Wednesday, August 18, 2010

The Herd Of Elephants In The Living Room

The phrase “the elephant in the room” has become extremely commonplace in the last couple of years, although it has been around at least since 1959 when the New York Times printed: “Financing schools has become a problem about equal to having an elephant in the living room. It's so big you just can't ignore it." More recently it has been commonly applied to the issue of climate change, and last week Dick Smith claimed that the real elephant was the link between climate change and population. The use of the phrase seems to have exploded since Al Gore’s “An Inconvenient Truth”, and is now frequently used to describe just about any obvious but inconvenient fact which nobody wants to acknowledge, no matter how significant it might be. All of a sudden, it seems that there are an awful lot of elephants all crowded into the room, demanding our attention.

The interesting thing is that many of these elephants are in fact related to each other. Just as climate change, sustainability, and population are linked, all of these are also linked to issues of community infrastructure, energy security, food security, and Australia’s favourite obsession, housing. Figures reported today indicate that residential rents in Sydney are outpacing inflation by as much as a factor of ten, with an average increase of 4.8% in the June quarter. At the same time, the latest housing affordability index shows that home buyers are also being stretched with houses becoming less affordable by 9.1%. This reflects both the increases in mortgage interest rates earlier this year and the growth in prices which was relatively strong up until a month or two ago. Both rental prices and purchase prices are on average becoming more expensive, but it’s not uniform across the nation.

The worst of the rental price increases are in Sydney, with many other parts of the country remaining relatively stable. Purchase prices have been rising fastest in Sydney, Adelaide, Brisbane and Melbourne, while homes in Perth and Canberra have become more affordable. But in every case, both rental and purchase markets are afflicted by a nationwide shortage of new home construction. It is estimated that the Australian housing market is undersupplied by about 200 000 dwellings, and that at the present rate it will reach 300 000 in the next four years. Foreign analysts keep warning us that our houses are overpriced by 40 to 60%, and that something has to give. But as long as the supply problem is not addressed it is hard to see just how prices might be expected to fall, whether quickly or slowly, whether in absolute terms or in real terms. But this is where the elephant barges into the room.

If house prices do not fall in real terms, that is, in terms measured against incomes and inflation, the very real consequences are that the Australian Dream will die. There are many different ways you can measure the prices of homes, as a proportion of average income, or of household income, or against the price of other consumer items, but no matter which way you measure it people are less able to afford to buy a home. There are many contributing factors, and the lack of supply is just one of them, but the end result can only be that our way of life is under threat. But the elephant, standing in the corner waiting to be noticed, is the simple fact that people must live somewhere. It is not sustainable to have a stock of housing that is simply out of reach for ordinary everyday people.

Sooner or later, something has got to give, which means that either house prices must fall relative to peoples’ capacity to pay, or our standard of living will instead.

No comments: