Few issues galvanise public debate as effectively as house prices. It must have something to do with the fact that unlike, say, salaries, houses are both transparent and ubiquitous. No matter where you live, somebody close by always has a bigger and better place. And, for better or worse, that fact is shoved in your face. It may be that much of the emotion and misinformation that accompanies the housing debate can be traced back to comparative justice. For the zealots, the frustrating truth is that the hard facts often do not support the hyperbole that we hear about housing.
To cauterise the “noise” that typically comes hand-in-hand with any discussion about affordability, it is useful to begin by addressing a few facts.
First, investment in both new and existing housing provides us with one of the most profoundly basic human needs: shelter. When you rent a home you are consuming pure “housing services” (put more pointedly, workers need this shelter to survive). If, on the other hand, you choose to buy a home you are making both an “investment” and a “consumption” decision. The fact that you are forced under current arrangements to buy 100 per cent of the equity in a home, and cannot ordinarily share that equity with outsiders, is known as the “all-or-nothing constraint” which I will return to later.
You can limit yourself exclusively to the “investment” activity by renting that house out to another family. Alternatively, you can both own and occupy the asset, and thereby concurrently satisfy your independent consumption and investment motives. It’s your choice. And it is no different to, say, owning a farm that produces the food you need to eat, or leasing it out on commercial terms to a third-party that will sell that produce at market.
Housing assets that provide us with proximate shelter (or “housing services”) are, therefore, similar to agricultural assets that yield food, infrastructure assets, such as toll-roads, railways, or aircraft, that supply us with transportation services for leisure and work, or computers that enhance our productivity and/or pleasure. Yet aside from perhaps farms that deliver food for us to eat, none of these assets is of more fundamental importance to a viable economy than putting a roof over workers’ heads.
So next time you hear the claim that housing is “unproductive” look through the rhetoric and note that this is just a straw-man being used to advance some ulterior agenda. Without housing, you would find it near impossible to work and live.
Second, contrary to popular opinion, there is no compelling evidence that Australia has experienced anomalously high house price growth or that we are currently suffering from a “house price bubble”. This is, however, quite different from saying that the cost of producing new housing could be lower, which, as I note later, certainly appears to be the case.
On the question of house price appreciation, the IMF has recently produced analysis which shows that between 1997 and 2009 real growth in Australian home values has actually been no greater than the median comparable country selected by the IMF in a survey of our peers. That is, we were merely “middle of the road”. In fact, Australia’s house price growth has been middle of the road since as far back as 1980 according to the IMF’s latest data.
The IMF also found that growth in Australian house price-to-income ratios over the period 1997 to 2009 had been less than the same metrics in the UK, Ireland, Spain and NZ. In fact, Australia’s house price-to-income ratio is no greater than it was at the start of this decade. This evidence hardly fits well with claims peddled by some that Australia has the most expensive housing in the world.
Indeed, as both the Reserve Bank and I have repeatedly noted, Australia’s housing market began correcting six years ago. Between December 2003 and December 2008 Australian house prices rose at nearly half the pace of both household disposable incomes and nominal GDP. This resulted in a striking 15 per cent plus contraction in Australia’s house-price-to-income ratio over that period. And it meant that home values in Australia experienced a very gradual adjustment over a multi-year duration in contrast to the precipitous price falls registered elsewhere.
My next observation is that much confusion reigns when people talk about that nebulous notion known as “housing affordability”. What exactly do they mean? Are they referring to home purchase affordability? Or perhaps rental affordability? Or maybe it is whether the cost of producing a new home is high or low? Could it be all of the above? The truth is most folks do not distinguish between these issues. What we can say is that home purchase and rental affordability are determined by a range of factors that have nothing to do with the costs of producing new housing, such as interest rates and household disposable income growth.
If we accept that interest rates are largely the domain of the RBA, and policies surrounding the distribution of income have nothing directly to do with the housing market, the most legitimate question for those interested in the housing market is whether there are any factors that have artificially raised the cost of producing new homes that we can seek to mitigate.