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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  • blazer

    report says ‘pretty much in the middle’!?Hardly compelling.The banks basically control prices at the moment.They have too much to lose by prices falling.Their 100% and 95% loans..,drip feeding mortgagee sales,refinancing terms and obsession with residential loans is a travesty.Ave Auck home $624,000…how many times ave earnings is that?

    • thor42

      “Ave Auck home $624,000”.

    • Goldie

      Most people buying a $624,000 house will be couples with two incomes and moving up the property ladder, so they will sell their first house to pay off most of the new house. As a result, a $624,000 house is really fairly reasonable for a couple who have two incomes and can put a $3-400K down on it. Two incomes with a $300K mortgage on a house valued at $640K is no problem. Its just that people have to WORK to get there.

  • StupidDisqus

    Who gives a shit? There is no real housing crisis, there is just a bludging crisis.

    Anyone with even a relatively moderate income – say USD250k or so – can easily buy a house in Auckland or Sydney.

    Bludgers without real income – well yes there is a crisis, they’re not starving in the gutter, thanks to welfare – and that’s the real crisis that must be flx to let the market work properly.

  • StupidDisqus

    more to the point: as who benefits from better affordability – i.e. from dropping house prices? Not worthwhile citizens with incomes and assets, especially as most of those assets are houses! Who benefits – labour/green voting bludgers, that’s who!

    Why on earth Joyce would bring in yet another policy that helps Labour voters, who knows? At least Shearer is openly aiming for utu – his 100,000 extra houses would crash the housing market so that (as he sees it) all those evil National and ACT voters have their investments smashed, perhaps go into negative equity. Labour thinks that’s a good thing because they don’t give a shit about private property.

    But anyone who does care about private property knows house prices in NZ are too low, not too high.

  • Goldie

    The “housing crisis” is about as credible as the previous “manufacturing crisis”.

    Any fool can go onto Trademe and see for themselves that there are plenty of 2-3 bedroom houses in Auckland for under $500,000, esp. out west. Its just that some people expect to live in a 4-bedroom house in an exclusive central or north harbour suburb without working for it.