Why are house prices so extraordinarily high? Short answer: because
Australians have an unusual relationship with their homes. The reasons
for that strange relationship aren't new, but until now they haven't
been well understood. And among foreigners they still aren't.
House
prices in cities such as Sydney and Melbourne don't just seem high to
you and me, they're high by international standards. According to the
International Monetary Fund, Australia has the third highest house
prices, relative to the level of people's incomes, among 24 advanced
economies.
Our house prices are so high that just about every
foreign economist who looks at them becomes convinced we're sitting on a
bubble that could burst at any moment. But few Australian economists
agree with them.
Though there's no guarantee prices will keep
shooting up the way they have been lately and nothing to stop them
falling back a bit - there's plenty of precedent for periods of either
stable or falling house prices in our recent history - most local
economists see little prospect of an American-style collapse in prices.
But
what is it that's holding our prices so high? For the full explanation
of Australian exceptionalism I'm relying on a typically thorough report
by one of our top business economists, Saul Eslake, of Bank of America
Merrill Lynch.
Much of the explanation comes from the insights of
economic geography, the study of how we're affected by the spatial
dimension of the economy and, in particular, of the way big cities work.
Eslake
says foreigners tend to think of Australia as a country of wide-open
spaces - "a land of sweeping plains" - where people live with kangaroos
grazing peacefully on their front lawns. In truth, most of us live on
the edge of the continent, crammed into a few very big cities, making us
one of the most urbanised countries on the planet.
Almost 60 per
cent of Australians live in cities with populations of more than one
million, a proportion exceeded only by Japan, Hong Kong and Singapore.
Of our six state capitals, all but Hobart fit that description.
Urban
geography research suggests real estate prices are usually a lot higher
in cities with populations of more than a million. So an unusually high
proportion of Australians live in big cities where house prices are
safe to be higher.
Second, compared with cities in other
countries, Australian cities are large in terms of area, relative to the
size of their populations. Trouble is, Eslake says, public transport
and arterial roads in the outer suburbs of Australian cities are
generally inadequate for the task of moving large numbers of people from
those suburbs to the central business district.
But, because of
this, many Australians choose to spend a higher proportion of their
incomes on housing so as to spend a smaller proportion of their time
commuting. In the process, we bid up the prices of houses and units
closer in.
So houses prices are higher in Australia partly because
commuting times are so long. The recent return of the delusion that
building more expressways will reduce traffic congestion is unlikely to
make things better.
Third, Australian house and apartment prices
are higher because our homes tend to be bigger than those in other
countries. Three-quarters of us live in detached houses, a much higher
proportion than in most other rich countries. Our average size of a new
house - 206 square metres - is a fraction higher than America's, with
daylight third. And our housing is usually constructed using more
expensive materials.
The international comparisons purporting to
show how expensive our houses are never allow for differences in size
and quality. If our housing is of higher quality than other people's,
you'd expect it to cost more.
Eslake's fourth point is that,
thanks partly to the resources boom and two decades without a severe
recession, Australians are richer than we were, even relative to other
high-income countries. Guess what? Better-off people tend to devote a
higher proportion of their income to their housing.
We can afford to, so we do. Sounds pretty Australian to me.
Another
part of the explanation is that, for more than a decade, we've been
building too few houses and units to keep up with the growth in the
population. Since the turn of the century we've had relatively fast
growth averaging 1.4 per cent a year with 60 per cent of that coming
from immigration.
During the 1990s we built 145,000 new dwellings a
year, but though the annual increase in the population has doubled
since then, our construction of new places has averaged just 150,000 a
year. It was estimated that by June 2011 we'd built 284,000 fewer homes
than needed to maintain housing patterns the way they were.
Supply
isn't keeping up because of excessive restrictions and charges by state
and local authorities. So this is putting some upward pressure on house
prices. But it's just the opposite of what happened in most of the
countries where prices tanked.
Finally, Eslake argues that a
further part of the reason our house prices are so high is our unusual
tax incentive encouraging people to invest in residential housing. It
wouldn't be so bad if it added as much to the supply of homes as it adds
to the demand for them but, in fact, 94 per cent of "negatively geared"
investors buy established dwellings, not new ones.
