Slaying property price myths

Labour and the Greens think they can control the market when it comes to house prices…they are dreaming.

It seems that New York and Australia have a housing crisis each as well…or so the media and politicians would tell us:

IN NEW YORK they are building tiny apartments less than half the size of cricket pitches. This week the city’s mayor, Michael Bloomberg, announced the winner of a design competition to build an apartment tower housing apartments of 300 square feet. In Australian parlance, that’s 28 square metres. That’s a portaloo block. That’s half a tennis court halved, then halved again, then halved again, with a balcony.

“We have a shortfall now of 800,000, and it’s only going to get worse,” Bloomberg said of the city’s dwelling stock.

“This is going to be a big problem for cities with young people.”

It has become a commonplace that in big cities in Australia – cities with young people – there is a housing crisis. In this context the term refers to a different sort of housing crisis to the one that swept through much of the US and Europe, where prices dropped and millions were kicked out of homes because they could not meet repayments.

In the Australian context, the term refers to the opposite sort of housing crisis – where people struggle to get into homes in the first place because they are so expensive.

It is more a New York-style of housing crisis.

Demographia, a research firm, has a knack of winning headlines with yearly reports demonstrating just how unaffordable Australian cities are. The most recent iteration hit the papers this week, with its assertion Australian houses were the world’s third least affordable, behind Hong Kong and Canada.

Sound familiar…Len Brown and labour are certainly planning New York style teeny-tiny apartments…they are deciding what we should live in, not the market. Being socialists though they will more likely be like Soviet style or Chinese tower blocks.

The news media here loved to use the Demographia Survey released a few days ago to have a larrup  at housing affordability…except there is a flaw in the data that they so loving used to beat the government over the head with.

It is obviously very expensive to live in big cities such as Sydney and Melbourne. It is expensive, and fast becoming more so, to rent. And it remains, in raw terms, expensive to buy. Just not the way Demographia described it.

The ratio of median income to average dwelling prices is the most commonly cited measure used to demonstrate how expensive Australian property is. Across the country, this ratio reached a peak of about seven (meaning dwelling prices were worth seven times median annual income) in 2003-04. In capital cities, the ratio was above eight. In Sydney it was above nine.

Historically, this looked high. In the mid-1980s the ratio was about three. The ratio also looked – and looks – high in international terms. This is where Demographia’s surveys, which always place Australia at or near the apex of the world’s least affordable cities, get their popular bite.

But Australian house prices are not international outliers. A Reserve Bank paper last month compared the ratio of incomes to house prices in Australia to a range of comparable countries, but used a different measure of income.

It used an average measure of income from the national accounts (which can therefore be compared to other countries’ national accounts) that was different in a number of respects from median income, one of which was in including income deposited in superannuation accounts.

This sounds strange, because people generally do not use superannuation income to buy and pay off a house.

But it is needed for a fair international comparison, because in places without advanced super systems people still save for their retirements but in ways that are included in national accounts measures of income.

And when you use these national accounts measures, Australian house and apartment prices are pretty much in the middle of countries like France, Belgium, Germany, Canada, Norway and New Zealand.

It is all about the sexy headlines though…while ignoring that there are plenty of ways with which to analyse data.

But the bigger problem with reports like Demographia’s is that they blinker a view of what real housing problems.

What reports like Demographia’s fail to capture – and what terms like ”housing crisis” and ”mortgage stress” in fact only obscure – is the variety of ways in which people respond to what is not so much a crisis as a market.

There are some people in Australia facing a housing crisis. They are homeless. They are couples and individuals facing retirement in a private rental system that offers scant solace to those with little independent income or savings.

Otherwise, people are making choices that invariably respond to the incentives and prices in a big city housing market.

These choices can be uncomfortable – moving back with your parents to save for a mortgage, living in a smaller apartment than you might like. But these are only crises in the sense that seasonal rain is: they can be a drag but they are manageable.

People respond to the Australian housing market every day in decisions about where to live, who to live with, about what to go with or without.

What’s been missing is a similar flexibility and responsiveness on the part of government to help those who genuinely need it; to ensure that if you’re going to live in an apartment the size of a New York shoebox you can be sure it is well made and that you won’t regret the investment; or if you are going to move somewhere with more space, you will have the roads, busways and train stations to ensure that a decision compelled by the housing market doesn’t require cutting you off from the rest of the city.

Len Brown for sure isn;t go to do any of that while he remains focussed on a silly city rail loop.

 


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As much at home writing editorials as being the subject of them, Cam has won awards, including the Canon Media Award for his work on the Len Brown/Bevan Chuang story. When he’s not creating the news, he tends to be in it, with protagonists using the courts, media and social media to deliver financial as well as death threats.

They say that news is something that someone, somewhere, wants kept quiet. Cam Slater doesn’t do quiet and, as a result, he is a polarising, controversial but highly effective journalist who takes no prisoners.

He is fearless in his pursuit of a story.

Love him or loathe him, you can’t ignore him.

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