Working Papers

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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The interesting thing is that house prices have increased more in Melbourne than Sydney, even though I understand supply-side impediments have been greater in Sydney. It’s all relative to the local demand I suppose, which has been higher in Melbourne due to migration patterns. BTW, assuming house prices don’t have another negative quarter of growth, do you know at what point Steve Keen will concede and don his Cliff Young gumboots?

Posted by .(JavaScript must be enabled to view this email address)  on  07/31  at  07:56 PM

Here is the latest from Keen, complete with all the usual capitalised nouns:


Needless to say, he now claims in was an analogy, not a prediction.

Posted by skirchner  on  08/03  at  11:57 AM

Thanks Stephen, absolutely fascinating. Keen willingly defines the bet/analogy as a 40% fall in nominal prices, which could only happen in an environment of substantial deflation. On the analogy issue, Keen still says in his Crikey post that he “saw no reason that Australia would avoid the same fate [as Japan]”. Even Gerard Minack has now conceded that the downturn won’t be so bad (http://business.smh.com.au/business/big-bear-recants-i-was-wrong-20090731-e3s3.html).

Posted by .(JavaScript must be enabled to view this email address)  on  08/03  at  12:30 PM

Australian metropolitan house prices clearly reflect the impact of demand on regulatory scarcity, hence the continent with the lowest population density having the highest average metropolitan houses in the Anglosphere, according to demographia.com. But the analogy to Japan is very weak, since they had a much more comprehensive financial meltdown due to a much worse regulatory regime. Though Glenn Stevens is clearly raising the possibility of a major crash in housing prices at some stage.

Scott Summer gives the RBA’s monetary policy performance much credit here.

Posted by Lorenzo  on  08/09  at  11:12 AM

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