This is the story about the cannibals' cooking pot and the east coast housing market. Seriously. Well, sort of.
You're stuck in a large cooking pot while the cannibals tending the fire debate the benefits of the paleo versus 5 – 2 diets. The water temperature has been rising at the rate of 5 degrees every 10 minutes, but the debate itself becomes heated when it starts to focus on the role of sugar and the cannibals are distracted from feeding the fire. Consequently, the water temperature's rise slows to 2 degrees every 10 minutes.
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The watched housing pot is nonetheless bubbling
Some folk have gone so far as claiming the housing market is cooling. Well, trying telling that to the people in the pot, who would most obviously be Sydney and Melbourne first home buyers.
So, would you say the cooking pot was cooling down, that you were feeling more comfortable about your situation?
No, I wouldn't either. But that effectively is what Reserve Bank Governor Philip Lowe is saying about the housing market. He's very watchful, but feeling more comfortable because prices nationally and credit growth for housing are rising more slowly while there's more supply on the horizon.
![While many predict a looming house price crash, other researchers suggest Sydney in particular will remain strong for ...](/web/20161002180512im_/http://www.theage.com.au/content/dam/images/g/r/i/j/l/9/image.related.articleLeadwide.620x349.grrtw6.png/1475199026387.jpg)
Some folk have even gone so far as claiming the housing market is cooling. Trying telling that to the people in the pot – most obviously, would-be the Sydney and Melbourne first home buyers traipsing around the auctions.
Housing is very definitely cooling in Perth as the collapse in population growth meets new supply that was geared to boom-time demand. Some 20 per cent of Perth home resales in the June quarter were at a loss. Darwin, suffering its own post-resources construction boom bust was worse – 24 per cent. And there are some sub-sectors of individual markets – such as the Brisbane CBD and some Melbourne units – that are coming off the boil, but the most desirable key east coast markets are still rising.
And while there's no shortage of commentators getting headlines for predicting a looming crash – as they have for the better part of a decade – there are other researchers suggesting Sydney in particular will remain strong for at least another year or so.
Deutsche Bank chief economist Adam Boyton is in the latter category. Among the points made in some solid Deutsche research this week, Boyton highlighted that housing is different to other markets in that housing supply is relatively fixed in the short run. By the short run, he means a quite a few years.
![House prices falling? Try telling that to first home buyers in Sydney and Melbourne.](/web/20161002180512im_/http://www.theage.com.au/content/dam/images/g/r/g/m/g/m/image.related.articleLeadwide.620x349.grrtw6.png/1475199026387.jpg)
"After all, there are around 9 million dwellings in Australia, with a strong year for housing construction only increasing supply by around 2 per cent, once we take into account not just completions but also demolitions," he wrote. "Add to that the lags involved from planning, to approval and then to construction.
"That combines to suggest that, yes, while in the very long run supply matters, over even a five to 10-year horizon it is likely to be the demand side that has a greater impact on house prices. Specifically, it is likely to be factors that shift the demand curve that drive trends in house prices."
Boyton goes on to demonstrate that borrowing power is the major force in shifting the demand curve. Borrowing power in turn comes from the combination of movements in income, interest rates and credit availability. Adding income growth and falling interest rates, Boyton produces a graph showing a very neat correlation between the growth of borrowing power and Sydney house prices.
Assuming 30 per cent of gross income was allocated to mortgage repayments, the average household's borrowing power grew by 286 per cent to $485,000 over the 20 years to 2015. Average Sydney house prices grew by 283 per cent over the same period.
Boyton points out there is not much new about the Deutsche finding, quoting a 2004 Productivity Commission inquiry into first home affordability in the wake of a previous housing price surge:
"The dominant source of the widespread escalation in prices has been a general surge in demand – above the normal increases associated with population and income growth – to which supply was inherently incapable of responding, at least in a way that could moderate the pressure on prices in the short term. There are several elements to the explanation … Cheaper and more accessible housing finance is a central part of the story. With inflation under control, interest rates fell through much of the 1990s and, in recent years, have been about half their levels of a decade earlier … For owner occupiers, a halving of the interest rate almost doubles the mortgage potentially obtainable, as well as nearly doubling the price of a home that can be 'afforded' for a given budget or income."
The commission also noted that "in addition to the effects of cheaper and more accessible credit, a sizeable proportion of the burgeoning demand for housing has come from higher incomes and more jobs – in short, economic growth."
Cue Sydney in 2016 – Australia's economic growth capital with the lowest unemployment rate, the biggest infrastructure spending, the most crowded trains, the highest new vehicle sales, the top destination for FI-FO work, international tourism and net migration. Whatever occasional international liveability surveys say, several million people agree with Paul Keating: "If you're not living in Sydney, you're camping out."
Back to the 2004 Productivity Commission report because its wisdom is a damning indictment of subsequent government failure:
"In most markets, such an increase in demand would have had an initial impact on prices, but this would soon have induced extra supply, moderating price outcomes over time. So why hasn't this happened in the housing market?
"The short answer is that, apart from any regulatory hindrances, the supply of housing is inherently constrained from responding quickly to sudden demand pressures. Even in a best-practice supply chain, it can take several years to bring new land on-stream, to provide the associated infrastructure and to construct new dwellings. But even if this were not so, there would have been major price pressures in the recent cycle, because much of the surge in demand came from people seeking to upgrade their dwellings (mainly in established areas) in response to increased purchasing power. Even if only a small proportion of households attempt to buy a higher quality or better located home, the price of all housing is soon bid up."
With the exception of Joe Hockey, what's been the stock response of governments to the housing affordability pressures around? "We need to increase supply", with a side-order of "blame foreigners".
(Hockey, now happily ensconced in the Australian Ambassador's mansion in Washington with several million dollars of family housing back in Sydney, infamously advised those having problems to "get a good job that pays good money" and go to a bank.)
But as has been demonstrated, increasingly supply takes a long time and then it tends to not be much. Yes, there's a boom in Sydney unit construction under way but, again with the exception of a few sub-markets, it's having very little impact on prices.
With our governments failing to get ahead of the game and collectively reducing their spend on social housing, there's been inadequate supply ammunition to counter the demand surge. The response in some quarters has been to attempt to shift the blame for high prices to the Reserve Bank. That was the undertone to several questions posed to Governor Lowe at last week's House of Representatives economics committee hearing.
Given the job the RBA has tried to do with little help from the government, it's no wonder Dr Lowe perhaps sounded a little defensive about the role monetary policy has played in fuelling the housing cooking pot – and a bit wishful about the outlook:
"Lower interest rates do affect housing prices. That is part of the way that monetary policy trickles its way through the economy. The housing prices go up. There is a bit more wealth. Some people will spend a bit more. And there might be a bit more housing construction as a result of that, as well.
"My assessment is that the housing market has slowed down a bit over the past year. The rate of price growth has nationally slowed to around 5 per cent. It is quite different to where we were a year ago. The rate of credit growth has slowed down. The turnover – the share of the housing stock that is being sold each year – has also declined a lot. I think we are in a better position than we were a year ago, but we are watching it very carefully.
"It is not in our society's interest for house prices to keep rising a lot faster than our incomes; that progressively corrodes the health of our balance sheet. So, we watch this very carefully. I am more comfortable about the state of affairs than I was before."
He must have been quite uncomfortable earlier then. I can imagine the potatoes and carrots getting tender, steam rising from the pot.
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