How Taxing Housing Diminishes Affordability
I have a piece in The Conversation highlighting the role of taxation in reducing housing affordability. It draws on a recent CIE report for the Housing Industry Association that should have been more widely reported.
posted on 17 April 2012 by skirchner in Economics, House Prices
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What Caused the Housing Boom of the 2000s?
Not monetary policy.
posted on 13 April 2011 by skirchner in Economics, House Prices, Monetary Policy
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The Irrelevance of Fed Policy to House Prices
In my CIS Policy Monograph Bubble Poppers, I was dismissive of the notion that Fed policy had anything to do with the US house price boom and bust of last decade. The Reinharts take this Fed irrelevance proposition much further in a new NBER Working Paper:
We take a close look at the responses of asset markets to changes in the short-term policy interest rate since the founding of the Fed in 1914. Changes in the federal funds rate have no systematic effect on either long-term interest rates or housing prices over nearly a century. Indeed, since the mid-1990s the policy rate had a negative relationship with long-term interest rates. This is consistent with a global view of capital markets where massive cross-border flows shape the availability of domestic credit and asset prices. The evidence casts doubts on arguments that a moderately different monetary policy path might have mattered.
I tried telling the same story to John Taylor once, without much success. Maybe the Reinharts will be more convincing.
posted on 01 March 2011 by skirchner in Economics, Financial Markets, House Prices, Monetary Policy
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Another Small Catch from the FOI Desk at the Oz
Another fishing expedition from the FOI desk at The Australian turned up this, with the following sub-editorial spin:
THE Reserve Bank deliberately intervened in the political debate over the property boom to stop governments releasing more land.
While I’m certainly not above using the FOI process to get a headline, a little more context would have been appropriate for this story. Luci Ellis wrote an RBA RDP in 2006 that argued that it was the combination of a demand-side shock from increased household sector leverage in a low inflation-low interest rate environment and an inflexible supply-side that gave rise to the early 2000s house price boom.
I agree with Chris Joye that the RBA had it wrong in the early 2000s and has now changed its tune. The RBA’s fingering of negative gearing in its 2004 submission to the Productivity Commission inquiry was possibly an attempt to set the government up as a scapegoat in case the early 2000s housing boom had ended badly in the context of a monetary policy tightening cycle. The RBA’s then jaw-boning of a supposedly over-heated market now looks rather quaint.
There has been a change in leadership at the RBA since then. Glenn Stevens’ more recent comments about ‘serious supply-side constraints’ in housing are pretty brave by the standards of an Australian central banker (imagine the reaction to Stevens making an even vaguely critical remark about the NBN and you will see what I mean). They are a damning criticism of policy at all levels of government. The only reason it hasn’t been written up that way is that many in the media simply don’t believe that housing affordability is a supply-side problem requiring supply-side solutions.
posted on 22 November 2010 by skirchner in Economics, House Prices, Monetary Policy
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Treasury Hand-Wringing on House Prices
The FOI desk at The Australian uncovered the following, which it then beats-up into ‘Treasury warning on home bubble’:
Phil Garton, the manager of Treasury’s Macro Financial Linkages Unit, sent colleagues a draft paper on the rise in household debt, prospects for further growth in the debt-to-income ratio and the potential implications of slower household debt growth.
His email prompted an exchange with Steve Morling, currently the general manager of the Domestic Economy Division, who argued the paper should “make a bit more about the risks”.
“The elephant in the room is house prices or more specifically the risk of a precipitous drop in them, perhaps from an external shock [SK: didn’t we just have one of those?] or perhaps from their own internal dynamics when affordability constraints or capacity debt levels see prices and expectations of house prices start to move in the opposite direction,” Mr Morling wrote on June 15.
“(I) know there are very supportive fundamentals, but prices rose by 50-60 per cent in three to four years in the early part of this decade, with largely unchanged fundamentals, so they can have a life of their own.
“And given what’s happened elsewhere I’m far less sanguine about this - and the interplay with debt - than in the past.”
Mr Garton agreed that there would be risks if the fundamentals of low interest rates, unemployment, and financial deregulation “reversed significantly”. But he maintained the price growth in the early 2000s was based on a “lagged response” to improvements in the fundamentals, and questioned how Australia could have maintained a bubble for more than six years.
Mr Morling said other bubbles had lasted that long, and the fundamentals were often used to justify price rises - including in Britain where a debate over lack of supply drove property prices higher “before the British property bubble burst”.
“(I) think price expectations can take over from the fundamental drivers that you have identified for extended periods, including generating house price falls,” he wrote.
The only remarkable thing about this analysis is how pedestrian it is. It’s not much better than the kind of hand-wringing you would expect from the writers at left-wing scandal sheet Crikey, who have long viewed the Australian housing market as an anti-capitalist morality play that can only have one ending.
Asked for reaction, the Treasurer’s office had this to say:
it is the considered position of the Treasurer and the Treasury that our housing market reflects the fundamentals of supply and demand and not a bubble - specifically that Australia is simply not building enough new houses.
Not that they will do anything about it.
posted on 20 November 2010 by skirchner in Economics, House Prices
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Rismark Offers Jeremy Grantham a $100m Bet on Aussie Housing
Rismark’s Chris Joye offers Jeremy Grantham the mother of all house price wagers:
Rismark believes it can facilitate a transaction whereby Mr Grantham will be able to invest $100 million into a short position over the RP Data-Rismark Australian capital cities dwelling price index, which is universally regarded as the most accurate and timely house price benchmark in the market.
Following a torrent a criticism, Mr Grantham appears to have placed tentative conditions on his extraordinary assertions, opining that, “In Australia’s case, the timing and speed of the decline is very uncertain, but the outcome is inevitable.”
Recognising Mr Grantham’s equivocality, we will give him lots of time—three years, in fact. That is, he would be able to invest his $100 million for a three year horizon against RP Data-Rismark’s Australian capital cities dwelling price index.
Mr Grantham’s investment would be structured as a very simple “delta-one” transaction: for every 1 per cent fall in the index, Mr Grantham would receive $1 million. Conversely, for every 1 per cent rise in the index, Mr Grantham would pay $1 million away. The trade would be settled at the end of three years with monthly margining to manage credit risk.
Beats sending the guy up a mountain wearing a funny t-shirt.
posted on 05 November 2010 by skirchner in Economics, House Prices
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Australians Swoop on US Property
Australians show Americans how to make money on US residential property (note the apparent absence of capital xenophobia on the part of Americans in relation to residential property).
posted on 30 October 2010 by skirchner in Economics, House Prices
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The RBA Did Not Prick a ‘Housing Bubble’
The Reserve Bank of Australia has released a research discussion paper that is aimed at ‘describing the Australian experience of a cycle in house prices and credit from 2002 to 2004 and discussing the role played by various policies during this episode.’ This period is widely misunderstood and the RBA seeks to set the record straight by noting that:
During the period, monetary policy continued to be set on the basis of medium-term prospects for inflation and output and the Bank was not targeting housing prices or credit growth.
Not that this will stop numerous observers, particularly from offshore, from continuing to maintain the contrary. The RBA’s approach during this episode is often used as a foil to support Fed-bashing of one kind or another. The fact is that the RBA’s approach was textbook inflation targeting, but one augmented by open mouth operations aimed at moderating growth in housing and credit markets, which the RBA then deemed to be experiencing speculative excess.
Of course, the RBA has been understandably reluctant to offer too much by way of objection to the suggestion that Australia’s economic outperformance in recent years has been due to the deft handling of monetary and other policy instruments. The authors of the paper no doubt see the Australian experience as a successful episode of managing an asset price cycle and at least one of the authors, Chris Kent, has been a long-standing advocate of a more activist approach to managing innovations in asset prices.
However, the paper’s review of the RBA’s past statements on housing and credit growth undermines the case for a more activist approach to asset prices. Any prospective home buyer or investor with a time horizon of more than a few years who actually heeded the RBA’s warnings would have almost certainly been left worse off in view of subsequent developments in the housing market. The RBA’s warnings about ‘overheating’ in the housing market during 2002-04 now look quaint in view of the chronic undersupply that has emerged in recent years. Indeed, it is frightening to contemplate what the current supply situation would look like in the absence of the boom in housing investment during this period. To the extent that the RBA successfully deterred housing investment during 2002-2004, it may have even contributed to the subsequent supply problems that have put upward pressure on rents, CPI inflation and house prices. The RBA can’t have it both ways. To complain about ‘overheating’ in 2002-2004 and then ‘serious supply-side constraints’ in 2009 suggests that the RBA’s jaw-boning efforts may well have been pro-cyclical.
Milton Friedman showed the disastrous consequences of a central bank becoming an ‘arbiter of security speculation and value’. The RBA’s review of its own record suggests that it is no better at calling future developments in the housing market than anyone else. Statements such as ‘the very prominent role of investors in the housing market also suggested a strong speculative element’ (p. 24 of the RDP) belong in the mouths of politicians and taxi drivers and not central bankers.
posted on 23 September 2010 by skirchner in Economics, House Prices, Monetary Policy
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Why Jeremy Grantham is Wrong on Australian House Prices
Chris Joye explains.
posted on 08 September 2010 by skirchner in Economics, House Prices
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Fundamentals of Australian House Price Inflation
There is a lot of ill-informed offshore commentary about Australian house price inflation, with anecdotal reports suggesting that some hedge funds are putting on trades designed to capitalise on what they see as an inevitable Australian house price bust.
We have heard all this before from a local debate about house prices that goes back to at least 2003 and substantially predates international interest in this issue since 2007. In 2005, Robert Shiller declared that Australia had suffered a burst housing bubble the previous year, a proposition that has become even more laughable with the passage of time.
Chris Joye reviews the latest data in his presentation for offshore investors.
posted on 02 September 2010 by skirchner in Economics, Financial Markets, House Prices
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What Did They Know and When Did They Know It: Ex-Ante Views on US Housing
Looking through all the after-the-fact wisdom and hand-wringing, a Boston Fed discussion paper examines the ex ante views of economists in relation to the US housing market:
From our review of the pre-crisis housing literature from the early-to-mid-2000s, it is apparent that well-trained and well-respected economists with the best of motives could and did look at the same data and come to vastly different conclusions about the future trajectory of U.S. housing prices. This is not such a surprising observation once one realizes that the state-of-the-art tools of economic science were not capable of predicting with any degree of certainty the collapse of U.S. house prices that started in 2006.
The paper has mostly fatal implications for the idea that the authorities can actively manage cycles in house prices.
posted on 16 August 2010 by skirchner in Economics, Financial Markets, House Prices
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Did Cheap Credit Fuel the US Housing Boom?
No, according to Ed Glaeser and his co-authors:
Interest rates do influence house prices, but they cannot provide anything close to a complete explanation of the great housing market gyrations between 1996 and 2010. Over the long 1996-2006 boom, they cannot account for more than one-fifth of the rise in house prices. Their biggest predictive influence is during the 2000-2005 period, when long rates fell by almost 200 basis points. That can account for about 45% of the run-up in home values nationally during that half-decade span. However, if one is going to cherry-pick time periods, it also must be noted that falling real rates during the 2006-2008 price bust simply cannot account for the 10% decline in FHFA indexes those years. There is no convincing evidence from the data that approval rates or down payment requirements can explain most or all of the movement in house prices either.
The authors also note that Robert Shiller’s ‘irrational exuberance’ is a non-explanation:
even if Case and Shiller are correct, and over-optimism was critical, this merely pushes the puzzle back a step. Why were buyers so overly optimistic about prices? Why did that optimism show up during the early years of the past decade and why did it show up in some markets but not others? Irrational expectations are clearly not exogenous, so what explains them? This seems like a pressing topic for future research. Moreover, since we do not understand the process that creates and sustains irrational beliefs, we cannot be confident that a different interest rate policy wouldn’t have stopped the bubble at some earlier stage. It is certainly conceivable that a sharp rise in interest rates in 2004 would have let the air out of the bubble. But this is mere speculation that only highlights the need for further research focusing on the interplay between bubbles, beliefs and credit market conditions.
A more fruitful line of inquiry would be to investigate fundamental factors such as the role of US housing GSEs in distorting the allocation of global capital.
posted on 03 August 2010 by skirchner in Economics, Financial Markets, House Prices, Monetary Policy
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Yet Another New Tax on NSW Housing
The NSW government has introduced yet another new tax on housing transactions. Yesterday, I gave a post-budget presentation to a business group in Western Sydney, together with Westpac’s Matthew Hassan. Matthew presented some stunning charts showing the growth in the tax burden on housing in each state, with NSW the clear winner. Indeed, the tax burden on a new house and land package on Sydney’s suburban fringe is now such as to make it unprofitable to bring to market, which helps explain why new housing supply in the state is running at 1950s levels.
If only some of the outrage directed against negative gearing and capital gains tax concessions by ignorant journalists and commentators could be marshalled against the taxes and charges that are really responsible for putting upward pressure on house prices.
posted on 13 May 2010 by skirchner in Economics, House Prices
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The US Housing ‘Bubble’ that Wasn’t
Some refreshing ‘bubble’ scepticism from Casey Mulligan:
Adjusted for inflation, residential property values were still higher at the end of 2009 than 10 years ago. This fact raises the possibility that at least part of the housing boom was an efficient response to market fundamentals.
posted on 06 May 2010 by skirchner in Economics, House Prices
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The Market Believes the RBA is Targeting House Prices
The weighted average of capital city established house prices rose a Steve Keen-busting 4.8% q/q and 20% y/y for the March quarter, with gains in Sydney and Melbourne in excess of 20% y/y. This saw three-year bond futures savaged by around 7 basis points and the implied probability of a 25 basis points tightening from the RBA tomorrow surge from around 50% to around 65% on iPredict. The ugly 3.4% annualised result for the trimmed mean of the TD-MI inflation gauge released an hour earlier should be more important for the RBA’s deliberations, but it is house prices that are grabbing the market’s attention.
posted on 03 May 2010 by skirchner in Economics, Financial Markets, House Prices, Monetary Policy
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