Housing
We have a national shortage, but at a regional level it’s complicated
Over the last year or so some negative figures have been turning up in CoreLogic’s monthly figures on capital city dwelling prices. The overall trend is for prices to keep on rising, but there have been falls in some cities, and because CoreLogic does not compensate for inflation, these falls have been significant in real terms. The graph below, constructed from CoreLogic’s January report, shows these different movements over the last 12 months.
To an extent these figures reflect what statisticians call a “regression to the mean”. The market is evening out as prices fall in Melbourne and Sydney, where they have been overpriced, while they have largely caught up with the average in other cities. They go some way to explaining why politically housing shortages have a regional dimension.
Also most observers believe that falling interest rates in the coming months will result in a demand-side boost to prices, returning Australia once again to growth in house prices.
The missing middle
Not enough of these
But even within cities the market is far from homogenous, as Alan Kohler explains in a 22-munute video, accessible from his post on the ABC website Australia's housing crisis is driven by lip-service, hypocrisy and an investment culture. There are different markets in different urban regions. Kohler refers to a “missing middle” in the market: our housing landscape was once dominated by free-standing houses, and more recently there have been many high-rise apartment buildings up to 100 floors appearing on the urban skyline, but there is a relative paucity of moderate-sized apartment buildings (4 to 8 floors) which tend to dominate many European cities. New suburbs on urban fringes, where housing is relatively affordable, have been attractive to migrants, while older outer suburbs are more likely to have mainly a native population (the old “working class” population the Coalition is wooing). There is strong demand for housing along urban transit lines, a development encouraged by state governments.
Infrastructure, zoning and NIMBY movements
Infrastructure is an issue in all urban growth regions. In growing outer suburbs construction of schools, health clinics and other services is not keeping up with the growth in young populations. In urban regions subject to densification, stresses on existing infrastructure are energizing NIMBY movements.
Kohler’s video includes short interview segments with Grattan’s Brendan Coates and with Peter Tulip, a housing specialist at the Centre for Independent Studies. Joe walker has provided a summary of some of Tulip’s papers on his website, which explain aspects of Australia’s housing market. (On your way through note Walker’s plug for a series of salons on policy problems.) Tulip’s papers explain the influence of zoning restrictions on apartment prices and the complex interactions of supply and demand – including demand influenced by interest rate rises.
Tulip, along with urban specialists, sees problems with the way governments conduct local consultations on changes to zoning. There is a bias in these consultations in that older, wealthier residents, with time on their hands, are over-represented. And the hopeful house buyers who would benefit from lifting zoning restrictions are not represented at all, the ABC’s Kenji Sato points out in his post Urban planners say community consultation system blocks affordable housing.
When housing prices eventually fall, will it be a soft landing?
One of Tulip’s papers, written in 2014 and co-authored with Ryan Fox, asks if housing is over-valued. They find that in 2003 “home buyers were acting as though they expected real appreciation of almost 4 percent per year—which was noticeably above the historical average”.
Expectations of unbounded future asset price growth fuel bull markets, which almost always end in tears. A catastrophic drop in house prices would be disastrous, because it would result in many borrowers having negative equity, leading to distress selling. Housing experts would like to see real house prices deflate slowly.
In this context Tulip could have mentioned the benefit of sustained moderate inflation, which slowly erodes the real burden of outstanding housing debt. A goldilocks path would see nominal house prices track nominal wage growth, allowing for a steady fall in real house prices.
Kohler and others are generally in favour of supply-side policies to make housing more affordable, and although practical measures to boost housing supply are generally state government matters, they believe the Commonwealth could do more to push along the 2023 Commonwealth-state commitment to build 1.2 million houses in 5 years. In fact housing supply should not just keep up with demand; it should be slightly ahead of demand.
They don’t discuss the Coalition’s idea of allowing young people to take out up to $50 000 from their superannuation accounts to buy their first home, or Labor’s more modest scheme which would likewise allow people to draw from their superannuation. Most economists are unenthusiastic about demand-side incentives that add to the amount people can spend in the supply-inelastic housing market.
Allowing people to dip into their superannuation may help balance the inequity between those who do and don’t have access to the bank of mum-and-dad, but supply-side responses are better public policy than those that contribute more weapons to those engaged in a bidding arms race. The inequities of allowing superannuation to be diverted into housing are discussed in a post by Mortgage Choice, authored by Kirsten Craze, How gaps in the Coalition’s super for housing plan could see affordability skyrocket.
The general point, stressed by Kohler, is that the main driver of housing unaffordability has been the Howard government’s effective reclassifying housing as an investment asset, rather than as a right. Howard’s government, yielding to pressure from the finance sector, changed capital-gains-tax provisions, which when combined with a permissive approach to negative gearing set off a continuing process of housing speculation.
Trickle-down theory in housing prices
One of Tulip’s papers (the sixth in the list) is about the way house prices are interconnected. Some advocates are critical of policies designed to increase the general supply of housing because they don’t prioritize social housing. That was the basis of the Greens joining with the Coalition to block the government’s housing buy-to-rent and build-to-rent schemes (on which they eventually conceded). Tulip points out that even if there is an increase in supply at the top end of the market, it affects prices at the next levels down, all the way to the bottom of the market.
It’s fair comment, and it aligns with our observation that what was once seen as the top end of town slowly becomes more relatively affordable. It also aligns with calls, mainly on state and territory governments, to replace stamp duty on property transactions with some other less distortionary form of tax, because stamp duty discourages property turnover. Tulip’s idea of prices trickling through the market works best if there is a reasonably high volume of trade in housing.
But does that theory hold at the extremes? Just last week a house in Toorak was exchanged between billionaires for $130 million. That suggests there is a problem beyond the scope of economists holding an academic discussion on housing prices. And what does it say about our attitudes when a bunch of young property speculators film themselves on a harbour cruise boasting about how many properties they own?
Housing quality
Needs work on draft prevention
A Conversation contribution by Australian and foreign researchers, written before the summer set in, reported that Victorian households are poorly prepared for heatwaves. The researchers noted that there are strong energy efficiency standards for new homes while older homes are falling behind. The researchers recommended that there be standards specifying minimum energy efficiency standards for rental houses – an area where Victoria and the ACT have made some initial steps.
That differential in standards between old and new houses is confirmed in a report, described by the ABC’s Hanan Dervisevic, revealing that homes in newer suburbs have higher energy star ratings than homes in established suburbs. Houses built after 2010 have a median energy star rating of 5.9 out of 10.0 – not a particularly high standard, but still better than an average 2.8 for houses built before then.
Last year the CSIRO produced a short report, essentially a piece of consumer advice, about how home insulation could reduce energy bills. They describe the benefits of measures such as ceiling insulation, wall insulation, draught sealing and other moves. Drawing on the CSIRO’s work, Dervisevic’s article describes, with hard numbers, how making those investments, generally costing less than $1500 a house, can provide substantial ongoing savings. The ABC’s Daniel Miles reports on other CSIRO work, revealing the benefits of making houses as airtight as possible.
The Conversation article describes how, faced with high electricity prices, many people in households with poor insulation ration electricity use, bearing intolerable discomfort, or escape to air-conditioned spaces such as shopping malls.
It is extraordinary that electricity companies are charging anything for electricity on hot days, when there is generally an excess of solar-generated electricity going to waste. This is yet another manifestation of the economic idiocy built into the National Electricity Market, and of the incompetence of the bureaucrats and politicians who developed its rules.
Also writing in The Conversation, three researchers from Torrens University report that building companies feel they must sacrifice quality for profits. The pressure to cut corners “is exacerbated by aggressive competition, work overload, exploitation and a toxic culture”. Many of these deficiencies are ones such as inadequate waterproofing and inadequate fire protection that don’t show up on first inspection.
This is the “lemons” problem, well-known and well-researched in the market for used cars. Now it is manifest in apartments, which cost a hundred times more than a used car.
This is a case for higher standards, and if those standards are properly enforced no builder will be at a competitive disadvantage. In fact if the quality of building can be improved buyers, who have been put off by some terrible defects in high-rise apartments, will have more faith in the market. That’s all within mainstream conventional economic throry.
Yet extraordinarily Peter Dutton has said that if elected his government would impose a 10-year freeze on changes to the National Construction Code, claiming that its proposal for a freeze has the “blessing and endorsement from every major stakeholder in the housing industry in this country”, an endorsement that the Property Council, among others, has denied. The embarrassment to the Coalition is described by the ABC’s Isobel Roe: Property lobby rejects key Coalition housing policy, after standing behind Peter Dutton during announcement.
This is yet another manifestation of the Coalition’s economic ignorance. Its zealots, clueless about the way markets work, get carried away with deregulationary zeal, and in doing so inflict terrible economic damage.
Or is it possible that they are not so stupid? As the research referred to above confirms, poor quality buildings require a lot of electricity if they are to be kept warm in winter and cool in summer. That’s one way to pay for those nuclear reactors.
How we talk about housing
Most people have a pretty good idea of how property prices have been moving in Australia, but do they notice how the language around property prices has been changing?
John Howard once said he had never met anyone who complained that their house had gone up in value. That’s a reflection on the company he kept – people who didn’t know the difference between inflation and real value – but he was probably expressing a generally-held view, that among homeowners, at least, rising prices are good.
It’s flawed thinking. The economics are simple – houses are deteriorating assets, and any rise in prices is almost entirely a manifestation of demand-pull inflation. But that’s all a bit too sophisticated for the average journalist writing on property websites. And while the gains for homeowners may be illusionary, they have real benefits for real-estate agents, mortgage brokers and bankers who have a vested interest in rising house prices.
Perhaps that attitude is changing writes Ross Gittins in his article The Nation is finally coming to grips with home affordability. He writes that for the first time in his experience people are understanding that housing affordability is a problem. Maybe it’s out of a sense of justice, or maybe it’s about self-interest. Gittins writes:
But now home owners are joining the dots and realising their growing wealth comes with a major drawback. Their kids can’t afford a home without big withdrawals from the bank of mum and dad. Why is this a smart way to run the country?
That’s a necessary first step towards better housing affordability. But it’s far from a sufficient step Gittins reminds us. There is a shortage of skills, manifest in declining numbers of young people taking up and continuing in apprenticeships, which the government hopes to overcome with directed assistance to young people. And as described in the post above, there is a strong NIMBY movement opposed to urban densification.