EDITORIAL WEDNESDAY 17.03.10.
Maybe I have been wrong about real estate prices. Not that they are too high, but that at some stage some sort of correction must take place. My assumptions have been based on the growing divide between average incomes and average prices. That gap has long since reached the point where a family with an average income can no longer buy an average house. Not even close. While supply and demand pressures are generally the factors considered in looking at prices, there are also other factors at play. While everyone else has been saying that while a shortage of supply persists prices will continue to rise, I have taken the view that capacity to pay and social cohesion are also factors that will have an impact.
The assumption is that ultimately, if nobody can afford to buy a house, society as we know it cannot continue to function. This pressure must eventually force a price correction, whether it is achieved gradually by a long period of price stagnation as it was after the boom of the late Eighties, or a more pronounced market collapse as has occurred recently in the United States. Both present difficulties, with a long flat spot creating a drag on the economy, and a crash causing widespread financial damage to vested interests, including anyone who has bought a home just before everything turns to custard. Either way though, the balance is restored and life goes on. But the idea that a price correction is inevitable is itself based on yet another assumption. It’s the assumption that the Australian way of life, and the living standards to which we feel we are entitled, will be preserved. But what if they’re not?
The Managing Director of Stockland, Matthew Quinn yesterday delivered a speech addressing what he described as the “ticking time bomb” of home affordability. He pointed out quite rightly a number of contributing factors including what he called the “complete disconnect” between federal, state, and local governments who all have responsibility for different parts of the problem. But he also pointed out that home buyers’ expectations are also a consideration, and made the comparison between Australian cities and places such as Los Angeles, Paris, and Tokyo. Housing density in Australia is nowhere near what it is in some of those cities and we have the capacity to accommodate far more people per square kilometer than we currently do if only we accept higher density development. Stockland, he said is already successfully selling smaller houses on smaller blocks of land.
To some degree he is right, but it still doesn’t address the fundamental reasons why an average family cannot buy an average house. Instead it is asking that family to accept something less. While it is true that in the past Australians were happy with smaller houses, they were on bigger blocks of land. We didn’t need a double garage because we didn’t have two cars. We didn’t need two bathrooms, a media room and a home office. But, at the same time, we weren’t asked to give up the quarter acre block of land either. Sure we might be able to make housing more affordable for first home buyers by offering smaller simpler dwellings, but there is no need to force people onto smaller blocks of land, except perhaps in metropolitan areas. And it is the land price more than anything else which is making homes unaffordable.
That’s the most astounding point of all. Why should land in Australia be so expensive? This is a huge country with a small population. There is plenty of land. The problem is that not enough of it is released for development, and when it is the process is too slow, too complicated and too expensive. The truth is that the most significant factor making land too expensive is the huge government fees and charges that are imposed. According to Mr Quinn’s figures the average Australian family can afford to buy a house at $330 000 at today’s interest rates. At the same time, the median house price is around $480 000. That’s a gap of $150 000, but the truly outrageous reality is that around $115 000 of that is government taxes, fees, and charges. In other words, if you take away the tax component, homes are not out of reach at all.
But that’s not all. The reluctance of planning authorities to allow the release of land for development keeps supply under a tightly sealed cap. That means high demand cannot be met, and hey presto, prices go up. But under my original assumption, if nobody can afford to pay those high prices, actual sales will fall resulting in that most horrible of economic monsters, stagflation. Besides, if developers cannot sell their product they would go broke, leading to the likelihood of discounting just to get cashflow and thus resulting in lower prices. That’s why it is reasonable to consider that capacity to pay is a factor which will eventually result in some sort of correction bringing prices back into balance.
Well known economist Steve Keene has another reason why there should be a price correction. It is his view that house prices are being propelled by an unsustainable spiral of ever increasing debt, creating an asset price bubble. He famously predicted a dramatic decline in house prices in the wake of the Global Financial Crisis. It didn’t happen, but he says that the reason it didn’t happen was because the government stepped in with its economic stimulus plan, and in particular the boost to the first home buyers grant. The plan worked, and there was no price crash, but the cost of doing so was even more debt, adding to the national total. Don’t forget that it was debt that caused the global financial crisis in the first place, so it does seem a little risky to solve the crisis by encouraging even more debt. But why would the government want to keep prices high, when there is an acknowledged problem with affordability? Surely it would be better to allow prices to deflate, gently if possible, to restore the balance.
But, I have now realized that I could be wrong. Because there is another way that the imbalance can be corrected. That is if our standard of living is allowed to fall. What if our governments and their agencies are more concerned about protecting asset prices than they are about helping ordinary Australians to be able to afford their own homes? The unholy alliance between governments and developers means that there are tremendously powerful vested interests who depend upon prices continuing to rise. Those interested parties depend upon asset values for their wealth, not cashflow. It doesn’t matter to them if families cannot buy houses, because wealthy landlords will, possibly foreign investors, leaving ordinary Australians to become lifelong tenants, just like serfs in Medieval times, forever in the thrall of their lords and masters.
So yes, I was wrong. It is not inevitable that there will be a price correction. But if there isn’t, then we can kiss goodbye to the Australian Dream.