Is there a solution to rising house prices?
Categories: Current Affairs, Featured
Written By: Tom Elliott
Early this week both the Real Estate Institute of Victoria (REIV) and the Australian Bureau of Statistics (ABS) delivered some sobering news for prospective homebuyers. Despite the depredations of the Global Financial Crisis, house prices in Melbourne have jumped sharply in 2009 with the median across metropolitan areas gaining a staggering 11%.
While this is undoubtedly good news who’ve already taken the plunge into the property market, it’s most dispiriting for those growing tired of spending their weekends at open-for-inspections and auctions. Is there a solution to the housing affordability crisis? I suspect there is, but it requires close analysis of why home prices have continued to rise.
At its most basic level, the housing market is like any other, ie it’s governed by the laws of supply and demand.
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Demand Factors
1. Bank lending – thanks to some prodding by the Federal Government, Australia’s banks have continued to lend funds for house purchases. In the absence of this credit, the market would undoubtedly collapse as few people can afford to buy a house with savings alone.
2. Increased Immigration – Australia is bringing in approximately 250,000 people a year, almost 100,000 of which are settling in Melbourne. As many of these immigrants are well paid skilled workers, they add immediate pressure to the housing market.
3. First Homebuyers’ Grant – this well meaning but misguided piece of intervention by both State and Federal Governments achieves little more than lining the pockets of vendors. Due to its popularity, however, it’s unlikely to be done away with entirely.
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Supply Factors
1. Established Homes – as no more land is (or can) being created in the inner suburbs of most cities, it’s hard to increase the supply of homes in the more desirable areas. More approvals for medium density apartment blocks would help, although there remains considerable NIMBY-like resistance to such town planning initiatives.
2. New suburbs – In Melbourne the State Government is grappling with its commitment to the six year old ‘Melbourne 2030′ policy which attempted to restrict greenfields expansion in the outer suburbs. A relaxation of this well meaning policy combined with a commitment to investing in the necessary infrastructure (public transport, schools, roads, etc.) in new suburbs could go some way to meeting the increased demand described above.
3. Public Housing – increased investment in this area does little to further the goal of increased home ownership, but it would assist the allied problem of rental accommodation shortages. In the 1950s and ’60s, the Victorian State Government had the foresight to build housing commission flats across many inner suburbs that are now extremely expensive (South Yarra, Fitzroy, North Melbourne, and so on). While many people decry these developments as ’slums in the sky’, without them the poorer echelons of society would’ve had nowhere to live.
Given the above factors, my policy prescription for the housing market is this: First, phase out the First Homebuyers’ Grant completely, as it really is a useless policy; and second, either reduce immigration or commit to massively increased infrastructure spending. Doing one without the other (which, sadly, appears to be the current approach) will exacerbate an already difficult problem.
October 16th, 2009 at 9:02 am
[...] Syndicated from The John Elliott Report October 16th, 2009 | Category: Ageing Population [...]
October 19th, 2009 at 12:23 pm
withdrawing the tax deductability of interest on investment properties would lower house prices.
Not a vote winner though!
October 19th, 2009 at 12:59 pm
You fogot some basic ones.
- Centrelink benefits
- Super benefits - non assessable assets
- emaotional attachment and security
- desire to live in good areas.
October 19th, 2009 at 8:29 pm
Tom, for those of us slow on the economic uptake, can you explain this?
In the UK the 2008 annual house price fall of 17.6 per cent – or £31,612 - is a record drop since the survey started in 1952. According to the Land Registry this is the lowest level on record as home owners saw the value of their properties fall for the seventeenth month in a row.
Now according to The Guardian Net migration into the UK rose by 25% to 237,000 people last year, according to the Office for National Statistics (ONS). These statistics have been strongly contested by both the Conservatives and the Liberals with claims that this figure should be closer to 300,000.
In ALL of the main cities, Birmingham, London, Glasgow, Manchester etc there is a massive housing shortage. Has been for the past decade at least.
How does this square with Australian conditions which seem to be similar: increased immigation. housing shortage. And yet housing prices are rising with predictions of no end in sight.
What’s going on?
http://business.timesonline.co.uk/tol/business/industry_sectors/construction_and_property/article5806662.ece
October 20th, 2009 at 11:08 am
Hi Allan
You’re quite correct, it wouldn’t be a vote winner! It’d also force up rentals, as Treasurer Paul Keating discovered in 1985 when he removed just such deductibility for 2 years before reinstating it.
Regards
Tom
October 20th, 2009 at 11:37 am
One out of three residential properties are bought by property investors. These investors boost the demand for property, but it is a false “demand”. They don’t need the property, but they want to sit on the property and wait until the real demand gets stronger. They act as a break and a burden on the community. Some of the worst offenders are real estate agents
There should be strict rules to discourage people who have a home, from buying a second home. Look to old Europe to see what happens when too much property is controlled by too few.
des hoad
October 23rd, 2009 at 11:00 am
Hi Des
Without such landlords, there wouldn’t be any rental properties! Remember there are plenty of people out there who, for various reasons, prefer to rent rather than buy. Second property owners help meet this demand.
Regards
Tom
October 23rd, 2009 at 4:19 pm
Hi Andy
UK house prices have dropped for 2 main reasons:
1. UK unemployment is much higher than Australia’s and still rising. People won’t commit to house purchases if they’re unsure about their jobs; and
2. the UK banking system is under real stress after 2 major lenders - Nthn Rok and Bank of Scotlan - had to be nationalised by the Govt. No Australian banks have failed, and are thus still lending plenty of money to their customers (for houses at least. Small business loans are another story).
Regards
Tom
October 26th, 2009 at 10:30 pm
I think ‘Bank lending’ has to be the biggest influencing factor.
This is the only factor that could single handedly drop the housing market on it’s head.
Any changes in the other variables can be easily offset one way or the other by bank lending.
October 28th, 2009 at 8:23 am
Hi Gerard
You are quite right - both the cost and availability of credit are major determinants of hosuing demand. This is why the Federal Govt was so keen a year ago to ensure that the banking system didn’t fall over - to prevent a confidence sapping fall in housing prices.
On the supply side, today it’s been reported that Kevin Rudd wants to reduce the red tape and delays that surround town planning decisions. If he’s successful, this could improve the supply of new houses in both established and greenfield areas.
Regards
Tom
October 28th, 2009 at 9:44 pm
Hi Tom,
re: FHOG
I’ve heard your opinion many times on the Mitchell program & I’m pleased to have the opportunity to give a contrary view.
I agree the FHOG should be abolished in the “second hand” market as it does only benefit vendors & agents.
However in the new home market, wouldn’t you agree that it stimulates jobs - not only in the building sector, but ALL areas of manufacturing. ie. white goods, appliances, carpets lighting….etc etc etc?
The small amount that is ‘given’ in the grant is returned ten fold to Govt in taxes & charges & rates.
October 29th, 2009 at 4:55 pm
Changes to foreign investment laws in March 2009 resulted in a significant increase in demand since then. Chinese Nationals have been buying up Australian property, mostly above $1million, especially in Melbourne. Some suburbs such as Balwyn and Canterbury in the inner East had up to 40% of their property being bought by foreign investors. They were often buying at 20% above the reserve. That influence has dropped off since the rise in the Australian dollar and the resulting unfavorable exchange rates for foreign investors. You could put this under government intervention. I guess the government changed the law as part of a multi-pronged stimulus package. Whatever the intention it helped pumped up already inflated prices. I doubt the government will ever roll back these laws unless there is a public outcry.
October 30th, 2009 at 10:21 am
Hi Angelo
If we have to have a FHOG it should definitely be restricted to the sale of new homes - which is what it was originally desgined to do, ie compensate such buyers for the impost of the GST on new dwellings back in 2001. Since then it has been twisted into an admittedly popular arm of social policy.
I’m all for helping people out, but would rather just have a tax cut that individuals could spend as they wish. With whitegoods, etc., we don’t make many of these here anymore, so all we’re really doing by encouraging demand is increasing imports.
So for the 85% of FHOG recipients who buy existing homes, we’re in agreement - scrap the grant!
Regards
Tom
ps I’ll be talking about the shortage of new homes with a member of the housing industry association on air (3AW) from 12.30-1pm tomorrow (Sat 31 Oct).
October 30th, 2009 at 10:23 am
Hi Mick
Chinese investment here is not just limited to house and property purchases. Several major takeovers going on right now (ie for nufarm & felix coal) involve PRC govt owned companies buying Australian ones. This is a trend I expect will strengthen over the next few years.
It’ll be interesting to see whether our govt changes its tune towards such large scale foreign investment.
Regards
Tom
November 15th, 2009 at 6:53 am
in response to allan hawley jacobs
i found this on a web search about you and i dont think i trust your comments now!
“Allan Hawley-Jacobs, who runs a small Gold Coast business, is attempting to trademark the name “Schapelle” in association with a raft of products from antiperspirant to nautical equipment, The Bulletin reported. “