Most analysts and commentators seem to agree that the market here is quite tight (unlike the situation in the US, for example, where they ended up overbuilding badly). Quite how tight is disputed. Nevertheless, almost 10% of dwellings are unoccupied (according to that National Housing Supply Council State of Supply Report) so I guess it very much depends on the nature of those that stand empty (and why) and whether that’s likely to change.

So much depends on economic conditions: if they remain relatively good, then the declining average number of occupants per dwelling may continue; should they take a turn for the worse, that trend could very quickly reverse with dramatic results on the whole supply/demand equation.

There’s a reasonably interesting paper at the RBA site containing a speech (with charts) given by their Head of Economic Analysis at the 4th Annual Housing Congress in March this year. He’s relatively sanguine, but what you may find most interesting are some of the charts. One, for example, shows net housing equity injection from 1980 to present. For about six years from 2001 to 2007, there was net equity withdrawal averaging probably about 2.5 to 3% of disposable income. Nothing like as extreme as in the US, but it does give an indication that they were definitely some real boom attitudes here as well.

I do think that a change in regulatory approach to land development would see a long term reduction in real house prices, but the supply of housing is too slow to make that precipitous and the time horizon for the more attractive property is even longer. First house on the estate has a way different environment than house #1000. I expect the profit margin on an S class merc is very different from a commodore.

Yes, though perhaps it would be wrong to characterise the past as an underinvestment. Prices are set by supply and demand and there definitely seem to be issues on the supply side. Perhaps people would have paid more in the past if they needed to, but luckily didn’t.

What has gone up the most appears to be the cost of land, though it could be that the construction price line is also hiding renovation effects. At any time the vast majority of the residential property being sold is already built, but a good percentage of that will be subject to ongoing improvements that might not be reflected in the growth of the cost of new housing (I hope I’ve expressed that idea clearly).

Having spent the last few days looking for arguments about head works charges that have more than doubled in a few years I’m not surprised at land price increases. New land is now heavily loaded with fees and development costs and existing (and often preferred) land gets pushed right up as a consequence.

Conrad raised a somewhat similar point in an earlier thread. As I said then, the size of the deviation over the last decade (as per the chart above) probably tends to dwarf such considerations in this instance. Unless, I suppose, one were to view it as a one-time adjustment to previously irrational underinvestment in real estate. Given the extent of the recent mania, and the sizeable shift in price/rent ratios, I struggle with that notion.

Some researchers have been thinking along similar lines to you and built in an adjustment to long-term price series in an attempt to account for changes in quality. This was the case, for example, in the long term chart (1880 – present) included in Steve’s Keen’s essay “Lies, Damned Lies, and Housing Statistics” where Stapleton deflated the housing prices by 0.6% p.a.

You see the same argument about health care spending. Part of the reason it grows as a percent of GDP is that we can afford it. Better health is, in a way, a luxury good. A bigger or better located house is also a luxury good. I’m not sure if that is factored into housing affordability comparisons which usually seem to be simply based on median household income or whatever. Same goes for comparisons between here and the US. I think our housing is more expensive for supply cost and constraint reasons, but that does not mean we cannot afford to buy houses at the higher prices, although other consumption will likely be foregone.

On your points, no argument; “unsustainable” is easier to specify with hindsight. Still, I think one can say that certain trends are unsustainable and that it’s therefore merely a matter of when they will end rather than whether. I guess this crisis should in any case help us to fine up our knowledge a little on where the boundaries may lie.

Part of the problem, of course (indeed, in my view by far the largest part) is that the outer edges of unsustainable were greatly extended this time around by government actions. The various safety nets, and more generally the growing sense that governments “had our back” so quieted traditional perceptions of risk that the tree did almost grow to the sky. Indeed, I’m still not wholely convinced that faith has been adequately shaken; the apparent “success” of various fiscal and monetary efforts may, if anything, have boosted belief. A scary thought.

I think “adjustments” as you’re using the word are already built-in to the various debt ratios. By comparing debt to GDP, income, assets and so on, we take account of both real economic growth and nominal changes. Or have I misunderstood you somehow?

1 unsustainable levels of debt in any significant sector of the economy are a danger. The trick is identifying when they are unsustainable. With reference to home mortgage debt in Oz, how relevant are the figures when the economy grows and the amount of money available for discretionary spending increases? The comparisons to the past need to be adjusted for that reason, assuming the adjustment is possible.

2 is the difference between the US counties partly an effect of their starting point, poor counties could well have less leverage because they are poor and less of a fall in the recession for the same reason.