I was going to write a missive on the housing issue after watching a debate between the Two Ronnies of housing analysis Steve Keen and Christopher Joye. But Leith van Onselen has done it already.
The core of the debate goes to the reasons for higher prices (and lower affordability). Keen argues that it's all about debt and that eventually increased debt will bring the whole edifice tumbling down. Joye argues it's all about supply constraints - planning laws, not enough land being released etc. But as van Onselen points out:
The debate went largely as expected, with Professor Keen arguing that Australia’s housing bubble had been caused by an explosion of debt levels and lax lending by the banks, as evident by the ratio of mortgage debt to GDP having risen from around 17% of GDP in 1990 to around 90% currently on the back of a large fall in deposit requirements by the banks (from 20% pre-1990 to only 3% currently). Professor Keen also dismissed the supply/shortage argument, noting that the number of homes has grown faster than population for decades and that there is a negative correlation between population growth and house prices.
By contrast, Chris Joye argued that the Australian banking sector has been conservative with mortgage default rates that are far below comparable nations. He instead blames supply constraints for the protracted increase in house prices, noting that supply had been constrained for the past 10 to 20 years whilst housing demand had grown strongly. Joye believes the economic solution for improving affordability in the medium to longer term is “elastifying” (improving the responsiveness of) the supply-side of the housing market.
I must admit that I found the debate incredibly frustrating. Why is it that commentators on the Australian housing market cannot acknowledge that both demand-side factors, like easy credit and speculation, as well as constrained supply have each played a role in creating Australia’s housing bubble? In my view, credit availability and planning/land-use constraints are equally responsible and cannot be viewed in isolation – one factor influences the other. I would even go as far as to say that housing bubbles are highly unlikely to occur unless both easy credit and supply constraints (whether from regulatory or physical barriers) are present.
When land supply is abundant and free of regulatory constraints, such as exclusionary zoning and urban growth boundaries, low-cost housing is able to be built quickly and efficiently whenever demand rises from increased credit. The fast supply response prevents prices from rising dramatically, which also reduces speculative intent, since there is little prospect of achieving strong capital gains. And with house prices remaining steady, you are also less likely to experience ‘panic buying’ from first home buyers
As long as commentators focus solely on the demand-side or the supply-side of the housing market, they will never fully understand the drivers of housing bubbles and busts. The resulting incorrect diagnosis will inevitably lead to poor policy prescriptions and outcomes. Clearly, both sides of the equation are important and each influences the other.
By all means, let’s crack down on the destructive speculation and easy credit that has fuelled Australia’s housing bubble. At the same time, let’s work to free-up the supply-side barriers that have enabled the credit-fuelled demand to feed into skyrocketing house prices. Only then will Australia achieve ‘housing nirvana’.Put Leith and the others on the MacroBusiness Super blog on your feed reader and get a view not driven by the special interests of the mainstream media.