Get The Great Housing Hijack Into Your Brain

Cameron Murray’s The Great Housing Hijack is self-recommending. You certainly don’t need a review of any sort to tell you to go read it if you have any interest in the peculiar case of the housing market. Nevertheless, here I supply my own review of sorts and extrapolate on what I consider a couple of Murray’s core points.

The Great Housing Hijack in Miniature

Among other things, Murray seeks to explain why there isn’t more supply to undercut the demand in the housing market. Yet unlike a lot of other housing analysts, he doesn’t think zoning or taxes have much to do with it. Murray instead brings forth the following factual claims to make his argument:

• Property developers landbank: they hold on to land and build on it slowly over time, specifically to maximise the profit they can extract from the value of the land and whatever property they eventually build;
• In aggregate, people spend about 20% of their nominal income on housing costs as expressed by rent, and this has been a constant for generations.

Based on those factual claims, Murray draws the following conclusions:

• Looser zoning regulations will have a minimal effect on supply because property developers already landbank to maximise their profits over time, so looser zoning regulations will only grant property developers more opportunity to hoard land;
• Property prices rise and fall in relation to the 20% of nominal income spent on it, so the key determinants of property prices are interest rates, rates of return in other sectors and the overall financial wealth of the society in aggregate.

I’ve collapsed the arguments in Murray’s book to what I consider the core essence for the purposes of the points I want to make, so many things are being excluded.

Nevertheless, it’s been interesting seeing how Murray’s detractors like Peter Tulip do not address the two facts that Murray puts forth. Instead, Murray’s detractors tend to repeat the mantra that it’s purely zoning that’s blocking the building of more housing and ignore Murray’s factual claims about landbanking and what proportion of a society’s wealth goes to housing.

And based on those core points, Murray claims that the current housing situation is just the normal operation of the market. If we actually do want materially lower house prices, especially for first-home owners, then the government needs to get directly involved in shifting the scales by itself becoming a property developer, much like the government steps in to affect the education and health markets.

Importantly, Murray is not making the claim that more housing supply does not reduce demand, as many of his critics claim. Rather, Murray is explaining why there isn’t enough supply to reduce demand. And Murray makes what should be the obvious point: anyone providing the housing supply does not want the price of their product to drop. Property developers are in the business of maximising a profit over the course of many years, and when land accumulates wealth over time all on its own, there is no pressing need to build in the short term. So Murray’s solution: get the government to do what the private sector won’t do and build even at the risk of house prices dropping.

Extrapolating on the The Great Housing Hijack

That’s my extreme synopsis of the book so that I can extrapolate into an even more contentious area that Murray doesn’t get into. My claim: that more housing supply can indeed make housing more expensive in certain situations, namely whenever and wherever agglomeration effects produce more wealth or amenities dispersed within a smaller geographical area.

Perhaps the best way to think about this phenomenon is San Francisco in recent times. The massive boom in real estate prices in San Francisco is clearly due to agglomeration effects. So if agglomeration effects make San Francisco housing more expensive, why would building more housing lower the price of housing? By building more in San Francisco and attracting more tech-savvy, ambitious people into the area, you’d be dispersing more wealth into a smaller set of geographical areas throughout the USA and the world. Granted, more housing could and should have been constructed in San Francisco — but it’s likely that more housing in San Francisco would have made house prices (and more importantly land prices) in San Francisco even higher!

Let’s consider a fictional example. Trevor working in tech in Albuquerque might make $50k, but that same Trevor in San Francisco might well be building the next tech unicorn. And no doubt Trevor in San Francisco is going to be using those millions to find himself accommodation more suitable to his higher station, and probably not just one property.

Trevor’s new business would also attract more people to San Francisco looking for a higher-paying job. All those people will only go to San Francisco if they are given a suitable wage, and so the effect snowballs into ever higher prices in San Francisco.

The only way to actually lower prices in San Francisco is to make San Francisco less attractive as a destination. You’d have to drive business out of the city, put junkies on more street corners or build so much housing that people are living so cheek by jowl that it’s not worth the trouble to live or move there. And if you take Hong Kong as an example, it’s not clear how easily one could outbuild demand in places with agglomeration effects as strong as in San Francisco even if no land banking was done by property developers.

As a corollary to the above, the next generation of people who want to live in a growing area will always feel a kind of downward social mobility as their only options become: move further away from the economic centre; move into a smaller space; pay much higher prices to maintain the same size and distance from the economic centre; or have mum and dad subsidise the costs of housing.

Now, it might well be true that housing becomes cheaper in Albuquerque as Trevor and his mates move to San Francisco. But if you accept Murray’s factual claim about 20% of wealth going to rents, Trevor’s move to San Francisco will not produce a commensurate drop in the price of housing because of the overall increase in wealth. Furthermore, ambitious young people generally want to live close to economic centres where careers and relationships can be established. Retirees or those with established careers or fat-enough bank accounts might seek a change of pace and move to Albuquerque, but no ambitious member of the younger generation starting from scratch would do so willingly. 

In his book, Murray’s outlines a solution for runaway house prices that takes ideas from how Singapore structure their housing market with much greater government involvement to help out the next generation to find a place to live. While what Murray proposes is excellent, there’s a further option that takes advantage of what Australia has in abundance and Singapore does not: land. 

And so I will make a further ambit claim: the best thing any Australian government ever did to reduce house prices was move the capital from Melbourne to a patch of paddock upon which Canberra would be built. Imagine how high Melbourne’s house prices would be if the city were also awash with federal government money?

Build, Baby, Build

Building cities anew across a number of sites throughout Australia is the best way to ensure generation after generation can get a leg up like their parents did by getting in early as a city grows. If it worked for convicts who paid each other in rum a couple of centuries ago, it should work out for our current crop of highly educated and hard-working Australian people. And why not take advantage of the predilections of our new king and request he sponsor an antipodean version of his excellent Poundbury and get cracking on a better way of living?

Barring economic catastrophes or gross mismanagement, the current model of only densifying existing cities, thereby increasing agglomeration effects, will only perpetuate the problem of ever smaller dwellings further and further away from the centre costing ever higher amounts of money. That’s not to say we shouldn’t densify our cities — just that we shouldn’t expect the housing situation for younger generations to be better than that of their parents, especially while the young are competing against much richer generations for the best locations. 

Murray provides a compelling case for why the ever increasing price of housing is just the expected outcome of current economic conditions. His solution of getting the government involved in building new housing stock is a good one. I’d just go a step further: let’s get the government involved in building new cities.