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.