One thing you can be sure of is that if house prices are soaring, governments will be holding inquiries into it. Unfortunately, the other thing you can be sure of is that nothing will come of those inquiries.
Why? Because their purpose is to express the government’s deep concern about the worsening affordability of homeownership – its heart-felt sympathy for young people struggling to buy their first home – not to tackle the problem.
Why? Because policy decisions made by governments – federal and state – over many years have rigged the housing market in favour of people who already own their homes and against those who’d like to own.
Why? Because the number of voting homeowners far exceeds the number of voting would-be homeowners. The established homeowners – and the industries that benefit from the rigged market, such as property developers and real estate agents – get shirty if they think their privileges are threatened.
Labor summoned its courage and promised to act against negative gearing and the deep discount of capital gains tax in the 2016 and 2019 federal elections but, since its shock defeat in 2019, its courage has deserted it.
Speaking of housing inquiries, as we speak Treasurer Josh Frydenberg has a parliamentary committee inquiring into “housing affordability and supply”. As its terms of reference make clear, it’s not actually about housing affordability, but really about blaming rocketing house prices on inadequate supply rather than excessive demand.
Why? Because, with a federal election fast approaching, its real motivation is to shift the blame for increasingly unaffordable house prices away from the feds and on to the states. Whereas most of the policies promoting demand for homeownership are under the influence of the federal government, most of the policies affecting the adequacy of the supply of homes are influenced by the state governments and their creature, local government.
When I wrote about the causes of rocketing house prices last week, I knew I was leaving myself open to attack because I focused solely on factors adding to demand and didn’t get to supply factors before I ran out of space.
True, no analysis of change in any market price is adequate if it doesn’t examine both sides of the market. So let me make amends.
In simple economic theory, if the price of some item rises, the reason should be that demand has outstripped supply. Let supply catch up and the price should return to where it was. If the demand for homes rises by 100, build 100 more homes and the price should be unchanged.
But such thinking is grossly oversimplified – especially when applied to something as complex as the housing market. For a start, the simple model is designed to analyse markets for “commodities” – simple consumer goods or services you buy and soon eat or use up.
Homes, however, are assets that last for decades and have a resale value. Most of that value resides in the land on which the home is built, and the land goes on forever.
This means a home is both a consumption good – it provides its owner or tenant with somewhere to live – and an investment good, which should at least hold its value over time and probably increase in value.
As the Reserve Bank’s submission to the latest inquiry has pointed out, the growth in the number of homes has pretty much kept up with population growth in recent decades, meaning a shortage of places to live can’t explain rising house prices.
In any case, the price of buying a home is an unreliable guide to the price of finding somewhere to live since there are two reasons for buying a home: as a place to live and as an investment (a good place to park your wealth).
The better guide to the cost of finding somewhere to live comes not from the price of houses and units but from the price of renting. And the figures show that (with the possible exception of Sydney), the cost of renting in capital cities has risen only a little faster than other consumer prices.
This fits with our earlier finding that the number of homes has kept pace with population growth. And it leaves little support for the widely aired claims of people from conservative think tanks that house prices have risen because state and local government planning and zoning regulations are limiting the release of land for housing development or the growth of medium and high-density housing.
This argument has been debunked by Dr Cameron Murray of the University of Sydney. Being based on mere modelling, it fails to take account of the empirical fact that zoning regulations have been eased in recent years, specifically to ensure that home building keeps up with population growth.
This has happened over many people’s objections to the growth in high-density housing. But, unless we want our capital cities to keep sprawling outward forever, more high-rise housing is an inevitable consequence of business’s demand for – and almost every economist’s support for – rapid population growth.
All this suggests it’s the strong demand for home ownership, not any inadequacy in the supply of homes that’s driving prices up so rapidly. But what, and why? I think house prices are rising strongly because federal government decisions have made housing more attractive as an investment.
They’ve made home ownership more favourably taxed than other forms of investment, such as shares, art and antiques, or fixed-interest investments. This has always been true, but it’s become more so, first, with the Hawke government’s introduction of a capital gains tax in 1985, while exempting the family home.
But the biggest change came with the Howard government’s move in 1999 from taxing only real capital gains to taxing the full nominal gain but at only half your marginal tax rate. The popularity of negatively geared property investment took off from that time.
Ask yourself this: if the number of homes is pretty much keeping up with growth in the number of households, what happens when some homeowners decide they’d like to own more than one home, maybe many more? They use their superior borrowing-power to outbid the other home owners, existing and would-be.
The supply of land for housing is limited, but not fixed. That’s because cities can sprawl, or you can pack more households onto to the same bit of land by building up. But both solutions add to costs.
The simple demand-versus-supply model assumes the “commodity” in question is “homogeneous” – all the same. But with houses and units, it would be closer to the truth to say every home is different. Even two houses of the same design are different if they’re in different suburbs.
And some homes are in prime positions – on the harbour, near the beach, closer to town. The cheaper it becomes to borrow, the more people will bid prices higher to get the fabulous place they want.
The more governments use high immigration to increase the size of cities, the more competition there is to buy a detached house, and the more people will pay to get a place that’s close to the CBD.
Ever-rising house prices is a demand story more than a supply story.
