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Sticking it Up the Wrong People

Steve Keen’s housing doomsday cult is wending its way up Mt Kosciuszko with an ETA of 23 April. By my count, only ten people turned up to see him off from Canberra, but Keen is quoted as saying:

’‘This has actually garnered me support,’’ he said. ‘‘People are saying, thank god someone is sticking it up the property industry.’‘

A theme of Keen’s housing doomsday cult is that hapless home buyers are being manipulated into buying property, resulting in a ‘housing mania.’  Like many of his fellow travelers, Keen sees housing affordability as a demand-side rather than a supply-side problem. 

Yet it should be obvious that it is in the interests of the property industry to promote housing affordability so that it can sell more houses.  The industry’s lobby groups and industry associations consistently argue for an easing of the tax burden on housing, development restrictions and other supply-side constraints on the provision of new homes.  The property industry’s interest in building and selling more homes is aligned with the consumer interest in making housing more affordable.  Keen is sticking it to the wrong people.  Like any industry, it has its share of spruikers and shonks, but the property industry in general is the solution and not the problem.

posted on 17 April 2010 by skirchner in Economics, House Prices

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My one reservation about the supply-side explanation for rising house prices is that Melbourne has reputedly released more land than Sydney over the last few years, yet is experiencing stronger house price growth. I understand Melbourne’s population is growing faster, but I am not sure if that is enough to explain the difference.

Posted by .(JavaScript must be enabled to view this email address)  on  04/20  at  11:54 AM

The supply-side is about more than just land though.  Melbourne probably has somewhat more restrictive planning laws.  Plus, I would not expect these things to map perfectly on to relative growth rates at just one point in time.  Melbourne will probably grow faster for a time as it converges on Sydney and may even over-take in level terms.

Posted by skirchner  on  04/20  at  02:48 PM

12 months ago there was roughly the same number of people and houses in Australia as there are today.  Open houses were quiet, auction clearance rates were low, and prices were flat or falling.

Today open houses are packed, clearance rates are strong, and prices are rising.

What’s changed?  Supply or demand?

Posted by .(JavaScript must be enabled to view this email address)  on  04/20  at  06:40 PM

Actually, there are an extra 451,900 people compared to 12 months ago. 

Yes demand has picked-up, but that’s only a problem because supply has not kept pace.

Posted by skirchner  on  04/21  at  07:53 AM

Can I respectfully suggest there was a big turnaround in confidence in mid-2009, and this is the real driver of house prices since then.  Low interest rates and the first home owners boost certainly helped as well.

If we look at the US housing market, the same oversupply situation existed in 2006 (at the peak of the boom) as exists today, but house prices are 30% lower.

If we look at China today, there are tens of thousands of newly built unoccupied apartments in every major city that are priced well beyond what middle class professionals can afford, yet prices keep rising.  Moreover, Chinese property investors typically leave new apartments empty until they are sold.

I’m not saying that demand and supply don’t influence house prices, but surely you can concede that buyer confidence and the availability of credit have a significant impact?

Posted by .(JavaScript must be enabled to view this email address)  on  04/21  at  08:38 AM

Sure.  If Australia had a negative demand shock like the US and UK, I have no doubt house prices here would have fallen more that they did and would still be struggling.  But we want the supply-side to be flexible enough to accommodate demand in the good times (which is most of the time).

Posted by skirchner  on  04/21  at  11:43 AM

Ok, but how much of the current demand in Australia is “real”?  By real I mean people needing a roof over their head, and how much is investor and FHB demand keen to buy now for fear of missing out?

Clearly the demand in the US in 2006 wasn’t real.  It was driven by insanely lax lending standards and a rising market.  Once credit evaporated and prices started falling, demand evaporated.

I went to a few open houses on the weekend with a friend who has come into some money.  He doesn’t need a second house, but he wants to invest now because he’ll “miss out” otherwise (his words).

Its pretty clear that sentiment is playing a big role in the recent recovery in Australian house prices.  I very much doubt that the 450,000 new Australians, many of whom are babies or immigrants from poorer nations, are in the market for houses in the $500K-$1M range, a sector that is booming ATM.

I’m all for freeing up the supply-side, especially at the bottom end, but I don’t think you can so easily dismiss the demand side.  Right now I reckon you could plonk a million new houses in Australia’s cities overnight, and prices would keep rising as long as the economy remained strong and credit was easy to come by.

Posted by .(JavaScript must be enabled to view this email address)  on  04/21  at  12:40 PM

The other factor is foreign demand.  New housing finance is down five months straight, but house prices certainly aren’t.

Kevin Andrews has jumped on the bandwagon today.

Is this simple xenophobia or is there something to it?

Posted by .(JavaScript must be enabled to view this email address)  on  04/21  at  06:11 PM

The change in the estimated resident population seems to predict growth in house prices, so I’m sure there is an effect at the margin.

Foreign tourists put upward pressure on the price of hotel accommodation at the expense of Australian families wanting a holiday.  Will Kevin Andrews argue that the number of foreign tourists should be restricted?

Posted by skirchner  on  04/22  at  09:35 AM

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