Working Papers

Not Enough Houses

RBA Deputy Governor Ric Battellino, on why the housing investment share of GDP will have to rise.

posted on 26 November 2009 by skirchner in Economics, House Prices

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Capital Gains Tax Myths and Realities

The CIS have released my Policy Monograph on Reforming Capital Gains Tax: The Myths and Realities Behind Australia’s Most Misunderstood Tax.  There is an op-ed version in today’s Australian.

The 2004 Productivity Commission inquiry into first home ownership noted that ‘changes to the capital gains tax regime coupled with longstanding negative-gearing arrangements were seen to have contributed to higher prices through encouraging greater investment in housing’, but the commission did not model the effects of the tax changes. If increased investment is putting upward pressure on prices, this is an argument for easing supply-side constraints, not for discouraging investment with a CGT. CGT is a tax on transactions that would reduce turnover in owner-occupied housing and lead to a less efficient allocation of that stock.

Some mistakenly see a CGT on the family home as a way of soaking the rich. Yet a CGT on owner-occupied housing would most likely be accompanied by tax deductibility for mortgage interest payments, as in the US, offsetting any increase in revenue from a CGT.

In conjunction with negative gearing, the Ralph reforms were blamed for the housing boom in Australia in the early part of this decade. In reality, the boom was caused by the inability of housing supply to respond flexibly to the increased debt-servicing capacity of households in a low inflation, low interest rate environment.

The boom in house prices also occurred in the context of a bear market in equities between 2001 and 2003. It is not surprising demand for housing increased when prices of a competing asset class were declining. House price inflation was a global phenomenon, arguing against country-specific factors as the main cause.

Rather than increasing the tax burden on housing, policymakers need to tackle the impediments to new housing supply to improve affordability.


posted on 12 November 2009 by skirchner in Economics, Financial Markets, Fiscal Policy, House Prices

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Steve Keen’s Accidental Demonstration of the Efficient Market Hypothesis

Following the release of the ABS house price data for the September quarter, Steve Keen concedes defeat in his bet with Rory Robertson and will be hiking from Canberra to the top of Australia’s highest mountain wearing a teeshirt that reads ‘I was hopelessly wrong on house prices, ask me how.’  Keen’s answer is to blame the gub’nent:

“I didn’t know the government was going to be stupid enough to bring in the first home buyer’s boost”.

While I would agree that the increased first home-owners grant has inflated house prices, transferring wealth from taxpayers to incumbent property owners, it would be an exaggeration to say that this prevented a decline in house prices of the magnitude Keen has been predicting.  Moreover, any forecast needs to discount the likely actions of policymakers.

Steve Keen has inadvertently supplied yet another observation in favour of the efficient market hypothesis, much like Robert Shiller’s suggestion in 1996 that investors should stay out of the stock market for the following decade.  The EMH maintains only that we cannot predict future innovations in asset prices.  It is ironic that both Keen and Shiller have demonstrated the truth of this proposition in the course of trying to refute it.

Perhaps the teeshirt should read, ‘The EMH was right on asset prices, just don’t ask me how’.

posted on 03 November 2009 by skirchner in Economics, Financial Markets, House Prices

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Steve Keen, They Hardly Knew You

The latest 12-month consumer house price expectations from Westpac-Melbourne Institute:

Some 73% of respondents expect prices to increase over the next 12 months with 15.9% expecting no change and 9.9% expecting a decline. The proportion expecting an increase compares with 53% in July and 32% – a minority – in May.

posted on 21 October 2009 by skirchner in Economics, House Prices

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Steve Keen’s Long Walk

A Steve Keen forecast that might actually come true:

2010 should be an interesting year for property. I will probably have to walk to Kosciouscko [sic] at its beginning…

posted on 30 September 2009 by skirchner in Economics, House Prices

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The Mother of All House Price Booms?

Recently, I have been drawing attention to the implications of Australia’s population growth, the strongest since the echo of the baby boom in the early 1970s.  Paul Sheehan quotes me on the issue here.

In the latest Rismark Monthly (gated), I’m quoted on the fact that Australia is now building fewer dwelling units per addition to the resident population since the early 1980s, based on one measure of dwelling commencements.  On another measure, we are producing fewer dwelling units per person than at any time since the late 1960s. 

The RBA’s head of economic analysis, Tony Richards, follows Governor Glenn Stevens in highlighting the implications of this dire supply situation for housing affordability.  The RBA is performing a valuable service in putting this issue on the agenda for public debate.  This is perhaps one of the few public policy issues the RBA can safely touch, because it straddles all three levels of government and so is less likely to be seen as criticism of a particular government’s policies.

posted on 29 September 2009 by skirchner in Economics, House Prices

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The Merchants of Doom

Juedische Allgemeine, Germany’s leading Jewish newspaper, recently asked Oliver Hartwich and I to write a profile of Nouriel Roubini as a counter to the numerous puff pieces in the Anglo-American press.  The German language version has yet to appear online, but there is an English language version in today’s Age:

For years, he argued that the US current account deficit would lead to a US dollar crisis and higher interest rates, pushing the US economy into recession. But that was not how the financial crisis unfolded.

One of Professor Roubini’s few specific predictions was that the US would experience zero GDP growth in the fourth quarter of 2006. This was far off the mark: the actual result was 3 per cent. After this embarrassment, he backed away from his recession prediction, writing in January 2007 that ‘it is not clear whether the bust of the housing bubble in the US will lead to a soft landing as the consensus view goes or a hard landing that could take the form of a growth recession or, less likely now, an outright recession’. The professor was hedging his bets in early 2007, clearly uncertain about the direction for the US economy.

The Age also runs a self-refuting profile of Steve Keen headed ‘This Keen professor overlooked by MSM [mainstream media].’  If only!

While on the subject of Keen, Christopher Joye has prepared a handy route map for Keen’s house price forecast death march from Canberra to Mt. Kosciusko.


posted on 10 September 2009 by skirchner in Economics, Financial Markets, House Prices

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The Political Economy of House Price Doom-Mongering

The Rismark Monthly for August suggests the following explanation for house price doom-mongering:

It’s very easy to rip into housing since it is a non-institutionalised asset class. All of Australia’s 8.4 million homes are owned by highly dispersed and faceless families.  Australian and international equities, LPTs, unlisted commercial property, hedge funds, and private equity are, by way of comparison, mostly owned and controlled by powerful institutional stakeholders—fund managers, super funds, investment banks, corporates and/or super high net worths.  In turn, most of the analysts, strategists, economists, investors and journalists’ business models are built on these asset-classes succeeding. It therefore makes little commercial sense to bludgeon them with the relentless hysterics we hear about housing.  In contrast, bricks and mortar is easy game. There are few if any institutional constituents to annoy. Just anonymous individual families with little authority and influence.

Making unsubstantiated claims about a forthcoming housing Armageddon is a win-win situation. With one hand you distract attention away from the poor performance of your own Australian equities portfolio, while with the other you boost the likelihood of unsuspecting retail money flowing your way.

While this explains the sell-side bias against housing, it is harder to understand the buy-side interest in doom-mongering.  Presumably, the media know their own market and stories of housing boom and bust undoubtedly sell.

posted on 31 August 2009 by skirchner in Economics, Financial Markets, House Prices

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A Supply-Side View of Global Housing Markets

Matthew Hassan looks at the supply-side of global housing markets, finding that Australia has one of the world’s most under-supplied markets, which in turn explains the resilience of Australian house prices.  Hassan’s simple indicator does a good job explaining cross-national variation in house price growth.

posted on 28 August 2009 by skirchner in Economics, Financial Markets, House Prices

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It’s Not Easy Being a Supply-Sider

From RBA Governor Glenn Stevens’ speech yesterday:

A very real challenge in the near term is the following: how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices. Given the circumstances – the economy moving to a position of less than full employment, with labour shortages lessening and reduced pressure on prices for raw material inputs – this ought to be the time when we can add to the dwelling stock without a major run up in prices. If we fail to do that – if all we end up with is higher prices and not many more dwellings – then it will be very disappointing, indeed quite disturbing. Not only would it confirm that there are serious supply-side impediments to producing one of the things that previous generations of Australians have taken for granted, namely affordable shelter, it would also pose elevated risks of problems of over leverage and asset price deflation down the track.

Much of the commentary on Stevens’ speech suggested that he was warning of a housing ‘bubble’, but the text makes clear that his real concern was the supply-side rigidities that amplify asset price cycles.  Stevens’ speech is the lead story in much of today’s media, but Google News finds only three stories that directly quoted ‘serious supply-side impediments’.  It is indicative of how difficult it is to interest the media in structural as opposed to cyclical stories.

posted on 29 July 2009 by skirchner in Economics, Financial Markets, House Prices, Monetary Policy

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Productivity and House Prices

In Bubble Poppers, I followed Peter Garber in arguing that claims about ‘bubbles’ in asset prices are a substitute for fundamental analysis, a non-explanation for events that people are otherwise unable or too lazy to explain.  In contrast to the dominant non-explanation for innovations in house prices in the United States, James Kahn argues that there is a strong relationship between house prices and productivity growth that explains the recent US housing boom and bust:

The housing boom and bust of the last decade, often attributed to “bubbles” and credit market irregularities, may owe much to shifts in economic fundamentals. A resurgence in productivity that began in the mid-1990s contributed to a sense of optimism about future income that likely encouraged many consumers to pay high prices for housing. The optimism continued until 2007, when accumulating evidence of a slowdown in productivity helped dash expectations of further income growth and stifle the boom in residential real estate.

posted on 10 July 2009 by skirchner in Economics, Financial Markets, House Prices

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The Long and the Short of Housing Wealth and Consumption

Charles Calomiris, Stanley Longhofer and William Miles, on why there is no wealth effect on consumption from changes in house prices:

any decrease in house prices hurts only those who are net “long” in housing, that is, those who own more housing than they plan to consume. This might include, for instance, “empty-nesters” who are planning on selling their current houses and downsizing. On the other hand, the decline in home values helps those who are not yet homeowners but plan to buy. Most homeowners, however, are neither net long nor net short to any significant degree; they own roughly what they intend to consume in housing services. For these households, there should be no net wealth effect from house price change. And when one thinks about the economy as a whole (which is a combination of all three types of households) the aggregate change in net housing wealth in response to house price change should be nearly zero; changes in house prices should affect the distribution of net housing wealth, but have little effect on aggregate net housing wealth. Thus any effect from net housing wealth change on aggregate consumption spending should be similarly small.

Put differently, an increase in house prices raises the value of the typical homeowner’s asset, but such a price increase is also an equivalent increase in the cost of providing oneself housing consumption. In the aggregate, changes in house prices will have offsetting effects on value gain and costs of housing services, and leave nothing left over to spend on non-housing consumption.

The authors also debunk the work of Karl Case, John Quigley and Robert Shiller.

posted on 23 June 2009 by skirchner in Economics, Financial Markets, House Prices

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Steve Keen, They Hardly Knew You: Consumer House Price Expectations

The most recent Westpac-MI Consumer Sentiment survey included a question on expectations for house prices over the next 12 months.  Expectations were close to balanced nationally, with those expecting declines slightly outnumbering those expecting falls.  However, there was considerable sub-national variation.  Most pessimistic are the resource states of Queensland and WA, while the south-eastern states are relatively upbeat.  No change was the single most common expectation in every state, except NSW, where the single most common expectation was for a rise of 0-10%.

posted on 27 May 2009 by skirchner in Economics, House Prices

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