On the RBA, housing economics and “alternative facts”
The Fifth Estate | 26 April 2018
News from the front desk: Issue 384 About a year ago we asked the development director of a major property company what would happen if the number of dwellings was suddenly doubled. Would the prices fall to reasonable, affordable levels?
No, was the clear emphatic, on-the-record response. As every developer knows, if the price of housing starts to fall you stop developing.
Yet the property development industry keeps talking up supply as the answer to housing affordability. As if what it was producing was not housing but widgets, whose pricing can be easily defined by working out where along the demand curve supply kicks in. It is so persistent with its lobbying and so repetitive and certain in its mantra that it manages to suck into its orbit a whole raft of intelligent otherwise well informed people. The Kool Aid effect.
In March the Reserve Bank of Australia fell into the trap. It published a report The Effect of Zoning on Housing Prices linking less restrictive zoning and higher supply with more affordable housing.
The Grattan Institute spins a similar story. As does the Productivity Commission. And the NSW premier Gladys Berijiklian repeated the supply and affordability mantra in her first public utterance as premier. It wasn’t a big stretch to imagine a metaphorical hand raised in blessing to property developers waiting in earnest and as devoutly as any throng in St Peter’s Square, for an early sign from their new leader.
Here’s what we thought of the RBA report at the time, RBA should stay out of zoning. To sum up it was more than a bit disappointing to see the highly regarded RBA wading into such a complex area and getting it wrong.
In particular, because so many mainstream journalists reported the paper as if it were a tablet handed down from on high, with barely a whimper of dissent or much analysis. And because this is the same story that’s proffered unblushingly by the industry, regardless of any facts it’s confronted with.
Now, thanks to Henry Halloran Trust at the University of Sydney and City Futures at the University of NSW, a panel discussion and a QandA session next Thursday will test the RBA “findings” and shine a light on some of the other facts that need to be brought to the table with such an important issue.
If the federal government and state governments want to prove they care enough about housing affordability to take some real action instead of pandering to the loudest lobby groups then it needs to send a few people along on the night.
Credit to the two authors of the RBA report, Ross Kendall and Peter Tulip, for agreeing to front this alternative throng.
“The paper is controversial,” the organisers say in their marketing material, in probably one of the understatements of the decade.
Also on the panel will be Brendan Coates of the Grattan Institute, Dr Cameron Murray from the Australia Institute and University of Queensland, Professor Nicole Gurran from University of Sydney and Professor Rachel Ong from Curtin University.
We spoke to a few people about some of the challenges that the RBA authors can start to prepare for:
Planning as an evil thing that gets in the way
University of Sydney’s Peter Phibbs says there’s an underlying assumption in the RBA document and it’s also evident in other classical economic theorists that planning is evil. (It’s not, by the way; planning is designed to protect and plan for better urban spaces so we can all thrive). But Phibbs says most of planning’s restrictions have been ditched anyway.
“They’re talking about a planning system that existed 20 years ago.”
The pricing evidence is faulty because it’s not based on zoning
Cameron Murray, who has recently published a book, Game of Mates, studied the Brisbane market and found the same pricing effects as the RBA found. Except his time frame was 1851 before zoning was even a thing in Brisbane.
Umm developers want more than 15 per cent returns unless they’re from Nightingale Housing
Phibbs says there is little understanding of how developers operate – the report cites 15 per cent returns, while significantly higher returns are expected. “I would think our first year planning students would know more,” Phibbs says.
Not all zoning is equal
Why does the property industry keep saying the same thing, like a “scratched record” as Phibbs put it? The truth is that if someone degregulated zoning on your site you would probably get a windfall. But if zoning was liberalised everywhere the market might crash.
Cameron Murray says the property industry has been lobbying to relax zoning for decades and if they got their way they would clearly collapse the market so, as this is something they don’t want, something else must be going on. It’s the zoning relaxation on a particular site, that can create huge uplift in value that the developers want, not the lifting of zoning restrictions overall.
And another thought, relaxed zoning has the capacity to destroy the quality of the thing that was attractive in the first place (judging by widespread examples).
Is the RBA in need of a scapegoat?
Phibbs suspects the RBA is tired of being blamed for runaway prices because of low interest rates and is looking for somewhere else to shift the blame.
It’s probably time for a mature conversation
What we need, Phibs says, is “people having a mature conversation about the problem”.
Bill Randolph from the City Futures at University of NSW, agrees and says the point of the session is to have a sensible debate.
(We suspect it might get a little beyond sensible given the depths of passion and sheer frustration some people are now feeling over this persistent spouting of a line in the face of the evidence indicating the opposite.)
Boom versus bust
We’ve just had the biggest building boom in ages and at the same time the biggest price rises. So how does extra supply make housing more affordable, exactly?
See Planning Institute of Australia’s John Brockhoff’s piece on this topic, where he points out there have been more cranes on the Sydney horizon than even in New York and Los Angeles and still prices have skyrocketed.
If prices fall, developers will stop building
The basic tenet of self preservation 101: if prices fall you stop building, you keep your landbank safe and secure. You do not go to market. You fall in line with your fellow developers, just like they do at the petrol pumps. Oligopoly? Ahoy Australian Consumer and Competition Commission! Anyone there?
House prices are mainly a function of… prices (and flow) of credit
“It’s a highly managed market,” Randolph says. “The thing that makes housing go up and down is not to do with supply, it’s to do with demand and demand in housing is overwhelmingly controlled by the flow and availability and price of finance.”
Globalising the spin
Randolph said the same argument is going global. (The expat contingent in property?) “There’s a big argument going on about this is in the UK as well.”
Not all economists are created equal
People on the same side of the fence, such as classical economics, have the same worldview, that in housing supply will lead to lower prices (like it does with widgets).
There are plenty of political economists and planning academics who argue that the housing market doesn’t work like demand and supply and can find an equilibrium, Randolph says.
The second-hand market doesn’t work with widgets, but with housing…oh yeah
Unlike other markets, the market for housing is largely constrained by the price of existing housing. Not like ordinary widgets at all. “You don’t go and buy a new widget but first work out the price of second-hand widgets” – Randolph.
“The bulk of the housing market is a second-hand market.”
Capacity of the industry is constrained
Imagine zoning freed up, Randolph says. Could the building industry find enough chippies and bricklayers to deliver another 20,000 apartments without pushing building costs through the roof? Probably not. “Among the housing industry, everyone understands this.”
“Show me a developer who will double his or her output to make prices fall.
“There won’t be one.”
The religious ardour of some economists knows no bounds
Cameron Murray recently released a book on corruption in the property development industry called Game of Mates. If you think he shines a reformist light on this sector you’d be right. Murray says the economists who espouse more supply and its twin, less restricted zoning, as a way to create more affordable housing are quite frankly dug deep in a religious doctrine, not facts.
They have a belief system, he says, that, if they let it go, will also threaten their beliefs about how the economy as a whole works “and their whole world view will come crumbling down”.
The economic understanding might be faulty but the training on how to study economics is good, and mostly out of the University of Chicago.
Murray is worth sticking with if you’re not afraid of becoming an economic atheist. His blog Fresh Economic Thinking delves deeper into the world of revelations, (not Revelations).
The truth about pricing
Murray who is an academic as well as a trained valuer points to the typical and rational behaviour patterns of developers. At FKP where he once worked, when prices for apartments were clearly set too low and the units were selling like hotcakes, the company shut the door on sales, raised the prices and even though it took another three years to obtain the higher prices, it was an opportunity to maximise profits too good to refuse.
The truth about more supply
“Strange”, Cameron says, “that no one from the property industry has ever proposed a housing delivery authority that builds 50,000 units a year.
“Why? Because it might actually work. It would be the only supply side strategy that works.”