considered commercial hubs of any scale. That won’t be changing anytime soon.

    BTW, the world’s most successful housing cost reduction program has been in Detroit. Be careful what you wish for.

  14. johanna

    I have been hearing about the housing bubble for almost as long as I have been hearing about the imminent destruction of the Great Barrier Reef, and how the solar energy breakthrough is just around the corner. People desperately want to believe it, apparently.

    What we get in Australia are slowdowns and slight reverses in the housing market, especially on a regional basis. They can be caused by trade factors, such as commodity prices falling, or stupid government decisions like closing down power stations.

    Short of a national catastrophe like the Great Depression, and much as the Puritans who hate people building wealth by owning their home keep wishing for it, it ain’t gonna happen. Short-term blips – sure. But the notion that half of the country is going to go broke because the housing “bubble” is going to burst (any day now, they keep hoping) is just a pipedream of socialists, the envious, the outright malicious, and people who hope that if they keep prophesying doom, one day they will be proved right and given the approbation that they think they deserve.

  15. Razor

    he RBA is like the driver speeding down an icy mountain road – tap the brakes and you go straight over the side. They have no choice to hold on and pray they reach the bottom for a soft landing.

    LOve the analogy is so very true
    thanks HB

  16. Razor

    Thats right Johanna house prices don’t fall big time do they? All not true = USA 2007. Perth now. Japan over 20 years.

  17. .

    Short of a national catastrophe like the Great Depression, and much as the Puritans who hate people building wealth by owning their home keep wishing for it, it ain’t gonna happen. Short-term blips – sure. But the notion that half of the country is going to go broke because the housing “bubble” is going to burst (any day now, they keep hoping) is just a pipedream of socialists, the envious, the outright malicious, and people who hope that if they keep prophesying doom, one day they will be proved right and given the approbation that they think they deserve.

    There is a bubble/”bubble” Johanna.

    Asset prices that appreciate by 13% each year whilst the asset is actually physically appreciating or the amenities/infrastructure nearby also physically depreciates or becomes congested?

    The bubble is a function on housing supply being unable to respond to demand.

    The additional costs we have on housing now due to usurious taxation and other charges, social and environmental regulation and general taxation creates affordability by removing the incentive to build or invest.

    Various studies show new housing consists of a tax component of 40%+ of the final price. The tax RATE on building new dwellings can easily be over 80%.

    No other asset class or stage of production is hammered like this.

  18. Razor

    9 to 12 times annual income is quite sustainable?
    Wages keeping up with CPI?
    Second highest personal debt load in the world is sustainable?
    Interset rates rising is covered well by current income with dispersions?
    $300 poistive bank balance covers emergency situations like tooth ache?
    The situation with debt has no relationship to safety levels re loan payments like one months payment in reserve for job loss?
    No, not a precarious situation currently Johanna.

  19. H B Bear

    The only thing stopping rapid reversals in housing prices is reasonably strong employment and a belief that prices will not go backwards (allowing price setting marginal (in the economic sense) buyers to take on vast amounts of historically cheap debt). In the last real recession under Hawke-Keating that almost sent Westpac to the wall due to commercial property lending, people were picking up houses at 10-15%+ under advertised prices.

    The only thing that stops the current Sydney-Melbourne property market being a pure Ponzi scheme is the 200,000 odd migrants being dumped into the system every year, many of whom want to remain in the two major cities.

  20. Ray

    Let us assume for a moment that government restrictions are so tight that no new land or developments will enter the housing market again. That means the housing stock is fixed into perpetuity and, as a result, we would have perfectly inelastic supply, or a vertical supply curve. In this hypothetical situation, where does the equilibrium price lie? Obviously at the point where the demand curve intersects with the supply curve. In other words, perfectly inelastic supply means that the price of housing is set by demand.

    Of course, supply of housing is never perfectly inelastic, although those who argue that the recent house price inflation is the result of supply are implying that supply is very inelastic. Yet this is not supported by recent evidence of record housing completions. ABS estimates of household numbers rose by 687,000 over the four years to December 2016. However, the number of housing completions for the same period totalled 737,000. So in the period where house prices have been accelerating fastest, we have actually been building more houses than required to satisfy underlying demand.

    Now some may argue that prices are rising to reflect pent up demand. Yet if this were so, the price in 2012 would have reflected the supply shortfall and prices would have adjusted lower since then to accommodate the rising number of excess completions. Clearly this is not so.

    As a result, it is highly unlikely that supply pressures are the cause of house price inflation.

  21. Tel

    I keep hearing this “House prices are insane!” discussion at my tiny Melbourne work-place. Yet in an office of six, four have moved here from either the country, inter-state or over-seas in the past two years.

    Right, but don’t ignore the reason for that. How does a big city business compete? More customers, best selection of workers, pays higher wages, deliver the best product.

    How does a small town business compete? Lower prices, more personal services, greater time spent on each customer.

    But Australia has labour market price fixing, there’s no flexibility so the small town business is stuck paying award wages regardless of the prevailing economic situation. Then they cannot compete, so the business closes down and the jobs are only available in the city.

    Government did this. Don’t let them off the hook.

  22. .

    As a result, it is highly unlikely that supply pressures are the cause of house price inflation.

    Total crap. You cannot determine elasticity from completions.

    You have a 1.8% increase each year during the time of greatest price growth. Population growth was the same or slightly lower in those years and slightly higher in the previous two years before that period.

    Now some may argue that prices are rising to reflect pent up demand. Yet if this were so, the price in 2012 would have reflected the supply shortfall and prices would have adjusted lower since then to accommodate the rising number of excess completions. Clearly this is not so.

    How can you have “excess completions” if there is “pent up demand”?

  23. .

    That’s right Tel. Only having six states and concentrating work in the government sector and in their capital cities really does alter the structure of the economy. Compare us to a more Federalised and laissez faire economy like the Swiss or US. Also the ease of setting up a business in America compared to here. Compromised, but not as bad. Anyone with savings and marketable skills in the US has more options.

    In Australia, the same advantages might merely allow you to change to an owner-occupier rather than renting.

  24. cynical1

    Too late.

    Correct the situation, and half the mortgagees currently paying off a house loan, will see a rapid drop in their house value and may indeed owe more than the house is worth.

    More supply = less demand.

    Bit like trying to address the Islam problem.

    The horse has crossed the finish line, never mind bolted…

  25. Ray

    In order to understand how house prices can rise in a market where supply is growing faster than household numbers, we need to appreciate what demand really is. Here it is important to note that demand is not just household numbers.

    Demand for housing is determined by a household utility function and a budget constraint. The former being the preferences which a household has for goods and services and the latter is the amount of money available to satisfy those preferences. Clearly, households will try to maximise utility within their budget constraint. As a result, households will make decisions as to what they can afford, substituting certain goods and services for other consumption so as to fit within their budget constraint.

    However, the budget constraint for housing does not function in the same way as it does for all other goods and services consumed by a household. This is because mortgages enable households to leverage their balance sheets to make a purchase and, importantly, the purchased property adds to the value of their assets, increasing the amount that can be borrowed. This self leveraging ability of housing loans actually increases the budget constraint, but only if those funds are expended on real estate. In other words, the budget constraint for housing is not the same as the budget constraint for all other household consumption.

    The budget constraint for housing is dependent on a bank’s estimate of serviceability and loan to security valuation ratios. Interestingly, the banks have not changed these ratios significantly over recent years. What has changed is the level of interest rates which have come down significantly, increasing both the serviceability and loan to security ratios and hence raising the budget constraint of households for real estate purchases.

    If you raise the budget constraint, then the demand curve for housing will shift upwards, raising the price of housing regardless of the level of supply. It is irrelevant whether we have a vertical supply curve or one that exhibits some level of price elasticity, the level of house price inflation is mostly determined by the budget constraint.

    Thus, for all the talk about the causality of supply, demand is the basic reason we have seen considerable house price inflation over recent years. That demand shift is a direct result of an increase in household budgets resulting from the Reserve Bank’s interest rate policies.

  26. Ray

    Dot, I would suggest that you try to read comments before whinging about the content.

    First, I was not arguing that you could estimate elasticities from completions only highlighting just how illogical it is to assume that supply is the cause of price inflation when supply is rising faster than household numbers.

    Second, I was obviously stating that there was no pent up demand.

    You need to be more careful if we are to take you seriously.

  27. Razor

    Well described Ray. Budget restraint for secured product is closely tied to the interest rate pressure on household budgets.

  28. A H

    Alan’s point is that inflated house prices are not making us rich. The misallocation of capital into housing is actually making us poor.

    Australia could have insulated itself from the global credit bubble by having higher interest rates. Had we done that, capital would have been better allocated.

    As it is now, house prices will fall, banks and people will take losses, and capital will be wiped out. The more this is delayed, the more misallocated will occur and the more wasted capital there will be.

    It could be a mistake to increase the supply of housing based on the current distorted price signal. That would mean even further malinvestment into housing as more capital is expended to increase supply. Or, to look at it from another perspective, whether an investor buys five units at 400k each, or two units at 1M each, he still spends 2M in total, and I don’t see that the total amount would be better spent either way.

    But the taxation that targets housing such as stamp duty is immoral, like all taxation. So you don’t even need to get into economics to argue against that.

  29. johanna

    Even if 10% of mortgagees go under (and that’s a big “if”,) that is hardly bursting this “bubble” we keep hearing about. It is not 10% of homeowners because almost half of them own their homes outright, and many more are close to it and have small repayments. Then there are renters.

    For decades, I have been hearing about the bubble and how buying a home is unaffordable, yet people keep buying them and hanging on to them somehow. The default rate is very low, because most people will go to almost any lengths to keep their home.

    Low interest rates have probably enticed people who can’t really afford it to get a home loan, and some sort of shakeout is very likely. But if you think that you will be able to pick up a Sydney waterfront or a Toorak mansion for a song, you are dreaming. Indeed, if you think that you can pick up a decent place in an inner ring suburb in Sydney or Melbourne for a song, you are dreaming.

    There is no bubble in the solid core of the property market. The people who live there are not going anywhere, and certainly don’t care about interest rates. After all, when they reached 17% all they did was cut back on expenses a bit and hang on.

    If there is a shakeout, as usual, it will be most felt in the marginal zones of desirability by people who probably shouldn’t have taken out a loan in the first place. It’s tough for them, but nothing like the catastrophe so ardently desired by some.

  30. .

    Ray
    #2354025, posted on April 14, 2017 at 11:57 am
    In order to understand how house prices can rise in a market where supply is growing faster than household numbers, we need to appreciate what demand really is. Here it is important to note that demand is not just household numbers.

    You cherry picked a four year period where dwelling growth slightly outpaced population growth. Prices still rose. The demand for housing is not directly correlated to population growth. Household formation is not fungible.

    Demand for housing is determined by a household utility function and a budget constraint. The former being the preferences which a household has for goods and services and the latter is the amount of money available to satisfy those preferences. Clearly, households will try to maximise utility within their budget constraint. As a result, households will make decisions as to what they can afford, substituting certain goods and services for other consumption so as to fit within their budget constraint.

    Which is why with expensive housing, people are choosing to renovate than build new housing as transaction taxes are a disincentive to build new dwellings and negatively affects labour mobility.

    Increasing household size outside of retirees is a function of increasing affordability.

    If you raise the budget constraint, then the demand curve for housing will shift upwards, raising the price of housing regardless of the level of supply. It is irrelevant whether we have a vertical supply curve or one that exhibits some level of price elasticity, the level of house price inflation is mostly determined by the budget constraint.

    This is almost totally wrong. Go back to school. The supply curve can shift back even if it is very inelastic.

    However, the budget constraint for housing does not function in the same way as it does for all other goods and services consumed by a household. This is because mortgages enable households to leverage their balance sheets to make a purchase and, importantly, the purchased property adds to the value of their assets, increasing the amount that can be borrowed. This self leveraging ability of housing loans actually increases the budget constraint, but only if those funds are expended on real estate. In other words, the budget constraint for housing is not the same as the budget constraint for all other household consumption.

    You’re blaming demand? There is no such thing as push cost or demand pull inflation. These are the after effects of inflation. This is why you had a conundrum earlier of believing on both pent up demand and excess completions. Your theory is near total crap.

    The budget constraint for housing is dependent on a bank’s estimate of serviceability and loan to security valuation ratios. Interestingly, the banks have not changed these ratios significantly over recent years. What has changed is the level of interest rates which have come down significantly, increasing both the serviceability and loan to security ratios and hence raising the budget constraint of households for real estate purchases.

    Yes, the serviceability for those who can afford a deposit which is three times the size as major banks upped their LVR from 5% to 15% after the GFC.

    f you raise the budget constraint, then the demand curve for housing will shift upwards, raising the price of housing regardless of the level of supply. It is irrelevant whether we have a vertical supply curve or one that exhibits some level of price elasticity, the level of house price inflation is mostly determined by the budget constraint.

    Outwards you hick…and no you are wrong. You are assuming that demand is income invariant for all goods. This is a stupid simplifying assumption. The only reason why supply is irrelevant is that you have conveniently assumed that the supply curve is fixed, rather than simply perfectly inelastic or near enough. You have assumed a straw man and are declaring victory by torching a construction of your own imagination.

    Thus, for all the talk about the causality of supply, demand is the basic reason we have seen considerable house price inflation over recent years. That demand shift is a direct result of an increase in household budgets resulting from the Reserve Bank’s interest rate policies.

    In part – and that is quite dangerous as well. Outlining the ill effects of credit manipulation but ignoring a 80-85% tax RATE on a particular asset class is rather schizoid.

  31. john constantine

    One of the points of high house prices is the unspoken great foundation stone of their millionaire socialist left.

    House Price Apartheid.

    Gated communities and exclusive high rises with door guards are the future for Australias leftist elite, but until that Sweet Stalinist Supremacy arrives, their left will make do with house price apartheid areas where a welfare jihadi’s 20 kiddies won’t go to government school alongside Isabella-Felicity Plibachek-Shorten.

    Serves a purpose, the house is worth less than half the price, the exclusivity is worth the rest.

  32. Razor

    AH
    Agreed.
    I was astounded when the mining came off heat that the reserve and treasury strategy was to shift the economy to real estate.
    Decreasing the reserve rate was directly related to this strategy and supported morally by the appearance of deflationary pressure.
    Glenn Stevens belatedly tried to stop the bubble growth by quick asides regarding house prices can go down.

    BUT to date the stock and financial markets are still being breast fed to continue to weight gain massively.
    Essentially the new comers to housing are being bled to provide more and more wealth to the already wealthy.

  33. Rabz

    The only thing that stops the current Sydney-Melbourne property market being a pure Ponzi scheme is the 200,000 odd migrants being dumped into the system every year, many of whom want to remain in the two major cities.

    Correctomundo, Bear. In a nutshell. Restrict supply, inflate demand through insane immigration levels and further stimulate demand with record low mortgage rates.

    Pretend to be shocked/surprised when the bleeding obvious results.

    But the taxation that targets housing such as stamp duty is immoral

    I’ve argued here previously that it is a de-facto CGT on housing, paid up front.

    Finally, as others have noted, investment in your home is not a misallocation of resources. It is one of the few sanctuaries we have from the ever increasing global idiocy we’re experiencing (recently culturally enriched peoples in Mosquebourne may disagree). By all means, do not tie up all your monies in your house, do not over borrow, work hard and try and obtain a better paying jerb whenever possible and do whatever you can to pay down your mortgage as quickly as possible. None of this is rocket surgery, BTW.

  34. .

    johanna
    #2354041, posted on April 14, 2017 at 12:18 pm
    Even if 10% of mortgagees go under (and that’s a big “if”,) that is hardly bursting this “bubble” we keep hearing about.

    That is correct but it could simply mean pent up demand is so great.

    It is not 10% of homeowners because almost half of them own their homes outright, and many more are close to it and have small repayments. Then there are renters.

    I don’t know if you can assume the defaults will happen evenly across the mortgagor population. Like you say later on,

    For decades, I have been hearing about the bubble and how buying a home is unaffordable, yet people keep buying them and hanging on to them somehow.

    Because loan serviceability is reduced.

    The default rate is very low, because most people will go to almost any lengths to keep their home.

    We have strict bankruptcy laws, mortgagors can be held accountable to a personal covenant and default rules have little grace. People don’t want to risk crystalising a loss either if they default when the market is down.

    Low interest rates have probably enticed people who can’t really afford it to get a home loan, and some sort of shakeout is very likely.

    Of course.

    But if you think that you will be able to pick up a Sydney waterfront or a Toorak mansion for a song, you are dreaming. Indeed, if you think that you can pick up a decent place in an inner ring suburb in Sydney or Melbourne for a song, you are dreaming.

    Ditto but just a bit further west/outwards and this is where the silliness starts. I saw a shipping container in Casula a few months ago renting out for 300 AUD pw, as a granny flat.

    There is no bubble in the solid core of the property market.

    I am not sure if it is a bubble. There is a definite and identifiable supply issue. It might go on indefinitely with small bubbles inflating and popping as it continues on, with relatively small effect compared to the main supply issue.

    The people who live there are not going anywhere, and certainly don’t care about interest rates. After all, when they reached 17% all they did was cut back on expenses a bit and hang on.

    Hey not all of them. A few of them lost businesses in that as well.

    If there is a shakeout, as usual, it will be most felt in the marginal zones of desirability by people who probably shouldn’t have taken out a loan in the first place. It’s tough for them, but nothing like the catastrophe so ardently desired by some.

    I don’t want a catastrophe either. You’re probably right as in SW Sydney after 2007, property prices fell dramatically.

    Let’s say there is a genuine supply constraint caused by high taxes and regulation. If that was resolved or ameliorated and house prices dropped, would that be a catastrophe? If people shouldn’t take on marginal loans, I’m not sure banks ought to loan against collateral that exists because of fiat either.

  35. Razor

    Being an Intellectual does not prevent one being an idiot.

  36. Anton

    Existing policies divert household savings away from productive investment uses

    A big assumption there. Do average people actually want to invest in “productive assets”?

    Many people still have first hand experience of significant losses after the GFC, or still remember their parents losing their retirement savings on the “dot com” crash. Who wants the hassle of owning a business as a passive investor (i.e. not buying a job). Or investing in a term deposit at 3% pa?

    The perception among many normal/everyday Australians is that real estate is the only viable savings and investment vehicle. And their money belongs to them, not some economic meddler.

  37. Ray

    Dot,

    You cherry picked a four year period where dwelling growth slightly outpaced population growth.

    By cherry picking do you mean choosing the last four years where we have seen a house price boom. The simple fact is that house prices were not out of control before that.

    The demand for housing is not directly correlated to population growth.

    Funny that is exactly what I was saying.

    Which is why with expensive housing, people are choosing to renovate than build new housing as transaction taxes are a disincentive to build new dwellings and negatively affects labour mobility.

    And this is relevant how?

    This is almost totally wrong. Go back to school. The supply curve can shift back even if it is very inelastic.

    You are 100% correct, the supply curve can shift back at will, if we bulldoze thousands of properties.

    I could go on but you bore me now.

  38. .

    By cherry picking do you mean choosing the last four years where we have seen a house price boom. The simple fact is that house prices were not out of control before that.

    So you reckon 13% price growth last year is not significant?

  39. .

    Many people still have first hand experience of significant losses after the GFC, or still remember their parents losing their retirement savings on the “dot com” crash. Who wants the hassle of owning a business as a passive investor (i.e. not buying a job). Or investing in a term deposit at 3% pa?

    That’s the thing. You’re noting how awful business conditions are.

  40. Ray

    To change subject, there is some comment here about a substitution effect of housing investment, i.e. housing crowding out investment in more productive sectors of the economy. I doubt this that is really happening here. What is more likely is that house prices are inflating because there are no alternative investments.

    The Reserve Bank has pursued an expansionary monetary policy for the express purpose of increasing investment in production. However, that is not happening for a combination of reasons including high taxes on capital, a rigid industrial relations system, high energy costs, an over zealous green regulatory regime and record budget deficits.

    If business investment were worth the risk in this country, it would happen, regardless of the state of the housing market. So it is probably the absence of reasonable risk / reward payoffs in business which are helping channel money into housing.

  41. .

    And this is relevant how?

    10 minutes later…

    To change subject

    You have some impressive double standards Ray. Don’t get your feet tangled up with your sabre when you cut and run, old bean.

  42. Anton

    That’s the thing. You’re noting how awful business conditions are

    Solving the “housing affordability crisis” will not lead to an increase in “productive investment”

    Actually, it may not be possible to solve the “housing affordability crisis” without destroying the economy altogether. In terms of saving and investment, housing is close to a monopoly supply (few viable substitutes) while people selfishly try to look after themselves rather than “do what is good for the country.

  43. Ray

    Dot, that is the reason you bore me. When I went to school the last four years included last year, but you obviously know better.

  44. .

    So Ray – you reckon dwelling construction of 1.8% a year and a price increase of 13% is because of…increased demand which is simply being met? Even though the prior three years also had dwelling construction that met demand?

    If the RBA can increase people’s incomes so much that assets appreciate by 13% a year for no other reason whilst inflation decreases slightly and income growth is only marginally increasing…interest rates did fall however from a 2.75% cash rate to 2% roughly.

    This doesn’t pass the sniff test. You’re trying to argue there is a credit cycle boom and no bubble. A credit cycle doesn’t increase incomes in real terms either.

  45. .

    Solving the “housing affordability crisis” will not lead to an increase in “productive investment”

    Actually, it may not be possible to solve the “housing affordability crisis” without destroying the economy altogether.

    So Anton you reckon if there was more housing investment (say we cut the effective rate of taxation on dwelling to construction from 80%+ to a “mere” 45%), you reckon this would destroy the economy by fixing a “non-existent” problem?

    Do you reckon people would not invest funds left over after this into other businesses?

  46. Anton

    Do you reckon people would not invest funds left over after this into other businesses

    For the most part, no they would not. They might pay off their mortgage or other debt more quickly, keep it as cash or blow it on a holiday, car or another property.

    The majority of Australians see share investment as gambling and employing people as a hassle.

  47. johanna

    If business investment were worth the risk in this country, it would happen, regardless of the state of the housing market. So it is probably the absence of reasonable risk / reward payoffs in business which are helping channel money into housing.

    Yes, as I and others have said.

    The trouble with economists is that they think that Joe or Jane Smith should all be red hot entrepreneurs, constantly scanning the finance pages and the economy in the hope of finding the next Bill Gates in his garage. They have NFI about the real world.

    Your ordinary working person’s first concern is that their carefully and painfully acquired savings should not disappear in a puff of smoke. This is not based on superstition, but on fact and history.

    Well-paid academics look down their noses at them.

  48. .

    You see Anton, that is exactly the point. If the same amount of capital can be used to build more new dwellings and so on…than we wouldn’t have gotten into this mess in the first place.

    If you own 2 mn of property and earn a decent 6.5% gross yield, you may not care how many people live in it. However if those properties can house six people instead of four people – then society is better off. The investor is not any worse off. Their ROI remains the same.

    It should be easier to invest, build and acquire real estate for wealth creation (superannuation is simply another barrier which makes this harder to do).

    In aggregate otherwise, there would be more funds left over for commercial loans (supply of loanable funds) or the more entrepreneurial types to start other new ventures.

  49. JC

    If business investment were worth the risk in this country, it would happen, regardless of the state of the housing market. So it is probably the absence of reasonable risk / reward payoffs in business which are helping channel money into housing.

    Wow, financial resources are infinite?

  50. Anton

    ., a few problems with your analysis:
    If you own 2 mn of property and earn a decent 6.5% gross yield. Most “mom and pop” property investors are more interested in long term capital gains than ROI. Real estate investment is generally seen as a retirement savings vehicle rather than an income generating asset.

    if those properties can house six people instead of four people . Outside of economics and social justice this is not really correct. The biased tenancy laws are more likely to favour one of the six people than one of the four people. low rent = high tenancy risk. It is also perceived (maybe incorrectly) that higher valued properties will show greater capital appreciation over the long term. Generally, mom and pop property investors will get the highest value property they can afford. (I don’t follow this model myself BTW)

    But I do agree that taxes are too high. Australia is currently in a master class (practical component) on the effects of being on the right hand side of the Laffer curve. From here things can either get worse or worse.

    Try a hypothetical example: A family with an income of about $100k has lived in their mortgaged home for about 10 years. Their youngest kiddy has just finished kindy, freeing up say $200 per month. The family decides to “do something for the future” instead of blowing the extra cash. They have their property assessed and are able to borrow say $400k. Their options:
    a>pay off their mortgage quicker
    b>renovate or move to a bigger home
    c>buy an investment property, which will be negatively geared in this case
    d>buy a share portfolio against their home
    e>buy or start a small business

    Economists and social engineers might want them to choose e or d. I would guess they go for c or b, which is the most rational decision for them based on a long term risk/reward analysis which takes capital risk, income risk and required effort into account

    What would you advise them?

  51. Snoopy

    Since the 1980s dwelling numbers have increased 40 per cent and people 60 per cent.

    Meanwhile families have become smaller.

  52. JC

    Anton

    Long story short lower housing costs increases purchasing power and therefore living standards. It’s all we have to understand instead of speculating about funds being directed towards stocks etc.

  53. Anton

    JC

    Only if you consider housing to be a consumable good.

    If housing is viewed at least partially as an asset/investment lower prices are not relevant
    If housing is viewed as an asset and funded by secured debt falling prices will cause a lot of problems

    Would we be better off if share prices fell?

  54. JC

    Of course housing is a consumable.

  55. Anton

    Of course housing is a consumable

    Says who?

  56. Wozzup

    I have no doubt whatsoever that the main problem ratcheting up housing prices are on the supply side, driven by insane levels of regulation that restrict land supply and / or impose higher costs on house construction. So why is it that the clowns who call themselves our “leaders” insist on demand side measures to deal with the problem, such as making personal superannuation available to fund housing. Measures that are of course destined to drive demand to even greater heights driving up prices even further. Can no one see this will have the opposite to the intended effect? Is there a single politician in Australia who has done a micro-economics 101 course (and understood it)? Apparently not.

    Check out the table in this report (below) at page 9. The table shows that between the early 1970s and 2006 land prices in little old Adelaide (who’s main economic assets consist of vacant land and wishful thinking of politicians who know nothing about the economy) were driven up 69 times compared to only 49 times in Sydney. The other SA “asset” in plentiful supply it seems are unneeded and unwanted development regulations that distort the market preventing it from responding properly to demand. So why?

    But of course there is money to be made in regulating land availability – higher land prices equates to bigger returns for the development and real estate industry who therefore lobby for it, bigger taxes on homes that keep going up in value, and higher revenue for governments engaged in flogging off inner suburb publicly owned land to fund their campaigns to be re-elected. Now, I think I have just answered my own question. They do it because it is good for them – not because it is good for us.

    http://www.ipa.org.au/publications/1673/the-great-lock-out-the-impact-of-housing-and-land-regulations-in-western-australia

    This is not a phenomenon that is new or exotic, unexplained or unexpected – one only has to Google the subject to find many reports of the same thing in other countries including the USA (where incidentally houses never the less cost much less than Australia with a few exceptions in places like NY)

    https://www.forbes.com/sites/scottbeyer/2016/09/30/the-verdict-is-in-land-use-regulations-increase-housing-costs/#6bdafdab4162

  57. Howard Hill

    The perception among many normal/everyday Australians is that real estate is the only viable savings and investment vehicle. And their money belongs to them, not some economic meddler.

    Business is fooked in Australia, too much work and little return after the parasites have had their fill. Much better to buy houses and sit back and watch their price appreciate.
    And people would rather renovate their existing dwellings than move. Why pay stamp duty to the pricks when you can put that money into your reno’ and increase the value even further?

  58. JC

    Anton
    #2354119, posted on April 14, 2017 at 2:26 pm

    Of course housing is a consumable

    Says who?

    Oh I dunno, possibly everyone with a finance, economic background.

    One other thing….

    Would we be better off if share prices fell?

    1. Stocks aren’t as directly impacted by government intervention as housing is. Starting a new business doesn’t cost you around 45% of outlay in taxes as housing does, but lets not digress.

    2. The optimum price for stocks is fair value.

  59. JC

    I have no doubt whatsoever that the main problem ratcheting up housing prices are on the supply side, driven by insane levels of regulation that restrict land supply and / or impose higher costs on house construction

    We have the same population size as Texas. 🙂

  60. Anton

    Oh I dunno, possibly everyone with a finance, economic background

    That right there is your problem. Never listen to anyone with an economics background unless you want to be wrong.

    If you see me go into a fishmonger and buy a kilo of prawns you might think I am buying food. Every person with an economics background might agree with you.

    But if I intend to plant them in the garden to grow prawn trees I am buying an agricultural input, regardless of what some economist tells you

  61. Tel

    Anton’s “Prawn Tree Economics”.

    That’s really heterodox man.

  62. JC

    That right there is your problem. Never listen to anyone with an economics background unless you want to be wrong.

    You’re right, boilermakers and doctors have a far better grasp of the study of scarcity than economists.

    If you see me go into a fishmonger and buy a kilo of prawns you might think I am buying food. Every person with an economics background might agree with you.

    Not only would economists think it’s very likely but also most other people. Interesting how you’re trying rationalize irrationality.

    But if I intend to plant them in the garden to grow prawn trees I am buying an agricultural input, regardless of what some economist tells you

    Are you smoking weed?

  63. stackja

    Sydney has mountains and the sea. Only alternative is up. How many towers?

  64. Anton

    JC

    You need ta abandon the notions of consensus and appeal to authority if you want to learn anything. I am here to help and won’t embarrass you too much.

    Read my post again and try to undrrstand what i have said. Individuals will determine for themselves what constitutes value. It isn’t that hard and you will come across as less uneducated if you can understand this (it was in the second year economics syllabus )

  65. JC

    Sydney has mountains and the sea. Only alternative is up. How many towers?

    Surrounded by wilderness parks and lots of them.

    The darker green shading is parkland. There’s plenty of room in the greater Sydney area.

    Zoom in and you’ll see a decent chunk of land north-east of Cronulla is parkland.

    It’s a myth to believe Sydney has physically run out of room.

  66. Squirrel

    It’s not a bubble, and even if it is a (bit) bubble(ish) nothing will go wrong, because ‘Straya is different and besides, nothing remotely like what happened in Melbourne in the 1890s could ever happen again, because we’re all so much smarter and wiser these days, and our public officials are peerless and faultless and they never forget the lessons of history…….

  67. JC

    You need ta abandon the notions of consensus and appeal to authority if you want to learn anything. I am here to help and won’t embarrass you too much.

    I couldn’t help not abandon such an appeal when you lumbered in with an appeal to those perfectly lacking in authority.

    Read my post again and try to undrrstand what i have said. Individuals will determine for themselves what constitutes value. It isn’t that hard and you will come across as less uneducated if you can understand this (it was in the second year economics syllabus )

    I think you’ll find the correct term used is “utility”. Value doesn’t mean, in this context, what you think it means. At least that’s what I learned in second year.

  68. Tel

    It’s a myth to believe Sydney has physically run out of room.

    There’s a very large military area at Holsworthy which Turnbull could easily move to somewhere else. I mean it’s only bush plus a few rough roads and some huts… not a whole lot to move.

  69. .

    Anton
    #2354105, posted on April 14, 2017 at 1:49 pm
    ., a few problems with your analysis:
    If you own 2 mn of property and earn a decent 6.5% gross yield. Most “mom and pop” property investors are more interested in long term capital gains than ROI. Real estate investment is generally seen as a retirement savings vehicle rather than an income generating asset.

    No, no problems at all.

    So what? You can use the income as savings or to buy other property/ies. It is not a problem at all.

    if those properties can house six people instead of four people . Outside of economics and social justice this is not really correct. The biased tenancy laws are more likely to favour one of the six people than one of the four people. low rent = high tenancy risk. It is also perceived (maybe incorrectly) that higher valued properties will show greater capital appreciation over the long term. Generally, mom and pop property investors will get the highest value property they can afford. (I don’t follow this model myself BTW)

    No. You are wrong. Society is better off. Allocative efficiency is better. So is productive efficeincy – Y = f(K, L, …) – creating more output is better. This is not social engineering. This is simply positive economics.

    Higher valued properties do not appreciate as much not do they have a better rental yield. Furthermore they have a higher price risk.

    Just because people want a capital gain doesn’t mean they are entitled to it.

    Try a hypothetical example: A family with an income of about $100k has lived in their mortgaged home for about 10 years. Their youngest kiddy has just finished kindy, freeing up say $200 per month. The family decides to “do something for the future” instead of blowing the extra cash. They have their property assessed and are able to borrow say $400k. Their options:
    a>pay off their mortgage quicker
    b>renovate or move to a bigger home
    c>buy an investment property, which will be negatively geared in this case
    d>buy a share portfolio against their home
    e>buy or start a small business

    Economists and social engineers might want them to choose e or d. I would guess they go for c or b, which is the most rational decision for them based on a long term risk/reward analysis which takes capital risk, income risk and required effort into account

    What would you advise them?

    It is their decision. Lindsay Fox probably made a good decision to start a trucking business instead of buying a rental unit in Maroubra. You keep on rejecting that in aggregate society has more funds that can be invested in businesses or equity markets.

    I’m astounded why you keep op prattling on with this homespun right wing dribbler “economists and social engineers” nonsense especially with a preference for a “right” to capital gains.

  70. Anton

    JC, just admit you are wrong.

    A house is an investment if the buyer says it is.

    About those prawn trees, you lose

  71. johanna

    Hong Kong has about the same population as the whole of NSW. Its area is less than 3,000 square km. In other words, it could fit into an area 50km x 60 km. And, it has a mountainous peak which makes building very difficult.

    It wouldn’t even reach as far as Parramatta, which is now east of the centre of Sydney. If you drew a circle around the CBD, most of the population would be outside it.

    The question is not, and has never been, about how many people you can fit into a space. The question is about how people want to live, and what they are prepared to pay for it.

    Snobs, urban planners (BIRM) and economists have always been irked by the masses preferring to have a plot of land and a house, however humble, that they can call their own.

    It really gets up their collective (and I use the word advisedly) nose. Apparently, they just don’t see the Big Picture.

  72. IainC

    “cumulative regulatory controls on housing which have created Hong Kong land prices in a nation with the world’s greatest supply of developable land”
    The problem being, 99% of the people don’t want to live on 99% of the available land area.

  73. JC

    Anton
    #2354224, posted on April 14, 2017 at 5:44 pm

    JC, just admit you are wrong.

    Okay, but I’d be lying to admit such a thing. It would only be to mollify you over the silly comments you’ve made.

    A house is an investment if the buyer says it is.

    It can be both. It can be an investment for people buying a home as investment returns through rental. It can also be a consumable if you live in the home.

    About those prawn trees, you lose

    That’s just hackneyed

  74. .

    A house is an investment if the buyer says it is.

    You’d have to really be rather cold about it, overcapitalising would make it a consumer good rather than an investment, but where this division can be made might be subjective.

  75. .

    Snobs, urban planners (BIRM) and economists have always been irked by the masses preferring to have a plot of land and a house, however humble, that they can call their own.

    More homespun “right wing” dribbling about being entitled to capital gains.

    I have never met an economist that wants people deprived of home ownership. I don’t hang out with lefties and public servants.

  76. Anton

    Prawn tree link does not work, google yourself

  77. Anton

    where this division can be made might be subjective.

    It will be known at the time the house is sold, just like shares or art

  78. Anton

    can be an investment for people buying a home as investment returns through rental. I

    Capital appreciation does not count?

  79. johanna

    More homespun “right wing” dribbling about being entitled to capital gains.

    Dot, you are making things up again. I never mentioned capital gains. In fact, in an earlier comment, I specifically said that even if capital gains were not on the horizon, people still prefer to own their home.

    Of course, if “right wing dribbling” turns you on, go for it. I’m seeing Ronnie Reagan in a wheelchair in a nursing home, and Dot going “See! I told ya!.”

  80. .

    Making shit up eh? Economists want people to deprived of home ownership? Yeah right.

  81. Scavenger

    One thing about supply/land availability that rarely gets mention is that, at least in times gone by in my experience, is that developers sit on “approved” residential land and drip feed it so as to increase demand and price.

  82. sdfc

    Purchasing a house is either saving or investment.

    It’s not consumption.

  83. .

    Oh great an argument about syntax. What about when you live in it? You could make sex on a jetski with Miranda Kerr boring, sfdc.

  84. sdfc

    That someone is living in a house doesn’t make it a consumption good.

  85. .

    Well no, it never would, even though it is. Capital goods are used to produce other goods.

  86. sdfc

    Dwellings are the largest asset on the household sector balance sheet. They are most definitely a capital asset. Expenditure on purchasing a dwelling is either savings or investment, it is not consumption expenditure.

  87. .

    Dwellings are the largest asset on the household sector balance sheet.

    Okay.

    They are most definitely a capital asset.

    Okay.

    Now you’re conflating capital assets with capital goods.

    Do you have a point at all?

  88. sdfc

    Again, purchasing a dwelling is not consumption expenditure.

  89. Entropy

    I would call it an asset. In the vast majority of cases, although you could probably find a scenario where the asset is in fact consumed, dot.

    I was having this conversation with my building inspector brother the other day, who was telling me of the endless and ever growing list of regulations and certifications (even ones that that are ignored in practice like little time bombs) imposed by the NSW government on anyone stupid enough to want to build a house. He reckons it adds up to almost half the cost these days, particularly in country towns. The land in a country town is the least of it. He reckons you are much better off buying old houses that don’t need a lot of doing up.

    Thing is, the people adding a regulation for this or is that are doing it because they believe they are doing good. It is a moral thing. And each new reg, of themselves, does not raise the cost that much. It is the cumulative burden. The regubators aren’t looking at the big picture and the overall impact they are doing, but are already looking ahead for the next new problem their moral virtue can solve.

    And if you are a chippy, every problem is a nail you have a hammer for. And for the lawyers that infest parliaments, for every problem there is a new law.

  90. mh

    80,000 dwellings are currently being left vacant in Melbourne alone.

  91. .

    People can’t go on holidays? There are four million people in Melbourne. How many of those dwellings are actually “liveable” or actually not used as holiday or second homes? How many are for sale and for lease at the same time?

    The idea that we have “excess housing” is rather absurd. Young families can’t be broken up across two or more bedsits.

  92. mh

    Dotty, many mainland Chinese investors are often uninterested in the revenue side of their investments. They are parking their capital, often using Australian residents with a line of credit to invest for them.

  93. .

    How is that even possible if a majority are using cash to purchase?

  94. Anton

    The other side of the “problem” with rising house prices is the SJW issue of “housing affordability”, with the commensurate “I will never be able to afford my own house” tales of woe.

    The housing affordability issue is a manufactured problem made up of 2 parts:

    1> The habit of all federal and state governments of moving all services to the state capital cities, leaving most regional towns unliveable for most families. To live in any town you would want suitable services – schools, hospitals, sporting facilities etc. But more importantly, you also need a job. it would be irresponsible to buy a house in a single employer town – you would want at least 3 viable alternatives before you made the move. On top of this, your partner (is “wife” really that offensive?) would need something similar, usually in a different industry. Also, not all partners/wives work in the same industry, so a regional town is unlikely to be attractive unless it has at least 10 viable employers spread over several industries.

    2>After 12 years in our Marxist schools (nobody fails a year anymore) our new adults believe they are entitled to have everything they want, right now and with no sacrifice on their part. A generation ago we used to buy our first house in the outer suburbs, and with a little effort and the benefits of urban sprawl we could upgrade after a few years. This is still possible for the snowflake generation, but very few are interested. While it may be true that a 5 bedroom house with a rumpus room and double lockup garage in the middle of the CBD is less unaffordable to the millennial voter than his parents’ first 3 bedroom, one bathroom, single carport house in the outer suburbs 25 years ago, low interest and liberal lending policies probably mean he could buy a traditional “first house” more easily than his parents could.

  95. JC

    Anton
    #2354249, posted on April 14, 2017 at 6:00 pm

    can be an investment for people buying a home as investment returns through rental. I

    Capital appreciation does not count?

    No, not really. I’ve never understood the rationale for buying real estate for capital appreciation reasons. Sure , look back suggests it can continue in the future, but it’s hardly a reason to be buying real estate hoping for capital appreciation because there’s been capital appreciation.

    Furthermore it’s not the house that’s actually appreciating. It’s the land component.

    House prices have been rising because the government keeps raising the cost of construction and land release has slow compared to demand.

  96. Anton

    JC

    It does not matter if house prices actually rise or not. It does not matter what causes the price rises.

    If people think prices will rise and buy a house to profit from the expected rise, the house is an investment. It may turn out to be a bad investment, but at the time of purchase it is still an investment.

Comments are closed.