Tweet
                                               

How the financial markets make and break housing affordability (not supply)

In what I regard as a timely real world experiment to test theories of what causes land values to inflate or deflate, house-prices have softened in most Australian capital cities in 2018.

To be precise, in Sydney homes are selling for a minimum of 5 per cent less than 12 months ago. Some analysts now predict they will drop up to 15 per cent from peak within the next 18 months.

While I suspect the correction will be more modest than this we are talking about a significant reversal. Even though this will mean a bit of a hit to the Williams family bottom line – a well-chosen phrase for property wealth accumulated through no genius of mine other than the capacity to sit on my backside while the market value of my Sydney home grew by a morally bankrupt $1000 a day since I bought it for doing nothing at all – I offer three cheers. This is good news from a public policy perspective.

It obviously has had a small but important impact on affordability for first time buyers but this needs to be put in context. While the proportion of first time buyers in the current Sydney market is now about 12 per cent from a historic low two years ago of 7 per cent this is nowhere near the 25 per cent of the market made up of first time buyers a generation ago. Again, the recent drop has only reduced the cost of a mortgage from 13 times median salary in Sydney – the second highest in the world – to 12.5.

What has caused this drop in prices?  Perhaps population growth has paused in Sydney? No, Sydney grew by 100,000 in the last 12 months, near an all-time high and twice the rate of London. Perhaps increased housing supply is putting downward pressure on prices?  Not really. Housing supply is now falling back from its 2017 peak. Yes, that’s right supply is slowing and will go down as prices go down while population goes up. I add: just like supply went up when prices went up in the boom.

This is happening in Australia just as it happened before the crash of 2007/8 in the UK and Ireland – and indeed everywhere where the dominant and sometimes only source of housing was homes for sale. Housing is a rational business. The developer business model is to calibrate supply in response to price signals showing that a return on capital employed (ROCE) of 22 per cent + can be secured.

When that ROCE cannot be assured they won’t build another brick in that market. A falling market means developers will release fewer homes onto the market no matter what the planning system or government do.

This phenomenon , this trifecta, of a drop in prices, levelling off of supply and rise in population has been happening after our state government decided without any serious evidence that they would seek to increase housing supply in Sydney so as to make housing “more affordable”.

Having lived through this delusion when working in the Blair Government I attempted to explain the actualities of the housing market to our (apparently) market-oriented right of centre government.

That is to say that increasing supply in a market system to reduce prices has never actually happened because developers are rational market agents who will not any day soon be able to increase housing supply in a market where prices are dropping.

More importantly the whole argument relies on the false idea that housing demand is a simple reflection of demography rather than of finance. Housing demand reflects ability to finance a mortgage, not need for shelter. House prices internationally have been rising in response to excess liquidity and the financialisation of property by the banks and indeed governments desperate to refloat the world economy after the crash.

For some reason this message has actually got through to the Reserve Bank of Australia but not to many politicians at state government level.

The RBA , seeing an overheated housing market in which house prices in Sydney were going up over 10 per cent a year between 2012 and 2017, acted by imposing stricter lending standards on the banks. At the same time there has been greater restraint placed on Chinese investment in Australian property, not least by the Chinese government itself. The result: downward pressures on availability of housing finance, therefore less cash to stoke up homes prices. All while population went up in Australia in the last 12 months by 1.7 per cent.

I feel vindicated by these trends as I have argued for a more evidence-based approach to handling the housing market for some time. I have consistently made this point: world property prices go up as access to mortgage finance and sources of liquidity increase and moderate as both decrease.

Reality has won the argument for me, though I am not sure if state governments have yet got the memo. You cannot reduce the price of homes by building more of them. The problem is more of a demand problem than a supply one.

We have over-financialised property in the “Anglosphere” (Australia, US, Canada) where 80 per cent of bank lending is for property. In Germany it’s about 50 per cent. That means there banks are investing in industry not property speculation. How quaint. How different. How healthy. 

Tim Williams is head of cities and urban renewal at Arup and adjunct professor at Western Sydney University.

Tags: , , ,

Comments

One Response to “How the financial markets make and break housing affordability (not supply)”

  • Housing supply is NOT falling back from its 2017 peak. Tim is measuring approvals not completions of new homes. The June 2018 year to date approvals (released today) are a record for metro Sydney of 42,529 which is well above the 20 year average required of 36,250. So the time Sydney’s house prices are dropping coincides with record housing supply as measured by completions.

    What is dropping fast are the approvals which have dropped in metro Sydney by over 7,000 ytd between September 2016 and June 2018 and look like falling even more. The likely outcome will be to drive house prices up again in about 2 years time.

Leave a Reply

Your email address will not be published. Required fields are marked *

Have Your Say
Submit an Article »

More Articles on this Topic