So Howard screwed up housing affordability too

At some point we will have to stop blaming John Winston Howard for every problem we face. For the moment, though, it does seem that whenever we lift the lid on some important issue we find something smelly whose cause was inaction or ineptitude on JHo’s watch.

Graph of ratio of real house prices to real wages

Yesterday it was how we’re stuck with the Super Hornets thanks to “a lack of sound, long-term… planning decisions by the former Government over the course of the last decade”. Today let’s look at Chairman Rudd’s theme of the week, housing affordability.

It’s now more expensive to live in Sydney than in New York.

[P]roperty prices have jumped 400 per cent since 1986, while income has increased by only 120 per cent.

The mysterious but awesomely-brained Possum Comitatus explains how he ran the numbers, leading to this graph.

It’s worth reading the full analysis, but his conclusion is blunt:

[R]eal house prices remained virtually frozen over the period from 1990 through to 2000. It wasn’t until Howard started stuffing around with halving the capital gains rate and things like the first home buyers grant that real house prices started to accelerate…

It also highlights in real terms just how much the NSW market has dropped over the last couple of years.

Possum’s going to look at our policy options in part 2, coming soon. However The Australian‘s George Megalogenis has already started down that path — from the suitably cynical viewpoint of which options generate the most votes for whom.

In the must-read piece Making housing more affordable, Mr Meganomics agrees with the Possum about one key point — it really isn’t about interest rates.

Rudd has nominated the second half of 2010 — when the next election is due to be held — as the time zone when inflation is meant to come back under 3 per cent. While he can’t make any promises on monetary policy, because that’s really the job of the Reserve Bank, lower inflation should, other things being equal, mean lower interest rates. Yet that won’t fix the problem of housing affordability.

The well-briefed Rudd would appreciate that house prices, not interest rates, are the main driver of housing affordability. So lower interest rates may mean housing becomes even less affordable by the next election.

Possum’s version of that statement is that “the two key metrics that are the foundation of housing affordability are income and house prices, with interest rates floating around as a third lesser order, though still important issue.”.

This demonstrates Howard’s (short-term) propaganda genius. Of the three key numbers only the least important, interest rates, was moving in his favour. By concentrating on that number through two elections, he made himself look good.

Megalogenis runs through the political angles and concludes:

In the short run, that is until the next election, the social goal of making housing more affordable is incompatible with the economic and political goals of staying sweet with the mortgage belt. In the long run, however, Rudd has no choice but to deflate the property price bubble.

He should view this challenge in the same terms as he does climate change: a project necessary to keep Australia viable. Housing should, pardon the pun, become truly freestanding by Rudd’s stated date for paradise: 2020. That is, bricks-and-mortar should lose its taxpayer supports.

Presently, voters expect a handout to enter the housing market and another to buy a second property. These tax breaks make housing less affordable than it would otherwise be.

He then discusses how you might achieve that — and I won’t butcher his arguments but instead encourage you to read the whole thing, including the comments, and think for yourself. Mr Meganomics takes part in the discussion, too. Fun.

I’ll link to Possum’s policy discussion when it appears. However for now he notes:

There is very simple root cause to the lack of housing affordability in Australia, but it is also a cause that has virtually no easy solution — Australia simply has too few large cities for the proportion of our population that chooses to live in an urban environment. As a result, the supply of desirable urban locations to live — be they inner city or hilltop or hinterland or bayside locations relatively near a city centre — is swamped by the enormous demand. Desirable locations lead the charge in house price growth which pulls the price of all suburbs up with it, generally in decreasing amounts the further away one gets from the suburbs with a high desirability premium.

But since we can’t really change this situation over any time frame shorter than the very long term, even if we were to attempt to, the policy options left to address housing affordability issues become more complex as a result of our policy options being forced to try and affect the affordability ends from policy angles that aren’t necessarily the root cause of the affordability means.

John Howard was never good at “the very long term”, of course. Unless it was looking backwards to Gallipoli. Will Kevin Rudd prove any better?

4 Replies to “So Howard screwed up housing affordability too”

  1. “[R]eal house prices remained virtually frozen over the period from 1990 through to 2000. It wasn’t until Howard started stuffing around with halving the capital gains rate and things like the first home buyers grant that real house prices started to accelerate…”

    This is the first analysis I’ve seen of the disastrous effects of the first home owners grant on housing affordability. I don’t believe it’s coincidental that the sharp rise in real house prices starts in 2000 when the FHOG was introduced. I was considering buying a house with a friend just before that, and overnight house prices in Canberra went up, not by $7,000 but by $70,000 or $140,000, based on the fact that the additional deposit available meant that deregulated mortgage lenders would count it as part of 10% or 5% deposit and increase the amount that they were willing to lend proportionally. This effectively put a house in Canberra or Sydney out of my reach, where it has remained ever since.

    The Rudd government savings scheme is likely to be similarly disastrous. This plans to reward savings with a guaranteed high interest rate and allows them to save $50,000 over a four year period. The catch is that you can’t take advantage of this scheme for anything less than the four year period, with the result that four years from now there will be a lot of people attempting to enter the housing market with a $50,000 deposit. Unless there has been strong re-regulation of mortgage lenders by that time, I’d argue that we can expect housing prices to skyrocket as a result.

  2. Beyond fiscal policy, I think the last chunk of analysis really hits to root cause. Supply — at least from those paragraphs, it seems that the analyst is really saying that there is a lack of housing in the “desirable” areas. California has the same problem also — the major reason why both LA and the Bay Area are so insanely expensive is because housing development is constrained (in a non market fashion). Both of these regions are severely constrained geographically AND they have regulated the maximum densities thus the ability for the central regions to grow (literally) up. With such clamps on growth, it is little surprise that these areas have taken any potential outlet for housing demand and burst into them while also seeing extreme housing prices.

    I’m generally an American “liberal” but having lived in the suburban free for all of Houston for the past four years, I must say that there are distinct benefits to living in a city which has no zoning and essentially no planning (like many moderately hypocritical people, I tend to believe that regulation in MY industry is bad). The benefits are several: 1. Things actually get done, its amazing how little paperwork effort it takes to get projects approved in Houston as opposed to in California. 2. Your neighbors can’t stop your higher density project as easily; there are ways, but without a formal process for bitching about what the guy next door is doing, there is much less fighting. 3. Which means things get done more quickly, and so you can be more responsive to market a critical variable for speculative building projects since their lead times are pretty long as it is. 4. You can change your land usages much more fluidly.

    Of course, without planning you get a city like Houston, but trust me, this city would be pretty ugly if you tried planning it also (see Dallas). What’s interesting is that in spite of much stronger zoning in California, the Los Angeles “urbanized area” (census term) is now the densest in America. While Manhattan is by far the most dense place in America, the rest of the LA suburbia is that much denser than the NY suburbia. I think the LA region has pushed the capability of little single-family box on a plot of land to its limits. The area needs to build UP and allow more units per acre of land, but unfortunately everybody (understandably) wants to protect their suburb and the high prices they paid for their house from the assumed negatives of higher density developments nearby.*

    All that to say the market (I’m wildly guessing similar dynamics are happening out in your side of the world) is most likely working its damndest to alleviate the situation, but there may be land-use restrictions that are really screwing up the ability of corrective market forces to actually correct.

    I really need to add that I am not against land-use restrictions, but California is in a situation where geography has constrains growth and regulation restricts growth upwards. I personally believe that we should absolutely cap sprawl (outward geographic growth), but let the market decide how dense and how high. It is wise to judiciously regulate how a city grows, but I would argue that it is inhumane to constrain building growth in all three X Y AND Z directions.

    *extra snarky note: Unfortunately, the current Mayor of the City of Los Angeles throwing sweet land deals for his cronies in Downtown LA isn’t going to really help alleviate the situation either. Doesn’t necessarily hurt, but those mega-projects do little to alleviate the problem while sucking up all the attention and spare cash from City Hall.

  3. The second part of Possum Comitatus’ analysis is 5000-odd words an I’m only starting to read it now. However it certainly seems a thoughtful piece. I’ll return to it late today Sydney time.

    @Quatrefoil: The various Howard-era pre-election bribes home-buyers grants were always certain to deliver increased housing prices. After all, in a given market, if the buyers have more money to spend then of course prices rise.

    @Joypog: You’re right re the supply-side problems being the drivers here — and having scanned the first 1000 words of so of Possum’s analysis he agrees.

    Sydney is a lot like SF and LA in this regard: coastline to the east, mountains to the west, national parks with rugged terrain north and south all constraining outward growth… neglected public transport making the more distant new suburbs unattractive… the marketed “desirable Sydney lifestyle” requiring a view of Sydney Harbour or the Pacific Ocean… local councils controlling zoning and wanting to keep existing residents happy… state-level politicians with questionable links to developers…

    The “desirable Sydney lifestyle” is now being marketed more as an apartment with a harbour view and nice stainless steel appliances rather than the traditional house on a quarter-acre block. (And, incidentally, the apartment is always shown furnished in a sparse modernist style — presumably because there’s no money left for personal items once the real estate and the designer furniture are paid for.) But much of the love people have for Sydney is the sense of open space and trees and clear skies — all of which tend to disappear in landscapes dominated more by apartments than free-standing houses.

    More on all this in a fresh post once I’ve read Possum’s second piece.

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