What’s driving house prices?

A couple of months ago I wrote a newsletter for Peach Home Loans clients on the price of housing. Ever since being put on the ‘drip’ of Hugh Paveletich’s daily broadcast emails I’ve been intrigued by the argument that the massive rise in housing prices has been driven by government regulation. The strongest argument for this is the price of housing in Texas where they use very different means of land regulation to here.

But then there’s all the demand side aspects that the deregulationists play down. The deregulationists also have odd bedfellows – like save our suburbs – who are keen on regulating to prevent the ‘densification of suburbs’.

In any event I wrote the sides of the debate up for Peach clients with an eye on its significance for property investment. Then Peter Browne editor of Australian Policy Online asked me to tidy it up for publication on his website and so I also sent it to The Age which published it today. So because Troppo is my site of record as it were, I’ve reproduced it below the fold. It’s quite an interesting economic subject and I’d be interested in Troppodillians input.

Why are house prices so high? And what can we do about it?

Opinions differ between those who argue that high prices are the result of government policies strangling the supply of land and those who argue that increasing demand has played an important role.

What Ill call the supply siders are led by New Zealand property developer turned international free market political activist Hugh Paveletich and his American partner Wendell Cox. Together they run the website Demographia.com a remarkably influential website they started just a few years ago.

Remarkably Sydney , Adelaide , Hobart, Perth and Melbourne made it onto Demographias list of least affordable cities in the Anglosphere. Thats part of the strength of their case. Its hard to believe that those cities have a greater demand on their housing services than other larger cities around the world.

What lends striking credence to Demographias case is that cities of similar sizes have very different price levels and guess what? The cheaper cities tend to regulate land differently. Take Austin Texas and Perth WA . Both cities are rapidly growing, and both have populations of 1.5 million. Perth s homebuyers have gone from paying 3.7 times their average annual earnings to around 8 over five years. Meanwhile in Austin prices have actually fallen from 3.3 to 3.1 of average earnings.

The difference, Demographia contends, lies in Perth s stringent land zoning regulations that monitor and restrain growth on the fringe. And the same conclusion is drawn for all 159 cities surveyed constraints on land supply for residential development has driven up house prices.

If Demographia is correct, then all those first home buyers have something to get angry about its politicians that are making that first home so difficult to buy. And investors? Well Demographias message for them can be boiled down into one word risk! If Demographia are right and they get their way and politicians ease up on land release on the outer fringe then maybe our house prices will plummet from over 6 times average annual earnings back to around 3 where Demographia says they belong. Red ink would be running in the streets at least from investors.

So whats all this mean if youre a property investor? Well like lots of other inputs into your thinking, this is just something to be kept in mind. The implications could be huge. But I doubt theyll be all that great. I have little doubt that if Sydney or any of our capitals converted to Texas s style of land tenure house prices would fall perhaps a fair way. They dont regulate land release on the fringe like we do. And they have fewer restrictions on redeveloping your block about which more in a moment.

At least one right leaning think tank the Institute of Public Affairs has geared up for a campaign for greater deregulation of land use. They and the Housing Industry Association are sponsoring the Great Australian Dream campaign to secure greater land release. John Howard is now on the bandwagon but its not his area its the states (strange how rarely he misses an opportunity to pass the buck).

All this activity will have some impact indeed it already has. And it will help people struggling to get into new houses on the fringe. But somehow I doubt that therell be a torrent of new land released. And most cities house prices are slowly heading up, not down. And even if they did release lots of land I doubt it would have a huge effect where prices are highest.

Macquarie Banks Rory Robertson thinks Demographias work is one dimensional. He argues that Dermographia fails to factor in the significant and interactive roles played by interest rates effectively halving from where they were fifteen years ago, negative gearing, the halving of capital gains tax, immigration, economic growth and the growth of wealth in the great centres of globalisation like Sydney.

Robertson points out that in Demographias list of affordable cities all are North American, all inland, most have comparatively low populations and many have been declining like Detroit. It is not news that most people would prefer to live in New York or Sydney than in Buffalo or Dubbo. The choice for Robertson is between dull or sexy.

Still I found Demographias comparisons between Austin and Perth and Houston and Sydney more pertinent. Yes, Perth and Sydney are on the water and so cant expand as efficiently as inland cities which can do it around all 360 degrees from the city centre. But can that really explain why Houston s houses cost around 3 times annual earnings while Sydney s are around three times that?

And how much would the release of more land on the city fringe reduce inner city house prices? Demographia is silent on what those real estate agents will tell you its all about location location location. The divide is not just between desirable and less desirable cities, but within cities themselves. The desire to live closer to the centre is based on infrastructure as well as life style choices, but inner city aspirations, the lure of location, is also responsible for driving up prices. First home buyers often buy on the fringe and then when they become wealthier and/or become empty nesters, often trade up to be nearer to the city. And as Robertson points out, any survey of median prices fails to distinguish between the value of inner city property and that on the fringe.

The American literature tells us that an important driving force of property prices is the difficulty of getting redevelopment permissions in inner city areas. This is an Achilles heel for Demographia. Because it is a political campaign as much as a research outfit, Demographia is keen to acquire allies in its fight. It seems supportive of the suburban lobby groups campaigning against redevelopment. Groups like Save-our-Suburbs often argue that they are resisting forced densification, which occurs in the inner suburbs as part and parcel of the smart growth philosophy which has inspired restrictions on land release at the city fringe.

But a major force for densification (Id guess its more important than any policy of smart growth) is increased demand for housing in inner city locations. The Save-our-Suburbs crew seem to me to be almost the antithesis of Demographias free market philosophy.

And theyll be supporting all those restrictions on redeveloping your block if you own a house in Hamilton in Vaucluse or Toorak. So my expectation is that property prices of well located and serviced suburbs will continue to rise. Indeed now probably isnt such a bad time to buy at least good property for the long haul.

But do keep an eye out for the issues that Demographia raises both as a citizen and (if you are) as someone who owns or is interested in real property. And watch out for land on the urban fringe. If you buy in, remember that some of its value comes from an artificial scarcity which could be undermined with the onward march of free market ideas (where theyre convenient for their advocates that is).

27 thoughts on “What’s driving house prices?

  1. Today’s big question:
    Is invstment property subject to the same conflict of interest rules for politicians and senior public servants that shareholdings are subject to?

    A bonus question:
    Have politicians ever excused themselves from, say, a cabinet vote because of their holdings (direct or indirect) of investment properties?

  2. Nicholas, what role do ‘trailer parks’ and such like play in the demand for housing in the US? Friends of mine who visited Texas relatively recently were amazed at the proliferation of trailer parks and also trailer-homes permanently sited on suburban and large urban-fringe blocks.

    These weren’t all poor white trash, quite the contrary (though they did all own a large number of guns!).

    These same friends said it was common to see trailer-home dealerships near the highway, with decent sized ones going for US$10k.

    Are these dwellings factored into house prices? Even if they aren’t, they would still significantly dampen demand for houses, as many less well off would opt for trailer homes.

    Surely house prices are the result of increasing demand? Low interest rates, significant housing equity in middle aged middle class Australia combined with favourable negative gearing and capital gains tax treatment lead to an explosion in demand for housing. This fuelled prices which meant aforementioned middle class middle aged types had even more equity in their houses which they could borrow against. Even relatively younger people who got in before the price explosion now also had more equity against which they too could borrow to fund investment properties .. sounds like a vicious circle to me.

  3. Aidan,

    Vicous for some – nice enough for others! :)

    It’s an interesting point. We have trailer parks here too and I know someone who’s very happy having bought a block in one for about 80K or less in the old Sundown Drivein in Narrabundah in the ACT and then bought a portable 2 BR house shipped in from Woolongong I think – for something like another 80K (though they’re a bit more now).

    One of the things she likes is the community aspect of living that way. It’s not strictly trailers – it’s portables. But it’s got a very nice homey feel and if your neighbours aren’t dropkicks I could imagine enjoying it very much myself.

    There’s a whole lot of things going on – including the lack of zoning in the Texan cities (they also have substantially fewer parks which is not my idea of a good time). That’s why I tried to stay reasonably agnostic on the issues. I do think that the Demographia crowd overstate their case, but the basic facts they cite – the most powerful of which is the Texan experience and the general division between ‘zoned’ and ‘unzoned’ states in the US gives credence to their basic argument that land supply is pretty important.

  4. Either I didn’t understand that or that didn’t answer anything.

    If you release a small amount of land, you’ll just gouge land prices – a large amount might work if its not snapped up and again sat upon by investors biding their time to sell it for more.

    Whatever the price of land, you can then add about $30 – 50 000 for all the water and sewerage essentials.

    On top of that, building a house, its cheaper in sydney by about half of what it is in the bush for every 9 square metres

    then the painting, decking the house out, making sure Utilities work, then rates for the area.

    How is any of the above article or numerous other articles on the Internet (I’ve read a number of them) suggesting to improve Housing affordability?

    Its the petrol theme all over again, instead of finding cheaper alternatives or “greener” alternatives, we complain about the price of petrol.

    Nick’s article makes a good point on where people would rather live but shouldn’t the housing prices be driving them out to the regions – it would certainly be cost effective. Where the regions to the suburbs wouldn’t be.

    However the common trait they both share is an emotional attachment to where they live.

    This explains why we complain about things instead of using our own initiative to fix the problem not to mention the temporary stress to the interruption of our everyday lives.

  5. Nick,
    all this makes little economic sense to me. The fact that Sydney is constrained in its expansion by sea and regulation does not immediately mean its price should be higher at all, just as the price of housing on the outer Hebrides is low even though its constrained. No-one wants to be there and even if they would, its not clear why the greater demand wouldnt move to another city that’s unconstrained. No, what Demografia argues makes no sense judged on its own.

    When thinking about housing prices in cities two elements stand out:

    1. What are the agglommeration advantages that lead to the greater comsumption and production benefits in the centre of a large city than in the perifery, and how has this changed in the last 20 years. This raises issues of transport times, spillovers, critical mass levels beyond which certain activities start to arise (like opera, landmark developments, diversified nightlife, etc.).

    2. What taxes and demographic changes have there been in the last 20 years that can be associated with increased localised demand?

  6. Ncholas

    Surely Canberra is the greatest example of Demographia’s case. Sheep paddocks for hundreds of miles in every direction- yet houses in the inner north and south – a mere stroll from said sheep paddocks – routinely go for close to a million dollars. Add to this the ACT Governments traditional arbatraige of the land tax / new land / stampduty tradeoff and Demographia’s case is further stregthened. The National Capital Authority is also a constraining factor.

    But, like you, I think the comparision fades a little in Sydney and Perth. Both have a limited supply of prime property (beaches, harbour views etc), which would likely not fall much if there were more land on the fringes. And Atlanta is hardly a fair comparison with Perth (its imho ugly and geographically unditinguished). Maybe the point is that Australia has six more or less world class cities, and little else, so land prices tend to be higher in those cities than in others around the world.

  7. Hi Nick

    I read your note on housing affordability on the APO website. As I understand it, you suggest that less restrictive zoning would reduce housing prices but that even if they did release lots of land I doubt it would have a huge effect where prices are highest.

    Can that be right? In the standard closed city model (i.e. the model in which there is no net migration), equilibrium urban land rents reflect differential transport costs (the bid-rent curve). Assuming zoning constraints are binding, changes in land availability at the boundary of urban settlement shift the entire bid-rent curve and hence affect land rent at each location. There are, in other words, ripple effects throughout the bid-rent curve, and if transport costs (and locational preferences) are unchanged by the increase in land availability, it is the whole curve that must shift, including land rents in inner-city areas.

    The open city model (which is likely more appropriate for long run analysis of Australian cities) is more complex, as an outward shift in land supply will induce migration inflows sufficient to bring the distribution of the population across places back into equilibrium (i.e. ensure that people cannot gain by shifting into or out of the city which has expanded). That population expansion would presumably restore land rents to their previous levels: indeed, if there are agglomeration economies (so larger cities are more attractive), it could increase them.

    This is not to suggest that zoning cannot distort land use and housing prices it can, and usually does. But the analysis is, in my view, fairly tricky and the outcomes will differ depending on what assumptions are being made about population movements.

    An additional and important complexity is that when land availability is altered, the ratio of capital to land will also have changed and the impacts will ultimately depend on the extent to which they are substitutes. In the closed city model, population is fixed by assumption. If removing inefficient zoning allows partially developed areas to become more developed, i.e. more densely populated, population must fall elsewhere. If capital is a good substitute for land, then most of the fall must come from the older areas (as capital has become more expensive relative to land) — so it is in those areas that the change in urban rents will be greatest. In contrast, if capital is not a good substitute for land, then more of the fall will come from the further outlying areas. (In the open city model, relaxing inefficient zoning restrictions in partially developed areas increases population there but does not reduce population elsewhere in the city. If greater scale increases productivity and hence wages, then the urban boundary may be forced out even further).

    As regards Paul Frijters comment, I have no problem with what he says. Obviously, agglomeration economies are important — factors of production are more productive in cities, which is why earnings are higher there, which, in turn, is why it is valuable to live in or near a city, making land prices there higher than elsewhere. That is all elementary urban economics. However, the (narrow) issue I am commenting on is the impact of changes in zoning within a city on the spatial pattern of land prices in equilibrium. There the relevant information, including expectations of future movements in land availability and prices, is captured in the bid rent curve and the question is the effect that not fully anticipated changes in zoning have on that bid rent curve. As I note above, this depends on the precise nature of the changes in zoning as well as — importantly — on the assumptions one makes about population and about capital/land substitution and any changes in transport costs.

    The simplest world is then the so-called “closed city” model in which population is held constant, transport costs are given and capital and land are used in fixed proportions. (The first two assumptions are probably ok in the short run, but it is obvious that the third is not — viz the development of MacMansions). If the land constraint is not binding at the fringe (which it probably isn’t in any Australian city), then inefficient zoning (and note that all zoning is not inefficient) likely reduces population density mainly in mid-outlying areas. Holding population constant, reforming that zoning would increase density in those areas at the expense of other areas. With land and capital used in fixed proportions, that greater density is going to come mainly from further distant areas, and there total rents will decline. On the other hand, if land and capital are good substitutes, a fall in the relative price of land will shift population out, so density in the innermost areas will fall.

    All of that says nothing about why land prices have changed in Australian cities over the last couple of decades. I agree that interest rate expectations have played a role. Increases in competition and efficiency in mortgage markets strike me as also of great importance. What role zoning has played is more difficult to say. My impression is that much Australian zoning and land settlement policy more generally is relatively inefficient, and I suspect it has driven rents higher than they would have gone had the supply of land been more elastic. I also suspect its greatest effects are in mid-outlying areas, where density is lower than it should be.

    Finally, you may be interested to know, if you don’t already, that modern zoning, though invented in Germany, came of age in New York in 1916, when the garment factories and insurance companies were zoned out of mid-town. The main reason for this was to allow the expensive department stores to attract a female clientele which did not want to rub shoulders with the sort of women who in those days worked in insurance companies, much less in garment factories. From small (but ugly) acorns great (and distorted) oaks grow…

    Regards, Henry

  8. Henry,

    woah. One would have to seriously read up on urban economics to do better than that reply in terms of intra-city phenomena with given population levels.

    The mileage on the demand side of recent demographic changes can be substantial though. The tendency of large families to subsidive in smaller ones each with their own house surely must be a huge factor in the increased demand for housing, whilst the relative decline in food prices and cheap imports of other goods will in an economy wide sense have made the proportion of wealth spent on non-transportable fixed factors (such as inner-city land) higher. Increasing inequality and reduction of the number of kids associated with the dinky phenomenon furthermore will have increased the shadow value of time, leading to higher premiums on inner-city land.

  9. Paul

    I don’t know about the extent or effect of the demographic changes. With respect to changes in the prices of other goods, one imagines some — perhaps many — of those are complements to land: for example, larger TVs require more space, as do adding computers to a household. This will shift the bid-rent curve, increasing land prices.

    As regards increased inequality, that is presumably more complex. Land is a normal good, so those on higher incomes demand more of it. Moreover, richer people can buy more comfortable cars and equip them with mobile phones and so on, which reduces effective travel costs. Finally, better off people typically have more control over their working hours (at least in the sense of when they start and end work), which means their schedule shift costs are lower (which is also equivalent to lower travel costs in the standard model of commuting). Whether those effects are sufficient to counter-balance the increase in the value of time is an empirical issue. That said, if increased inequality means some people are worse off, then that too will affect locational choice and hence the bid-rent curves, presumably offsetting the impacts of increased earnings at the top.

    Regards
    Henry

  10. My biggest bitch about land prices is the arbritary way the Valuer General decides the UCV. It’s a chicken and egg situation that bears little relation to demand. Every three years a bureaucrat looks at the statistics for real estate transactions in a suburb and increases (never decreases) the UCV based on some unexplainable arcane formula. This sets off another round of increase in land values, not only within the established suburb but also for new developments on the fringes of the city. A new land development is happening around the corner from our house, largely driven by the Defence Housing Authority. Opportunities for private ownership are conducted by ballot which artificially reduces supply and stimulates demand thus driving prices even higher. Not that anyone who is on the hurdy gurdy want’s prices to fall – having paid a ridiculously inflated sum (the profits of which are spread throughout the business community – land developers, real estate agents, newspapers and most importantly, the state) the new owner dreads the absence of “the greater fool”. Those agitating for more reasonable land prices need to look at how the state values existing land (for rating purposes) as well as the supply of new land.

  11. Arguing about whether the cause is this OR that is silly. There are multiple factors at work and their relative importance will vary from one locality to another.

    There are interesting papers on the topic of housing cost/regulation etc by Ed Glaeser et al at http://www.economics.harvard.edu/faculty/glaeser/papers/Manhattan.pdf and http://www.economics.harvard.edu/hier/2003papers/HIER2004.pdf.
    There’s also some worthwhile posts about a Radio National program earlier in the week on affordable housing, at http://www2b.abc.net.au/tmb/Client/MessageList.aspx?b=44&t=214&te=True

    On increasing urban density: I live in what used to be the Democratic People’s Republic of South Sydney, now part of the City of Sydney, where infill housing and apartment building (particularly in former industrial sites) has being going on apace for a number of years. The interesting point is that the district is actually far better for it.

    The strip shopping district is more lively than it’s ever been, there’s great nightlife and with most sidestreets blocked to through traffic, it’s far more pedestrian-friendly than a typical suburban neighbourhood. Families are moving back. The primary schools that were in danger of running out of children a decade ago are thriving.

    No government that I recall has ever tried to show its people that increased housing density can add to the quality of life, not detract from it.

  12. Pingback: Club Troppo » Missing Link, (Black) Friday 13 July

  13. MikeM,

    You say that “No government that I recall has ever tried to show its people that increased housing density can add to the quality of life, not detract from it” but my impression of govt policy and govt rhetoric is that it’s strongly anti-sprawl and pro-smart growth (ie densification).

    So by implication they have been sending that message. Densification is good, good for the environment because it’s public transport friendly, good for anti-sprawl because sprawl is (self-evidently I guess) bad.

    Henry,

    I agree that the models you cite are sensible heuristics with which to think about whats going on. However there are an awful lot of things possibly going on. Its for that reason that I find the examples of the Texan cities persuasive. But I may be quite wrong.

    I think there are wealth effects going on also. Also if one seeks to buy a property and one is thinking of that property as an investment, and one believes that the better suburbs will generate higher capital gains (and those cap gains are tax sheltered if it’s owner occupied) then it seems to me that this could contain a fair bit of the ripple effect from the periphery.

    (Btw, these are the ravings of a man trying to buy a family home in Brighton.)

  14. One horrendous side effect of our urban sprawl – besides families being bankrupted by petrol costs and stymied if one of the cars breaks down – is the building over of arable land. Naturally, our early settlers settled the best land firs, and the new housing developments are concreting over the better soil.

    Does the Demographia mob address that at all?

    Also, those who think medium to high density is always bad should look at St Kilda and Elwood. There are numerous blocks of flats, brick, not high rise, built around the depression era, but nevertheless built with proper materials and to higher standards than the cardboard mansions of today. This living environment is now highly sought after.

  15. Helen,

    I’m not arguing that one (sprawl) is better than the other (higher density) or vice versa. But it’s damn difficult it seems to me for planners to work out how much of one we should have and how much of another. People have all sorts of different tastes and they differ as they move through life. I’m a medium density guy myself. And high density can be exciting though I prefer to live somewhere near the ground. But I have a couple of kids nine and thirteen years old. Elwood and St Kilda isn’t too flash for them – especially the nine-year old boy.

    It’s circumstances like that that make me think that markets are best placed to make those kinds of decisions. Of course land markets are far from perfect markets – there are external effects to land use and land requires infrastructure to be useful and infrastructure is a collective asset and has long lead times and is a sunk investment. But blanket decisions that sprawl is bad and medium density is better and government decisions to support these judgements make me nervous.

    On the use of arable land – well it’s the same story. Tokyo CBD is on great arable land. But its got a much higher value use. How do we know? We look at what people are prepared to pay for it and what they want to do with it. Saying that there’s something bad about locating houses on good arable land seems to me like saying that there’s something bad about farming sheep on land where you could farm cows. If the sheep farmer is prepared to pay more for the land to farm the sheep, that’s a fair guarantee that its a better – higher value – use for the land.

  16. I agree with Nick on this — it is consumer choice, driven by relative price signals, that should determine housing density.

    In reality, of course, there are distortions to price signals that may be material. Whether these encourage “sprawl” is uncertain. We underprice congestion on urban roads, which may make commuting less expensive than it should be (though the congestion increases the time cost of road travel, partially offsetting the first round effect), and provide tax-favoured status for vehicles (though petrol is heavily taxed, likely too much so, again partially offsetting these effects). We also under-price parking, especially where it is provided as part of a remuneration package, which again encourages commuting, and likely under-price road accidents (as a by-product of CTP). Additionally, albeit to an extent that varies, utility prices (especially water, sewerage, electricity and emergency services) and charges for public services (hospitals and medical services, schools) have a “postalised” element which means that outlying, relatively new, areas contribute less than older, inner areas to common costs of service provision — with the effect, presumably, of encouraging population movements to new areas. There are some offsetting distortions — for example, farm subsidies and the wide range of subsidised services provided to communities in country areas make cities too small and too dense.

    Eliminating all of those distortions would yield potential welfare improvements. However, I suspect it would have little long term impact on urban densities. In effect, internationally, urban densities have been falling since at least the 1820s (according to a series of papers that began with work by Peter Mieszkowski and Edwin Mills). This largely reflects technological factors that reduce the need for proximity to urban centres and rising incomes (which increase the demand for space and for the amenities space provides — including the ability to store more, and more durable, goods (the household’s capital stock)). Those factors will continue to work, even if all pricing distortions are eliminated (which would likely result in a small, once-off, slowing of the decentralising trend).

    In short, there is a case for eliminating distorting policies — but it is not because you will change the density gradient. You probably won’t, or at least not much, and certainly not for long.

  17. Yes, the thing you’ve mentioned that I didn’t that stands out is congestion pricing. It should have been a frontier of micro-economic reform and perhaps it would have been had the ALP stayed in Govt (though there were no guarantees of that – it’s just that – certainly under Hawke, but even under Keating, they were a fair bit more professional about policy. The Howard Govt has produced large lurches in policy towards some iconic reforms – GST and workchoices – but apart from that there’s been little sense of a reform agenda unfolding, moving on as policy is developed.).

    [Pauses and waits for attacks to roll in].

  18. Congestion pricing is a good idea, by and large, but is far more complex to do properly than is commonly thought — see Richard Arnott’s excellent survey in Arnott et al “Alleviating Urban Traffic Congestion” (MIT Press, 2005). As for reform in this area, there is a COAG working group dealing with urban congestion — I don’t know where it is up to but rather fear the worst (i.e. some half-baked ideas, with the flavour, but not the substance, of serious economics). The BTRE is also working on this, I believe, which should inject some decent material into the public debate.

    Overall, while it is true that little has happened in this area to date, I don’t think it is fair to blame the Howard Government — traffic issues, and urban policy more broadly, are State responsibilities, and everything the States have done in this respect in recent years almost seems designed to make matters worse, rather than better. For example, urban tolls have proliferated, usually without any serious consideration of time of day pricing, the need to control double marginalisation and the desirability of avoiding merely creating traffic diversion effects (think of the Cross City Tunnel). Whether the Commonwealth could have done more is difficult to say, but at least to date, the problems, in my view, reflect the gap between the States’ rhetoric (which claims to emphasise microeconomic reform) and the reality of their conduct.

  19. Yes Henry,

    Outrageously fair points I must admit. The main culprits are the states on this I agree. However the states have never really ‘got’ micro-economic reform. It’s hard to think of anything much they’ve achieved in the area. (Well some utilities reform I guess).

    My template for reform would be some process like the National Competition Policy which was driven by the Feds who copped the flak for it, and bribed the states to accept, kicking, screaming and back biting some decent policy.

    One couldn’t do anything as neat in congestion pricing as you intimate, but some Federal Government leadership might help a fair bit.

  20. Texas real estate has been going up too. Unless you think the level of money supply growth is neutral money supply feeding hard asset price inflation has been the biggest influence.

    Code restrictions have been around forever in cities like Melbourne or Sydney. There were once severe limitations on how many single dwellings one could build on residential blocks. Not any longer yet house prices have zoomed.

    No, the real issue is that M1 has grown 360% since 1994. People act rationally when they purchase land etc.: to protect against currency debasement.

    Prior to Switzerland turning itself into a soft currency around 60% of the population were renters.

    there are several reasons why housing is so costly:

    1. Central bank’s abuse of the money supply.
    2. State Labor governments charging higher taxes on new land releases.
    3. Height restrictions
    4. Population growth (of course)
    5. Expensive code requirements such as 5 star environmental rating.

    As an aside….. if housing was so unaffordable then why are there so many buyers chasing housing in most of the large capital cities? There are reports of up to 1/2 dozen buyers seriously bidding at auctions. Meanwhile the sale rate is up at 75% in places like Melbourne. That is hardly an indication of lack of affordability.

  21. Responding to money-supply-nutters like Jc seems a bit pointless, but here goes. Switzerland still has only 36% owner-occupation rate (e.g. http://www.swissinfo.org/eng/swissinfo.html?siteSect=107&sid=6029902&cKey=1125483769000). It’s rising, but that is because interest rates have been very low here for a long time. The rate will probably stay below that of English-speaking countries because the tax system doesn’t subsidise home ownership. Maybe you will something useful here: http://www.bfs.admin.ch/bfs/portal/en/index.html

    As for the M1 nonsense, funny, Australia has had lower inflation since 1994 than earlier times. Also, picking M1 is just dishonest. I found the data as Table D3 on the web site of the Australian central bank. http://www.rba.gov.au under “Statistics”

    Here are the cumulated growth rates for the different monetary aggregates since January 1990 to April 2007, and expressed as annual averages:
    series cumul ann avverage
    Currency 193.9 6.4
    M1 422.0 10.1
    M3 298.5 8.3
    Broad money 198.2 6.5
    Base money 162.3 5.8

    Why is M1 so different? Well, looking on the central bank site I read that accounts with chequebooks are in M1. In the past these paid no interest, but later banks were allowed to pay interest on cheque accounts. Maybe people have been switching to those accounts.

    Here in Europe the ECB recently admits that the money supply is not so useful an indicator. Why can’t Jc?

    Also on the central bank’s web site are many interesting reports about housing affordability. One big one from 2003 – search on “affordability” on their site. They say it is demand too, especially by people who rent houses out to other people.

  22. Swisschick

    Perhaps you could explain where all that “money” has gone.

    What I find astonishing is just how few economists understand monetary policy and the implications for loose money. Money Supply (MI) over and above the rate of natural economic growth is inflation (debasement)- pure and simple.

  23. Jc,
    All that money is the same money as before, but now instead of having one saving account (in M3 but not M1) and one check account (in M1), all of it has a checkbook and all is in M1. That is why M1 grew faster than M3. It is just structural change.

    I looked also at the definitions of M3 and broad money on the RBA web site. Broad money is just like M3 but includes accounts with non-banks (what are these called exactly? Is it like a finance company?). Broad money grew at only 6.5% per year over this period. M3 a little faster, must be banks won market share from the non-banks.

    The Australian statistics office (Australian Bureau of Statistics http://www.abs.gov.au) has national accounts data that says nominal GDP did grow by around this 6% per year rate over this period – 5.7% if I have understood seasonally adjusted to mean what I think it does. Yes, 2.5% of this will be the inflation target of the central bank, plus 3 and a little bit percent of real growth.

    So you point at the one money supply series that is really distorted by a change in the regulation about check accounts paying interest and say that this is debasement? But other money supply figures are only a little above growth in nominal GDP. This is from the exact same spreadsheet.

    Maybe you think that any inflation above 0% is not ok. But according to the RBA web site, 2.5% inflation is their target, agreed with the Australian government. So if you want a different target, maybe you need to call upon your government to change it. The money supply growth figures are fully in line with such an agreement. They are a result not a cause. Even the ECB admits this now. I think it is you who do not understand monetary policy.

    Anyway it is a sunny day here, I am going to go back outside.

  24. Terrific post – and a really interesting comments thread. As to optimal land release policies, I understand the Victorian government last year did a lot of work to determine the marginal public infrastructure cost out the outer fringes, and now are charging developers that amount. This seems about as non-distortionary as you can get.

    Also, I can’t help but agree with Jimmy’s comment about Canberra. Turn left at the first roundabout as you come off the highway, and you’ll drive down Antill Street, where you can see apartment blocks (6 storey, I think), that literally overlook paddocks.

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