Possums Pollytics

Politics, elections and piffle plinking

Now Listen Up Kev – What about this housing bizzo? Part 2 – Policy bits.

Posted by Possum Comitatus on March 22, 2008

Continuing on from Part 1 where we had a quick look at the nature of the data, we’ll head into a potential policy solution for increasing affordability, but certainly by no means the only one. This is a rather long article (5000 odd words) that might not be everyone’s cup of tea, but if we’re going to do this type of thing, we may as well do it properly.

George Megalogenis hit the nail on the head in his article about housing affordability when he said:

“If the Labor Government is serious about getting more people into the property market, while also making those with existing mortgages feel less stressed, it has to find a way to get wages rising faster than house prices over the next few years.”

I’d add that it’s real wages that have to rise faster than real house prices for any increase in affordability to occur – you can see that easily by looking at the graphs from Part 1.

But from a policy perspective this is more problematic. The only real impact that the government can have on real wage growth is through enhancing productivity growth via broader economic reform – and while there is always scope for that, it’s generally a slow hard grind that takes years to deliver. A decade of reform starting in the 80’s took until the early to mid 90’s for the benefits to really show up in the metrics. While the economy today is much more reactive and adaptive to changes than it was 25 years ago, meaning that a new round of reform would probably start delivering observable benefits much earlier – it’s still a relatively laggy process.

Yet it’s the other side of the equation, the “real” house price side of the coin where the political problem becomes front and centre. Any policy that deliberately sets out to reduce nominal house prices would be political poison and realistically would not be countenanced by any government. Political parties are many things, but deliberately suicidal is rarely one of them.

This gets us onto something that really needs to be kept in mind here. When it comes to debating policy change, not enough attention gets paid by independent policy pundits (professional and amateur alike) to the political realities that surround any change in policy. It’s all good and well spruiking some grand policy proposal that could well be economic perfection on a stick over the longer term if, over the shorter term, it would kill the government that implemented it. Even the Hawke government, the most reformist of governments, didn’t introduce many policy programs that were pushed onto its radar (like indirect taxation reform – a GST) because it would have been a political step too far. That’s not to say that purity doesn’t have its place – it most certainly does, but realistically we all need to be mindful of the clichés of politics being the art of the politically doable.

Nowhere is this more acute than when dealing with the largest asset class in the country that forms the backbone of around 60% of the population’s net worth over their lifetime. Deflating housing values for some notion of the greater economic and social good is one thing, but widespread negative equity would be a dead chook hanging around the neck of any government majority.

However, house prices can be reduced in real terms while avoiding the electoral retribution of obvious negative equity and falling house price values if the NOMINAL price of housing is kept flat to small growth and inflation is allowed to erode its real value over time.

The value of my house hasn’t changed for years” incites much less public indigestion than “OMFG! The value of my house is dropping!” – especially when the understanding of “value” that most people hold is one based on ‘nominal’ value (the cost of a house in simple dollar terms when it was purchased compared to its simple dollar value today), rather than real, inflation adjusted value. In many respects, the combination of inflation and time is (and certainly has been in the past on many occasions) a powerful and handy policy tool, even at relatively low levels of 2 and 3%.

The quantitative difference between the publics focus on nominal value and any policy goal’s focus on real value, provides a window for politically sustainable policy activity to deliver between 1 and 3% deflation in the housing market every year (assuming nominal growth in the median house price of between 0 to 1%). It might not sound a great deal, but throw in 10 years worth of time and the compounding effect of inflation slowly eroding the real value of the housing market would deliver a 20-40% reduction in the real value of housing from inflation alone.

Add in real wages growth of 1 to 1.5% per year and we’re talking about a reduction in real house prices in proportion to real wages getting close to halved over that decade period, while avoiding the electoral hysterics associated with falling nominal values of the housing stock.

Once you break it down this way – the problem looks far less insurmountable, and also suggests that drastic action isn’t required, but that slow, thoughtful policy responses can deliver the goods without pissing too many people off or creating any great deal of economic and political dislocation.

But the real beauty here is that it allows for public policy programs to deliver outcomes in the way that public policy works best – incremental behavioural change. Policy is like a good Irish stew; the slower it’s cooked, the better it delivers. A couple of percent change here, a couple of percent change there – add ten years to the mix and we’re quickly talking about serious adjustment.

So if we keep in our thought orbit the idea of maintaining the nominal value of the median house price somewhere around flat to small growth as an overarching policy target for the house price side of the equation, it gives us a foundation to work off in terms of the magnitude of behavioural change that needs to be delivered to ultimately achieve the objective of increasing housing affordability.

POLICY

In the supply/demand nexus that justifiably dominates any discussion on housing affordability (and a great many other things like, say, taxation generally), the debate always seems to become demand centric. Arguments like “Policy X increased the demand for housing” , or “We need to implement Policy Y to reduce demand” seem to take up the bulk of brainspace in these debates – but it’s supply that needs to be focused upon here, and more particularly the how demand affects supply and the spatial distribution of supply. If we want to increase housing affordability, we simply need to increase the number of houses, but ideally we also want large parts of that increase to be, if not geographically where people wish to live, at least in large part where they would be reasonably willing to live. Yet as I argued in Part 1, the starting position for the Australian housing market is one where the supply of reasonably desirable land surrounding large metropolitan centres is simply swamped by demand because we have too few cities. Because each city has a small fixed amount of desirable residential geography – the fewer the number of cities we have, the smaller is the total amount of desirable residential land.

While we can’t just go out and build new cities (as exciting as it may sound for those with a capital works fetish – littering the national landscape with huge white elephants is probably a tad unnecessary), we do have plenty of scope to enhance the growth of larger regional centres organically, by both changing the destination of demand and more importantly the destination of supply, not only through tax and regulatory treatment of housing itself and its consequent price signals, but by assisting regional centres to emulate those economic qualities, but more importantly the origins of those qualities, that drive people to live in metropolitan areas to begin with.

But first up, how do we change the tax treatment of housing to better increase supply?

The current negative gearing regime that has run in conjunction with the two Capital Gains Tax regimes over the last 20 odd years has failed to increase the supply of the housing stock to match the increase in demand. But what is important to acknowledge here are the differing types of demand involved. We’ve had organic demand increasing simply as a function of not only population growth, but also the trend towards smaller household size – that sort of demand is simply a function of life.

But we’ve also had the situation whereby the tax structure applied to housing, in conjunction with the cheap capital costs associated with lowish interest rates in recent years, has increase the investor demand for mostly established housing. The increased competition in the housing market between the organic demand and the investor demand stimulated by tax treatment, has bid up prices across the board. But what it hasn’t done is spurred an increase in supply to match this demand. In a very real sense, we have half of our market not working effectively – and it’s not hard to see why. Investors chasing capital gains growth would maximise that growth by purchasing established housing stock closer to desirable locations (where capital gains are historically greater) rather than invest in new stock which, with our limited number of cities, is now mostly confined to areas far away from those desirable locations (where capital gains are historically much lower). The new supply of housing is essentially doing little more than meeting organic demand that has been pushed out of the established house market by the influx of policy stimulated investor demand.

So why don’t we utilise the tax treatment of housing to directly stimulate new housing rather than established housing?

This can be done without creating a great deal of grief or economic dislocation (i.e. making voters think they’re worse off) – and due to the time it takes to bring new housing stock to the market, we can slowly increase supply to be consistent with the overall objective of maintaining current nominal house price values.

Firstly, keep the CGT regime as it currently exists and grandfather out the existing negative gearing regime to current investors for their currently held properties. This way a government would minimise any backlash from existing investors by avoiding any change to the long term financial plans of existing investors. Those who already have it, keep it until they dispose of the property.

Secondly, keep the current regime for negative gearing whereby losses can be offset against all income sources, but only for properties where the investor is the original purchaser. This isolates loss offsetting against total income to new housing stock only.

Thirdly, for the established housing market, quarantine negative gearing losses to income derived from rent.

This way, the complexities of dramatically changing the CGT regime where someone always ends up worse off is avoided, current policy remains for existing investors until they dispose of currently held properties meaning political grief from that mob is mostly avoided, investment in established housing is still a reasonably viable option for those that are really keen, and negative gearing would finally be structured to actually increase supply by the tax system providing the greatest incentives for investment in new housing stock.

So saying, there will always be those on the fringe that will organise and reorganise their affairs in complex ways to cash in on such targeted incentives when they ordinarily wouldn’t qualify for them – that’s to be expected. But what’s more important is the way incentives change the behaviour of the bulk of the targeted group.

So how would this play out over time in terms of effects?

Increased demand for new housing should spur supply of new housing -but because it quarantines existing investors out of the new regime, there would be no mad rush to adapt (which is important), instead one would expect there to be just a slow, gradual increase in the demand for new housing stock at rates above organic demand levels, providing plenty of forewarning and opportunity for developers to bring new housing stock to the market.

Another consequence would be to reduce demand for established houses, easing pressure on any price growth in the second hand housing market. Even though there would be additional demand for new housing, possibly even to a level where it may start to slightly push up the price of new housing over the very short term, any price rises that occur from this increase in demand would have an effective price ceiling placed on it by the larger established housing market which would now be experiencing softer prices levels because of the way demand has shifted away from established housing into new housing.

A further interesting consequence would be budget savings. Since negative gearing losses claimed by investors would, over time, move from older established housing to brand new housing, there would be far less opportunities available for investors to claim losses via capital expenses and maintenance because the house in question is brand new. One of the biggest rorts of negative gearing are the things that can be claimed as expenses – which in reality are little more than loopholes for subsidising renovations for many. With new houses, gone (over the short to medium term at least) is the capability to redo the kitchen or the bathroom because they are falling apart, or renovate the aesthetics of the outside of the house under the guise of failing guttering and water damaged eaves.

New is new – meaning less scope to claim expenses, meaning less revenue forgone by the tax department (currently it’s about $2 billion a year on negative gearing).

Hopefully it would kill dead the growth in lost treasury revenue that negative gearing has delivered over the last few years. As the proportion of negatively geared new properties grows at the expense of negatively geared established properties, so too would the revenue savings be expected to grow.

One juicy potential of this budget saving is for it to be used to compensate State governments in return for reductions in their fees and charges applied to new land and housing developments.

If the costs of new housing could fall slightly by reducing government fees and charges, that would certainly assist the target of zero to small growth in the nominal value of the median house price – if it could be done in a way that is essentially budget neutral – well that’s the political cherry on top.

The other benefit from using the tax treatment of investor demand to slowly deflate housing prices by simultaneously reducing demand for established homes on the one hand while stimulating the supply of new housing on the other, is that it leaves open the opportunity to change the CGT regime in the future if, after a couple of years, it’s shown that nominal prices are falling or alternatively, rising too fast – giving the government a bit of fine tuning capability to manage the zero to small nominal house price growth target if needed in the future.

Finally, it’s probably worth mentioning the important role that expectations seem to play in the housing investment market. While discussion on the profit expectations of small property investors tends to be dominated by perceptions of capital gains growth (many people expect property will nearly always rise in price despite any empirical evidence to the contrary – you know the type: “You can’t lose with housing, mate”), there’s certainly more complicated dynamics at play. In terms of the risk assessment between property and other investment alternatives that small time property investors make, it’s not only the potential of the growth upside that plays out in the decisions on whether to invest in housing, but equally important are the perceptions of the possible downside of house price falls.

I had a squiz around the place for recent research on estimates of the absolute risk aversion coefficients of small time housing investors in Australia, but unfortunately came up with virtually nothing (if anyone knows of any research in this regard – please let me know!). But anecdotally the downside component of risk aversion for small time property investors seems to be a belief that any house price losses would be relatively small in proportion to the total value of the investment, and would recover over a relatively short time frame. This seems to be verified, anecdotally at least, by a relatively large number of otherwise conservative investors that go into property – including people that believe the share market is too risky a destination for their direct investment (where the downside risks are considered greater than that of property).

So while a policy target of flat to slow growth in the nominal median house price would expect to have consequences of reducing total investor demand as the realisation of small capital gains growth flows through the system, because of the nature of the risk aversion that drives at least some part of the housing investment market, the size of any reduction in total small time property investment one would ordinarily expect to occur through a decade of flattish nominal prices would seem to have a fair chance of being ameliorated to some extent by investors with conservative risk aversion coefficients that aren’t in property only for the capital gains upside, but also because of the minimal risk downside compared to alternative investments.

Add to this that property investment isn’t always singularly about capital gains, but also includes the future capability (after the asset is fully purchased) to provide an income stream in retirement, is perceived as a “safe” asset class that’s relatively liquid and also provides future leverage capabilities – I don’t think the housing investment volumes from small time property investors would necessarily shrink as much as we would ordinarily expect them too in an environment of flat to small nominal median house price growth. I’d be particularly interested in your thoughts on this?

Another thing I’d be really interested to hear your thoughts on regarding the change of housing market expectations is whether it would be likely to have an effect on the overall size of owner/occupier mortgages?

If the reality of flat to small house price growth starts to become institutionalised into the markets expectations, or at least into the market for mortgage owners – would that expectation of small to zero price growth reduce the incentives for borrowers to take out loans larger than they ordinarily would, simply to buy more expensive homes which could then be turned into larger capital gains upon later sale? If perceptions of the capital gains benefit involved with having larger owner/occupied mortgage debt started to erode, what sized impact would that have on the established housing market in terms of reducing the capital gains driven, debt funded price bidding war for established housing stock?

REGIONAL DEVELOPMENT.

While changes to the negative gearing regime alone would be expected to increase housing affordability over time, it’s really tinkering around the edges because it doesn’t address the biggest underlying problem that the country experiences – too few cities providing too small an amount of desirable land, leading to a large supply constraint on desirable urban geography as the starting point for the national housing market.

To maintain longer term housing affordability, this really needs to be addressed otherwise we’ll start running into other problems like our capital cities becoming vast urban basins with enormous redevelopment costs; meaning bloated infrastructure budgets needed just to run large transport networks through existing developments simply to allow the cities to continue growing beyond their current fringes while, still, at least pretending to function adequately.

The big question here becomes one of “If we can’t build new cities, can we do anything that can attempt to emulate in regional centres those qualities that drive people to want to live in our capital cities in the first place?

The most important quality here, and one which has an extraordinary bearing on many of the other qualities that drive people to live in our capital cities, qualities like the provision of services and economic opportunities, is simply the income ceiling of regional centres.

People, particularly young talented people that grew up outside of the capital cities gravitate towards the big metro centres because they can earn more money and have better career prospects.

High income households have enormous consequences on the economic geography surrounding where they live. High income households not only spend more, increasing localised demand and increasing employment to service that demand as a result, but they also purchase goods, but more particularly services that are themselves provided by other higher income earners, which in turn increases the volume of opportunities for localised high paying jobs, or at the very least increases local career paths towards those types of jobs.

Essentially it’s a twist on the old upstairs/downstairs economy playing out, with high income earners (the upstairs economy) not only increasing the demand for goods and services provided by lower income earners (the downstairs economy), but also providing demand for more sophisticated goods and services from the upstairs economy itself. It’s a perfect example of the cliché of “the ladder of opportunity” playing out in the real world.

If you want examples of this, you only have to go to areas at the centre of the resources boom in North Qld to see it happening, where the increase in high income earners has boosted the demand for more sophisticated local services from top quality accountants, lawyers, health professionals and financial advisers, through to more sophisticated and expensive recreation, through to the retail provision of more expensive goods like cars, boats and home entertainment products, which has, in turn, provided a larger number of better paying jobs for the entire local economy.

When I looked at the data for income ceilings and collated it up, I was actually a little surprised by the enormity of the income ceiling that exists outside of our metropolitan areas. To show its full graphic horror – if we accept as our baseline households earning $1999 per week as our income ceiling, we can then use the 2006 census data to show the proportion of families in each of the 150 electorates across the country that earn $2000 per week or more. That proportion of each electorate can be read from the left and right hand sides of the graph, each individual bar is an electorate, and the electorates themselves have been separated into three categories; all metropolitan electorates (the electorates classified by the Australian Electoral Commission as either inner or outer metro), provincial (an AEC classification for electorates surrounding large non-capital city centres that include places like the Gold Coast, Newcastle, Ballarat, Bendigo etc) and rural electorates.

The electorates have also been sorted within their geographic classification from highest to lowest on the proportion of families earning $2000 or more per week.

incomeceiling.jpg

There are two big results here. Firstly, 57 out of the top 60 electorates in terms of the proportion of families earning $2000 or more per week are metropolitan electorates. Secondly, the median proportion for all metro electorates is higher than all but 3 non-metro electorates. Three!… and they are mining boom electorates.

So if we want to solve the great underlying supply problem Australia has, we need to figure out some way of increasing the income ceiling in areas outside of the capital cities, which essentially means eventually delivering an increase of around 50% in the proportion of families living outside of capital cities that earn $2000 or more per week – just in order to get people to perceive that the regional economy in question has an income ceiling high enough to make it a viable alternative to capital city living.

No small ask!

One of the possibilities here is to target high income earners in specific sectors to start the ball rolling – and it’s something that folds into the governments push for a high speed national broadband network (in whatever form that eventually takes).

Are their incentives that could be offered to firms to both encourage telecommuting from their employees that wished to live in regional centres but where their employer was based in a capital city, as well as any possible incentives that could encourage the relocation of some types of high paying firms, or at least units of those high paying firms to regional centres?

That would probably require the new broadband network to have some serious grunt, maybe not quite Fibre-To-The-Home, but certainly, at the very least, the top end of the ADSL+2 spectrum.

Once a decent sized cluster of high income earners develop in a given non-capital city location, the economics starts to become self-perpetuating and the income ceiling starts getting pushed higher as a result as the demand profile of those high income earners starts to affect the broader economy of the area.

I’d also be interested in hearing your thoughts on what you think the other qualities are that drive people to want to live in capital cities, and if there are any policy options available that could be used to emulate those qualities in non-capital city areas? Particularly in terms of incentive based policy options.

UPDATE:

I thought I better add this since I didnt quite explain myself very well here. The usual types of regional development policies associated with decentralisation programs of the past didn’t work particularly well, and probably wouldn’t in the future. The problem when governments come in and start demanding people to do things usually backfires, and the “build it and they will come” school of regional development just seems to create white elephants everywhere. But are their more out of the box type incentives that could be used, not to copy the qualities that drive people to live in capital cities, but to emulate those qualities?

There’s also the big issue of health and education, where families with kids are unlikely to move to regional centres if they think that the quality of their healthcare and the quality of their kids education will decline -considering the state of the health system in most capital cities that might not be too difficult a proposition, but school quality may be.

Yet, unless we can find ways of making more of the population want to live in the regions, we’ll continue to face the problem of the supply of desirable urban geography being limited by having so few capital cities.

On something partially related:

Quite frankly I’m fed up to the back teeth with the vacuous fucktardery over Teh Culture Wars which was rammed down everyone’s throats during the Howard years in some kind of grand exercise of diversional therapy. That includes the idiots that participated in the great pollution of the national agenda on the media’s Op-Ed pages over the last decade, and the editors that thought it was a really shit hot idea to waste everyone’s time by pushing it.

I don’t know about everyone else, but I couldn’t give a rats arse about Teh Evil of Teh Left or Right or whoever it was this week that was going to destroy the fabric of civilisation with their nefarious memes, and I don’t actually know many people that do or ever really did give much of a tinkers cuss – which is funny, because I’d like to think that my circle of acquaintances isn’t exactly a peanut gallery…… but maybe that’s the point.

Every time (which was approximately every day) these irrelevant, self declared and self-absorbed insiders shouted at each other through the megaphone of the national press about, at best essentially nothing, at worst little more than figments of their own political paranoia – I found myself just scratching my arse wondering if this incessant downpour of drivel would ever end.

So it’s really nice to see more serious opinion and analysis pieces about real issues that actually affect national living standards turning up far more regularly of late, like the articles Megalogenis has been writing at The Oz (although he’s been doing that for a quite substantial period of time), a few that have been turning up in the Fairfax broadsheets lately, as well as what seems to be a substantial increase in the quality of the blogosphere over the last few months. – and it’s sure as hell more interesting, important and constructive than the horseshit that gets peddled by the likes of Planet Janet and the menagerie of mental malignancy that have been corralled down at Culture Warrior corner for the last decade wasting everybody’s fucking time…. pardon the French.

It’s a relief to see that zoo finally being emancipated from the public’s attention, assuming that it ever had the public’s attention in the first place, rather than just a disproportional hold over the media real estate.

And not a damn moment too soon can I add.

So keeping with the hope of a re-dawning of rational debate in this country that might even be worth listening to, for any bloggers reading that might like to yak about their own suggestions for housing affordability on their own sites, (or for any aspiring bloggers that have always wanted to, but never had a reason to start up a free wordpress or blogger site of their own until now) tell me via the comments, hit me with a pingback or drop me a mail and I’ll stick a link in to your housing affordability spiel right here. We’ll generate some traffic, we’ll generate some exposure to new ideas and we’ll do our bit to help move the national debate beyond the vapid twaddle that’s infected the recent past. After all, you’d be surprised at who is actually reading.

Also worth having a squiz at are the following pieces and suggestions on improving housing affordability:

Gary Sauer-Thompson has an interesting discussion on the changing nature of demand for different urban housing types. Worth reading on this was a piece the Fin Review ran over Easter in their Review section by Christopher Leinberger, which can be seen over at The Atlantic. Demand in the US for legoland developments is in decline with a projected surplus of 22 million large-lot homes by 2025, while higher density mixed-use urban developments are booming. Australia has only partially followed the US history of residential living trends – but that article certainly provided some data worth chewing over.

Christopher Joye and Joshua Gans with a timely proposal for an AussieMac , a means to maintain competition (i.e. keep mortgage rates down organically) in the domestic mortgage market during periods of international volatility in credit markets that have little to do with the overall integrity of the Australian mortgage market. Also over at Larvatus Prodeo where Joshua Gans says in comments, ” I keep asking the question “why not?” and have not heard an acceptable answer” – which is a pretty good way to put it.

From Sean of http://www.housingaffordability.blogspot.com fame comes an ominously titled forum called: http://forum.globalhousepricecrash.com/index.php?showforum=9.

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81 Responses to “Now Listen Up Kev – What about this housing bizzo? Part 2 – Policy bits.”

  1. pligg.com said

    Now Listen Up Kev – What about this housing bizzo? Part 2 – Policy bits. « Possums Pollytics

    Continuing on from Part 1 where we had a quick look at the nature of the data, we’ll head into a potential policy solution for increasing affordability, but certainly by no means the only one. This is a rather long article (5000 odd words) that might…

  2. Well argued, Possum.
    However from a micro regional perspective, high-income earners moving into the NSW Northern Rivers region(wanting sea, river or wilderness views as they tend to do)have been driving up the cost of land for years.
    So that, in many coastal areas with the minimum existing services attractive to this cashed-up mob, there are few vacant lots under $1 million.
    Before enough high earners moved into a regional area so as to significantly raise the level of infrastructure in order that the region became generally attractive to domestic migrants, land prices would likely have bolted.
    Thereby rather defeating the purpose.
    A purpose already being defeated in its infancy by the fact that current developers are sitting on both large and small parcels of subdivided coastal land which they are witholding from the market until there is a large upward movement in land pricing.
    P.S. Living in a regional area as I do, I’m not all that sure I want it turned into a mini-metropolis just so that another generation can go on to build large energy-guzzling, greenhouse gas emitting houses.

  3. Vee said

    Just like there was never a skills shortage crisis, there is not a housing affordability crisis. Move 200km from your location – a mere 2 hour drive, shorter than some commutes – and you will find plenty of affordable housing.

    Out of curiosity is the rural electorate with the highest proportion of income as you have measured it, the Hume electorate?

  4. Ronin8317 said

    As Greenspan commented in his book “Age of Turbulence”, productivity improvement is capped at 3% per year, and any further increase in wages goes straight into inflation. If investment return on housing is below 3% in real term, investors will be better off placing their money in a term deposit account.

    People wants to live close to where they work without sacrificing their lifestyle. This is the root of the crisis. You cannot increase supply as there is no vacant land anymore. High density apartments is not the solution as no Australian wants to live in a 40 square metre apartment unit.

    High income household is predominantly interested in ‘showing off’ their million dollar mansions near the harbour. They want an expensive house because the house is expensive. They will never willingly live in a ‘poor’ suburb surrounded by ‘poor’ people.

    The solution is to move the jobs away from the city center to places where the houses are still affordable. That will only be possible when the new broadband infrastructure is built.

  5. John Leonard said

    The real problem is the belief that the economy is going to carry on expanding forever and forever amen.

    Possum, you’ve already pointed out that there is a finite supply of land near the major cities, but one of your solutions, to increase economic activity in regional areas is going, in the end, to create exactly the same problem. Australia is large, but it isn’t infinite, and very few parts of it are suitable for large cities.

    The long-term solution has to be to have a population policy that sets a target for a sustainable population for Australia (and it looks like that would have to smaller than the present population) and then shapes government policies to achieving this (restricting immigration, removing incentives for people to have large families &c).

    The other problem with increasing demand for new houses is that almost all the new houses that are presently built are not, by any definition, efficient. We need strong policies to force new buildings to be more sustainable in terms of being solar-passive, not requiring air-conditioning &c, otherwise our already unsustainable lifestyle will quickly become even less sustainable.

    If we continue to believe that we have to keep on growing the economy unsustainably to continue to make progress then we are doomed.

  6. JP said

    Poss, I’ve got a problem with one of your base assumptions: I’m not sure falling nominal house prices are political death. What would actually happen if house values dropped $25%?

    If someone paid $400k for a house to live in, and it drops in value to $300k, then they can still live in it. Big deal.

    If someone paid $400k for a house to live in for only a few years, and it drops in value to 300k, then they can still move to another house that used to be worth $400k for no cost, because it will now be worth 300k, too. And if they want to upgrade, then houses that were worth $800k may now be available for $600k, so the upgrade cost has also gone down. Bonus!

    If someone paid $400k for an investment property that they rent for $350/wk, then they can continue to receive $350/wk.

    And if you’ve been renting for years because you couldn’t afford today’s ridiculous prices, then as soon as prices fall 25% you may well be able to finally buy a house and tell your cheapskate landlord to shove his rotting kitchen floor and his brillo-pad carpet up his @#$&. Battler heaven.

    So who loses?

    The spivs who bought 25 investment properties on 0% deposit (because prices only ever go up, right?) who planned to retire at 35, while maintaining their recreational cocaine habit for life from the proceeds. Not only would nobody cry for these bastards, but they’re unlikely to have voted Labor in the first place, so there’s little to lose politically.

    Empty-nester boomers who wanted to cash out some of their house equity for retirement income. A potential problem, but while one of the couple may mourn that cute Noosa condo, then the other is probably secretly glad they get to do the grey nomad thing.

    Consumer junkies who treat their equity-linked mortgages as a giant low-interest credit card facility, and who’ve just about maxxed out their lending limit buying 106cm plasmas for their kids’ bedrooms and a family holiday to Disneyland. The uber-aspirationals. Again, they’re a political risk, but again, they’re less likely to have voted Labor in the first place. In any case, it would be bloody useful to get people like this to pull their heads in, spending-wise, if you’re concerned about inflation and the current account deficit (which Wayne Swan should be).

    I’ll offer myself as a litmus test. If property prices fell by 25% as a direct result of new Labor policies, how would I react?

    Firstly, I wouldn’t actually care about my home’s value, as I have no intention of selling my property in the foreseeable future. Secondly, even after a 25% drop the value would still be about 50% higher than what I paid for the place. And that was only in 2002! In other words, my annual rate of return would drop from 10% to 5%, or about what I could have had from a term deposit over the same timeframe. Not worth jumping off a bridge over. Certainly not worth voting Liberal over. Thirdly and most importantly, I’d be thinking that I might be able to afford an investment property sooner than planned. So on balance, I’d be stoked.

    Falling prices are only an issue if you’re geared through the roof, or if you’re a net seller. In real estate, most people are net buyers for most of their lives. Since when did buyers hate falling prices?

    And if sellers really don’t want to cop a loss, guess what? They can choose not to sell! God forbid they might wait until values recovered. Stick a tenant in the place. Whatever. This reluctance to sell would also provide a natural brake on the rate that prices could fall.

    So if I were Labor, I’d tread softly this term when all eyes are on their economic management credentials, then wait for the Loony Libs to hand them an increased majority in 2010, then get stuck in. Abolish negative gearing (or force losses to be carried forward for use against future gains, instead of reducing current year tax liability, at a minimum). Abolish the CGT discount for residential property. See what happens. I have a feeling that the sky would not actually fall.

  7. gam said

    “If the Labor Government is serious about getting more people into the property market, while also making those with existing mortgages feel less stressed, it has to find a way to get wages rising faster than house prices over the next few years.”

    that, quite frankly is insane. all that will accomplish is inflating already sky-high house prices. if there are only 10 widgets and 100 customers, will the price of widgets go down or up if the 100 customers have more money to spend? i can only assume this bit of economic lunacy was taken out of context. surely this can’t be a serious solution by a serious commentator. perhaps i’ve missed something.

    as far as solving the actual housing crisis goes, look at the supply side. why do councils persist in giving land to developers? simply stop the sale of land to developers and let developers make money from building the actual goddamned house on the land. ffs, why isn’t this obvious? the finite supply of land around capitals is artificially restricted because if you want any, you have to go through a middle-man who bought the land for a cheaper price and sells it at a profit. cutting out a bunch of hoarding middle-men would do more to actually create more supply and drive prices down without risking economic blowback a la negative gearing or using clumsy policy instruments. if you can’t even sell petrol at market rates without every man and his dog breaking into l’ internationale and demanding cheap fuel for workers, why is it ok to sit on piles of land waiting to cash in on demand?

  8. Kerneels said

    Just a suggestion – provide subsidies for business to move to regional centres. There is no real reason for say the head office of a bank to be in one of the capitals, after all having a head office in Melbourne has never stopped a financial business from operating successfully in Darwin.

  9. JP said

    Oh, and Poss….

    I agree it’s great that serious discussion of policy is replacing Teh Culture Wars. But you seem to have forgotten who you have to thank for that.

    If you listened to John Howard’s speeches in America, you would have learned that it was JWH himself that stopped all this navel gazing, and replaced it with a robustly confident, forward looking approach. In terms of The Culture Wars, which Howard claimed to have won, it reminded me of nothing so much as Bush standing on the USS Abraham Lincoln and declaring “Mission Accomplished”.

    Back on topic:

    You talked about targetting certain sectors of the high-earning workforce in making regional living more desirable. One profession that has already experienced a push to get its workforce to move to the regions is medicine. And one of the key problems is that it’s really hard to target just one profession in isolation – the key reason being that as two-career families are so common you run up against the barrier “But what is partner going to do?”. No matter what you do to make the regions attractive to doctors, it doesn’t work if their partner is a trial lawyer, or a university lecturer, or an orchestral musician, or a forex trader for Macquarie Bank.

    To make a change work, it needs to be a sweeping one (like the VDSL network) or focussed on a particular region, rather than a particular industry, I think.

    Also, I think a large part of the problem is one of ignorance of regional realities on the part of urban Australians. I think many Sydneysiders who are paying $1M plus for a pretty ordinary house in a nice suburb would be absolutely astonished what $700k can buy on the NSW north coast. And they’d be astonished that we have universities, private schools, ADSL2 broadband in the larger towns, symphony orchestras, and great restuarants and cafes, and if you must you can fly to Sydney in less than an hour for less than $100. If people just knew, I think more would seriously consider the move. Frankly, I think that ignorance is (possibly reasonably) cultivated by the regions themselves, who don’t actually want to be descended on by swarms of urbanites. Better to have paradise to ourselves🙂

  10. Why said

    Poss4Prez

  11. Possum Comitatus said

    Gam – what George was talking about there is nominal wage levels and prices. If you take an arbitrary length of time (let’s say a decade), over that period in the ordinary course of events it would be expected that both wages and house prices would rise. But because we have so much policy and other things affecting housing ( from tax treatment, to developer behaviour and land release, through to monetary policy) the usual supply/demand relationships for housing gets gummed up and starts distorting the relationship between income and housing (as we’ve seen since 2000 from the data in Part 1). So what George is suggesting there is that policy options need to be pursued that cleans away some of that gum, which stops at least some of the distortionary effects so that it brings income and house prices back into whack – which over the same arbitrary length of time would mean that wages end up rising faster than house prices.

    JP – negative equity changes peoples behaviour fairly significantly, but it’s not because what actually happens to them, but because what they fear could happen to them (making it similar to Workchoices in many respects for many people). Because housing makes up (on average) the largest chunk of a persons net worth in Australia – when the mortgage becomes larger than the actual value of the house, giving them negative net worth, it means that they are in the situation where if anything happens to their employment or their health they are up financial shit creek. Most people that end up with negative equity just ride it out and only a few end up suffering large hardship over it – but all of them *_FEAR_* what could happen. That changes the way they behave. It’s like a sword that hangs over their head.

    CG -The supply of land in the regions, and the way developers seem to be too smart for local councils is a serious problem. Maybe a “use it lose it” system for public land release would help – but the development of private land becomes more problematic.

    Maybe using development rights for large chunks of greenfield land is worth looking at whereby when a private piece of land is sold for urban development, a certain number of rights are issued, attached to the land by local government to develop a given number of houses. As certain time benchmarks are hit after the sale, the number of houses that can be developed on that land starts reducing (effectively the development rights start eroding over time). There’s a couple of ways local governments can use that development rights approach to stop land hoarding.

    Up and down the NSW coast you see fairly dramatic differences in house prices. Coffs Harbour seems to be managing growth better than, say, Port Macquarie – but both seem to be managing growth a lot better than the far north coast of NSW.

    There’s certainly a fair whack of NIMBYism at play in regional areas, where the last person through always seems to want to shut the gate behind them. But you cant have decent house prices and no new development – it’s an incompatible situation. I know a bloke that lives near Lennox Head – he complains that the prices of local housing is disgusting and the government needs to do something, but then says there should be no more residential development in the area because the place is full and it’s ruining the nature of the town!

    It all gets a bit weird sometimes.

  12. gam said

    Gam – what George was talking about there is nominal wage levels and prices. If you take an arbitrary length of time (let’s say a decade), over that period in the ordinary course of events it would be expected that both wages and house prices would rise. But because we have so much policy and other things affecting housing ( from tax treatment, to developer behaviour and land release, through to monetary policy) the usual supply/demand relationships for housing gets gummed up and starts distorting the relationship between income and housing (as we’ve seen since 2000 from the data in Part 1). So what George is suggesting there is that policy options need to be pursued that cleans away some of that gum, which stops at least some of the distortionary effects so that it brings income and house prices back into whack – which over the same arbitrary length of time would mean that wages end up rising faster than house prices.

    agreed, but that gum should be removed on the supply side, largely because demand is relatively inelastic in this market and that it’d be easier to do. the goal should not be to hit an arbitrary price target (lower), the goal should be to let the market price houses as fairly as possible. that’s the problem with ‘house prices are too high’, they are not. they are correctly priced given the economic conditions of artificially restricted supply, which then plays into location dynamics and urban planning. it’s harder to plan your cities if you’ve given away land prospective taxpayers will live on to a sector that is not motivated by planning concerns. if govt. is serious about moving away from the single cbd model of planning (which will improve affordability) they’re going to have to get a handle on that.

  13. Possum Comitatus said

    Gam, I agree – the gum should be removed on the supply side.But most of that supply side gum seems to have been caused by compositional changes in demand that tax treatment has delivered.

    Places like Demographia and the IPA which sheet home all the blame for housing affordability (in terms of median house price to median income ratio) onto the regulatory environment and land release policies do good work, but the empirical data for Australia isnt consistent with that theory. Because the capital cities have vastly different land release and regulatory environments – if it was just the supply side gum created by lack of land release and development regulation that was causing the problem, we would expect to see far far far more variability in price changes between our capital cities over the last 25 years than we actually have. If we take Sydney and Brisbane as two examples – Sydney has had appaling land release over the last 10 years and regulatory policies that are nanny state at best.Brisbane on the other hand has had zero shortage of land release and a benign regulatory environment. If it was just supply side gum causing the problem we would have seen Sydney house prices surge proportionally much higher than Brisbane prices – but we didnt. The prices in both cities increased dramatically – with Sydney having only a slightly higher proportional increase because of their land release issues than Brisbane.

    So it was something else that was driving the big cost increases rather than supply constraints in and of themselves.But it was also something that had federal origins because of the way it moved all capital city prices across the country in the same way and roughly the same magnitude.

    Which brings it back to tax treatment.Not only in the way it boosts demand in ways that bid prices up, but the way it changes the composition of demand which then flows through to the composition of supply.

    We desperately need better land release and planning laws – but that alone wouldnt appear to be able to change the nature of what is going on. If it were, we would have seen far more variability in capital city price movements over the last 25 years.

  14. JP said

    Poss, you’re right of course about negative equity creating risk. It’s a pity that right at the time things like the CGT discount put a rocket under house prices, banks and others started lending more than the old 80% maximum. Under the old system of requiring a 20% deposit it was WAY harder to ever get negative equity.

    I’m still not sure it would affect that many people, though. A 25% fall in prices here would take us back only to late 2006 levels – anyone who had bought before is only losing the profit they’ve made since then.

    It would have been so much better to have never let the genie out of the bottle in the first place. It’s just another example of the truly diabolically bad economic management of the last 11 years by the Libs. And Howard was actually proud of the housing bubble, with his “no-one ever complained to me about their house prices going up” comments. If we stick to flatlining nominal values to achieve a fall in real house prices, we’ll take 20 years to fix this mess.

    And another thing: you say it must be a federal issue as it affected all states (and I agree that negative gearing and the CGT discount must bear a lot of the blame) but this is a pattern that’s also been seen overseas in the US and UK amongst other places. Did they also have regulatory stimuli, or should we be pinning a larger slice of the blame to the pumping up of demand by the rise of easy credit from lenders worldwide?

  15. Tad said

    Hi Poss & all

    I appreciate the interesting policy discussion here, but it feels a bit like trying to plan in detail the best location for the deck chairs to go on the Titanic.

    House prices running so far ahead of real wages is a big marker that, hey, this has been a *bubble*, and the current events in the US around the subprime crisis should send shivers down our collective spines. When a credit crunch is on after a bubble bursts, negative equity can’t be avoided by any of the measures discussed herein… all of which are worthy but will take way too long to implement. It is now almost impossible to get a home loan with less than a 20% deposit, repossessed houses in some areas can’t even be moved for $1000 at auction and conservative estimates are that some 2 million repossessions will occur this year alone.

    The biggest risk Rudd faces is not the runaway inflation he keeps talking about. It’s a nasty recession with a downward spiral in house prices sitting alongside mass repossessions and mountains of negative equity. There are likely to be many ordinary punters suffering, leading to heavy political cost, even though at one level the ALP won’t be to blame for processes outside their control. Of course before that happens we’ll be reminded daily by Mr Swan that the “fundamentals are sound”. But that’s what they always say before a crash.

    Thank goodness we got rid of Team Rodent, but the touching faith the Labor front bench has in ideology-free neoliberalism hardly looks like a convincing economic alternative in these turbulent times.

  16. 2 tanners said

    Poss,

    As a fan in general, I’m not sure where to begin, because I think you’ve really got it wrong this time.

    First, is housing affordability a problem? It’s as bad as it’s been in 25 years. I bought 27 years ago in an outer suburb and no-one was weeping tears of blood for me, least of all myself.

    Trying to make rural centres more attractive with incentives and with other methods have already been tried. Would you believe that the Federal Government is STILL trying to clear up that mess, created in the Whitlam years. As JP points out, it’s a matter of where people WANT to live.

    You compare QLD and NSW (@13). Try comparing the population changes in the mix and you might be surprised. The Gold Coast is the fastest growing conurbation in Oz last time I looked.

    I sincerely believe that people need to lower their sights a bit. You can find my full comments in George’s article on http://blogs.theaustralian.news.com.au/meganomics/index.php/theaustralian/comments/making_housing_more_affordable/P50/” title=”this page”> [hope my lousy html skills worked], but the idea is that it doesn’t happen all at once and it is a long term investment requiring sacrifice in the short term. When I bought, I was negative equity for 5 years. Tough. Patience, persistence and 25 years have put me in the position where I provide housing for 5 tenants who cannot or will not buy their own homes (and I know their circumstances) plus housing for execs who don’t want to live in one city all the time. Did I develop or build any of these properties? No. Does it matter? No. Would you like your taxes raised to pay for public housing for any or all of these folks?

    Finally, my ambition is to be ineligible for any public funding of my retirement, beyond my compulsory superannuation. Still trying to figure out how I ended up being part of the evil empire for taking responsibility for my own future from age 23.

  17. gam said

    poss, we might be going in circles here but i feel i should try again. my argument is that not releasing much land and releasing it to people who just sit on it till demand makes it very profitable (sydney and brisbane) accomplish exactly the same thing in a market where demand is inelastic and at a similar level for both cities. the only difference is the location of the artificial supply restriction. i’m not arguing that this is the only cause of the problem, simply that it is the most proximate factor and the best place to start working. tinkering with financial policy will largely help in the next property cycle, not this one. i understand what you’re getting at and my disagreement is with a detail, not the general thrust of the argument. however, i suspect this discussion is moot simply because no party could survive a deliberate drop in house prices to unrestricted market prices.

    to go off on a tangent, people who tell people like me to ‘lower their expectations’ after a life time of subsidised government education, tax policy largesse and an economic boom kicked off by their parents’ generation irritate me no end. the facts are that these people saved less of their incomes for a shorter time to buy their homes and yet pontificate about how the rest of us should just grit our teeth and pay several times what they did for their houses. the point is lost on them that we are already working harder for a home than they did and a lot of us likely won’t get there despite working and saving harder. no offence, but the stats don’t back their interpretation.

  18. Possum Comitatus said

    2 Tanners,

    The affordability of housing both in real inflation adjusted terms as well as in terms of the how many times the median or average wage it takes to buy a home has never been like it is today. That isnt to deny that in the past people found it difficult, and neither is it blaming people from previous generations for what has happened.

    People operate in the environment they find themselves at the time – I think the last thing this country needs is intergenerational warfare where Gen X and Gen Y start blaiming the baby boomers just because the boomers happened to be around at a time before the market blew out.But while Gen X and Gen Y need to keep their misdirected snark at boomers in their pants, boomers also need to realise that despite sensationalist media stories to the contrary where first home buyers are buying the biggest and the best – the reality is actually the same for first home buyers now that it was for previous groups. You borrow a large sum of money to get into the bottom of the market, but where the difference today is that the size of the loan that’s needed now is effectively 2, 3 and sometimes 4 times larger (depending on your location) IN REAL TERMS than it was 25 years ago.

    No group is part of some evil empire responsible for the housing market – government policy is responsible for that, not the people that operated within the market.

    The big problem with the house price blow out is the consequences for ‘other things’. How many people here realise that the majority of our foreign debt flows over the last 10 years or so have come from local banks borrowing offshore to fund the domestic mortgage market? Due to the ballooning costs of housing we’ve found ourselves in the perverse situation where we borrow from overseas to purchase our own land. I dont mean that in some sort of pre-70’s economic isolationist way – I mean it just in terms of its general peversity.

    As housing has ballooned in price, there’s the enormous opportunity cost involved. All that money that has flowed into artificially high prices was money that could have been used elsewhere – like business development, purchasing better quality baskets of goods and services (meaning having higher standards of living), other expenditure – other investment.

    We dont get something for nothing – high housing prices involves trade-offs, yet the current policy regime has not only created high prices, but has done so in such a way that the usual solution to high prices (which is where developers start building more housing stock to cash in on those high prices – eventually lowering the price as a consequence) has not eventuated. The market has been seriously distorted when the solution to higher prices in so longer higher prices itself.

    The problem isn’t current property investors – the problem is current policy. What we want is not less investment – but more! But we also need to change the tax treatment so that more investment doesnt simply bid up the prices of established housing (which it currently does) without actually increasing the housing stock. Wha we want is to normalise the market so that increased investment actually does what increasing investment is supposed to do – increase supply.

    On regional development – I agree.The usual types of government intervention when it comes to decentralisation programs didnt work and I cant see them working any time in the future. But I do wonder whether more unusual policy programs can create unusual incentives that might work?

    Policy programs that might be a little bit out of the box? I probably should have clarified that a bit better in the post (I might go and do it now). I chose the word “emulate” rather than “copy” deliberately when describing what the qualities that people see capital cities as having which drives them to live there, and what can be done by regions to compete with these qualities. The regions probably wont be able to copy those qualities – but they may be able to emulate at least some of them (which gets on to the question of how).

  19. […] concentrate on some client work and the gym first. Meanwhile, you can always read part 2 of Possum Comitatus’ housing policy analysis and Guy Rundle’s negative perspective on the […]

  20. Kiashu said

    Well, if you want to make buying a home more affordable, kill off negative gearing.

    Of course that’ll then put rents up. And realistically, a good portion of those who rent are low or low-middle income, and are not going to buy unless the median house price is a year or two’s wages. The historical average of 3-5 years is beyond them, and forget about today’s 7-10 years.

    So it’s all about whether you want to help low-income (negative gearing helping renters) or middle-income (nix negative gearing, helps first home buyers) people. Historically the ALP aimed at the working class, so they’d be against neg gear, but then in the 1980s they decided to try to abolish the working class (economic rationalism, yay!) so they had to appeal to the middle classes instead.

    Thus, negative gearing, and helping out those who upthread were called “consumer junkies” treating their mortgage like a low-interest credit card. I know a few people like that. “Oh! They just revalued our house at $400,000 compared to the $350,000 we borrowed, awesome, let’s borrow another $50,000 and SPEND!”

    That’s the middle classes for you – aka the Whinging Classes. They did a study over in the UK on finances and stress. You might expect that impoverished people would be the most stressed about money, but nope – it’s the middle classes. People feel the most stress when they have everything they need but not everything they want… and as they say, the squeakiest wheel gets the most oil – so government policies are going to be aimed at the Whinging Class…

    Plus, all parties know they’re the swinging voters. The impoverished and working classes all vote Nat in the country no matter what, and ALP in the city no matter what, and the upper class votes Lib no matter what – so that leaves the rural and urban middle class as the swinging voters. And most of them aspire to be “consumer junkies”, except for the lefty greenish minority.

    So I don’t see the government policy changing soon…

  21. 2 tanners said

    Gam (@17),

    Assuming the last was a shot at my post, when I bought a house it cost $72,500. My annual salary was $6,500. Interest rates when I agreed the loan were 9% but were 11% by the time my house had settled and the first payment was due. There were no tax breaks, no baby bonus, no nuthin for owning your own home. What subsidised education has to do with it evades me, but it’s still subsidised and paid for only when your salary reaches a certain level.

    Is it hard today? Of course! But what I don’t get is why people wring their hands or expect saving at 0.0003% interest will help. Or why the Government should help, after their last hamfisted attempt caused this mess. Get out. Find alternatives. I took a second mortgage to help me afford my first home.

    Anyone fortunate enough to buy for the first time in the mid nineties was doing well, but hardly qualifies as a typical boomer.

    BTW, have you thought that perhaps if prices did take a tumble what the market reaction would be? I certainly would be in there buying, and thereby competing for the same products.

  22. Possum Comitatus said

    2 Tanners,

    House prices tumbling would be a poor outcome by any yardstick – big movements create dislocation and inevitably piss someone off (making the politics impossible, hence killing the exercise stone dead) . Ideally one would want house prices to stay static in price (or only very small growth) as slowly supply expands to allow wages to catch up and inflation to erode the real value of housing. That way one wouldn’t get big market reactions – just a small, incremental increase in housing affordability over time that everyone can live with.

  23. Grumps said

    Poss,

    Post like this, should keep the trolls a bay. To do deep and hard for them. Homework required. Not what the net is about Poss.

    My suggestions for affordability and growth of reasonably priced housing stock in the regionals. Can’t tackle the economics of your argument.

    With you on the winding back of CGT, but this is deeply ingrained for any reasonable tackling of the problem. It will be one of the bitterest pills to be taken as a medicine for a situation that is akin to drug dependency. Both disease and medicine are unpalatable.

    My suggestions though not as well thought out and reasoned as yours:

    Transport fixes tackled on a nation wide basis. Connection with any regional and intra city area with fast heavy rail links, use of light rail and bus feeder connections. This task has to be rated on priorities set nationally, including all stake holders. This should keep local pork barrelling out of it to get best bang for buck.

    For the average family (or should I venture the median family) affordable housing comes with price. Outer suburbs and regional areas being poorly connected to public transport. Citing average data for these areas all are 2 car families. Assuming $0.48 cents per kilometre operating cost of a vehicle a 10000 klm road mileage per year, this bill equates to $4800.00 (I know unscientific and on the low side but give me latitude I am grumpy.) Roughly a tenth of the average (not median) income on transport.

    This needs to be spent from after tax income to guarantee and maintain an income to pay of the home loan (“pythonesque” but I am on night shift).

    Affordability is also an issue to keep homeowners in their current dwellings. Good transport links also can act as back paths to regional centers meaning that some may make that final job and home purchase in a regional center.

    Introduction of a savings style superannuation product. don’t want to take up space with operation but if it is done in this style a product offered only by super companies with iron clad requirement of building housing of all types and pricing to permit a diversity of entrance pricing and affordability’s. Development to be undertaken by companies directly linked to these Super firms.

    This should break the nexus of the big home building firms buying up tracks of land and releasing them in a style and pricing levels to suit their shareholders. I am aware of an area in the west of Melbourne where a listed company has sat on land that could accommodate up to 6000 house blocks. This is just starting to be dribbled to the public after at least 10 years of ownership and arguing over what they want.

    Maybe we should think of an ownership model that permits a sense of ownership, for the short term renter allows for a capital increase to be shared between owners and renter and provides a modest and ongoing return for the investor.

    The big splash for housing Something to be said for removing state governments or herding them up in a single direction. This is one of those issues. State policies and planning laws need to be addressed to achieve a commonality to allow larger players to come into the field.

    This will hurt, but if one firm with can build a city, clear objectives of affordability, style type of housing, quantities levels of density, traffic movements, foot bicycle public transport, etc., interconnections to other cities and regions.

    I would be talking in terms of a Walter Burley Griffin Canberra carried out to fruition rather than a piece meal approach.

    Rates Analyst mentioned Maslow as an issue with the young in post 1. Do agree a tiny little bit of this does occur but if mum and dad are going to provide lodging, food and all those ancillary services for nothing. Why leave home !!!!!

    I think that there is a building despondency among the young in entering the market. It is difficult and the sooner this issue is tackled the sooner they can have their own home rather than waiting for the olds to fall of the perch.

  24. Harmless Cud Chewer said

    I’d like to mention the two things that are most overlooked and perhaps least understood in the housing debate.

    Firstly, cities are quintessentially a transport network. Transport technology enables the city. It also sets the natural bounds and indirectly, the cost of land.

    Secondly, the prime motivations for most people who choose to live in cities are social networking and convenience.

    So what we have is a delicate balance between the perceived and real advantages of living in a city versus the perceived and real disadvantage of living at any particular location in a city.

    And its not rocket science to predict that people will pay more to live close to a city, less further away. My point is a bit more subtle. That is, the cost (real or perceived) versus distance equation is all about transport and transport planning.

    Put it this way: if we had invented teleportation already, we wouldn’t be having this debate.

    It’s also stating the bleedin obvious to say that Australia doesn’t have enough cities. More precisely, it doesn’t have enough cities with the perceived advantages of our capitals. And believe it or not, this isn’t about income. Most people have the wisdom to understand that moving to Sydney isn’t an automatic ticket to wealth. We all know the place is expensive to live in. Rather, we do so mostly for non economic opportunity.

    Besides transport not having its share of mind space in this debate, my other annoyance is the way people take transport for granted and the way our culture responds to transport needs reactively, not pro actively.

    There are numerous examples where creating a new freeway or train link with the intent of linking cities, has created its own growth corridor. The point here is, organic growth in land settlement will follow opportunity and the most important one is simply getting there and back in what is perceived to be a reasonable time.

    The way to go then, is to link existing large cities with existing towns, with high speed (300km/hr+) transport and then let organic growth do its thing. Of course it doesn’t hurt to do some ‘seeding’. That is to create individual germs of advantage for our new cities. Nor does it hurt to do some old fashioned branding.

    Btw, I generally agree with most of the other comments here, particularly to do with our broken tax system. But we still need to actually build stuff.

  25. Alphonse said

    Good stuff, Possum. Other thoughts, allied with those about transportation:

    What about differential tax treatments that favour:-

    – new non-greenfield development that increases density around established infrastructure

    – basic housing over McMansions

    A gradual lowering (or freezing in real terms – same thing) of eligibility threshholds for purchase grants and an introduction of property value threshholds for CGT relief should be part of the mix.

  26. swio said

    “So it’s really nice to see more serious opinion and analysis pieces about real issues that actually affect national living standards turning up far more regularly of late, like the articles Megalogenis has been writing at The Oz.

    Amen to that. I know more about Barack Obama than I do about my own local council and that’s just crazy.

    You haven’t mentioned popultation policy, but surely that’s the biggest driver of demand for housing? Especially as almost all migrants end up in the big cities.

    I am not sure that keeping house prices constant in nominal terms for an entire decade is politically realistic. There is an entire industry out there with enormous political clout that is based on rising house prices and they are not going to meekly sit around for a decade and put up with flat house prices. Many people feel that rising house prices are a god given right. As soon as there is some potential for house prices to rise, say in five years time, enormous pressure will be brought to bear on all governments to let house prices rise again. I just can’t see any government fighting against the housing lobby for an extra five years with nothing to gain out of it except more realistic house prices. It doesn’t make political sense. This is a big reason I feel pessimistic about the prospects for (government led) housing affordibility. Barring a financial crisis I think we passed through a window in about 2003 and from now on our housing market is going to look more like Europe’s with much lower levels of home ownership.

    “Are their incentives that could be offered to firms to both encourage telecommuting from their employees that wished to live in regional centres but where their employer was based in a capital city, as well as any possible incentives that could encourage the relocation of some types of high paying firms, or at least units of those high paying firms to regional centres?”

    On this point I think I can claim some insight.

    1) The company I work for had an arrangement like this in Victoria in the city of Ballarat. I don’t know the exact details but they got some sort of subsidy per employee they had in Ballarat for a certain number of years. I think the idea was that they hire local grads and build up a division out there. My company is a big multi-national and most of its employees would be the type of people you’re talking about. What happened in practice was that they turned Ballarat into a low cost centre. ie, they specifically looked for low wage, relatively low skill jobs in the company and moved them to Ballarat. Sort of the opposite of what you’re hoping for and it remains something of stopping station for grads on their way to a better job in Melbourne from what I understand.

    2) I am able to telecommute to work. If I have my work laptop and a broadband connection then in 30 seconds I can be logged on and operating exactly as if I am at my desk. At the moment I do this if I have to work from home because I have the plumber coming around, or if I have to fix a production problem in the middle of the night. If I really wanted it, and was really nice to my boss and knew the right people to talk to there is a 50/50 chance I could arrange to work from home permanently. If that was the case I could live and work anywhere in Australia there was a very very reliable ADSL2 connection or faster (satellite would not work). One member of my team actually does this and works from home in Perth as part of a team that is in Sydney. Despite the fact that I can’t really afford a decent house in Sydney, and I and my wife like the idea owning a decent sized block of land somewhere outside Sydney I wouldn’t do this.
    * Reliable internet connectivity – At the moment and for the next few years at least I doubt you could convince me that anywhere has an internet connection reliable enough for two jobs to depend on. I have heard too many horror stories about Telstra stuff ups (within Sydney metro) resulting in weeks of interrupted internet access. (That guy in Perth can always go into the Perth office if he needs to).
    * The risk of downsizing. If I got downsized then I’d have to find work with another company that would let me work from home. Right now that’s a bit unrealistic. Maybe in a few years things will be different but for now someone who telecommutes faces significant employment risk.

    But are their more out of the box type incentives that could be used, not to copy the qualities that drive people to live in capital cities, but to emulate those qualities?
    If I was going to try and get people to move out of the cities here are a few things I’d do.
    1) Pick the places that high income earners currently go to on holiday. The place has to have some sort of reason for people to want to live there and a holiday place has that. On top of that it will already have all the basic entertainment things like restaurants and coffee shops.
    2) Set up reliable broadband, with a range of choices of ISP’s and some sort of Service Level Agreement about speed, reliability and availability with financial penalties for non-compliance. For my work ADSL2 is fast enough for everything thing I do. I am pretty sure that very few jobs would need faster than that. But what’s just as important is the quality of the ISP and the backbone behind it. If you use a good isp like iinet or Internode with ADSL2 you’ll likely have a fast enough interent connection to telecommute for almost any job except 3D graphic animation. If you have ADSL2 with Bigpond or Optus then its a different story.
    3) Create a walk in office in the main town where people can lease desks which has all the usual office stuff like printers, faxes and a network. That way people won’t feel so alone in a new town and will have a place work other than their home.

    As for moving an entire firm or division of a firm, well I think that is pretty hard. For alot of people the whole point of working your way up the corporate ladder is so that you can earn enough money to live the good life in the heart of a major city. What do you with a $200k income in a regional town? Any company that moved to a regional centre would be almost guaranteed to lose alot or most of its staff. In Sydney there is a big project to move alot of the legal work to the new Parramatta Justice Precinct, about a 30 minute train trip from the CDB but still with Sydney and lots of people have quit over being even that far out of the city. There was something I read about company relocations a while ago (can’t remember the details). It studied a whole bunch of them and found only one rule always held true. The commute of the CEO always got shorter. Maybe you could set up a CEO relocation plan and see if the companies follow, but I’m pretty sure that most CEO’s are going to want to live in a major city regardless.

  27. […] Possum Comitatus publishes the second part of a long and impressive analysis of Australian housing policy. […]

  28. derrida derider said

    What Tad says. It won’t be very long at all before housing affordability is yesterday’s issue. Real wages will rise a bit in the near future while credit dries up and houses start saving more to repair their balance sheets.

    You’ve always got to remember that house prices can never be unaffordable at an aggregate level, because if people can’t afford those prices then they won’t buy and prices will drop to a level they can afford. Unless there is evidence of widespread homelessness or unacceptably substandard housing (neither of which obtain at present) we should be quite blase about such indicators. Markets work.

    Oh, and you don’t need to compare real wages with real prices to measure “affordability” – doing them both in nominal terms is fine because inflation in numerator and denominator will cancel out.

  29. There are some comments on junk for code These are more about the shift in urban demographics–the shift from the car-based suburbs to the inner city.

  30. 2 tanners said

    Having vented my bitter and twisted comments, I’d support what various people have said about cities and transport and what swio says about telecommuting. Come its day (not yet, and not for a while, given my knowledge of how management lags technology) housing may become decentralised.

    The point that migrants occupy the capitals is true if we are talking international migrants. Internal migrants incorporate a lot of sea changers, tree changers, and gold coast/sunshine coast retirees as well. That is worth thinking about, especially as it affects particluar markets.

    There is no Australian real estate market, just as there is no Australian electorate – it is a sum of disparate and contradictory motions. This is important to bear in mind in preparing policy prescriptions. You can’t look at the Australian situation through (e.g.) Sydney goggles.

    Finally, Poss, thanks for bearing with my arguments in your usual polite and reasoned manner. Although we are not entirely in agreement it is at least a pleasure to discuss, rather than dispute.

  31. James said

    derrida derider: Unless there is evidence of widespread homelessness or unacceptably substandard housing (neither of which obtain at present) we should be quite blase about such indicators.

    What about the serious lack of housing in Perth?

  32. Zafar said

    Doesn’t having a greater number of cities (and high paying jobs) depend on there being a sound economic reason for these cities in the first place? Cities don’t exist because people need somewhere to live, they exist because there’s work that can best be done by many people in a small area. Everything else flows from that.

  33. Possum Comitatus said

    Cities in Australia for the last 100 years have generally a product of political history rather than industrial. Each state has a major city, its capital, and everything was centralised into those capitals as a result.

    If Capricornia and New England became states, what’s the bet that Armidale would be twice its current size, and whatever the Capricornian capital would have been (Cairns, Townsville or Rockhampton) would likewise be far larger than it is today?

    When you compare the American experience of decentralising government functions compared to the Australian experience of centralising them – is it any wonder that the yanks have far more cities than we do (in proportion to our respective populations).

    If we take Sydney as an example, what sound economic reasons give it a population of 4 million rather than 2 million? Urbanisation is just the consequences of the population clustering, but when we have so few places to cluster around as a result of the way we’ve not only organised our government functions (the public service is the biggest employer in the country by far), but the way we’ve encouraged capital cities to monopolise metropolitan type industry – our lack of large cities seems to be more driven by historical inertia than any type of necessarily rationale behaviour.

  34. Zafar said

    Possum

    (Damn, now I feel like Dame Edna….)

    [Cities in Australia for the last 100 years have generally a product of political history rather than industrial. Each state has a major city, its capital, and everything was centralised into those capitals as a result.]

    I agree that making a city a capital does increase its population. But that’s because it increases, by fiat, the centralised services (governance) that that city produces and provides, as well as the related symbiotic services (eg media). Somebody has to ‘produce’ this stuff.

    I would argue, however, that choosing a seat of government isn’t a random decision – there’s a tendency to pick the ‘centre of the economic action’ (or very close to it) – both because governance means keeping an eye on what’s going on, and also because, well, you need people to do the governance, and the people are where the action’s at. (This is kind of circular.) The vast majority of political capitals are in cities which are at, or very near, that polity’s economic heartland. (The exceptions – Canberra, Ottawa, Abuja and Brasilia – are due to political compulsions.)

    Once you have a critical mass of people (Government is only part of the story, imho), it makes economic sense (in terms of access to domestic markets and to labour) to carry out economic activity in, or around, the city. That’s why urban regions continue to attract more and more people and capital. And why even Canberra has an industrial area. I guess it’s an illustration of how the market does not, on its own, solve everything. Rational individual economic decisions contribute to increased centralisation of economic activity, but the sum of them unchecked can make cities less and less productive.

    [If Capricornia and New England became states, what’s the bet that Armidale would be twice its current size, and whatever the Capricornian capital would have been (Cairns, Townsville or Rockhampton) would likewise be far larger than it is today?]

    Very probably – and if there had been more states to begin with, Australia might have had a lot of medium sized cities rather than a few large ones, which might have been a good thing wrt housing affordability. But I’m not sure that one or two of these wouldn’t have drawn ahead in terms of level of product/services it provided (for a national rather than just state level markets) anyway.

    [When you compare the American experience of decentralising government functions compared to the Australian experience of centralising them – is it any wonder that the yanks have far more cities than we do (in proportion to our respective populations).]

    You could argue that it’s a function of American geography. The fact that so many more people can live on the land, because of availability of water, makes small towns that service surrounding rural populations that much more viable – and any one of these can start providing services to a broader region, thereby beginning its growth into a city. The political structure complements/reflects that rather than the other way round. And the spread of the population is what makes the number of state governments they have viable. If there weren’t enough people in an area to pay enough state taxes to run State institutions, there wouldn’t be a State Government there.

    Certainly once some towns attain critical mass, they become significant markets and sources of labour themselves, but their locations (and starting populations) are a function of older constraints. New York and Philadelphia, for example, were about the same size until the Midwest was settled. Just about all of the grain exported to Europe from the Midwest went up to the Great Lakes, across the Erie canal and then down the Hudson and out through New York city. Philadephia didn’t get a look in because it had the anthracite Adirondacks between it and the Midwest. New York certainly doesn’t depend on exporting grain today, but the critical mass it achieved when exporting grain was ‘the thing’ has kept Philadelphia from ever becoming a serious rival again. (I think that the gold rush might have done this for Melbourne, even if we had started off with many small States and state capitals.)

    [If we take Sydney as an example, what sound economic reasons give it a population of 4 million rather than 2 million? Urbanisation is just the consequences of the population clustering, but when we have so few places to cluster around as a result of the way we’ve not only organised our government functions (the public service is the biggest employer in the country by far), but the way we’ve encouraged capital cities to monopolise metropolitan type industry – our lack of large cities seems to be more driven by historical inertia than any type of necessarily rationale behaviour.]

    It’s due to a lack of planning – sort of letting the market sort it out, when the market doesn’t really work when it comes to this. It’s economic inertia, rather than historical inertia.

    Somebody has commented here that transport is the key – and I’d tend to agree with them. Both within capital cities – good transport expands the part of the city that is desirable to live in because it’s not how far you are from the CBD that matters, it’s how long it takes you to get there – and around capital cities. Basically a system that facilitated surrounding cities access to (for eg) Sydney’s markets (and labour?) would increase the number of high paying jobs in these cities, increase their attraction as places to live, and result in more housing close to where people wanted to live by increasing the number of places they wanted to be close to.

    Jane Jacobs (‘cities and the wealth of nations’, I think) argues that conurbations of small urban areas function better as wealth creation systems than single large urban areas (contrasting Toronto and Montreal). If she’s correct, the end result of facilitating economic participation around Sydney would be better for people who lived in Sydney as well as those who lived outside Sydney.

  35. JP said

    HCC @ 24:

    What you say about transport being a key I think is true, but not for much longer.

    My family lives in the Coffs Harbour hinterland, and our road infrastructure is bone-rattling and suspension-wrecking. We have no rail, bus, whatever. Getting to Coffs for work is a right pain in the arse, especially compared to our previous habitat in Sydney’s inner west, where we were close to everything.

    So how do we cope?

    Broadband.

    My wife works in Sydney. And Dublin. In the past she’s worked in Lismore, and Narromine, and Brisbane, and Honiara. Sometimes all on the same day.

    I’ve worked on a project team in Sydney with a team member who moved to Toronto (in Canada) mid project – he didn’t quit, he just moved. My project manager didn’t seem to find that a hassle, but perhaps that’s because she was in Adelaide.

    If you built a 300km/h bullet train from Coffs to Sydney, we still wouldn’t catch it, because we can be working in Sydney in zero minutes, for zero dollars right now, so the train just couldn’t compete on price or convenience.

    Now not everyone works in the information economy, but if those that do leave the cities, then they drag demand for goods and services (and the jobs that provide them) with them when they go. At $4.7 billion for a nation VDSL network to enable this sort of change that’s got to be better value than 19th century solutions like railways, where $12.5 billion only gets Sydney a 37km metro line.

    Hmmm, let’s see, I’ve got $4.7 billion – national VDSL, or 14km of underground railway? As much as railways are cool, they’re expensive, and yesterday’s technology.

    You’re more right than you think when you say that if we’d invented teleportation we wouldn’t be having this conversation. We’ve got the next best thing, and we shouldn’t be discussing transport.

  36. From Dowunder said

    Is it that we don’t have enough housing, or that we are living in the wrong housing?

    For example:
    Family one: husband, wife, 2.4 children, in a two bedroom flat. No garden to maintain/use.
    Family two: retired husband, retired wife, poor health, in a four bedroom house, with large garden to maintain/use.

    I’m one of the fortunate ones to have bought just before prices went silly. I moved into an area that was built for families thirty years ago. Now that the neighbours kids have all left home, the area is mostly retired couples, generally with a small pet, living in 3-4 bedroom houses. There are multiple (mostly empty) public children’s playgrounds in the area.

    Now lets suppose that we create a tax incentive for ‘downsizing’ our housing, say as a rebate on the land tax/council rates for moving into a smaller area, and for building ‘retiree friendly’ communities. Conversely, a tax (or higher council rates) could apply where households have more bedrooms than people.

    Building small houses is generally cheaper/easier than building large houses.

    Encouraging retired persons/couples out of large/low density housing, and into areas with level access & close to facilities (e.g. near nursing homes, doctors, shops, recreation facilities), you free up the ‘family homes’ for families. One option could even be to have subsidised nursing homes having an ‘preferred area’, where people from that area getting preferred access (similar to how public schools have a ‘preferred area’).

    This then (hopefully) makes available existing large houses for families.

    [Standard Disclaimer]
    THE SUBJECT MATTER INCLUDED HERE IS PROVIDED “AS IS” AND WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED. WE SHALL NOT BE LIABLE FOR ANY SPECIAL, INCIDENTAL, ACCIDENTIAL OR CONSEQUENTIAL DAMAGES, INCLUDING, WITHOUT LIMITATION, LOST REVENUES, LOST PROFITS, LOST VIRGINITY OR LOSS OF PROSPECTIVE ECONOMIC ADVANTAGE, RESULTING FROM THE USE OR MISUSE OF THIS CRAP.

    [ Sorry Dowunder – you were stuck in the spam bin for a bit. Rates exemptions are an interesting incentive though! …Poss ]

  37. Roger said

    I do like the fact Poss that you have gone “out there” and offered your thoughts and ideas – but my sense of it is that the time for properly managed policy responses has long gone. Now we are in unchartered waters – the housing market has a life of it’s own and “policy” – is pretty much redundant.

    A major factor influencing house prices is “emotion” – how else to explain the fact that for at least three years the “punters” have been buying houses at seriously overvalued prices. The OECD have been saying for at least those three years that OZ house prices are 50% overvalued. It might be that *some* of us are deaf but the rest of us have been in denial. The truth is that we have been paying too much because we think that we will be bailed out – either by the banks or by government.

    And the reason is because that is the expectation and the history of the place. When was the last time that Joe punter had to wear the consequences of his decisions? Greed is a powerful emotion and greedy punters think that they will be saved from their own stupidity – by *someone* – often a taxpayer.

    And in truth it will likely happen. Because we have been pouring our spare cash into non-productive housing investment and not into real business activity, we have come to believe that this is all OK. I can point to many folks who have been influenced by this against their better judgement – just because the local “guru” said it is OK.

    And because people have to live somewhere and they think that it is almost OK to pay twice what the place is worth – just for a roof – it’s the way they are conditioned. Sad I know.

    My sense is that we are about to find out how the “market” works – and some of those folks who were flashing around someone else’s money will end up in deep doo-doo.

    The question is – “do we save them from their own stupidity”? Or “do we let the market perform it’s function”?

    I honestly don’t know the answer.

  38. 2 tanners said

    I think it’s even worse than that, Roger. With Which Bank? encouraging people to lever themselves to the eyeballs for boats, cars and flash house extensions, some are going to end up in real doo-doo and have nothing to show for it except assets which will depreciate.

    However, I repeat a point I made earlier, in a different way. In what sense is investment in established housing to provide an accommodation service to renters ‘unproductive’? How is it really different from buying a shop offering medical services, for instance? It saves the Government from providing that same service, although the Government certainly subsidises the service provision rather than paying for it outright, it meets a market demand, it provides soemthing that most think of as a social necessity (accessible accommodation/medicine) and if you take a risk and go broke doing it, tough.

    Re JP’s broadband comments, too many managers today either (a) manage by body heat (if you aren’t there, you aren’t working) or (b) require physical presence at meetings to be comfortable. Technically, there are also still problems. As someone who has tried to hold a teleconference which included Honiara, I can tell you that when the national monopoly telco goes down for two days, it can be cheaper and more effective to hop the next plane to Brisbane and meet face to face.

  39. JP said

    2Tanners:

    Investment in housing isn’t necessarily a bad thing. But when property prices doubled, so to did the investment in housing, without any extra productivity. It’s better to invest $400k in a house and $400k in a business, then $800k for the same house (!) and $0 in a business.

    And as far as Honiara goes, it’s cheapest to just wait a few days till they get their act together🙂 Just like people have to wait when our business is regularly off-line. And that’s not because of broadband, which we find ultra-reliable in our corner of the bush, but because we don’t have a reliable electricity supply. Honestly it feels like the the third world sometimes, and it’s stuff like this that city people find a scary prospect about moving to the regions. Wishing we went solar now… But seriously, if you want to ease the pressure on city infrastructure, then you need to provide regional infrastructure that’s better than third world standards. Too often, we don’t.

    Roger:

    People did not pay big bucks for overvalued real estate because they thought they’d get bailed out if values fell, they payed big bucks because they thought the value would only increase more, and they’d make a quick couple of hundred grand for no work.

    As a society, we seem to have taken a very “pure market” approach to almost everything. We have no concept of the value of things, beyond the stated price. People believe an unrenovated semi in Mosman is worth $1 million because that’s the price tag. It no longer has anything to do with what it cost to build a house, or the fair price for land. People take this approach with everything from housing, to cars, to everyday goods, to services, to national infrastructure (the tendered cost of projects on the Pacific Highway, for example, seems to have less to do with the cost of materials and labour than it does to do with working out what cost the Government will bear).

    But as you say, people act on emotion, and the biggest emotion that I’ve personally observed is fear of change. Some years ago we swapped our 230 square metre block and small house on a main road under the flight path in Sydney’s inner west for 17 acres of riverfront paradise on the north coast. We don’t even have to share the river with neighbours on the other side – it’s a World Heritage listed National Park. Our house is bigger, and we don’t need to lock it or take the car keys out of the ignition. If we forget to go meet the school bus 200 metres away, the bus driver makes a detour and drops the kids in our driveway. We’ve ditched the 11km commute (that took an hour each way!) and set up to work from home. And what did all this cost? Nothing. In fact by selling our tiny house in Sydney and buying all this we had five figures worth of change. Our ongoing costs are so low that we’ve cut our combined work hours from around 120 hours a week to 35.

    I don’t mention all of this to brag (although I do think it’s pretty cool) but to make note of our friends’ reactions. They almost unanimously think we’re insane. Some think what we’ve done is good, but not something they could ever do. Very few can come up with reasoning to back up their position, it’s just emotional. And so they stay in the city and slave their guts out to buy pretty ordinary houses with mortgages bigger than the price of my whole farm, all the while bitching about the traffic, the trains, and the cost of childcare.

    If people made rational decisions about things like the cost of housing, and stopped paying $1 million for houses that contain less than $100k worth of building materials, then whingeing about their debt levels, then we would never have got into this position. And as a bonus, property developers wouldn’t be the richest guys in town.

    But people are strange, and I think poss is right in saying that the only way to burst this bubble without political pain is to force house prices to stagnate, and let inflation provide the real falls that the market needs. As such, I think the best policy that the Government could adopt is to publicly state that they are looking at ways to manage house prices lower. They don’t actually have to do anything, but stating loudly that they’re not just ok with flat house prices, but actually all for it, would take out a lot of the irrational exuberance from the housing market.

  40. Possum,

    You’ve really got your paws working over time on the key board and produced some excellent work and discussion. Sincerely; well done.

    As for the ‘culture wars’, I cannot agree more. The irony is that is the likes of Janet remind me of the lefties of the 1980’s with her sanctimonious ramblings. Just another version of Political Correctness – the very thing they rail against.

    A big yawn indeed.

    Jules

  41. steve said

    Just a lightweight confirmation of your risk aversion point

    http://www.realestatesource.com.au/Articles/Residential-Real-Estate-Forecast-for-2008.html

  42. Old Academic said

    A Very Worthwhile discussion. I’m no economist, but I’m curious if the following policy would be help, at least to those under “mortgage stress”. Allow “family home” owners negative gearing (against any income) if they are prepared to pay CGT when they sell. They could be allowed to “opt” for this if they choose. The idea is that the reduced tax burden would help them survive when their incomes are low (when they start out) and the CGT would only hit them much later, when they are better off at a later stage in life.

    Another idea that might help is to allow a CGT discount on any portion of the CapGains on a house sale that is put into “new” housing. If the entire amount is put into new housing, no CGT is payable. This should also “encourage” investment property owners who sell, to buy new housing rather than existing stock.

    I think it is true that telecommuting will be a great help with this in the years to come, and not only with greenhouse gas reduction.

  43. steve said

    The growth of real estate debt markets

    http://www.mirvac.com.au/investor/pdf/20070411_The_Growth_of_Real_Estate_Debt_Markets.pdf

  44. Zafar said

    JP

    Very interesting point about knowledge economy workers being able to do their thing from anywhere with broad band, but a few things to think about:

    1 How many such workers are there in Sydney? 5%? 10%? More? Less?

    2 How many can live away from cities (can their spouses also work via broadband)? How many of these WANT to live in a rural idyll?

    3 What about all the physical products that need to get to the Sydney market? (eg potatoes). How many of these are produced in Australia? Transport still plays a big role for these.

    4 Even in the service industries, most jobs require a physical presence in the marketplace.

    Re: letting housing prices stagnate – can only be done and accepted if alternative ways of building up savings/capital are made more attractive. (Since most people have most of their retirement funding sitting in their homes.) Which is where the market could be harnessed – some of the ideas mentioned here (no new negative gearing on existing housing stock is a good one).

  45. JP said

    Zafar

    1. You’re probably too low on the 10% figure. Remember it’s not just the creative types, but a fair whack of the IT industry, and just about anyone who works in a call centre. They outsource these sort of jobs to India, so rural NSW shouldn’t be too hard.

    2. Yep, some can’t or don’t want to live away from cities, especially if they have family or other networks there. In that sense, transport back to the cities is important to decrease the sense of dislocation. But also remember that if 10,000 knowledge workers move out, that creates further regional employment for shop assistants, plumbers, mechanics, teachers, doctors, waiters, real estate agents, accountants, you name it, so gettig ANYONE to make the move is an enabler for others to follow.

    3. Yes, transport infrastructure is important just for economic efficiency. I’m a bit of a transport infrastructure junkie myself, but it’s just not directly relevant to housing affordability. You don’t get enough bang for your buck. It’s stupid to improve transport so that people can live further away from their jobs. Better to move the jobs.

    4. See 2🙂

    People really are lacking in imagination as to how high-bandwidth broadband can revolutionise choices about where to live. The teleportation analogy is closer to the potential we’ve got on this. Our family intends to have an extended working holiday in Europe in a few years. What work? Same as usual. No-one even need know we’ve gone (except that they’ll get more 2am emails).

    As an aside, there is a downside, too. At first, before everyone has woken up to the fact that they can live anywhere, most people with skills in the new technologies will still be in the cities, and the first wave of adoption of this technology will be used to have city-based people deliver services (like higher education or telemedecine) to the regions, displacing regional workers. So before it is hailed as a success, expect howls of how it’s achieving the opposite of what people like me claimed as its benefits. But give it a few years and people will wise up to the fact that they could do their job from anywhere, and they will.

  46. steve said

    Here’s an interesting study on Assets held by Australians

    Moreover, sole parents also have more equity in
    businesses than equally wealthy single individuals without children at home.

    This is consistent with previous evidence that the number of children at home is positively related to the probability that a women is self-employed (Connelly 1992; Hildebrand and Williams 2003; Williams 2004).

    Finally, divorced and widowed individuals hold more real estate and less superannuation wealth on average than equally wealthy
    never-married individuals, while it is the financial wealth and real estate holdings of couples that are most closely related to the marriage history of spouses. On balance, these results are broadly consistent with the way in which we expect asset portfolios to evolve as households age. Younger households with children hold a relatively large share of their assets in real estate, while older households have shifted their wealth to
    liquid assets (financial wealth) from illiquid assets (real estate and superannuation)(see Porterba and Sandwick 1997; Flavin and Yamashita 2002; Milligan 2005).p17

    http://ftp.iza.org/dp3304.pdf

  47. steve said

    There are three studies here on Inclusionary zoning Acts which forces builders to sell some of their stock as cheap homes.

    http://www.docuticker.com/?p=19680

  48. swio said

    My friend did that at work a little while ago. He had booked a holiday to Taiwan to visit his parents but it turned out that work needed him and he to postpone the holiday. Instead of canceling the trip he just took his work laptop with him and logged in via his parents broadband over there. He ended up getting two months in Taiwan instead of one, and for the first month he was on full pay. Since Taiwan is only a couple of hours behind us it was no problem at all. Half his customers are in other countries throughout Asia Pacific so it didn’t make much difference to how he worked. When I was on holiday in New Zealand recently I realised I could have done the same thing. Everywhere we went had broadband so I could have travelled around NZ on a driving holiday while still being at work.

    Wireless broadband makes it even better. Now that you can get 5gb of 3G wireless broadband for only $40 a month you could conceivably hold down a full time job while wandering around Australia like a homeless hobo. Using an ultraportable laptop with a big 10 hour battery and a wireless connection you can be at work out in the bush while sitting around a camp fire.

  49. Norfik said

    You note that the last big decrease in residential real estate affordability occured after two policy changes, the CGT reduction and the first home buyers grant. The link you (and others) draw between these policy changes and the post 2000 decrease in affordability seems fairly logical. But soaring house prices relative to incomes isn’t just an Australian thing. Spain, the UK, Ireland, the US and other parts of the Europe – all these places had similar decreases. I doubt there were comparable tax changes everywhere – there must be other factors at work. Perhaps, given how globally widespread the decline in affordability has been, these other factors are the more important ones.

    I haven’t really thought this through, and I’m not economically trained, but maybe one of these other factors is the growth in incomes at the top end of the scale relative to incomes at the bottom or (more importantly when you’re talking about buying real estate) the middle.

    If we accept that people are highly status-conscious and view their home as the single most important indicator of their social status, and are therefore willing to commit a large proportion on any income increase in order to live in a higher status home (of which by definition there is a limited supply), wouldn’t a situation where after tax incomes rise relatively more at the top end than in the middle naturally produce lower housing affordability for people on median incomes? I’m not sure about this logic, but if it’s right, might the highly skewed GST tax cuts be part of the post 2000 problem? Might the Hawke Government’s tax cuts for the upper end have caused part of the fall in affordability in the last years of the 1980s? Might the relative growth in top end incomes globally be part of the widespread decline in affordability?

    If the above is correct (and it’s only an uninformed hunch with no data to back it) I don’t think it necessarily invalidates your reasoning or your policy ideas. Maybe it just adds weight to the argument that the next round of tax cuts (after those that the Rudd Government has already committed to – it’s politically unrealistic to expect these to be junked) should be skewed far more heavily to low and middle income earners.

    Maybe it also has some impact on your question about how capital gain expectations would affect owner-occupier behaviour, in the sense that if the bidding war for established housing is driven more by status than by rational economic incentives, changes to tax are likely to have less of an impact on behaviour than we might otherwise think or hope.

  50. Let me add my voice of congratulation to you possum for expanding the debate.

    I’ve always thought that the answer to regionalisation was to boost regional universities. I can’t see us creating a Cambridge in the bush, or even one of the better university towns the US has, but surely it would be possible to expand and improve places like Deakin Warnambool and Monash Gippsland.

    Academic salaries are not what they once were, but they’re still well above the average of these regional centres, and the spin-off companies some create pay even better.

    If the prestige is high enough overseas students will go there. Much cheaper for students who have no prior association with an established city. I think JCU is already on this road, but don’t see why more can’t go the same way.

    Would you include these in the “white elephants” you refer to?

  51. Some slightly tangential thoughts at my new blog.

    http://rapturousthinking.blogspot.com/2008/03/where-will-people-go.html

  52. Harmless Cud Chewer said

    JP @35.. I agree on the value of broadband. And as an IT type guy myself I would love to see a lot more telecommuting. Although, the widespread adoption of telecommuting is more a cultural rather than a technical problem.

    Remember we still have big open plan offices that staff phone sex workers :-s

    I disagree about trains. We are practically the only developed country without high speed trains and I think you’ll find that in Europe the trains are an integral part of the culture that creates smaller cities. To compare the cost with broadband is a bit like the space program versus starving people thing. It’s irrelevant because larger sums of money get spent on dumber things.

    If you want a real comparison, it would be relevant to compare the price of trains versus roads. We happily spent $20Bn+ on the Sydney to Newcastle freeway only to encourage urban growth onto the central coast and now, its saturated. Meanwhile the Sydney to Newcastle rail link remains an outdated joke. (The speed record on this line still belongs to a steam train.)

    As for the figure you raised for a rail tunnel. Let me ask, was the price inflated by the need to have to go under an existing city? Or did someone encounter monsters from Doom in the process?

    I’ll challenge you to nominate a technology that can get people efficiently over medium scale distances (100-500km). Planes, no matter how efficient don’t come near trains. Er.. unless you go real slowly.

    Oh and Possum, you’re quite correct about the rather arbitrary way that cities are ‘seeded’. But the kind of city it is, how crowded it feels, and how costly the land is, is ultimately about the human factors I speak of. Convenience. Social connectivity. My point still is. If you could take even a place like Melbourne, and simply triple the speed of its transport, you’d effectively make a very much larger area ‘habitable’ or put another way, considered part of the city. More land. Lower prices.

    The same effect happens when you simply foster satellite cities and the key ingredient is still, transport.

    -moo

  53. JP said

    @ HCC:

    Remember we still have big open plan offices that staff phone sex workers :-s

    Really? The only phone sex worker I know lives down the same dodgy smei-remote road I do🙂

    In any case, surely that sort of business would still be cheaper to run if you hired a big open plan office in a regional town.

    We happily spent $20Bn+ on the Sydney to Newcastle freeway

    No we didn’t. Seriously. Less than half that amount has been spent on the Pacific Highway upgrade between Sydney and Tweed Heads, let alone Newcastle. The Sydney to Newcastle Freeway was built decades ago, and was famous for being the first Australian road to cost a million dollars a kilometre. Last time I checked it wasn’t 20,000km from Sydney to Newcastle!

    As for the figure you raised for a rail tunnel. Let me ask, was the price inflated by the need to have to go under an existing city? Or did someone encounter monsters from Doom in the process?

    It’s not my figure, it’s Morris Iemma’s. As I said, I’m a bit of a transport infrastructure junkie – I don’t get the costing either – similar projects worldwide are being built for a quarter to half the cost (and light rail for one-twentieth the cost per kilometre, making it more sensible to build a light rail feeder network for the existing heavy rail lines, but I digress) Even if they built the NW Metro for half the announced cost this single metropolitan rail line would still be nearly twice as expensive as a national VDSL network.

    The VDSL network would do way, way, way more to ease pressure on the capital city housing markets than one Metro link in NW Sydney. We really, really, really need to pull our fingers out and get the most effective projects funded first.

    In terms of promoting housing affordability through decentralisation, national VDSL is the low hanging fruit. Compared to even modest transport projects, it is shockingly cheap.

    To compare the cost with broadband is a bit like the space program versus starving people thing. It’s irrelevant because larger sums of money get spent on dumber things.

    I don’t get it. Are you saying that transport is a dumber thing?

    In this case I think it’s VERY relevant, because what we’re discussing is connecting people to their workplaces. Physically transporting people to a desk to work at is no longer necessary for a vast number of information-based jobs. But, by and large, we still do it. That will change, and it will change even faster with video-capable broadband. And as soon as corporations bend their heads around the thought that by letting people work from wherever they already are they could entirely eliminate the need to pay the rent, power bills, cleaning and maintenance on open plan call centres, they’ll stop building them. And about a decade or two after that, the public service will stop building them, too😉 And then who’ll be catching trains from the urban fringes to the city?

    Railways (and cities) were a necessary byproduct of the industrial revolution – factory workers can’t work from home.

    Telecommunications networks are a necessary byproduct of the information revolution, without them my wife, for example, could not source regular work in both Dublin and Sydney as she does now. No amount of transport infrastructure can compete with that. Ever.

    That’s why the comparison starts to become irrelevant. Transport and IT can each provide only a subset of the solutions for connecting people and work, but IT’s subset is growing explosively, and transport’s is shrinking.

    As our economy moves from manufacturing-based to sevice-based and information-based, so the infrastructure spending needs to go with it, or else we’ll just get stuck doing things the old ways while the rest of the world moves on.

    JP

    PS: even in Europe, the road network is far more influential than rail in keeping cities small. Rail is more of a competitor to air over the shorter distances involved.

  54. caf said

    On the subject of more efficient transport links to existing cities seeding new growth areas, this JNR report on the “Economic and Social Effects of the Shinkansen” might be of some interest, particularly the example of Kakegawa City, which experienced a localised economic expansion apparently associated with the addition of a Shinkansen station (on an existing line – the Tokaido between Tokyo and Osaka) there in 1988.

    On the greater housing affordability issue, my only worry with the policy prescription given is that any measure which reduces the attractiveness of housing to investors will reduce the pool of available rental properties – thus improving affordability for purchasers, but eroding it for renters. So it’s essential that while cooling-off the money-fight between investors over the limited stock of existing houses, that they be definitely directed into building new housing instead of shifting their investment activity into a new asset class.

    Of course, if housing affordability improves then there should eventually be a movement from renters into owner-occupiers, which will have a dampening effect on the rental market. How much of an effect is hard to say.

    With so many interrelated variables, many of which act with a lag, not to mention an array of unpredictable external shocks, this is a pretty complex system that could well act in quite unexpected ways when prodded. Could be interesting to try and come up with a mathematical model of it a la Lotka-Volterra.

  55. JP said

    Not only would a price reduction attract renters into the owner occupier market, but it would also attract new investors, not only from those who could now afford property on account of it being cheaper, but also those who have put off investing because they expect the bubble to burst, and don’t want to be there when it happens.

    Besides, if prices fell, that would improve yields (making investment property more attractive) even without an increase in rents.

    Possum, I think the whole “investors abandoning a falling market” leading to a soaring rents is bunk. Do you have data from which you could work out whether there is a correlation between house prices and rents (possibly with some lead or lag)? Because I have a feeling rising property values have been the biggest drivers of rent increases over the years.

  56. Possum Comitatus said

    JP – I’ll have a bit of a dig around and see what I can find on that.

  57. caf said

    I wasn’t implying “investors abandoning a falling market”, I was envisaging a situation of “public policy pushing investors away from the market”, with the stated aim of stabilising nominal prices.

  58. Harmless Cud Chewer said

    JP @53.. The ‘dumber things’ comment was in reference to defense spending, corporate welfare, middle class welfare, etc. We have a trillion dollar economy. We do have the ability to do ‘national building’. Oh and btw, I had in mind the absurdities of the US economy behind that thought too.

    You’re preaching to the converted over xDSL technology. If anything I would argue that we need to spend the extra few billion and install fibre to the home. (Plastic fibre is now coming of age.)

    I’d agree that most work can be decentralized. However, I would still argue that there will always be physical ‘stuff’ to move, process etc and that tends to have synergies of locality. Also, unless you get towards the half million mark (population), you will tend to find that people prefer places like Sydney purely for the variety and social opportunity. In other words, even with decentralisation and satellite cities, people are still going to want to feel part of a larger whole. And with that they will want to travel mid-level distances often.

    Possum, here is an interesting thought for you. The growth of cancers and the growth of cities have some interesting mathematical parallels🙂

    -moo

  59. JP said

    Caf, I wasn’t actually referring to your post in that last paragraph. I think you were pretty spot on, except that I’m more convinced than you seem to be that the movement of renters to home ownership and the entry of new investors (attracted both by lower prices and the ensuing higher rental yields) would prevent rents blowing out.

    But you do hear a lot of alarmist sentiment that if negative gearing was abolished and investors fled the market then houses could fall from, say $400k to $300k, and rental shortages could see rents on similar houses go from $400/wk to $500/wk. My point is that most people who could afford $500/wk in rent would just go out and buy a $300k property instead, thus solving the problem. Not to mention how many people would be attracted by rental yields pushing 10%. The market would correct itself – any situation where it’s cheaper to buy than rent is not sustainable unless people see the market steadily declining for decades, and I think we’re a long way from that.

    But it’s just as well that I don’t make public policy, because if I was king for a day I’d ban the holding of non-owner occupied residential property as collateral against a loan. Leave investment properties to those who actually have enough of their own money (or other mortgagable assets)to invest in one. Bugger the inflationary speculation of “investors” who are aren’t actually investing any of their own capital, and simply taking a punt on the capital gains using borrowed money. Why a bidding war between these spivs (who are all receiving the “tenth home buyer’s grant” – oops, I mean “negative gearing deductions”) should be allowed to price coming generations out of home affordability is beyond me. And why as a government you would go beyond allowing that, but actually encouraging that, and being proud of it, beggars contemplation.

  60. JP said

    HCC @ 58:

    Yep, agree with all of that. Transport IS important, and for all the reasons you listed like freight, and allowing people social opportunity.

    But in terms of commuter transport, I think we’re better off moving jobs closer to people, preferably as far as their homes where we can, for as much time as we can. Our current transport networks (in Sydney, anyway) – road, rail, the rest – all work fine in the school holidays with just a fraction of the workforce not commuting on any given day. Get those people to stop commuting permanently, or just one or two days a week, and we’ve solved the problem, nationwide, for less than the price of a single new railway line, not to mention the benefits of allowing decentralisation to ease pressure on the housing market as we’ve been discussing.

    I think that’s one of the problems when people contemplate projects that cost billions – it’s hard to wrap your mind around just how much money that actually IS, so we sort of think of all these projects as just costing “lots”, and so all end up seeming a bit interchangeable. But to get the same effect on the housing market from high-capacity, high-speed, medium-haul commuter transport as you would get from VDSL &/or FTTH, you’d have to spend 10, 20, maybe 50 or 100 times as much, nationwide, and you still haven’t invested in a model that meshes well with our increasingly entrepreneurial model of work, where individuals derive their income from an ever more diverse range of sources.

  61. lurker said

    Hello Possum,
    haven’t been back for a while, and unfortunately don’t have time to read all you (no doubt) excellent analysis and the comments but here are a couple of thoughts of mine on housing affordability (apoplogies if they have already come up):

    1. There is a a small, but significant and growing population of international students in places like Adelaide that are putting significant pressure on rental vacancies. The number of international students a few years ago was a few hundred, now it’s 20,000 and there’s talk it will be 30,000 in a couple of years time. In a town like Adelaide that’s a significant proportion of the rental housing stock. I’ve heard stories of students having to share rooms the market is so tight.

    Solution: universities should be “encouraged” to build affordable specialist accommodation for international students as part of the deal in increasing numbers. Some places exist but are so expensive students prefer to use the private rental market.

    2. The boom in rental accommodation encourages investment housing and negative gearing only makes it worse. Negative gearing is a double edged sword – I’ve lived in the UK where it doesn’t exist and paying rent is significantly more expensive than paying off a mortgage. So NG does bring rents down somewhat. But what about phasing out negative gearing over a number of years so that it is only allowed for one property per person?

    3. Any new outer suburb developments should have well designed energy efficient housing, public transport links, services like shops, doctors clinics. Medium to high density housing should be encouraged on infill inner city industrial sites (we have a few of those in Adelaide).

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