Wendell Cox

                                          Wendell Cox 

Only natural disasters or manipulated markets can cause price rises on the scale we have witnessed in our housing markets, argues Wendell Cox.

As noted in The New City February editorial (‘Workers flee Sydney's unaffordable housing’), there is plenty of reason to be concerned about Sydney’s future and, for that matter, the future of Australia’s working families. The Third Annual Demographia International Housing Affordability Survey starkly illustrates the reality – housing affordability has become a thing of the past. The great Australian dream is being transformed into the elite Australian dream. Literally hundreds of thousands, even millions, of households excluded from the dream are being forced into a great Australian nightmare of perpetual renting.

As the survey shows, housing affordability crises of such magnitude are found only where urban consolidation or ‘smart growth’ land rationing practices have been implemented. Where the urban consolidation ideology has been resisted, housing affordability remains at historic norms, generally with median house price to median household income ratios (‘median multiples’) of 3.0 or less.

We have been heartened by the generally positive reaction to the survey in Australia and around the world. The general agreement with our analysis is not surprising, given the strong body of research that has reached similar conclusions and the consistency of those findings with fundamental economic principles.

Half-economic analyses

The few criticisms of our survey settle on what may be characterised as ‘half-economic’ analyses that blame demand for the loss of affordability. They are called ‘half-economic’ because they attribute price rises to demand alone, ignoring the role of supply.

The most persistent (and wrong) of the criticisms is from Rory Robertson of Macquarie Bank. In examining US housing markets, Robertson commits a major error by using local authority data to estimate housing market (metropolitan area) demand. This is akin to using Sydney city council area (local authority) or even Penrith data to evaluate the entire Sydney area. In the US, as in Australia, metropolitan areas (housing markets) comprise multiple local authority areas (hundreds in some cases). It is not surprising that this flawed methodology produces spurious results. He declares many markets to have declining populations, when in fact all have had population increases. Robertson facetiously labels many US and Canadian urban areas as ‘dull’ (others ‘sexy’) and dumbfoundingly dismisses Houston as an unacceptable place to live based upon his former fiancee’s opinion. That this is published under the moniker of a respected international bank is all the more puzzling.

The law of supply and demand

However, even where research methods are right, half-economic analyses are just not enough. Prices are not driven by a ‘law of demand’; rather, it is the ‘law of supply and demand’ that is at work. Demand in and of itself does not raise prices. That occurs only where there are constraints on supply. No amount of ink or rhetoric will justify denying the obvious fact that supply restrictions are the proximate cause of the housing affordability crisis in Sydney, Perth and the other large Australian markets. Moreover, virtually all of the unaffordable markets, from Australia to the American West Coast to the United Kingdom, were affordable before overly restrictive land use planning policies and practices created land shortages.

Supply constraints are the problem

Moreover, the difference between affordable and unaffordable international markets could not be clearer – where there are significant land use restrictions, markets have become unaffordable. Where there are no significant land use restrictions, markets remain affordable. Affordable markets include Atlanta, Dallas-Fort Worth and Houston, the three fastest growing markets with populations above 4 million in the surveyed nations (and indeed in the high-income world).

The depth of the crisis

Despite the substantial attention that the housing affordability crisis has received in Australia, the ultimate likely damage does not appear to be comprehended, at least where it counts: in government circles.

In little more than a decade, the price of land for housing development has risen more than any other element in the consumer price index. Even Typhoon Larry was unable to inflict so great a price increase on the fruit element of the CPI, not even temporarily. The land price increase has been more than double that of petrol. Prices only rise with such a vengeance in manipulated markets (such as OPEC-dominated petrol) or where natural disasters inflict short term increases.

The depth of the crisis is illustrated by housing affordability trends over the past decade. In Sydney, for example, the rise in the median multiple converts into an increase of approximately $500,000 to pay for and finance the median priced house over just a decade. This is, astoundingly, eight years of median household income. The situation is even worse in Perth, where the increase is the equivalent of eleven years of median household income. Even in low-demand Adelaide, urban consolidation has added the equivalent of seven years income to the cost and financing of the median priced house. Few if any government policies in history have inflicted such horrendous losses on future generations in so short a time.

Spilling into rental markets

Not surprisingly, the destructive urban consolidation policies are now filtering into rental markets, as evidenced by increasing media attention and federal proposals to provide rental assistance. As ACOSS President Lyn Hatfield Dodds told the ABC, ‘It’s the availability of land, it’s the affordability of land.’

The economic price

Suffice to say that taking hundreds of thousands of dollars out of household budgets to pay for housing will crowd out other spending. Households with less discretionary income will be less affluent and will have less money to spend on the consumer goods that create jobs. All of this will weaken the Australian economy, as will become clearer as lower cost older mortgages are replaced by the new far more expensive mortgages that are the reward of urban consolidation.

There could be even more crowding out. More of Australia’s young, talented professionals might be attracted to other shores, where they can own former great Australian dream homes at affordable prices. Some might, for example, leave Perth (or Sydney) for information technology hub Austin, Texas, and gain more than a decade’s worth of income (before even considering the much higher incomes in Austin).

Of course, most will not leave. Many will be condemned instead to a lifetime of renting and an inability to save and invest as their parents achieved through rising home equity. Others who buy will pay so much that their long term savings will be far less than would have been the case without the plague of urban consolidation.

Reaction in the United States

The underlying economic effect of overpriced housing can be seen in the stunning internal migration losses from coastal markets in the United States. According to US Bureau of Census data, more than a net 2.5 million people have moved from the most unaffordable ‘housing bubble’ markets in just five years. Within the last decade, each of these markets had been far more affordable, but has since seen smart growth land rationing destroy affordability.

US Federal Reserve Board research indicates that markets with overly restrictive land use policies tend to grow less than would otherwise be expected. Whether this leads to long-term laggard economic performance (as seems to be developing in NSW) or a strong downward correction to bring overvalued housing prices back to reality cannot be known for sure. It is, however, clear that where housing affordability has been destroyed by urban consolidation, households and economies will suffer, whether in Sydney, Perth, San Francisco or Vancouver.

Pseudo-solutions

All manner of non-solutions have been proposed by governments. Some would provide a few thousand dollars more in grants to new home buyers. Others would reduce or eliminate stamp duties. More recently, shared equity schemes have been proposed. In the abstract, these proposals may or may not have merit. What they all have in common, however, is their virtual irrelevance to the housing affordability crisis. First home buyer grants and stamp duty relief are pittances compared to the hundreds of thousands of dollars that urban consolidation has added to the price of housing in just a few years. Shared equity would only further institutionalise the current unsustainable imbalance between housing costs and incomes. Finally, each of these programs would drive prices up even further in the absence of effective supply side measures, primarily releasing enough land to meet demand.

Immediate action required

There is no point in manipulating economics to deny the reality. The great Australian dream will be needlessly lost for most future households unless effective programs are implemented to restore it. As the survey indicates, to restore the dream requires sufficient land to be developed to meet demand and reduce land prices on the periphery to realistic rather than trumped-up values. Further, Sydney’s burdensome and inequitable infrastructure charges must be removed, with community infrastructure being paid for by the community, not new home buyers. The solutions are simple to enunciate, yet difficult to implement in a complex political environment. But the future demands no less.

Wendell Cox is co-author of the Demographia International Housing Affordability Survey. He is principal of Demographia in metropolitan St. Louis (USA) and serves as a visiting professor at the Conservatoire National des Arts et Metiers in Paris.

 TNC  18 March 2007                         Like to respond?                     Top/Home