Thought bubbles on Sydney house ptrice bubble

MivacAustralia needs a new strategy to deal with house price inflation.

That is the collected wisdom of the commentariat, particularly in the left-leaning Australian Broadcasting Corporation (ABC) and its collective loud-hailer The Drum, after Treasury secretary John Fraser said  “unequivocally” that Sydney and parts of Melbourne have a property bubble.

That anyone should be surprised by this comment is remarkable. Indeed the prime minister, Tony Abbott, voiced an inconvenient truth, saying, “As someone who, along with the bank, owns a house in Sydney, I do hope that our housing prices are increasing,”

Both Sydney and Melbourne are world class cities. Recently both cities plus Brisbane were judged to be in the top 20 liveable places, and Melbourne came top. The only reason prices in Melbourne have not risen by as much as Sydney (10 per cent in the last year) is because there has been a lot of apartment building in the Victorian capital, and because Sydney has the edge in terms of financial significance, a better government, and, of course, the weather.

But people, particularly the young want to live in world class cities, and demand pushes prices up, especially where there is a shortage of supply as in Sydney which has the Pacific Ocean on the east, two great national parks limiting growth north and south, and the Blue Mountains in the West.

Until there are more sensible planning laws, more high rise construction, or some significant decentralisation by big employers like the Australian Tax Office, prices will continue to go up, even if at slower rate. Outside Sydney and Melbourne, dwelling prices are flat. In many attractive areas within two or three hours of Sydney, homes have been up for sale for a year or more at prices of between 60% to 70% less than in the state capital.

But some think otherwise.  Michael Janda, an economics reporter for the the state broadcaster, seems to think people have to earn a right to live in Sydney, and that society should provide through social engineering. Like some of his colleagues, he cannot accept a statement by Abbott, even when it is sensible. In The Drum, he opined that Abbott was “putting self-interest above national interest. In that sentence, Abbott summed up everything that’s gone wrong with Australian housing policy over the past three decades.”, said Janda, ignoring the rules under which public service broadcasters are supposed to work..Janda’s article is worthy of study in its own right, because it provides a straightforward example of an ABC journalist using selective economics to argue a a case for social change, rather than reporting the facts.  Take this sentence, ”Most independent housing economists – those not employed by developers, banks or real estate agents – have long agreed that something needs to be done to reduce the incentives for over-investment in property. Whether it is reducing the capital gains tax discount, winding back negative gearing or bringing in a broad-based land tax, there is plenty the Federal government can do.”

The problem is that Janda wants to ignore the basic law of economics, supply and demand. If you cut the incentives for investment in real estate, then that investment will dry up, and fewer dwellings will be built. If you no longer make it profitable for investors to buy property to rent, then there will be less property for rent. The Australian Financial Review has noted that many property investors in Sydney are young people, who buy several properties to rent out, and then choose to rent themselves. This year, first-time buyers are more likely to be investors than owner occupiers.

It is also a nonsense to argue, as some do, that if prices in Sydney fell sharply, homes would be more affordable for those that cannot buy now. If the Sydney market were to lose all of its recent gains – and, remember they came after a sluggish period of several years – this will not help affordability.  That is because the government has jawboned the banks into tougher lending policies, in the interests of prudence and to stop people gathering more debt they can afford. So now deposits of 20% of valuation are the norm, rather than the previous 10% (Australia rarely had 100% mortgages as in the US or UK). Lenders also make ‘what-if’ calculations on the assumption of a 3% rise in interest rates and its impact on repayment affordability.

There is another important issue. The cost of construction in Australia is extremely high, largely the result of union contracts, an over-regulated industry, and penalty rates. Given the high cost of land in Sydney, it is difficult to build speculatively for profit. The best bet for a developer is a large block of high rise apartments. Given that these are the only new dwellings in which the Chinese can invest, the best are sold off the plan.

If government has a role in this, the policy issue that needs discussion is decentralisation.

Published by admin@Strategies

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