tag:theconversation.com,2011:/nz/topics/housing-bubble-214/articlesHousing bubble – The Conversation2022-02-23T16:44:50Ztag:theconversation.com,2011:article/1752212022-02-23T16:44:50Z2022-02-23T16:44:50ZCanada’s housing crisis will not be solved by building more of the same<figure><img src="https://images.theconversation.com/files/444892/original/file-20220207-127289-c6kl53.JPG?ixlib=rb-1.1.0&rect=26%2C0%2C3000%2C1967&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Are building booms helping address the housing crisis? </span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Chad Hipolito</span></span></figcaption></figure><p>Canada’s “housing bubble,” along with increasing sale and rental prices, <a href="https://www.theglobeandmail.com/opinion/editorials/article-canada-needs-to-build-a-lot-more-housing-there-are-finally-plans-to/">has led to calls</a> for building more housing. </p>
<p>However, the housing crisis will not be solved by building more of the same like condos and suburban homes for single families. But alternatives to <a href="https://www.versobooks.com/books/2111-in-defense-of-housing">housing-as-commodity</a> could offer a partial solution to the bubble, and housing inequality more broadly. </p>
<p>One underlying reason for calls for more housing supply is <a href="https://theconversation.com/home-sweet-home-is-a-dying-dream-federal-election-promises-wont-solve-affordable-housing-crisis-166300">the notion of private property</a> and its historical connection to citizenship. Early Canadian legislation divided and <a href="https://www.dukeupress.edu/colonial-lives-of-property">granted land to white settlers as private property to encourage occupation</a>.</p>
<p>Another reason is financial; home ownership is seen as a means of wealth accumulation, and government policies and actions — like low mortgage interest rates — <a href="https://theconversation.com/federal-election-2021-more-supply-wont-solve-canadas-housing-affordability-crisis-167620">fuel this vision</a>. </p>
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Read more:
<a href="https://theconversation.com/housing-is-both-a-human-right-and-a-profitable-asset-and-thats-the-problem-172846">Housing is both a human right and a profitable asset, and that's the problem</a>
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<p><a href="https://www.investopedia.com/terms/n/neoliberalism.asp">Neoliberalization since the 1980s</a> <a href="https://www.levyinstitute.org/pubs/wp_525.pdf">and financialization since the 2000s</a> have created the <a href="https://theconversation.com/new-study-reveals-intensified-housing-inequality-in-canada-from-1981-to-2016-173633">current conditions of housing inequality</a> in Canadian cities and beyond. </p>
<h2>Spotlight on housing inequality</h2>
<p>People lacking intergenerational wealth are more likely to be <a href="https://betterdwelling.com/canadas-recent-immigrants-are-unhappy-with-housing-after-real-estate-prices-soar/">newcomers, racialized or marginalized</a> — making accessing housing even more difficult. </p>
<p>Along with issues of race, the <a href="https://www.theglobeandmail.com/canada/article-cities-across-canada-grapple-with-how-to-respond-to-growing-homeless/">pandemic has spotlighted</a> another crucial housing inequality issue, homelessness. The issue has been exacerbated by the pandemic <a href="https://www.cbc.ca/news/canada/manitoba/winnipeg-transit-shelters-homelessness-1.6310355">as people experiencing homelessness avoided shelters</a> because of overcrowding and fears of contracting the virus. </p>
<p>The summers of 2020 and 2021 were marked not only by outcries about housing prices, but also by the struggles of homeless people who claimed their rights to be housed on public spaces through <a href="https://theconversation.com/the-solution-to-homeless-encampments-is-making-them-unnecessary-not-illegal-167166">tent encampments</a>. </p>
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<img alt="Two people hugging each other. In the background, tents, crates, sleeping bags, coolers, shoes and other personal belongings can be seen." src="https://images.theconversation.com/files/444884/original/file-20220207-1085-ozen2d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/444884/original/file-20220207-1085-ozen2d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=408&fit=crop&dpr=1 600w, https://images.theconversation.com/files/444884/original/file-20220207-1085-ozen2d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=408&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/444884/original/file-20220207-1085-ozen2d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=408&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/444884/original/file-20220207-1085-ozen2d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=512&fit=crop&dpr=1 754w, https://images.theconversation.com/files/444884/original/file-20220207-1085-ozen2d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=512&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/444884/original/file-20220207-1085-ozen2d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=512&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Two friends embrace at a homeless encampment at Strathcona Park in Vancouver, B.C., after a 10 a.m. deadline was given for people to vacate the park on April 31, 2021.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Darryl Dyck</span></span>
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<p>The housing crisis is affecting Canadians across the income spectrum, driving up costs and making it out of reach for some and more difficult for others. I experienced the heated market first-hand last summer when I was outbid on multiple homes. I have moved five times in the past decade. Even while having steady and secure employment as a professor, and being part of a dual-income family, housing cost me not only a good portion of my income but also considerable time.</p>
<p>This is a standard story — but why should it be?</p>
<h2>Architecture and decommodified housing</h2>
<p>My experiences with the housing market motivated me to study the architectural history of a number of decommodified housing options conceived <a href="https://www.routledgehandbooks.com/doi/10.4324/9781315712697-14">at the end of the 1970s</a> that are still in operation in Providence, R.I., and in Montréal. (My paper on Montréal cases called “Empowerment through Design? Housing Cooperatives for Women in Montreal” will be published in May.) </p>
<p>The projects I studied had benefited from a shift in national housing policy around 1973 when governments moved from direct supply in the form of public housing projects, to funding non-profit and for-profit suppliers <a href="https://cornellpress.manifoldapp.org/read/public-housing-myths/section/f03e4235-b970-48d7-a46b-82a7c295b3bd#PrintPage_Ch5_121">of low-income housing in the United States</a> and <a href="https://publications.gc.ca/collections/collection_2017/schl-cmhc/nh15/NH15-566-1992-eng.pdf">non-profits and co-ops in Canada</a>. </p>
<p>In both contexts, I noted that having access to affordable housing, adequate space, public services and schools allowed residents to invest in other areas of their lives and in their families. It helped a lot if the architectural designs were attuned to the residents’ lives and needs. </p>
<p>In apartment layouts, the Providence-based Women’s Development Corporation provided eat-in kitchens comfortably large enough for children to study and play in while working parents prepare dinner, in addition to a separate, more formal living room, along with lots of storage space. The plans came about after participatory design workshops with future users who were single mothers.</p>
<h2>The history of co-op housing</h2>
<p>Canada has had many experiments in collective ownership and decommodified housing. Co-op housing is one of the better know experiments. </p>
<p>The first-generation of co-ops were intended for private property acquisition. Members of these “building co-operatives” would not only contribute payments, but also <a href="https://memorialuniversitypress.ca/Books/S/Sweat-Equity">sweat equity</a> where households would provide construction labour to bring down the costs. </p>
<p>The building co-op would typically dissolve once the buildings were ready for occupation, and titles were distributed to the owners. In denser urban areas, such as Montréal, higher land prices and the inability of families to contribute sweat equity made such projects more difficult to realize. </p>
<p>Through the 1960s, the co-op sector moved away from a model of private property to one of social property, to “continuing co-operatives.” Continuing co-operatives offered their members control over their living conditions and environments. In dense areas such as in Montréal’s urban core, <a href="https://www.miltonparc.org/about-us/">co-ops such as Milton Park</a> — which remains one of the largest renovated housing co-op developments in North America with 616 co-op units organized in 15 distinct co-ops — have helped renovate existing housing stock and contributed to historic preservation and inner-city regeneration. </p>
<p>Through collective ownership, such co-ops helped curb appreciation of property values. </p>
<p>From the mid-1980s, the Canadian government started withdrawing its support, and by 1992 had <a href="http://www.borealispress.com/underconstruction.html">cancelled its co-op housing programs</a>. Yet, co-ops are still being built with provincial and municipal funding schemes and new challenges, like increased inner-city land prices.</p>
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<figcaption><span class="caption">Information on scattered-site housing for low-income families with children and a variety of other households.</span></figcaption>
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<h2>Alternative housing solutions</h2>
<p>From the transformation of single room occupancy (SRO) hotels <a href="https://www.bchousing.org/projects-partners/development-projects/sro-renewal">into affordable apartments for young people (SRO Revitalization)</a> in Vancouver, to the conversion of <a href="https://www.torontohousing.ca/alexandra_park_revitalization">Alexandra Park public housing</a> to the <a href="https://utorontopress.com/9780802038036/building-a-co-operative-community-in-public-housing/">Atkinson Housing Cooperative</a> in Toronto to <a href="https://www.cmhc-schl.gc.ca/en/professionals/industry-innovation-and-leadership/industry-expertise/affordable-housing/case-studies-and-testimonials/cohabitat-quebec-city">Cohabitat in Québec City</a>, there are ongoing efforts to provide alternative housing and living models across Canada.</p>
<p>Beyond our borders, there are also examples from around the world <a href="https://citymonitor.ai/housing/residential-construction/red-vienna-how-austrias-capital-earned-its-place-in-housing-history">such as Vienna, Austria</a>, where government interventions serve a range of income groups — not just low-income people. </p>
<p>They have achieved this through high levels of government support and legislative frameworks that support a combination of non-profit and limited profit housing co-operatives which invest profits back into housing. </p>
<p>If housing is indeed a right, could it not be re-imagined like health care or education? </p>
<p>Regardless of one’s income, one can choose to send their children to the public school system, and theoretically access the same resources. Similarly, one can also choose to use publicly funded health-care services because they are better and trustworthy, regardless of income. </p>
<p>Societal investment in housing would decommodify a significant portion of the housing market, and could help create a more equitable, diverse and happy future society for all of us. We can move beyond our current housing crisis and engage in collective social dreaming for new possible housing futures. </p>
<p><em>This is a corrected version of a story originally published on Feb. 23, 2021. The earlier story said Milton Park is the largest housing co-op development in North America, but it is one of the largest renovated housing co-op developments in North America.</em></p><img src="https://counter.theconversation.com/content/175221/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ipek Tureli receives funding from SSHRC and CRC. </span></em></p>Providing more decommodified housing alternatives, like co-op, could offer a partial remedy to rampant housing inequality in Canada.Ipek Tureli, Associate Professor of Architecture, Canada Research Chair, McGill UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/874932017-12-19T01:41:39Z2017-12-19T01:41:39ZMarket bubbles and sonic attacks: Mass hysterias will never go away<figure><img src="https://images.theconversation.com/files/199472/original/file-20171215-17863-mpj8c0.jpg?ixlib=rb-1.1.0&rect=1738%2C0%2C6202%2C4737&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Were U.S. diplomats at the embassy in Cuba stricken by a mass delusion?</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Cuba-Sonic-Attacks/be7ba705400847398b024df1ef81bea9/4/0">AP Photo/Ramon Espinosa</a></span></figcaption></figure><p>Ancient and quaint seem the days of <a href="https://books.google.com/books?id=FfUcvgAACAAJ&dq=Extraordinary+Popular+Delusions+and+the+Madness+of+Crowds&hl=en&sa=X&ved=0ahUKEwjezcXZqPPXAhWlzIMKHXPHA8EQ6AEIKDAA">witch crazes, demon scares and tulip manias</a>. <a href="https://www.csicop.org/si/show/mass_delusions_and_hysterias_highlights_from_the_past_millennium">Instances of mass hysteria</a> may strike you as rare events in modern advanced societies. But such outbreaks are products of their times. They’re still around today, just in different guises. </p>
<p>Aided and abetted by its status as an internet meme, the <a href="https://www.snopes.com/slenderman/">myth of an evil, supernatural Slenderman</a> has been <a href="https://theconversation.com/beware-the-slenderman-how-users-created-the-boogieman-of-the-internet-71338">panicking adolescents</a> since 2009, even culminating in an attempted murder by proxy. If it’s easy to brush this off as a case of impressionable teens with too much internet access, then what of otherwise rational late 20th-century <a href="https://youtu.be/gVJJijESlko">American adults participating</a> in <a href="http://www.heavensgate.com">suicide cults</a>, Puerto Rico’s mythical cattle-killing <a href="http://www.animalplanet.com/tv-shows/lost-tapes/creatures/chupacabra-history/">Chupacabra monster</a>, the “<a href="https://press.princeton.edu/titles/10421.html">irrational exuberance</a>” of the dot-com bubble in the 1990s, or the seemingly insane rush to make <a href="https://www.thisamericanlife.org/radio-archives/episode/355/transcript">bad real estate investments</a> in the latter 2000s? </p>
<p>A diplomatic dustup between the U.S. and Cuba may be the latest well-publicized case of collective delusion. In 2017, the U.S. State Department claimed its diplomats in Havana were subjected to “<a href="https://www.propublica.org/article/diplomats-in-cuba">sonic attacks</a>” that produced a range of physical symptoms including hearing loss, headaches and dizziness. Consequently, the federal government <a href="https://www.state.gov/r/pa/prs/ps/2017/09/274518.htm">pulled out most of its embassy staff</a> and sent packing most Cuban diplomats stationed in the U.S. </p>
<p>Although medical exams have <a href="https://www.nbcnews.com/news/us-news/doctors-identify-brain-abnormalities-u-s-embassy-victims-cuba-attack-n826996">identified unusual physical conditions</a> in some diplomats, those exams lacked proper experimental controls and fall well <a href="https://www.theguardian.com/world/2017/oct/12/cuba-mass-hysteria-sonic-attacks-neurologists">short of providing evidence</a> for any sort of sonic attack. There remains no demonstrably valid evidence that diplomats were subjected to sonic attacks at the American embassy in Havana – and a good deal of evidence has now been amassed suggestive of the contrary. The latest culprit to be fingered is the <a href="https://www.vanityfair.com/news/2019/01/the-real-story-behind-the-havana-embassy-mystery">chirping of crickets or cicadas</a> – in conjunction with mass hysteria.</p>
<p>So how do otherwise logical and informed 21st-century people fall under the spell of these mass delusions? Over the past several decades, psychologists and sociologists have used examples like these to dig into when and how this kind of false belief gains traction.</p>
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<a href="https://images.theconversation.com/files/199296/original/file-20171214-27555-13p9e4c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/199296/original/file-20171214-27555-13p9e4c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/199296/original/file-20171214-27555-13p9e4c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/199296/original/file-20171214-27555-13p9e4c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/199296/original/file-20171214-27555-13p9e4c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/199296/original/file-20171214-27555-13p9e4c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=499&fit=crop&dpr=1 754w, https://images.theconversation.com/files/199296/original/file-20171214-27555-13p9e4c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=499&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/199296/original/file-20171214-27555-13p9e4c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=499&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">One of the most famous mass delusions in America led to the Salem witch trials in 17th-century Massachusetts.</span>
<span class="attribution"><a class="source" href="http://www.loc.gov/pictures/item/2003677961/">Joseph E. Baker, Library of Congress Prints and Photographs Division</a></span>
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<h2>A recipe for collective delusion</h2>
<p>Collective delusions are the culprits behind mass hysterias and related phenomena. As traditionally defined, <a href="https://mcfarlandbooks.com/product/little-green-men-meowing-nuns-and-head-hunting-panics/">they’re characterized</a> by a rapid, spontaneous and temporary spread of false beliefs within a circumscribed population.</p>
<p>Nowadays that circumscribed population can be a virtual one, bounded only by cyberconnections to a shared source of misinformation. The recent upsurge in vocal flat-Earth proponents, for example, is not the result of geographical neighbors whipping each other into a near frenzy. <a href="https://theconversation.com/how-social-media-fires-peoples-passions-and-builds-extremist-divisions-86909">Social media makes it easy</a> to find like-minded others, serve distorted information to the curious, and stir up excitement about events such as the 2017 eclipse, celebrity endorsements, and <a href="https://theconversation.com/you-dont-need-to-build-a-rocket-to-prove-the-earth-isnt-flat-heres-the-simple-science-88106">a proposed rocket launch by a flat-Earth proponent</a> intended to prove once and for all that we are all living on a disc.</p>
<p>Collective delusions emerge under a combination of several conditions. Each of these precursors is straightforward enough, but it’s harder to foresee when they might occur in concert. In turn, this makes predicting delusional outbreaks a very inexact science.</p>
<p>The most obvious precursor is the presence of multiple people who are sufficiently connected so as to share information or experiences. </p>
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<a href="https://images.theconversation.com/files/199473/original/file-20171215-17889-jwk6gq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/199473/original/file-20171215-17889-jwk6gq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/199473/original/file-20171215-17889-jwk6gq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=879&fit=crop&dpr=1 600w, https://images.theconversation.com/files/199473/original/file-20171215-17889-jwk6gq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=879&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/199473/original/file-20171215-17889-jwk6gq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=879&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/199473/original/file-20171215-17889-jwk6gq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1105&fit=crop&dpr=1 754w, https://images.theconversation.com/files/199473/original/file-20171215-17889-jwk6gq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1105&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/199473/original/file-20171215-17889-jwk6gq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1105&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">In 1978, Rev. Jim Jones orchestrated a ritual of mass murder and suicide of his followers, isolated in Jonestown, Guyana.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Jonestown-Remains/7ac740d31fe246208412db8b9f757208/96/0">AP Photo/File</a></span>
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<p>Second, just as an isolated individual may develop some beliefs and behaviors that depart from prevailing norms, collective delusions and responses are more likely to occur in relatively insular groups or networks. </p>
<p>Third, a collective delusion is more likely to take hold if the group is undergoing some kind of distress. This could be rising unemployment, political destabilization or an enemy’s threats of warfare. On a smaller scale, a town may lose a crucial employer, or a fire-and-brimstone minister can instigate a satanic panic with rumors of baby-killing cults. </p>
<p>And fourth, the stressors are potent enough to trigger, in at least some individuals, either a <a href="http://www.telegraph.co.uk/news/health/11635758/Psychosomatic-disorders-When-illness-really-is-all-in-the-mind.html">psychosomatic response</a> or <a href="https://www.psychologytoday.com/blog/hide-and-seek/201312/the-psychology-scapegoating">scapegoating behavior</a>. Psychosomatic reactions – physical symptoms with psychological causes – may be as mild as itching or as severe as blindness. Scapegoating involves blaming a group of innocent (or possibly nonexistent) others for causing problems – psychosomatic or otherwise. </p>
<p>When conditions are ripe, this catalyzing subset of group members <a href="https://books.google.com/books?hl=en&lr=&id=WVNrDys7cyIC&oi=fnd&pg=PA163&dq=Imitation+as+entrainment+Brain+mechanisms+and+social+consequences&ots=aeSUUGQfAl&sig=anvDTaHKs6fEdQwIhK0j5N6QEhw#v=onepage&q=Imitation%20as%20entrainment%20Brain%20mechanisms%20and%20social%20consequences&f=false">sets off a chain reaction</a>. They begin to seek and identify external causes for their distress, or sources for its relief. Psychosomatic responses spread; contempt for the scapegoats grows. People become hypervigilant and toss critical thinking out the window, looking for and finding imagined threats. Conspiracy theories are spawned, angels and demons invoked, fears stoked, panic induced. The supernatural may start to seem natural.</p>
<p>As more and more group members become ensnared in a positive feedback loop, the perceived threat is legitimized, only broadening and deepening social distress further. Because they are inherently newsworthy, mass delusions are picked up by mass media, which <a href="https://www.thehistorypress.co.uk/publication/panic-attacks/9780750937856/">fan the flames</a> even more.</p>
<p>In these ways, a nonexistent threat can set off a self-sustaining cascade of irrationality that lasts until the perceived threat recedes.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/199306/original/file-20171214-27597-khjcfn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/199306/original/file-20171214-27597-khjcfn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/199306/original/file-20171214-27597-khjcfn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/199306/original/file-20171214-27597-khjcfn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/199306/original/file-20171214-27597-khjcfn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/199306/original/file-20171214-27597-khjcfn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/199306/original/file-20171214-27597-khjcfn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/199306/original/file-20171214-27597-khjcfn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Will they look back and wonder what they were thinking?</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Visual_kei_1.jpg">Jacob Ehnmark</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Delusion everywhere, to different degrees?</h2>
<p>While descriptions of mass hysterias make great reading, they represent only the far end of a continuum of what sociologists like me call social diffusion processes. For the most part, these are quite mundane – you might recognize a few from your own daily life. While around the world stock market bubbles and bank runs make news, less frenetic responses to perceived threats and conspiracies abound: the <a href="https://www.csicop.org/si/show/the_9_11_truth_movement_the_top_conspiracy_theory_a_decade_later">9/11 “truthers</a>,” the recent uptick in <a href="https://www.theflatearthsociety.org/home/">flat-Earth beliefs</a>, <a href="https://www.prevention.com/eatclean/read-this-if-youre-still-afraid-of-eating-gluten">fears of gluten</a> and <a href="https://www.csicop.org/si/show/no_health_risks_from_gmos">genetically modified foods</a>, <a href="https://www.skeptic.com/insight/signs-of-hope-and-despair-on-climate-change/">climate change deniers</a>, <a href="https://www.skeptic.com/magazine/archives/22.4/">wars on science</a> on some liberal college campuses, and more. Even the <a href="https://www.amazon.com/Fear-Fashion-Critical-Cases-Anxiety/dp/9198038885">desire to be fashionable</a> can be seen as a response to the fear of being excluded. </p>
<p><a href="https://doi.org/10.1146/annurev.soc.24.1.265">Simple mathematical equations</a> can quite elegantly describe the speed, duration and extensiveness of the spread of beliefs and behaviors. A typical “diffusion model” shows how the penetration through a population of such things as beliefs, behaviors, illnesses, innovations or products is determined by just a few parameters. These typically include the group’s size, the density of its members’ interconnections and the inherent contagiousness of the thing being spread.</p>
<p>Irrational beliefs, and the often ill-considered responses they engender, can spread like an infection across groups as large as nations or as small as nuclear families. Sunshine, as they say, is the best disinfectant. <a href="https://doi.org/10.1037/0003-066X.36.4.343">Social impact theory</a> would suggest that the best approach to administering social disinfectant is via large numbers of geographically nearby, authoritative nonbelievers.</p>
<p>In the case of the supposed sonic attacks in Cuba, one approach to stemming the scare would have been a rapidly deployed on-site investigation by acoustic experts, neurologists, psychiatrists and military strategists. A folklorist as well wouldn’t hurt. Short of such a full-frontal counterattack, disseminating easy-to-digest skeptical information as early as possible in the process should help to slow the diffusion process and quell a mass delusion.</p>
<p>It’s easy enough to be caught up in a mass delusion. Fads and fashions are great examples, though their most harmful consequence may be our embarrassment when we look back on some of our previous style choices. As long as people are stressed and living in groups, most of our mass delusions will remain invisible to us until they have already run their course.</p>
<p><em>This is an updated version of an article originally published on Dec. 18, 2017.</em></p><img src="https://counter.theconversation.com/content/87493/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Barry Markovsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Sociologists know what conditions make it more likely a mass delusion will take hold and spread through a group – whether adherence to a fashion fad or belief in a doomsday cult.Barry Markovsky, Professor of Sociology, University of South CarolinaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/891442017-12-14T19:15:16Z2017-12-14T19:15:16ZVital Signs: Australia heads into 2018 with mixed economic signals<figure><img src="https://images.theconversation.com/files/199165/original/file-20171214-27593-171g8ju.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It's hard to get a fix on where Australia's economy is headed.</span> <span class="attribution"><span class="source">Garry Knight/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<p><em>This week: the housing market is still cooling, but not disastrously so, consumers remain optimistic, but business is cautious, and all eyes will soon turn to Christmas retail sales.</em></p>
<hr>
<p>Since housing is the main thing that Australians seem to talk about (even when the Ashes is on), let’s start with that.</p>
<p>The ABS <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6416.0">residential house price index</a> for the September quarter showed a small decline Australia wide, with prices falling 0.2%. Sydney prices were down 1.4%, while Melbourne was still up 1.1%.</p>
<p>This was, as we are now used to, met with press commentary about how the <a href="http://www.abc.net.au/news/2017-12-12/house-prices-off-the-boil-will-population-keep-things-simmering/9250146">housing boom is well-and-truly over</a>, and with various other shrieks of angst. Really? Melbourne just didn’t grow as fast is it did before. And Sydney, though down 1.4% on the quarter, is still up a whopping 9.4% over the past 12 months.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/four-ways-an-australian-housing-bubble-could-burst-76505">Four ways an Australian housing bubble could burst</a>
</strong>
</em>
</p>
<hr>
<p>On one level, the reaction makes no sense at all. On another, as I wrote <a href="https://theconversation.com/vital-signs-the-spooky-mortgage-risk-signs-our-bankers-are-ignoring-85591">in a previous column</a>, the implications of even modest falls could be large, given how residential lending is structured. If Australia’s banks are lending people a massive chunk of their disposable income, marking-to-market on a regular basis and issuing a lot of interest-only loans, then even small falls can have big effects on household spending and even defaults. And. They. Are.</p>
<p>The Westpac consumer sentiment index came in stronger than expected, rising 3.6% in December to 103.3 points (recall 100 in these indices is the breakeven between optimists and pessimists). Westpac’s chief economist Bill Evans said:</p>
<blockquote>
<p>This is a surprisingly strong result and confirms the lift we have seen in the index over the last three months.</p>
</blockquote>
<p>This contrasted with the news on business confidence. The <a href="https://business.nab.com.au/wp-content/uploads/2017/12/201711-nab-business-survey.pdf">NAB Monthly Business Survey</a> business conditions index dropped 9 points. This still left it at +12, however, which is above the long-run average of +5 index points. Moreover, it appeared that some of the business concern was about wages edging higher, which would be a good thing for workers and the economy more generally.</p>
<p>As I have said in Vital Signs many times, sluggish wage growth has been a persistent problem among advanced economies, and Australia is no exception. Even early signs of an increase bode well for the economy more broadly – and business will ultimately benefit from that. But these are very early signs.</p>
<p>Unemployment in Australia remained stubbornly high at 5.4% in November. A large 61,600 jobs were created, but the labour force participation rate rose to 65.5%, leaving the overall unemployment rate unchanged. It will be important to see in coming months if that pace of job creation can be maintained – for that is a prerequisite for a genuine drop in unemployment.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-economics-cant-explain-why-unemployment-and-inflation-are-both-low-85824">Vital Signs: economics can't explain why unemployment and inflation are both low</a>
</strong>
</em>
</p>
<hr>
<p>Thursday morning Australian time, the US Federal Reserve raised interest rates for the third time this year, bringing the target Fed Funds Rate to the 1.25-1.50% band.</p>
<p>The Fed also suggested in <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20171213a.htm">its statement</a> that we can expect further, gradual rises, in 2018, saying: </p>
<blockquote>
<p>The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.</p>
</blockquote>
<p>Most market participants interpret this as meaning we can expected three 25 basis point hikes next year.</p>
<p>As has been the case for some time now, the recovery in the US looks to be self-sustaining and robust. In Australia, we continue to see very mixed signals across different aspects of the economic map. </p>
<p>The housing market looms as a huge potential problem, with regulators only taking action relatively recently to begin to rein in the extravagant lending of a decade or more. And pretty modest action at that.</p>
<p>The next major thing to watch for in Australia is the all-important holiday season retail sales figures. And, as ever, the housing market.</p><img src="https://counter.theconversation.com/content/89144/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>Housing and wages loom as stubborn problems that could bring our economy unstuck in the year ahead.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/878512017-11-23T19:10:45Z2017-11-23T19:10:45ZVital Signs: five economic red flags to watch for in 2018<figure><img src="https://images.theconversation.com/files/196084/original/file-20171123-6072-13xyzhk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">We don't know for sure if any of these things could happen, but if they do we're in for a wild ride in 2018.</span> <span class="attribution"><span class="source">Image sourced from shutterstock.com</span></span></figcaption></figure><p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<p><em>This week: A break from weekly data to look forward to the year ahead.</em></p>
<hr>
<p>With a data-light week, and the end of 2017 looming, this is a good time to touch on five issues to watch out for in 2018.</p>
<h2>1. Trump loses patience with NAFTA</h2>
<p>US President Donald Trump has made clear his contempt for a variety of international agreements to which the US is a signatory. The North American Free Trade Agreement is certainly one of them. 2018 could be the time when Trump engineers either a renegotiation of NAFTA, or (scarily) a US exit from it.</p>
<p>Right now, the administration is trying to extract concessions from China and Mexico on the deal, and has set a March 2018 deadline for an agreement.</p>
<p>A US exit from NAFTA would be calamatous. The three economies have become heavily integrated since NAFTA began, and it’s almost hard to imagine what the US economy would look like without, for example, cheap goods and agricultural produce from Mexico.</p>
<h2>2. We find out Australia had a housing bubble, because it bursts</h2>
<p>Is there a bubble in the Australian housing market? I have consistently said that I don’t know, and I wouldn’t know how to prove it even if there was. But there are some troubling markers, including investment bank <a href="https://neo.ubs.com/shared/d1QtAq68bSw15m/?off_id=AC201709E304806129W1757731499&ma=X47535154596E5669&camp_id=EM%3AUNKW%3A2017-09%3A10%3AC">UBS’s report</a> warning about the potentially large number of so-called <a href="https://theconversation.com/how-liar-loans-undermine-sound-lending-practices-87073">“liar loans”</a>.</p>
<p>I’ll add one more marker that I haven’t heard discussed before. <a href="https://thejollyswagmen.com/new-blog/2017/11/15/28-liar-loans-peter-white">A respected mortgage industry insider said</a> the data in the UBS report doesn’t make sense, and that mortgage brokers aren’t encouraging people to falsify loan applications. But the same expert said any instances of bad behaviour are isolated, that statistics aren’t facts, and he rejected the idea that incentive payments to brokers encourage them to push bigger loans to borrowers. Basically, “believe me!”</p>
<p>2018 should give us a pretty good read on whether there will be a slow deflation of Sydney and Melbourne property prices (at least in real terms), or whether there will be an abrupt reduction in prices, a series of fire sales, and trouble for the banks. I think the balance of evidence now suggests the latter.</p>
<h2>3. There’s a ‘take back’ of the Brexit vote</h2>
<p>The UK will continue to negotiate its exit from the European Union, and 2018 will be both important and consequential. There is a very specific timeline for the UK’s exit – 11pm GMT, Friday March 29, 2019 to be exact.</p>
<p>The four big issues are: (i) what the UK owes the EU financially, (ii) the Northern Ireland border, (iii) what happens to UK citizens living in the EU, and EU citizens living in the UK, and (iv) the biggest of all – trade.</p>
<p>Theresa May – when not defending inappropriate behaviour from her male colleagues, or falling for sophomoric pranks when speaking in public – is sticking to her “hard Brexit” line. 2018 will show whether this is even vaguely possible. I strongly suspect not – and there are a whole host of interesting things that could happen.</p>
<p>One, May could easily lose the prime ministership. Two, there could end up being another vote to “take back” the Brexit vote. If you think that’s crazy then <a href="http://podcast.cnn.com/the-axe-files-david-axelrod/episode/all/1TFnFglOwOT80L/f3h850.html">listen to Tony Blair</a> discussing how it could happen.</p>
<p>All of this could cause major upheaval in financial markets. London remains a fundamentally important international capital market.</p>
<h2>4. US financial regulation softens</h2>
<p>Janet Yellen’s departure as US Federal Reserve Chair in February, and her replacement by Jay Powell, is unlikely to materially alter US monetary policy. Expect gradual rate rises throughout 2018.</p>
<p>What could differ – and not in a good way – is the Fed’s stance on financial regulation. Powell is thought to be more hostile to Dodd-Frank (as the regulatory response to the Great Recession is known) than Yellen. 2018 will be revealing in this regard, because the Trump White House is known to despise those regulations and there could be a concerted effort to remove them using whatever means available.</p>
<p>This would be dangerous and foolish, and lay the groundwork for the next financial crisis.</p>
<h2>5. The European experiment fails</h2>
<p>With a wave of populist sentiment across Europe, and German Chancellor Angela Merkel having a hard time forming a coalition, there is the slim but scary prospect of the EU essentially disintegrating. This could be the result of a sovereign default by a major country like Italy or Spain, that is too big to bail out. Or it could come from a German government that is no longer willing to support the European Central Bank the way it has to date.</p>
<p>It could well be that none of the worrying scenarios outlined above actually occur. But any number of implicit and explicit deadlines make 2018 look like a more eventful year than most.</p><img src="https://counter.theconversation.com/content/87851/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>Any number of implicit and explicit deadlines make 2018 look like a more eventful year than most.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/737512017-04-09T19:58:10Z2017-04-09T19:58:10ZWhat housing issues should the budget tackle? This is what our experts say<p>The Conversation has published many articles by Australia’s foremost academics on policies that affect housing. In the lead-up to expected announcements in the federal budget in May, we review the arguments in the articles since January 2016 – 81 were identified, of which 58 concerned housing policy.</p>
<p>This article focuses on the most frequently mentioned aspects of housing policies and other policies that had unintended effects on housing – fiscal policy, land supply and planning approvals, and affordable housing. A concern with politics and inequality was a consistent theme. Recent articles have discussed a possible housing bubble.</p>
<p>This article considers demand-side market distortion, supply-side blaming, and inequality. The second article will consider housing affordability and prospective policy changes.</p>
<h2>Demand-side distortions</h2>
<p>The discussion of fiscal issues most often involves the following government responsibilities:</p>
<ul>
<li><p>negative gearing and capital gains tax exemptions – a federal responsibility;</p></li>
<li><p>stamp duty (state government); and</p></li>
<li><p>the need to replace stamp duty with land taxes and to implement value-capture taxes on unearned rises in land value (state and local governments).</p></li>
</ul>
<p>The <a href="http://www.firsthome.gov.au/">First Home Owner Grant</a> and the use of superannuation savings to buy housing were seldom mentioned. The same is true of the Reserve Bank and the role of the Australian Prudential Regulatory Authority in regulating housing lending.</p>
<p>The macroeconomic implications of fiscal issues were largely not included in the housing debate. The irony is that both major parties support market distortions – the Coalition government somewhat moreso than the Labor opposition. </p>
<p>This is where politics enters the picture. It is <a href="https://theconversation.com/the-way-australia-taxes-housing-is-manifestly-unfair-58421">recognised that</a>:</p>
<blockquote>
<p>70% of voters own their houses … Housing accounts for more than 60% of the value of total assets held by Australians.</p>
</blockquote>
<p>Home owners have a vested interest in stable, if not increasing, housing prices. As a result, it <a href="https://theconversation.com/housing-policy-is-captive-to-property-politics-so-dont-expect-%20politicians-to-tackle-affordability-55384">was observed</a>:</p>
<blockquote>
<p>The default position for politicians is to sound concerned about housing affordability, but to do nothing.</p>
</blockquote>
<p>Reading the articles caused me to think the debate should be framed somewhat differently and focused on market distortions. These are a negative when policies:</p>
<ul>
<li><p>give rise to price distortions;</p></li>
<li><p>divert capital from more productive investments to less productive ones;</p></li>
<li><p>divert consumption from other goods and services and associated jobs as a result of inflated housing prices and mortgage payments;</p></li>
<li><p>create risks: household debt and exposure to interest rate rises, bank mortgage lending, the housing market, the national economy;</p></li>
<li><p>raise transaction costs;</p></li>
<li><p>reduce labour market efficiency by discouraging labour mobility; and</p></li>
<li><p>exacerbate inequality.</p></li>
</ul>
<p>Market distortions, when transparent, are positive if they serve social ends like affordable housing and reduced inequality.</p>
<p>With some variation in interpretation, Conversation authors agree that negative market distortions arise from the fiscal policies listed earlier. Negative gearing and capital gains tax are “<a href="https://theconversation.com/the-apra-bandaid-for-the-housing-market-is-wearing-off-75539">perverse incentives</a> in the tax system”. Together, they have “simply added <a href="https://theconversation.com/the-latest-ideas-to-use-super-to-buy-homes-are-still-bad-ideas-74841">fuel to the fire</a>” of increasing housing prices.</p>
<blockquote>
<p>Negative gearing is … a <a href="https://theconversation.com/a-first-step-on-negative-gearing-but-not-much-more-54738">subsidy for buyers</a> … The problem is one of too many buyers willing to pay high prices, and negative gearing is designed to create more buyers willing to pay more.</p>
<p>So negative gearing encourages people to invest in property, and it particularly encourages them to invest by borrowing most of the price of the house … This is a very odd kind of housing and investment policy, seemingly designed to encourage people to over-extend and expose themselves to big risks if property prices were to fall.</p>
</blockquote>
<p>Capital gains tax is “<a href="https://theconversation.com/explainer-why-negative-gearing-is-bad-policy-21882">diverting capital</a> from other productive investments in the expectation of tax-free capital gains”.</p>
<p>Lopsided lending for private housing has diverted finance <a href="https://theconversation.com/australias-soaring-housing-costs-signal-need-for-a-new-economic-consensus-56806">away from business investment</a>.</p>
<p>The articles also identify distortions to the economy, household debt and Australia’s budget deficit. An example is:</p>
<blockquote>
<p>… the <a href="https://theconversation.com/the-apra-bandaid-for-the-housing-market-is-wearing-off-75539">unusually generous treatment</a> which the Australian tax system gives to the costs of and returns from debt-funded property investment.</p>
</blockquote>
<p>And, referring to a possible housing bubble:</p>
<blockquote>
<p>… double-digit increases in house prices, combined with unprecedentedly high household debt (more than 120% of GDP, the third highest in the world) and household debt servicing ratios (also the the third highest in the world), <a href="https://theconversation.com/what-economics-has-to-say-about-housing-bubbles-74925">make for a precarious situation</a>.</p>
<p>… the CGT exemption cost the budget A$46 billion in 2015-16. Removing the exemption altogether would wipe out the budget deficit <a href="https://theconversation.com/why-politicians-hate-the-idea-of-taxing-the-homes-of-the-rich-52973">in one swoop</a>.</p>
</blockquote>
<p>Another author <a href="https://theconversation.com/moving-on-from-home-ownership-for-generation-rent-71628">notes that</a> by:</p>
<blockquote>
<p>… making homes default savings accounts essential to our long-term welfare security … we have come to depend on them for much more than housing … A welfare system that relies on home ownership in a globalised era is … critically vulnerable. </p>
</blockquote>
<p>The articles on market distortions lead to firm conclusions. Fiscal policies that benefit home owners significantly distort the economy, inflate housing prices, and create risks that permeate from households to the national economy.</p>
<h2>Supply-side blaming</h2>
<p>It must be noted from the start that:</p>
<blockquote>
<p><a href="https://theconversation.com/why-housing-supply-shouldnt-be-the-only-policy-tool-%20politicians-cling-to-72586">New supply is a small fraction</a> of the total stock of dwellings (about 2% in Australia). Prices are set by the total housing market …</p>
</blockquote>
<p>Discussion of housing prices that singles out supply-side issues is thus poorly grounded. This is contrary to Treasurer Scott Morrison’s <a href="http://sjm.ministers.treasury.gov.au/transcript/006-2017/">view</a>:</p>
<blockquote>
<p>The issue here is fundamentally about supply. </p>
</blockquote>
<p>He <a href="https://theconversation.com/morrison-targets-state-planning-regulations-as-problem-for-housing-affordability-67524">seems to believe</a> that:</p>
<blockquote>
<p>… the most important factor behind rising prices has been the long-running impediments to the supply side of the market.</p>
</blockquote>
<p>Morrison seeks to push states to remove residential land use planning regulations that are supposedly unnecessary and impeding the supply of housing.</p>
<p>Several articles observed that it is easy for the federal government to express dire concern about affordability and to blame state and local governments for planning and building regulations slowing the supply of land and housing. State governments sometimes repeat this mantra, blaming local governments.</p>
<p>It was observed that home owners are susceptible to scare campaigns by property sector bodies about the claimed impact of possible fiscal reforms It was <a href="https://theconversation.com/how-the-property-council-is-shaping-the-debate-around-negative-gearing-taxes-61006">also observed</a> that Morrison was the Australian Property Council’s national policy and research manager from 1989 to 1995, and is well versed in blame shifting.</p>
<p>Are the supply-side problems dire? It appears not. In Sydney and Melbourne:</p>
<blockquote>
<p>… approvals are running at about double the <a href="https://theconversation.com/why-housing-supply-shouldnt-be-the-only-policy-tool-politicians-cling-to-72586">actual dwelling construction levels</a>, so “fixing” the planning systems is unlikely to have much impact on dwelling supply levels.</p>
<p>Growth in the national housing stock has <a href="https://theconversation.com/can-the-private-rental-sector-provide-a-secure-affordable-%20housing-solution-63880">kept pace with population growth</a> for almost a decade.</p>
</blockquote>
<p>Developers release land to the market at a rate that sustains prices.</p>
<blockquote>
<p>Developers … simply won’t allow supply to <a href="https://theconversation.com/why-housing-supply-shouldnt-be-the-only-policy-tool-politicians-cling-to-72586">get ahead of demand</a> in a way that would put significant downward pressure on prices. Dwelling approvals in Sydney and Melbourne are running way ahead of building starts, but housing projects are released in stages to avoid swamping the market.</p>
</blockquote>
<p>As a result:</p>
<blockquote>
<p>Record construction rates <a href="https://theconversation.com/if-youre-serious-about-affordable-sydney-housing-premier-%20heres-a-must-do-list-71791">have co-existed</a> with unprecedented and ongoing property price hikes.</p>
</blockquote>
<p>The issue is less the scarcity of land than speculative acquisition of land. The developers benefit from unearned increases in value arising from zoning changes, and then from a managed release of land to the market. </p>
<p>For these reasons, some articles proposed taxes should accompany rezoning. A vacant land tax was also mentioned.</p>
<p>Many articles also worried about where land is being released. The need for planning and the importance of location have long <a href="https://theconversation.com/smart-cities-wouldnt-let-housing-costs-drive-the-worse-off-into-deeper-disadvantage-61213">been evident</a>:</p>
<blockquote>
<p>In his 1972 election campaign, Gough Whitlam loudly proclaimed that in modern Australia an individual’s health, wellbeing and life chances were shaped more by where they lived than the job they held, their religion, race or ethnicity.</p>
</blockquote>
<h2>Promoting inequality</h2>
<p>In effect, all home ownership in Australia is subsidised. It’s a form of social welfare biased in favour of the wealthy. For example:</p>
<blockquote>
<p>… Australian governments have effectively subsidised housing <a href="https://theconversation.com/explainer-the-financialisation-of-housing-and-what-can-be-done-about-it-73767">through taxation incentives</a> for home ownership.</p>
</blockquote>
<p>For instance, the exemption from capital gains tax:</p>
<blockquote>
<p>… results in the payment of income support to <a href="https://theconversation.com/lets-talk-about-the-family-home-and-its-exemption-from-the-%20pension-means-test-61736">those with substantial wealth</a> tied up in their principal residence.</p>
<p>… the current benefits of exempting the main residence from CGT <a href="https://theconversation.com/why-politicians-hate-the-idea-of-taxing-the-homes-of-the-rich-52973">flow mainly to high-income earners</a>, with more than 50% of the benefit flowing to the top 20% of households … [capital gains tax] is a perk for the rich.</p>
<p>… negative gearing is a tax deduction … the higher your marginal tax rate, the <a href="https://theconversation.com/a-first-step-on-negative-gearing-but-not-much-more-54738">more you get</a>. Someone on $200,000 will receive about half their loss back. Someone on $30,000 will only get about a fifth.</p>
<p>… most of the gains go to a small subset of investors with lots of properties and on very high incomes. The “mums and dads” <a href="https://theconversation.com/a-first-step-on-negative-gearing-but-not-much-more-54738">get a relative pittance</a>.</p>
</blockquote>
<p>In addition to fiscal measures:</p>
<blockquote>
<p>… the lack of well-located affordable housing is an economic productivity concern <a href="https://theconversation.com/if-youre-serious-about-affordable-sydney-housing-premier-heres-a-must-do-list-71791">as well as a social problem</a>.</p>
</blockquote>
<p>Intergenerational inequality in home ownership is not included here. While often mentioned, it is “<a href="https://theconversation.com/how-the-housing-boom-is-remaking-australias-social-class-structure-66976">framing the housing affordability question the wrong way</a>”. The divide is <a href="https://theconversation.com/how-the-housing-boom-is-remaking-australias-social-class-structure-66976">determined by class</a> and perpetuated by those with wealth in property and the potential for intergenerational wealth transfer <a href="https://theconversation.com/moving-on-from-home-ownership-for-generation-rent-7162">in the housing market</a>.</p>
<p>A specific insight concerns the geography of mortgage stress. Mortgage stress is more a result of household income than the price of the house. Rather than Sydney and Melbourne, where mortgages are highest:</p>
<blockquote>
<p>… mortgage stress is highest in <a href="https://theconversation.com/not-on-struggle-street-yet-but-mortgage-stress-risk-is-rising-64293">Tasmania and South Australia</a> … Households in regional areas are also facing more mortgage stress than their city counterparts.</p>
</blockquote>
<p>If attention turns from house prices to mortgage stress, the geography of housing angst <a href="https://theconversation.com/a-housing-affordability-crisis-in-regional-australia-yes-and-heres-why-71808">turns to regional Australia</a> and to “<a href="https://theconversation.com/not-on-struggle-street-yet-but-mortgage-stress-risk-is-rising-64293">employment and income statistics</a>”.</p>
<h2>Beware simplistic mantras</h2>
<p>It is hoped this article leads to some introspection regarding the causes of housing affordability problems. Australia has for too long persisted with the mantra of housing prices being caused by problems of supply. </p>
<p>This is not a political statement. It was Labor that established the National Housing Supply Council. The emphasis on supply is so very misleading. The focus should be on the functioning of the housing sector and on those unable to enter the housing market.</p>
<p>It is hoped as well that this article has caused some concern regarding the macroeconomic distortions and productivity costs associated with housing policies and, more to the point, policies that are not intended to affect housing. </p>
<p>The failure to resolve housing issues, besides being thoroughly unfair, is also a failure to improve the productivity of Australia’s economy.</p><img src="https://counter.theconversation.com/content/73751/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Tomlinson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Housing experts writing for The Conversation largely agree on the government policies that are causing negative distortions in the market and the wider economy. And supply is not the key concern.Richard Tomlinson, Professor of Urban Planning, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/749252017-04-02T19:39:45Z2017-04-02T19:39:45ZWhat economics has to say about housing bubbles<figure><img src="https://images.theconversation.com/files/163382/original/image-20170330-4583-16sv89e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Rapid rise of Australian house prices have created disagreement between economists on whether a housing bubble currently exists. </span> <span class="attribution"><span class="source">Brian Birdwell/flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>The b-word is doing the rounds, barely a decade after the United States house price bubble burst spectacularly, setting in motion a global financial crisis. As Australian real estate prices continue to break records, many wonder whether this is sustainable. </p>
<p>Economists disagree on how to define a bubble, or even whether bubbles exist. Intuitively, a bubble (and this applies to any asset, not just real estate) exists when the price of an asset is over-inflated relative to some benchmark. And here’s the rub: no one can agree on what that benchmark should be.</p>
<p>The benchmark could be an estimate of the asset’s value based on a collection of variables that plausibly affect its supply, demand and price – so-called fundamentals. For houses, these fundamentals include population growth, tax policy, household size, household income and many others. </p>
<p>But economists cannot agree on what fundamentals determine an asset price, or how important each fundamental is. As well, the value of these fundamentals can only be estimated, not observed. It’s subjective to the point that someone will always be able to concoct a story based on fundamentals to rationalise why house prices are at the level they are.</p>
<p>Some economists propose alternative benchmarks to measure a bubble, such as historical long-run averages, or an estimate of the underlying value of a trend. If asset prices are greater than these averages or the trend, then we have a bubble. However, this definition is too simplistic because the economy is dynamic, ever evolving, and both long-run averages and trends do change.</p>
<h2>Price hikes and bubbles</h2>
<p>It’s only when asset prices reach outrageous heights that a majority of people, economists included, agree that the asset is overpriced and due for a major correction (a bubble burst). Even then some economists will deny the existence of a bubble. </p>
<p>One of the earliest examples of an asset price bubble was the frenzy in the market for Dutch tulip bulbs in the 17th century — the so-called “Tulipmania”. Although the data are patchy and many historians have not exercised great care in retelling the story, there’s little else to explain how prices for Witte Croonen bulbs rose 26-fold in January 1637 and fell to a 20th of their peak value in the first week of February.</p>
<p>Yet, <a href="https://www.uv.mx/personal/clelanda/files/2013/02/Garber-2000-Famous-first-bubbles.pdf">well-respected scholar Peter Garber argued that</a>:</p>
<blockquote>
<p>The wonderful tales from the tulipmania are catnip irresistible to those with a taste for crying bubble, even when the stories are so obviously untrue. So perfect are they for didactic use that financial moralisers will always find a ready market for them in a world filled with investors ever fearful of financial Armageddon.</p>
</blockquote>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/163385/original/image-20170331-4572-keijqg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/163385/original/image-20170331-4572-keijqg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=391&fit=crop&dpr=1 600w, https://images.theconversation.com/files/163385/original/image-20170331-4572-keijqg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=391&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/163385/original/image-20170331-4572-keijqg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=391&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/163385/original/image-20170331-4572-keijqg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=491&fit=crop&dpr=1 754w, https://images.theconversation.com/files/163385/original/image-20170331-4572-keijqg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=491&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/163385/original/image-20170331-4572-keijqg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=491&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Soldiers destroy tulips to reduce supply and stabilise prices following the sudden collapse of tulip prices in seventeenth century Holland. The Tulip Folly (1882) by Jean-Léon Gérôme.</span>
<span class="attribution"><span class="source">Jean-Léon Gérôme/Wikimedia Commons</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>Assuming bubbles are a significant gap between the observed asset price and some appropriate benchmark value, the mere existence of this gap raises the question of how it came about. The answers mostly rely on psychology, which is why many economists (looking to represent the world in a mathematical model) struggle with the concept.</p>
<h2>Bubble frenzy</h2>
<p>Bubbles are ultimately a confidence game, in which the vendor sells the asset to a buyer at a profit, with the latter hoping to do the same in the future. This game relies on a powerful narrative that captures people’s imagination and persuades them their turn will be different. </p>
<p>As George Soros, the famous US-Hungarian multibillionaire <a href="https://en.wikiquote.org/wiki/George_Soros">hedge-fund manager once remarked</a>:</p>
<blockquote>
<p>[…] Bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.</p>
</blockquote>
<p>This misconception is the consequence of human behaviour and traits that depart from the fully rational paradigm so often assumed in formal economics. Instead, as behavioural economists argue, people exhibit a number of biases.</p>
<p>These include, for example, the desire to find information that agrees with their existing beliefs (called confirmation bias), and the tendency to form decisions based on the most readily available information (called availability bias). People experience and seek to resolve their discomfort when they have two or more contradictory beliefs, ideas or values. They also employ simple abstractions in thinking about complex problems and events (framing).</p>
<p>People are poor intuitive statisticians and care more about avoiding losses than about experiencing gains (called loss aversion). The list of flaws in human behaviour goes on. Moreover, humans, social animals that we are, compete with and emulate our peers, herd like sheep and act on rumours. </p>
<p>Occasionally, all these traits and biases reinforce each other and send the prices of houses, or shares, or whatever, into the stratosphere.</p>
<h2>Who’s afraid of a bubble?</h2>
<p>The bubble itself is rarely a major cause for concern, although young Australian households looking to buy their first home will disagree. The problem, of course, is that every bubble eventually pops and this correction is typically violent and painful, for two reasons. </p>
<p>First, asset prices often fall faster than they rise, so the downward correction can destroy value in a very short time. And second, most bubbles are fuelled by debt, because the only way a bubble can expand in the later stages is if the demand for the asset is bolstered by debt.</p>
<p>This combination – high debt and falling asset prices – generates a vicious cycle in which distressed debtors scramble to repair their balance sheets and sell their asset. This in turn pushes the price of that asset even lower, causing further distress to similar owners of the asset, and so on.</p>
<p>The pain associated with a bursting bubble varies considerably. Sometimes economies rebound rather quickly from a burst bubble, as was the case after the breath-taking collapse of the <a href="http://www.investopedia.com/terms/d/dotcom-bubble.asp">dotcom bubble</a>. </p>
<p>However, housing bubbles are in a league of their own. Historically, they have <a href="http://press.princeton.edu/titles/8973.html">always led to severe recessions</a>, and there is no reason to believe this should change. The next time is not different.</p>
<p>The answers on how to deal with a bubble range from “nothing” to “whatever it takes”. The problem is that no-one (policymakers included) can reliably identify a bubble. </p>
<p>If there is such a thing as a bubble, we will only know for sure when the bubble is already popping. Acting early to prevent a bubble expanding further is risky and unpopular. It’s a brave central banker who raises interest rates in anticipation of an increase in asset prices when the rest of the economy is humming along just fine, or even showing signs of weakness.</p>
<p>So, is Australia in the midst of a housing bubble? I will go out on a limb and answer in the affirmative. </p>
<p>There are plenty of arguments why current house prices are exactly where they should be, based on the fundamentals. But in my opinion these explanations do not pass the smell test: double-digit increases in house prices, combined with unprecedentedly high household debt (more <a href="http://stats.bis.org/statx/toc/CRE.html">than 120% of GDP</a>, the third highest in the world) and household debt-servicing ratios (also the <a href="http://www.bis.org/statistics/dsr.htm">third highest in the world</a>), make for a precarious situation. </p>
<p>All it takes is a modest change in investor sentiment, a few interest rate hikes, or a noticeable increase in unemployment, and the whole scheme unravels. I hope I’m wrong, but history is on my side.</p><img src="https://counter.theconversation.com/content/74925/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timo Henckel received funding from the Centre for International Finance and Regulation. He is chair of CAMA's RBA Shadow Board at the Australian National University. </span></em></p>Economists struggle to agree on when and where housing bubbles occur, but bubbles all have similar characterisitics.Timo Henckel, Lecturer, Research School of Economics, and Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/750502017-03-23T19:14:06Z2017-03-23T19:14:06ZVital Signs: if it looks like a bubble and sounds like a bubble…<figure><img src="https://images.theconversation.com/files/162143/original/image-20170323-13515-1y4cizo.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The foundations of Australian house prices could shift at any time.</span> <span class="attribution"><span class="source">Shutterstock.com</span></span></figcaption></figure><p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<p><em>This week: Australia’s housing obsession continues, and it’s difficult to assess the future path of interest rates.</em></p>
<hr>
<p>I didn’t think it was possible for there to be more focus on the Australian housing market than in 2016, but the last couple of weeks have proved me wrong.</p>
<p>ABS figures revealed that in the December quarter, across the eight major Australian cities, house prices rose 8.9% and apartment prices rose 4%. Those are stunning figures, particularly on the back of the huge rises of recent years.</p>
<p>This prompted renewed discussion about whether prices constituted a bubble. Many players weighed in, but former Liberal Party leader <a href="http://www.abc.net.au/news/2017-03-22/property-bubble-called-by-former-liberal-leader-hewson/8375868">John Hewson put it most succinctly</a>, saying on ABC’s Lateline:</p>
<blockquote>
<p>“I think it’s a crisis, it is a bubble. I know people are hesitant in saying that, it is a bubble.”</p>
</blockquote>
<p>In one sense it doesn’t really matter whether there is a housing bubble or not. Once buyers start believing there is and think it will burst, they have every incentive to wait to purchase. That dries up liquidity in the property market and sellers who need to sell are forced to take a steep discount. That justifies the buyers’ belief that prices are going to fall. And that, simply put, is how a bubble bursts.</p>
<p>Are we at that point yet? It’s hard to say, but given that a former Liberal Party leader, the <a href="http://thenewdaily.com.au/money/property/2015/05/18/housing-bubble-real-danger-asic/">ASIC chairperson</a>, and the <a href="http://www.abc.net.au/pm/content/2015/s4246414.htm">Secretary to the Treasury</a> (among others) have said so recently, there is reason to think we might get there.</p>
<p>The <a href="http://www.rba.gov.au/monetary-policy/rba-board-minutes/2017/2017-03-07.html">most recent board minutes</a> revealed the RBA was somewhat focused on housing as well. The minutes stated:</p>
<blockquote>
<p>“Over recent months, conditions appeared to have strengthened in Sydney and had remained strong in Melbourne; these cities had continued to record brisk growth in housing prices, and auction clearance rates had remained high. Housing loan approvals and credit growth had picked up for investors, primarily in New South Wales and Victoria” and that this “continued to suggest that there had been a build-up of risks associated with the housing market.”</p>
</blockquote>
<p>The minutes also noted a number of positive developments, from the terms of trade to the strength of our trading partners to business sentiment. The notable exception was the labour market which continued to confound understanding. The RBA noted that the key implication was that:</p>
<blockquote>
<p>“Domestic wage pressures remained subdued and household income growth had been low, which, if it were to persist, would have implications for consumption growth and the risks posed by the level of household debt.”</p>
</blockquote>
<p>It is difficult to assess the future path of the cash rate. The economy looks like it might be strengthening, and if business investment were finally to rebound, there would be a case for a rate rise. But with a weak labour market, a rise in rates would put the squeeze on those heavily indebted households. This could, in turn, detonate the property market. The nightmare scenario is that it has a big enough effect on bank balance sheets that they contract lending significantly, further hurting the property market.</p>
<p>This is the delicate tightrope the RBA is trying to walk.</p>
<p>The run-up in prices has put further focus on housing affordability. The Coalition have suggested they will announce a series of measures to address it in the budget. They are rumoured to be considering schemes like allowing first home buyers to access their superannuation – which is <a href="https://theconversation.com/the-latest-ideas-to-use-super-to-buy-homes-are-still-bad-ideas-74841">a very bad idea</a>. It is another policy that fuels the demand side without addressing supply. I have said numerous times – including in my <a href="http://research.economics.unsw.edu.au/richardholden/assets/the-mckell-institute-switching-gears-addendum.pdf">McKell Institute plan</a> – that demand-side excesses such as negative gearing need to be curbed and the supply side needs to be encouraged.</p>
<p>The housing package might be the most interesting thing to look out for in the federal budget on May 9.</p><img src="https://counter.theconversation.com/content/75050/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>Australia’s central bank is still trying to walk a delicate tightrope.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/606552016-07-08T15:01:16Z2016-07-08T15:01:16ZJust building more homes won’t fix the housing crisis – here’s why<figure><img src="https://images.theconversation.com/files/129879/original/image-20160708-24087-1fu8059.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/ramnaganat/7366802232/sizes/l">Natesh Ramasamy/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>In major cities across the globe – from <a href="http://indy100.independent.co.uk/article/londons-housing-crisis-in-13-property-listings--lkkRKVsjXe">London</a> to <a href="http://www.manilatimes.net/ph-housing-bubble-forming-expert/220920/">Manila</a>, <a href="http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11579043">Auckland</a> to <a href="http://www.latimes.com/opinion/editorials/la-ed-brown-affordable-housing-20160527-snap-story.html">Los Angeles</a> – housing is becoming less and less affordable. This has caused <a href="https://www.theguardian.com/society/2016/apr/30/uk-throes-of--housing-crisis">a great deal of angst</a> over house prices. But so far, politicians and the media have been much more effective at whipping up public anxiety, than putting in place actual solutions. </p>
<p>Over-inflated house prices are caused by more than just <a href="https://www.parliament.uk/documents/commons/lib/research/key_issues/Key-Issues-Housing-supply-and-demand.pdf">supply and demand</a>. Policy changes often focus too narrowly on increasing housing supply, by opening up more land for development and <a href="https://theconversation.com/the-rose-and-the-property-developer-a-cautionary-tale-on-the-perils-of-hasty-urban-planning-59765">speeding up the planning process</a>. Of course, supply is important. If more people want to buy houses than there are houses available then prices may be forced upward. </p>
<p>But it is not enough to address only one cause. Another major driver of price increases is a housing market “bubble”. A bubble can be detected when property <a href="http://www.economist.com/node/4079027">prices increase significantly faster than rents</a>. In investment terms, this means you’re buying a more expensive asset, but it doesn’t give a higher return from rental income. </p>
<p>When prices are rising rapidly, buyers tend to anticipate that this will continue, guaranteeing a tidy profit when they eventually sell the property. Add <a href="http://www.telegraph.co.uk/business/2016/06/01/mortgage-rates-fall-to-record-low-as-bank-of-england-mulls-rate/">record low interest rates</a> and the resulting abundance of low-cost debt means that house prices can easily become over-inflated, relative to people’s incomes. </p>
<p>The <a href="http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2013/shiller-facts.html">2013 Nobel Prize-winner</a> Robert Shiller theorised this buyer behaviour and called it “irrational exuberance”. Housing markets in many cities across the globe are stubbornly following Shiller’s theory. As a bubble grows, more people are priced out of the market for buying property, while the <a href="http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11608770">apparent urgency to get onto the property ladder</a> increases. Even if housing supply is increasing, the expectation of increasing property values will continue to drive this kind of behaviour in the market. </p>
<p>It is thought that London alone requires <a href="https://www.london.gov.uk/what-we-do/planning/london-plan/current-london-plan/london-plan-chapter-3-0/policy-33-increasing">42,000 new homes each year</a>, based on population estimates. Between 2001 and 2011, Greater London’s population <a href="https://www.london.gov.uk/sites/default/files/gla_migrate_files_destination/Fitting%20a%20Quart%20into%20Pint%20Pot%20-Ian%20Gordon.pdf">increased by 12.6%</a>, while housing supply grew only 7.5%. It is only physically possible to meet this demand by putting more people into existing houses, leading to overcrowding, which is <a href="http://www.childrensrightswales.org.uk/UserFiles/resources/no-space-at-home.pdf">harmful to health and well-being</a>. </p>
<p>So, building more houses won’t discourage irrational investment on its own. In fact, it might encourage more people to take on debt and invest in an over-valued housing market. If the bubble bursts – which would most likely be caused by a recession, or an increase in the cost of debt – prices will undergo a “correction”. Whether this correction is large or small, the financial impact on households and the threat to the stability of the national economy are significant. </p>
<h2>How to rent a home</h2>
<p>To diffuse this situation, we need to question our common assumptions about housing. The key role of housing is to meet the basic human need for safe and secure shelter. Housing policies mostly assume that home ownership is the only way to do this. </p>
<p>This idea has its roots in the post-war era, when governments <a href="https://www.theguardian.com/commentisfree/2008/apr/21/thehomeownershipideology">promoted the idea</a> of owning your own home, as the mark of financial security. Home ownership is not wrong – although households should seriously consider the risks of taking on large, long-term debts. But arguably, it isn’t an appropriate one-size-fits-all solution for cities in 2016. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/129442/original/image-20160705-791-brrmig.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/129442/original/image-20160705-791-brrmig.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/129442/original/image-20160705-791-brrmig.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/129442/original/image-20160705-791-brrmig.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/129442/original/image-20160705-791-brrmig.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/129442/original/image-20160705-791-brrmig.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/129442/original/image-20160705-791-brrmig.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Not ideal.</span>
<span class="attribution"><span class="source">from www.shutterstock.com</span></span>
</figcaption>
</figure>
<p>So, what other options do we have? For starters, better rental regulations could allow for long-term tenure and provide better protection for tenants. In Germany, <a href="http://www.independent.co.uk/property/house-and-home/why-the-germans-and-french-prefer-to-rent-2291077.html">only 39%</a> of the population owns their own home, compared with roughly 60% in the UK. </p>
<p>But they also rent under very different conditions to people in the UK. Local governments can limit the rate of rent increases, and <a href="https://england.shelter.org.uk/__data/assets/pdf_file/0019/392410/International_comparisons_briefing_v6.pdf">tenants have more rights</a> to occupy a property over a long-term period. These arrangements make renting a viable option for people looking for long-term accommodation, which frees up household income to invest in other assets, with lower risk. </p>
<h2>The real crisis</h2>
<p>There are even more inventive ways to emphasise the importance of access to shelter, over and above home ownership. For one thing, there are some creative and forward-thinking design solutions on show at this year’s “<a href="http://www.architectural-review.com/archive/home-economics-the-british-pavilion-at-the-venice-architecture-biennale-2016/10003239.fullarticle">Home Economics</a>” display, at the Venice Biennale. </p>
<p>But we also need to rethink the way we plan our cities. In reality, the housing crisis stems from the fact that house building is left largely to the private market. Private developments don’t always include smaller, more modest homes for low-income households as well as expensive homes for the wealthy (the latter are usually <a href="http://www.citylab.com/housing/2015/06/the-big-money-behind-tall-buildings/395690/">more profitable</a>). A <a href="http://www.ft.com/cms/s/0/4ea96f5e-bde6-11e4-9d09-00144feab7de.html#axzz4Dk9ceLCD">survey of developments</a> between 2014 and 2015 found that only 20% of the total number of homes built were deemed to be “affordable”. </p>
<p>Local governments require a certain share of new houses to cater to those on low incomes, but these affordable housing requirements are notoriously weak, too. In London, as little as <a href="http://homesforbritain.org.uk/a-damning-indictment-of-affordable-housing-in-london/">12% of dwellings</a> in new developments need to be “affordable” – a classification which allows rents as high as <a href="https://www.london.gov.uk/what-we-do/planning/london-plan/current-london-plan/london-plan-chapter-3/policy-310-definition">80% of market rate</a>. In some cases, the price of a home deemed “affordable” was equal to <a href="https://www.theguardian.com/society/2016/mar/15/london-record-low-new-affordable-housing-figures-show">30 times the average UK wage</a>.</p>
<p>Policies focused purely on expanding supply, without catering to different income groups, ignore the fact that cities depend on people who earn many different levels of income to provide key services. There are wider costs to society if cleaners, bar staff, creatives, cashiers and nursery assistants cannot afford to live in urban areas. Even if cheaper accommodation is available on the outskirts, this won’t offer a solution if commutes are long and costly. </p>
<p>We don’t know how or when the UK’s housing market bubble will burst, or how much prices might fall when it does. For the moment, those who don’t own property can take comfort in the fact that they aren’t taking on a mortgage in an overvalued property market. Meanwhile, leaders need to consider more innovative housing options, which focus on access rather than ownership. They need to provide meaningful alternatives for people on low incomes – or risk driving them out of our cities altogether.</p><img src="https://counter.theconversation.com/content/60655/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jenny McArthur receives funding from Auckland Council. </span></em></p>Clue: the UK needs to get over its obsession with home ownership.Jenny McArthur, PhD candidate, infrastructure investment, urban growth and liveability, UCLLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/568062016-05-03T03:56:15Z2016-05-03T03:56:15ZAustralia’s soaring housing costs signal need for a new economic consensus<figure><img src="https://images.theconversation.com/files/118271/original/image-20160412-15853-12bud02.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The International Monetary Fund estimates that Australia’s houses are overvalued by around 10%.</span> <span class="attribution"><span class="source">AAP/Paul Miller</span></span></figcaption></figure><p>The deeper issue behind Australia’s <a href="https://theconversation.com/housing-policy-is-captive-to-property-politics-so-dont-expect-politicians-to-tackle-affordability-55384">current housing debates</a> is how housing investment will impact on our long-term prosperity.</p>
<p>The International Monetary Fund <a href="https://www.imf.org/external/pubs/ft/scr/2015/cr15275.pdf">estimates</a> that Australia’s houses are overvalued by around 10%. The special place of housing arises from a distinctive policy consensus about how the overall economy should be managed and governed, which has dominated major party thinking since the early 1980s, and the institutional priorities this consensus has produced. </p>
<p>The questions we need to ask now are not so much whether house prices will slump, or whether they are too high. Instead, we should ask: what is investment’s role in the wider economy? And how can the underpinning consensus, which is outliving its usefulness, be renewed?</p>
<h2>How we got here</h2>
<p>This consensus was developed in the early 1980s, originally as a social-democratic project that embraced neoliberal economic reform. It was driven by the need to ensure all citizens benefited from the economy’s modernisation, and for a stable, consensual set of institutional arrangements through which to govern.</p>
<p>As Australia moved from the 1990s into the 2000s, low interest rates and the surge of mining-related income combined with growing private credit to drive house price inflation. </p>
<p>Mining was only one side of a twin boom in which private borrowing for housing purchases has helped drive prices to giddying and unsustainable levels. This is perhaps most obvious outside large cities. Every city in the Anglo world (the US, Canada, the UK, New Zealand, Australia) with a population of fewer than 100,000 people and house prices over five times the median income <a href="http://www.macrobusiness.com.au/2015/11/more-excuses-for-australias-expensive-housing/">is in Australia</a>.</p>
<p>Australia emerged from the once-in-a-century resources boom more indebted than when it entered. Bank lending increased between 1985 and 2015 from <a href="https://griffithreview.com/time-for-a-new-consensus-e-book/">just above 20% of GDP to almost 130% of GDP</a>. The data reveal that the private debt accumulated by Australians is largely for housing, and largely foreign.</p>
<p>Australia has the world’s highest ratio of housing debt to total lending at 54%. This compares to, for example, 16% in the US, 20% in France, 40% in the UK and 14% in Hong Kong. Australia also has the world’s second-highest ratio of mortgage debt to GDP at 99%.</p>
<p>This places Australia at risk in the event of a downturn in housing prices. But the deeper point is that housing is an unproductive economic investment. Housing is either direct consumption (owner-occupied) or speculative investment (rental returns are below interest rates, implying that buyers rely on future capital gains to make the investment pay).</p>
<p>Even more worrying, Australia’s productive base outside of mining has actually narrowed or declined over this period. Lopsided lending for private housing has diverted finance away from business investment, which should be devoted to the development of new products, services, infrastructure and jobs in non-mining sectors.</p>
<p>Housing finance increased from less than 25% of credit outstanding in 1990 to more than 60% today. Business lending declined from nearly 65% to less than 35% over same period. Finance for new houses declined from 35% of new commitments to 15% today.</p>
<p>This shift also illustrates the Australian economy’s <a href="http://www.tradingeconomics.com/australia/manufacturing-value-added-percent-of-gdp-wb-data.html">changing structure</a>. Finance and real estate soared from 7% in 1975 of gross value added to 12% in 2015. Mining grew only from 6% to 9%. Manufacturing declined from almost 20% to 7%.</p>
<p>Finance sector profits increased from less than 1% of GDP in 1985 to more than 5% in 2015. The finance sector now makes up almost half (47.5%) of the ASX200’s entire market value.</p>
<p>So, during this period, exports were concentrated into mining while rising wages and currencies hollowed out domestic industry. Private debt rose astronomically to fund house purchases. For two decades, mining investment, rising house prices and escalating government expenditure masked the impact. But as the mining boom subsides, the picture revealed is sobering.</p>
<h2>Can we change course?</h2>
<p>The current consensus assumes these structural shifts to be rational and inevitable because they are driven by market decision-making. </p>
<p>But as with the previous Australian consensus of the early 20th century, the assumptions and commitments standing behind the consensus are historically contingent. When the facts and circumstances change, the assumptions should be challenged.</p>
<p>Ballooning borrowing to invest in the housing market is impeding investment in the real economy, holding back the development of skills and jobs and driving up inequality. All of these damage Australia’s long-term economic growth.</p>
<p>Australia is not immune to the global forces that have increased returns to capital relative to returns to labour. This shift has left millions of workers facing a decline in real living standards and highlighted their over-dependence on sharemarket and housing price increases for income growth. Yet the 1980s consensus has almost nothing to say about how to respond.</p>
<p>One-and-a-half million Australian households <a href="http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/1301.0%7E2012%7EMain%20Features%7EHousing%20and%20life%20cycle%20stages%7E132">now own</a> more than one residential property. Two-thirds of those under 30 <a href="http://www.theguardian.com/business/grogonomics/2015/sep/14/the-rich-are-getting-richer-and-their-wealth-is-safe-as-houses">rent their home</a>.</p>
<p>Wealth inequality is as high as it has ever been in Australia. The wealthiest one-fifth of households <a href="http://www.theguardian.com/business/grogonomics/2015/sep/10/australias-rich-are-getting-richer-everyone-else-is-stagnating">hold nearly two-thirds</a> of Australia’s net wealth.</p>
<p>Long-run economic development and growth is supported by institutions that distribute opportunity and reward as widely as possible. This makes hard work, creativity and risk-taking worthwhile. </p>
<p>To achieve this in the 21st century, we must renew the consensus through an open, contested debate about Australia’s real and potential sources of comparative advantage and a sustained, long-term effort to invest in those advantages through public policy and private enterprise.</p>
<hr>
<p><em>Time for a new consensus: fostering Australia’s comparative advantages, by Jonathan West and Tom Bentley, is published by Griffith Review and available as a <a href="https://griffithreview.com/time-for-a-new-consensus-e-book/">free download</a>.</em></p><img src="https://counter.theconversation.com/content/56806/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Ballooning borrowing to invest in the housing market is impeding investment in the real economy, holding back investment in skills and jobs, and driving up inequality.Tom Bentley, Principal Adviser to the Vice Chancellor, RMIT UniversityJonathan West, Emertius Professor, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/478582015-09-28T03:40:51Z2015-09-28T03:40:51ZUrban policy: could the federal government finally ‘get’ cities?<p>The appointment of a <a href="https://www.environment.gov.au/minister/briggs/index.html">federal minister for cities and the built environment</a> is a signal moment in urban policy in Australia. It is a much-needed portfolio for an overwhelmingly urban nation but will need new policy capacity if the government’s urban goals are to be realised. </p>
<p>Australian cities are among the fastest-growing in the developed world. They face problems of poor housing affordability, growing inequality, inadequate and inefficient infrastructure, unsustainable environmental demand and uneven employment distribution and productivity.</p>
<p>Long neglected federally, urban affairs is the gaping void in 21st-century public policy. Not since 1972 has Australia seen both the Labor and the Liberal parties commit to a cities portfolio within the Commonwealth ministry. That this has now occurred under a Coalition government is especially unusual.</p>
<p>Labor governments have been most engaged with urban questions. Curtin initiated a federal housing program and spurred states to better urban planning. Whitlam sewered neglected suburbs and stabilised fringe land markets, while Keating stimulated inner-city urban renewal. The Rudd-Gillard government boosted infrastructure and set national principles for metropolitan planning.</p>
<p>The short-lived McMahon government’s 1972 <a href="https://www.comlaw.gov.au/Series/C1972L00183">National Urban and Regional Development Authority</a> is the only previous Coalition urban foray of note. </p>
<h2>Creating the capacity to do urban policy</h2>
<p>As the new minister, Jamie Briggs’s agenda is not yet detailed, although it looks set to focus on <a href="http://www.theaustralian.com.au/national-affairs/malcolm-turnbull-sends-gang-of-three-to-unclog-cities/story-fn59niix-1227542862627?sv=9d68d99a6c06e535533c7f2c184e8e8e">integration, infrastructure and greening</a>. What could a new urban program look like, and what are the urban reform imperatives facing the Turnbull government? </p>
<p>The first task must surely be to develop permanent urban analytical and policy capacity in the federal public service. The Department of Environment, where the cities minister will be hosted, has almost no urban policy capability. The strongest federal urban capacity is in the <a href="https://infrastructure.gov.au/infrastructure/pab/">Planning Analysis Branch</a> of the Department of Infrastructure. The Turnbull government must build rapidly off this small but competent base.</p>
<p>A second task is to create federal capacity for cross-portfolio policy coordination. A cities agenda requires federal arrangements that can link across transport, infrastructure, environment, housing, finance, education, health and social services to build a multi-dimensional policy perspective on cities. </p>
<p>The third capacity-building task is to re-establish national coordination arrangements for urban policy. The federation gives almost all hands-on urban responsibility to the states but the Commonwealth has the revenue. The previous Labor government worked through the <a href="https://www.coag.gov.au/">Council of Australian Governments</a> (COAG) to establish consensus principles for major city planning and investment in a largely bipartisan way. That process could be revived and improved with relative ease.</p>
<p>A robust evidence base exists on which to ground policy directions but it is not well linked with policy. Capability development should thus also extend to Australia’s high-quality but under-resourced university research sector. The extensive network of scholars within the <a href="https://www.be.unsw.edu.au/centres/city-futures/state-australian-cities-research-network">State of Australian Cities Research Network</a> could assist with this task, as could the <a href="http://www.ahuri.edu.au/">Australian Housing and Urban Research Institute</a>. </p>
<p>The final capacity need is for federal policy to establish its own analytical framework. The urban sector abounds with rent-seekers. A federal urban perspective must stand above such rent-seeking to develop a sophisticated conceptual stance on how our cities work and the levers of policy. </p>
<h2>Directions for policy</h2>
<p>The overturning of Tony Abbott’s aversion to public transport funding is a welcome sign of progress. Public transport is vital for future urban productivity and sustainability. </p>
<p>New arrangements are needed to make transparent the external urban costs of private car use, whether through road and parking user pricing or via enhanced environmental emissions charging. Such measures need to be progressive, however, so the burden does not fall unfairly on low-income, car-dependent households with the fewest alternatives. </p>
<p>Building infrastructure alone is unlikely to improve how our cities function. We need to make better use of existing assets. This includes dedicated multi-modal network coordination in public transport, as the 2009 <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Rural_and_Regional_Affairs_and_Transport/Completed%20inquiries/2008-10/public_transport/index">Senate inquiry into public transport</a> advocated, accompanied by optimisation of existing road space via conversion to high-frequency transit routes. </p>
<p>Further areas in urgent need of intervention are Australia’s inflated and exclusionary urban housing markets. <a href="https://theconversation.com/au/topics/negative-gearing">Negative gearing</a> should be reformed as a tax credit scheme with transparency to ensure the value of the concession is targeted to the most needy urban renters.</p>
<p>We need an urban taxation regime that captures the value gains from federal investment. Land value uplift from infrastructure investment should not accrue to private interests but be recycled into the federal funding pool. </p>
<p>A national approach to replace stamp duty with broad-based land taxes is also needed. This would improve the flexibility and efficiency of urban housing markets while retaining a financing stream for urban investment. Land tax should be progressive, so it targets land value and housing wealth, not housing consumption. </p>
<p>A progressive capital gains tax on owner-occupied housing could also be applied to dampen price inflation and raise new public revenue. Similarly, a national approach to inclusionary zoning mechanisms for affordable housing would also help to ensure urban redevelopment creates new social housing supply. </p>
<p>As a suburban nation Australia faces serious gaps in how it plans new suburbs and renews existing areas. A national suburban policy is needed to improve the quality of fringe development and facilitate the renewal of ageing middle suburbs for new housing. </p>
<p>Employment distribution in Australian cities is highly uneven. Ready access to high-quality jobs is increasingly the preserve of inner-urban households. Federal support for expansion of suburban employment nodes linked to public transport could ensure more higher-quality jobs are closer to the places households live. Ensuring land-use zoning does not exclude workers from job-rich middle suburbs is a further task. </p>
<p>Reform of the planning arrangements for our cities is desperately needed. National principles for metropolitan planning, as COAG established in 2009, are not unhelpful. But we need governing entities that can plan and manage cities at the metropolitan level while providing a democratic accompaniment to the current dominance of state planning ministers. </p>
<p>Prime Minister Turnbull has <a href="http://www.govnews.com.au/turnbull-could-drive-a-new-focus-on-cities/">previously argued</a> that density is the solution to our urban woes but that poorly done density reduces amenity. High-amenity densification is possible but <a href="https://theconversation.com/the-carbon-devil-in-the-detail-on-urban-density-4226">the urban science on very-high-density development</a> shows its environmental performance is often poor.</p>
<p>Density can help to improve our cities but only as part of carefully crafted wider changes to spatial structure via infrastructure, housing and governance reform. Density is a means, not an end in itself. Plans to expand green space and provide for biodiversity in cities must be part of any densification strategy. </p>
<h2>Putting policy to work</h2>
<p>A sense of urgency is needed. The urban sphere is dominated by what Nicole Gurran and Peter Phibbs have called <a href="http://www.tandfonline.com/doi/abs/10.1080/02673037.2015.1044948?journalCode=chos20#.VgS8RWSqqko">busy work</a> in which policy discussion and review defer substantial change.</p>
<p>Moreover urban policy is often captive to property, infrastructure and financial interests that put their private gain over the public interest. The Turnbull urban agenda needs to be more than a talking point or vehicle for shoddy deals.</p>
<p>Urban policy is the key policy discipline of the 21st century. It needs to be placed at the core of Australia’s federal policy arrangements.</p><img src="https://counter.theconversation.com/content/47858/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jago Dodson is affiliated with the Australian Cities Research Network, the Clean Air and Urban Landscapes Hub and the Australian Housing and Urban Research Institute. </span></em></p>For the first time, both major parties have a cities portfolio in their front bench team. With a few more changes, the government could create a structure that will really get to grips with urban issues.Jago Dodson, Professor of Urban Policy and Director Centre for Urban Research, RMIT University, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/428812015-06-11T20:01:38Z2015-06-11T20:01:38ZThe facts on Australian housing affordability<p>Housing affordability, high house prices and rents are attracting plenty of media attention right now. The latest figures on house prices, mortgages, number of first time buyers and so on are dissected by journalists and commentators as if this is an issue of recent origin. In fact what we have here is a long-term structural problem that has been neglected for decades.</p>
<p>Back in 1982, the <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6523.0">ABS Survey of Income and Housing</a> revealed that 168,000 or 10% of home buyers spent more than 30% of their gross household income on housing costs. Nearly 30 years later in 2011 these numbers had soared to 640,000, equivalent to 21% of all home buyers.</p>
<p>The trends in housing cost burdens reflect rising real house prices. The history of house prices over this timeframe is one of booms in which real house prices escalate to higher levels than they peaked in the previous boom. Periods of house price stability punctuate these booms, and give household incomes some breathing space in which to catch up. </p>
<p>But at each peak in house prices, household incomes have fallen further behind. According to the same ABS data source, households in 1990 on average valued their homes at a multiple that was four times their average household income. By 2011 this multiple had climbed to nearly six times average household income. </p>
<h2>A generational threat</h2>
<p>It is therefore not surprising to find that young first time buyers are finding it increasingly difficult to purchase a home. As our first table shows, on <em>a person</em> basis the rate of home ownership in the prime 25 – 34 year age group has slumped from 56% in 1982 to only 34% in 2011. Delayed entry into home ownership is a factor, but it turns out that these declines have set in across all but the post-retirement age group. The “Australian dream” of home ownership is under threat.</p>
<p><strong>Home ownership rate 1982-2011, in percentage terms</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/84489/original/image-20150610-6804-1rnx3a8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/84489/original/image-20150610-6804-1rnx3a8.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=277&fit=crop&dpr=1 600w, https://images.theconversation.com/files/84489/original/image-20150610-6804-1rnx3a8.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=277&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/84489/original/image-20150610-6804-1rnx3a8.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=277&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/84489/original/image-20150610-6804-1rnx3a8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=348&fit=crop&dpr=1 754w, https://images.theconversation.com/files/84489/original/image-20150610-6804-1rnx3a8.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=348&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/84489/original/image-20150610-6804-1rnx3a8.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=348&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/6541.0.30.001Main%20Features202011-12?opendocument&tabname=Summary&prodno=6541.0.30.001&issue=2011-12&num=&view=">ABS Surveys of Income and Housing</a></span>
</figcaption>
</figure>
<p>How have we reached this position? To be sure population growth, low interest rates, deregulation of mortgage markets and rising real incomes have helped fuel the demand for housing, and pushed up real house prices. But there are deep seated structural problems that contribute to an inflationary bias in land and property markets.</p>
<p>Fiscal concessions in the form of capital gains and land tax exemptions to home owners, negative gearing and concessionary capital gains tax for “mum and dad” investors, and asset test concessions to home owner retirees offer powerful incentives to accumulate wealth in housing assets. As a result, the supply side problems are not so much about a shortage of housing, but an inefficient distribution of the stock of housing.</p>
<p>According to the 2010 Household, Income and Labour Dynamics in Australia Survey, roughly 1 in 6 Australian households own two or more properties, and for 30% of these households the second property is a holiday home. Growing numbers of ageing “empty nester” households are deterred from downsizing and releasing housing equity by stamp duty, the taxation of alternative investments of the equity released, and the lack of suitable housing opportunities in the communities they would like to stay in. </p>
<p>Meanwhile according to the latest census more than 100,000 Australians are homeless, and many more than this are struggling to meet housing payments.</p>
<h2>The supply issue</h2>
<p>Back in the early 1980s these fiscal drivers did not matter so much, because there were ample greenfield sites on which new housing could be constructed. These sites still offered reasonable access to amenities and jobs. But such opportunities are drying up, and state governments have introduced curbs on urban expansion, as well as developer charges and fees that have increased the costs of construction on the urban fringe. </p>
<p>Adding to supply side problems are planning controls that impede higher density development in middle ring suburbs, as “insider” home owners understandably seek to protect the “leafy character” of their communities.</p>
<p>We are left with a problem that has wider ramifications because it has created a housing system saddled with growing indebtedness. In the 21 years illustrated in the chart below the average mortgage debt has soared relative to the average household incomes of mortgagors in all age groups.</p>
<p><strong>Mean mortgage debt to income ratio</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/84490/original/image-20150610-6793-1nxgp49.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/84490/original/image-20150610-6793-1nxgp49.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=306&fit=crop&dpr=1 600w, https://images.theconversation.com/files/84490/original/image-20150610-6793-1nxgp49.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=306&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/84490/original/image-20150610-6793-1nxgp49.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=306&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/84490/original/image-20150610-6793-1nxgp49.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=384&fit=crop&dpr=1 754w, https://images.theconversation.com/files/84490/original/image-20150610-6793-1nxgp49.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=384&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/84490/original/image-20150610-6793-1nxgp49.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=384&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/6541.0.30.001Main%20Features202011-12?opendocument&tabname=Summary&prodno=6541.0.30.001&issue=2011-12&num=&view=">ABS Surveys of Income and Housing.</a></span>
</figcaption>
</figure>
<p>Moreover, the proportion of home owners with outstanding mortgage debt has increased, especially in the 55–64 year cohort that is typically approaching retirement (see chart below). Interest rates were much higher back in 1990 and so household incomes in 2011 can comfortably service loans that are larger relative to household income. </p>
<p><strong>Percentage of home owners with a mortgage debt</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/84491/original/image-20150610-6820-oi1atg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/84491/original/image-20150610-6820-oi1atg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=377&fit=crop&dpr=1 600w, https://images.theconversation.com/files/84491/original/image-20150610-6820-oi1atg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=377&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/84491/original/image-20150610-6820-oi1atg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=377&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/84491/original/image-20150610-6820-oi1atg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=474&fit=crop&dpr=1 754w, https://images.theconversation.com/files/84491/original/image-20150610-6820-oi1atg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=474&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/84491/original/image-20150610-6820-oi1atg.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=474&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">ABS Surveys of Income and Housing</span></span>
</figcaption>
</figure>
<p>Nevertheless repayment risks and investment risks (house values falling short of outstanding mortgage debt) loom more prominently, and for a larger number of precariously positioned households. These risks could test the resilience of local economies and the national economy.</p>
<p>The Australian housing system weathered the global financial crisis much better than did many of its counterparts in the developed world. </p>
<p>Does this suggest a resilience that we can bank on in the future? Federal and state governments might be well advised to introduce structural reforms to housing finance that strengthen that resilience.</p><img src="https://counter.theconversation.com/content/42881/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gavin Wood is an Emeritus Professor at RMIT University and Adjunct Professor at Curtin Business School, Curtin University. Gavin Wood receives funding from the Australian Housing and Urban Research Institute and Australian Research Council. The views expressed in this article are the sole responsibility of the author and do not represent the views of the Australian Housing and Urban Research Institute and the Australian Research Council.</span></em></p><p class="fine-print"><em><span>Rachel Ong is affiliated with the Bankwest Curtin Economics Centre, which is an independent economic and social research organisation located within Curtin Business School at Curtin University. The Centre was established in 2012 with support from Bankwest (a division of Commonwealth Bank of Australia) and Curtin University. The views in this article are those of the author and do not represent the views of Curtin University and/or Bankwest or any of their affiliates. Rachel Ong has received research funding from the Australian Housing and Urban Research Institute. </span></em></p>Housing affordability, high house prices and rents are attracting plenty of media attention right now. The latest figures on house prices, mortgages, number of first time buyers and so on are dissected…Gavin Wood, Professor of Housing, RMIT UniversityRachel Ong ViforJ, Principal Research Fellow, Bankwest Curtin Economics Centre, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/430812015-06-10T11:57:50Z2015-06-10T11:57:50ZHockey’s proneness to mistakes matters well beyond issues around the housing bubble<figure><img src="https://images.theconversation.com/files/84535/original/image-20150610-6810-v7dpmy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Joe Hockey has been defended by Prime Minister Tony Abbott – again.</span> <span class="attribution"><span class="source">AAP/Dean Lewins</span></span></figcaption></figure><p>In trying to help a colleague out of a hole, there’s always the danger of slipping into one yourself.</p>
<p>Shoring up Joe Hockey after the treasurer’s advice to young homebuyers to get a good job, Tony Abbott recounted his own mortgage experience.</p>
<p>“I’m someone who has over the years felt a bit of mortgage stress,” Abbott said. “Even as a Cabinet minister sometimes it’s hard to pay a Sydney mortgage and I know over the years I’ve earnt a lot more than the average person … We still have a mortgage, like so many Australians.”</p>
<p>A financial adviser might tell Tony to get that mortgage paid off while he’s on his prime ministerial salary and living at Kirribilli. A political adviser might wonder how the anecdote will wash with Tony’s tradies.</p>
<p>However, the substantive point is that Abbott was forced to defend his treasurer, once again.</p>
<p>And this after he himself had attracted criticism last week when, in the wake of Treasury secretary John Fraser’s acknowledging the “bubble” in Sydney and parts of Melbourne and expressing concern about the social impact for young and low-income people, Abbott just wanted to paint Bill Shorten as desiring to drive prices down.</p>
<p>This week’s furore started when Hockey was asked on Tuesday about the problems first home buyers face getting onto the Sydney property ladder.</p>
<p>Hockey said in part: “The starting point for a first home buyer is to get a good job that pays good money. If you’ve got a good job and it pays good money and you have security in relation to that job, then you can go to the bank and you can borrow money and that’s readily affordable. More affordable than ever to borrow money for a first home now than it has ever been.”</p>
<p>And Hockey said: “If housing were unaffordable in Sydney no-one would be buying it.”</p>
<p>Hockey also talked about the importance of adequate supply. But his get-a-good-job advice exploded in the media, and by the time he sought to inject more understanding on Wednesday, he’d been badly burned.</p>
<p>If Hockey had greater credibility, if he’d not talked last year about the car-less poor, if he’d cast his remarks in a context of appreciating young people’s struggle, his job line might have attracted little attention. But Hockey is not nuanced or subtle, and often he’s not careful. His detractors have for years nicknamed him sloppy Joe.</p>
<p>The government was called out again on Wednesday when Reserve Bank Governor Glenn Stevens said some of what was happening in Sydney was “crazy”. Sydney prices were “acutely concerning for a host of reasons”, he said, describing it as a social problem. This echoed Fraser’s line.</p>
<p>Housing affordability is good ground for Labor – and Hockey’s bumbling has certainly made it so this week. But there will be complications when the ALP has to produce a policy. The opposition is leaving the option open to put some curbs on negative gearing, grandfathering investors’ current arrangements. If it goes down this path, it would risk alienating many small investors, who could distrust the grandfathering guarantees or find their future plans dashed or limited.</p>
<p>Hockey’s proneness to mistakes matters well beyond issues around the housing bubble. It’s not just that he has been a serial creator of problems for the government. It’s also that this is a particularly challenging time for the economy, which requires a treasurer who’s seen both as competent and as in touch with ordinary people’s situations.</p>
<p>Surveys released on Wednesday carry mixed messages as the government waits to assess the real impact of its budget – which got a largely positive initial reception.</p>
<p>The bad news was that the <a href="https://melbourneinstitute.com/miaesr/publications/indicators/csi.html">Westpac–Melbourne Institute Index of Consumer Sentiment</a> fell 6.9% in June. Westpac senior economist Matthew Hassan described it as a surprisingly weak result, seeing the May surge of optimism as a “brief relief rally” after the interest rate cut and the budget, and warning the fall showed renewed concerns about the economy.</p>
<p>The good news came in the <a href="http://business.nab.com.au/nab-monthly-business-survey-may-2015-11384/">NAB monthly business survey</a> for May: it found that after the budget and rate cut business confidence “moved up significantly” to “the highest level of confidence since August 2014”.</p>
<p>Stevens, speaking to the Economic Society of Australia, highlighted the importance in these uncertain times of a broad “confidence-enhancing narrative”.</p>
<p>Obviously there are many challenges in shaping and projecting such a narrative, which Stevens said should extend to a range of areas. But having an accident-prone treasurer surely is a drag on the government’s effort to get across a “narrative for growth”.</p><img src="https://counter.theconversation.com/content/43081/count.gif" alt="The Conversation" width="1" height="1" />
In trying to help a colleague out of a hole, there’s always the danger of slipping into one yourself. Shoring up Joe Hockey after the treasurer’s advice to young homebuyers to get a good job, Tony Abbott…Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/428162015-06-04T20:08:40Z2015-06-04T20:08:40Z‘Slippers’ and ‘stickers’: the hidden victims of rising house prices<figure><img src="https://images.theconversation.com/files/83918/original/image-20150604-11749-18dr9bl.jpg?ixlib=rb-1.1.0&rect=7%2C201%2C1214%2C881&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">"Stickers" find themselves caught in unaffordable housing. </span> <span class="attribution"><span class="source">Author provided</span>, <span class="license">Author provided</span></span></figcaption></figure><p>Australia needs to have a housing conversation that isn’t just about housing “bubbles”, profits and investment properties. Sadly, we punch well above our weight in international measures of poor housing affordability, and increasing numbers of Australians can’t afford their rents or mortgages. </p>
<p>Even a modest increase in house prices will make things even tougher for these Australians – but importantly, do we reliably know who they are, where they live, and how extreme their affordability problems are? </p>
<p>Our <a href="http://www.tandfonline.com/doi/full/10.1080/08111146.2015.1034853">new research</a> reveals some poorly understood distinctions in unaffordable housing. Some people appear to be “slipping” in and out of housing affordability problems, while others remain “stuck” with them for long periods, or even a lifetime. </p>
<p>When we look at housing affordability in this way and compare these two groups of people, these “slipper” and “sticker” groups are shown to be very different within Australian society, with different intervention needs implied. </p>
<h2>Limitations of the 30/40 rule</h2>
<p>To address housing affordability and target assistance we usually rely on data on the prevalence and nature of unaffordable housing. The most widely used measures of housing affordability are based on simple ratios, for example, the 30/40 measure. This approach classifies people as being in unaffordable housing if they are in the lower 40% of the income distribution and their rent or mortgage payments exceed 30% of their income. </p>
<p>Such a simple, straightforward measure - that classifies people as being either in unaffordable housing or not – is undoubtedly useful, and outside of the housing research community, data using these measures are rarely questioned. But it’s useful to think about that data a little more critically. </p>
<p>The picture of housing affordability portrayed by most of the measures we (and policy makers) rely on is a snapshot – a point-in-time collection of people’s ability to afford their housing (on Census night for example). Importantly, it’s a very blunt measure. In fact, when we look more closely at people’s experience of affordability problems we see that the snapshot is a pretty poor predictor of longer-term unaffordability.</p>
<p>For a great many households, both income and housing costs - and where they sit relative to other households - change a lot over time. This causes people to slip in and out of unaffordable housing. In a large Australian sample, we see that hidden within the segment of the population classified as being in unaffordable housing in any one year, fewer than half were classified in the same way the next year. Because the total number of people counted in unaffordable housing is stable, it points to a limitation in the way that we measure housing affordability. </p>
<h2>Slippers and stickers</h2>
<p>By following people’s income and housing costs each year for a five year period, we classify stickers as being in unaffordable housing (using the 30/40 rule) in every one of the five years. To be classified as a slipper, people must have made at least one transition into, and one out of, unaffordable housing over the five year period. Slippers outnumber stickers three to one, and therefore affordability initiatives may be more concentrated upon the needs of slippers. </p>
<p>Compared to slippers, stickers have much lower incomes and employment rates. Around 60% of stickers have a disability, and stickers are twice as likely as slippers to be carers for other people in their household. Looking deeper, three quarters of those stuck for long periods in unaffordable housing are women, they also tend to be much older than slippers, and more likely to live alone.</p>
<p>This description points to what some might call a vulnerable group of people or even an “underclass” perpetually facing housing affordability issues and, most likely subject to the consequences of this, such as limited financial resources and stress.</p>
<p>It is interesting to note that the characteristics of the sticker population are very similar to those of Australia’s public housing tenant population, but because public housing largely addresses affordability by rent capping, stickers are most likely to be private renters and low income mortgage holders. </p>
<p>This means that, in addition to being highly vulnerable, many stickers are likely to receive little or no government assistance with their housing costs. It also implies a pressing need to improve the supply and affordability of housing in the private sector - via the taxation system or the land supply system. </p>
<p>Rather than looking at housing affordability as one problem, the distinct differences observed between Australia’s slippers and stickers imply a need to focus particular attention and interventions on stickers. We also need to better understand how people enter and exit unaffordable housing and what we can do to prevent people becoming stuck. </p>
<p>In the bigger picture our findings describe real social inequalities in Australia that are present and persistent. It reminds us that the conversation we need to have about housing affordability in Australia isn’t just about the positives of “housing bubbles”, but also needs to be about how to address the serious affordability problems of the growing group of (often already vulnerable) Australians who are stuck.</p><img src="https://counter.theconversation.com/content/42816/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Emma Baker receives funding from the Australian Research Council FT140100872.</span></em></p><p class="fine-print"><em><span>Rebecca Bentley receives funding from the Australian Research Council and National Health and Medical Research Council. </span></em></p>New research into affordable housing reveals some poorly understood distinctions that deserve great policy scrutiny.Emma Baker, Reader in Housing, University of AdelaideRebecca Bentley, Senior lecturer, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/412562015-05-08T05:04:45Z2015-05-08T05:04:45ZSpeaking with: Keith Jacobs on the politics of housing<p>The Reserve Bank <a href="http://www.rba.gov.au/media-releases/2015/mr-15-08.html">cut interest rates</a> to 2% on Tuesday hoping to stimulate business investment and household spending. The RBA’s decision was <a href="http://www.theage.com.au/business/federal-budget/federal-budget-2015-joe-hockey-looks-on-the-bright-side-as-reserve-bank-cuts-rates-20150505-ggujh0.html">welcomed by Treasurer Joe Hockey</a>, but there are concerns the record-low rate will further inflate the already heated housing markets in Sydney and Melbourne.</p>
<p>The Economist magazine recently evaluated Australia’s housing market to be <a href="http://www.economist.com/blogs/dailychart/2011/11/global-house-prices">overvalued by more than 25%</a> (along with Britain and Canada). Even accounting for our higher incomes, Australia’s house prices are now among the <a href="https://www.imf.org/external/research/housing/">highest in the world</a>. </p>
<p>While there is sympathy for the difficulties faced by would-be first-time homebuyers, a strong housing market is often associated with jobs and revenue for States and Territories (the economies of both New South Wales and Victoria have <a href="https://theconversation.com/non-resources-states-vic-and-nsw-now-in-best-budget-position-41240">strengthened significantly</a> partly <a href="http://apo.org.au/research/nsw-economic-update-january-2015">due to the housing sector</a>). Rising house prices are also good news for many Australians – <a href="http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/1370.0%7E2010%7EChapter%7ELevels%20of%20home%20ownership%20%285.4.3%29">more than 60% are owner-occupiers</a> - and successive governments have implemented and maintained policies that promote a buoyant housing sector.</p>
<p>Policies such as negative gearing, the first home owners grant, and capital gains tax concessions have helped many middle and high income earners buy property, but how are these policies impacting low income earners? </p>
<p>Dallas Rogers speaks with Keith Jacobs about the politics of housing in Australia, and how to address the inequalities within the current system.</p>
<p><br></p>
<hr>
<p><em><a href="https://itunes.apple.com/au/podcast/speaking-with.../id934267338">Subscribe</a> to The Conversation’s Speaking With podcasts on iTunes, or <a href="http://tunein.com/radio/Speaking-with---The-Conversation-Podcast-p671452/">follow</a> on Tunein Radio.</em></p>
<p>Music: Free Music Archive/<a href="http://freemusicarchive.org/music/Blue_Dot_Sessions/Stingray/">Blue Dot Sessions: Stingray</a> (CC BY-NC)</p>
<p>Additional audio: <a href="http://aso.gov.au/titles/sponsored-films/a-home-of-their-own/">A Home of their Own</a>, National Sound and Film Archive</p><img src="https://counter.theconversation.com/content/41256/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dallas Rogers does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>While policies such as negative gearing have helped middle to high income earners own property, they have also locked low income earners out of the market and created an unequal housing sector.Dallas Rogers, Urban Studies Lecturer, Western Sydney UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/350902014-12-12T00:06:28Z2014-12-12T00:06:28ZSpeaking with: Nicole Gurran on affordable housing<p>Australia’s residential house prices rank among the <a href="http://www.smh.com.au/business/the-economy/australias-house-prices-secondhighest-in-world-bis-20140915-10gybt.html">highest in the world</a>, and an increasing number of aspiring home owners are finding themselves locked out of the property market.</p>
<p>While low interest rates and higher wages have somewhat tempered the impact of high house prices, these factors have not helped low-income earners, who continue to struggle to find housing within their budget.</p>
<p>One possible solution is to use urban planning policies, such as inclusionary housing, to boost the number of affordable dwellings. Such policies have been successful in other countries, but are yet to be effectively adopted in Australia.</p>
<p>Dallas Rogers speaks with Nicole Gurran about how other countries are using inclusionary housing policies and the lessons for Australia.</p>
<hr>
<p><em><a href="https://itunes.apple.com/au/podcast/speaking-with.../id934267338">Subscribe</a> to The Conversation’s Speaking With podcasts on iTunes.</em></p>
<p>Music: Free Music Archive/<a href="http://freemusicarchive.org/music/Podington_Bear/">Podington Bear</a>
and <a href="http://freemusicarchive.org/music/Jahzzar/">Jahzzar</a></p><img src="https://counter.theconversation.com/content/35090/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dallas Rogers does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Australia’s residential house prices rank among the highest in the world, and an increasing number of aspiring home owners are finding themselves locked out of the property market. While low interest rates…Dallas Rogers, Research Fellow - Urban Research Centre, Western Sydney UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/322252014-11-05T03:37:28Z2014-11-05T03:37:28ZMove over, McMansions – the tiny house movement is here<figure><img src="https://images.theconversation.com/files/63233/original/sqmz63dv-1414623548.jpg?ixlib=rb-1.1.0&rect=21%2C0%2C4638%2C2643&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Who needs a big garden when you've got this?</span> <span class="attribution"><a class="source" href="https://www.facebook.com/tinyabodes">The Tiny Abode Co.</a>, <span class="license">Author provided</span></span></figcaption></figure><p>A small group of people is gathered around a campfire in a Victorian State Forest. Members of the <a href="https://www.facebook.com/TinyHousesAustralia">Tiny Houses Australia community</a>, they’re attending a Spring Camp to talk about how to build a tiny house, and compare notes on how to address common barriers, like local government planning schemes. </p>
<p>The group is diverse, from students to professionals and retirees. One has been living temporarily in caravans. Others were forced to move into shared accommodation or board with family. Most have given up on the idea of buying their own home, put off by the high price tag or the size of the mortgage, or the downside of living far from family or employment. </p>
<p>Most of the group are also fierce promoters of a more sustainable, minimalist way of life who want their new houses to reflect this. You won’t find many en suites or walk-in wardrobes in their floor plans. </p>
<h2>Is bigger really better?</h2>
<p>Something is wrong when <a href="https://au.news.yahoo.com/thewest/a/25372224/170k-family-priced-out-of-perth/">a professional earning A$170,000</a> cannot afford to live close to work; or <a href="http://www.smh.com.au/business/property/firsthome-crisis-triggers-call-for-action-20131115-2xmcv.html">a doctor needs a parental loan</a> to buy a house. All 25 major urban housing markets in Australia are ranked as <a href="http://www.demographia.com/dhi.pdf">severely unaffordable</a>; and Australia has the <a href="http://www.imf.org/external/research/housing/index.htm">second most unaffordable</a> housing market among member nations of the Organisation for Economic Co-operation and Development (OECD). </p>
<p>Australian houses are also <a href="http://www.demographia.com/dhi.pdf">among the largest</a> in the OECD. In 2008, the average new house was 214 square metres, double the size of an average 1950s house. Very large houses are not only more expensive, but environmentally unsustainable. For example, the major factors that determine a house’s greenhouse gas emissions are its size and location; the bigger and more isolated the house, <a href="http://link.springer.com/article/10.1007/s10901-011-9212-2#page-1">the larger its emissions</a>. </p>
<p>For many, particularly young people entering the market and older people leaving the workforce, the “great Australian dream” of a big house on a quarter-acre block is a distant fantasy. And even for those who are living the dream, a sudden interest-rate rise, job loss or chronic illness could rapidly turn it into a nightmare. </p>
<p>Regardless of the debate over whether we’re in a <a href="https://theconversation.com/memo-to-the-imf-there-is-no-housing-bubble-27925">housing bubble</a>, the affordability problem is much broader than property prices. The most serious issue is the lack of affordable <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1467-8462.2008.00502.x/full">rental accommodation</a>.</p>
<h2>Finding sanctuary in a tiny house</h2>
<p>From this backdrop has emerged a trend towards <a href="http://www.bloomberg.com/news/2014-07-09/tiny-houses-big-with-u-s-owners-seeking-economic-freedom.html">building much smaller houses</a>. The <a href="http://en.wikipedia.org/wiki/Small_house_movement">tiny house movement</a> originated in the United States in the late 1990s, largely in response to problems with housing affordability, although it has also been spurred on by the <a href="https://theconversation.com/au/topics/global-financial-crisis">global financial crisis</a> and a widespread desire to live more sustainably. The movement has now spread to New Zealand, Australia and Canada. </p>
<p>Tiny houses are generally smaller than 40 sq m, and <a href="http://www.businessinsider.com.au/beautiful-tiny-homes-2014-8#this-60-square-foot-home-is-the-smallest-house-in-the-uk-16">can take many forms</a>, from granny flats, to repurposed shipping containers, to a <a href="http://www.huffingtonpost.ca/2014/03/21/tiny-house-on-wheels-abbotsford_n_5003376.html">complete houses built on trailers</a>. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/63676/original/m36s92m7-1415151376.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/63676/original/m36s92m7-1415151376.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=419&fit=crop&dpr=1 600w, https://images.theconversation.com/files/63676/original/m36s92m7-1415151376.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=419&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/63676/original/m36s92m7-1415151376.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=419&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/63676/original/m36s92m7-1415151376.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=527&fit=crop&dpr=1 754w, https://images.theconversation.com/files/63676/original/m36s92m7-1415151376.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=527&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/63676/original/m36s92m7-1415151376.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=527&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Room to manoeuvre: some tiny houses have wheels - just don’t call them caravans.</span>
<span class="attribution"><span class="source">The Tiny Abode Co.</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>The benefits of tiny houses include <a href="http://tinyhousebuild.com/tiny-houses-infographic">overall sustainability</a>, reduced energy and water use (tiny houses are often “off the grid”) and, of course, affordability. Some tiny houses can cost less than A$10,000. Moreover, they <a href="http://onlinelibrary.wiley.com/doi/10.1162/1088198054084680/abstract">use significantly less resources</a> to build, and are often constructed from salvaged materials or sustainably sourced products.</p>
<p>Mobile tiny houses could even help their inhabitants adapt to climate change; a house on wheels can be moved out of danger from floods or storm surges. They can allow adult children or aged parents to live independently, yet maintain access to family, employment and public transport. </p>
<p>Tiny houses can even address aspects of homelessness. In the United States, some local governments are donating land for <a href="http://www.huffingtonpost.com/2014/10/27/greensboro-north-carolina-tiny-homes_n_6054590.html?ir=Impact">homeless people to build their own tiny homes</a>.</p>
<h2>The biggest issues with a tiny house</h2>
<p>Although <a href="https://www.facebook.com/TinyHouseBlog">information is plentiful</a> on building techniques, plans and design, it is not very easy to build a tiny house. However, as attendees at the Spring Camp agreed, perhaps the biggest problem with building a tiny house is finding a place to put it. </p>
<p>Tiny houses do not conform to many <a href="http://www.berkeleyside.com/2011/01/07/a-city-looks-for-big-solutions-in-a-little-very-little-house">local government planning schemes</a> or building codes, which mandate minimum house sizes, maximum number of houses per plot, connection to utilities, parking provisions, and restrictions on temporary occupation. </p>
<p>It might also be argued that allowing tiny houses will reduce land values and lead to health and safety concerns, such as overcrowding. But people currently live in crowded conditions or illegally in sheds or caravans. </p>
<p>Some states, such as New South Wales, allow property owners to build <a href="http://www.planning.nsw.gov.au/Portals/0/plansforaction/affordablehousing/docs/Affordable%20Housing_Fact_Granny%20Flats.pdf">granny flats</a>. In other states, the regulations differ between and within each local government, although almost
almost all have restrictions on the duration of temporary occupation.</p>
<p>For non property-owners, particularly those who don’t want to take any legal risks, the options are fewer. And of course, local governments can and should impose planning restrictions on tiny houses, and ensure that they comply with building codes and standards. </p>
<p>Tiny houses are not for everyone. They will probably <a href="http://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=4196241&fileOId=4196242">always remain a niche market</a>, more suited to people with no children, or retirees. </p>
<p>Niche, yes, but for some people tiny houses could be a lifeline. Being unable to afford to buy property, fulfil mortgage commitments, or even rent a home can lead to <a href="http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=1046376&fileId=S0033291706009767">mental and physical illness</a>. In a sustainable city, everyone should be able to <a href="http://www.tandfonline.com/doi/abs/10.1080/0811114032000147430#.VFB38vmUd8E">access affordable housing</a>, and a tiny house is certainly better than no house at all.</p><img src="https://counter.theconversation.com/content/32225/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Heather Shearer is a member of the Greens Party, 350 Org and the Tiny Houses Australia Facebook Group. </span></em></p>A small group of people is gathered around a campfire in a Victorian State Forest. Members of the Tiny Houses Australia community, they’re attending a Spring Camp to talk about how to build a tiny house…Heather Shearer, Research Fellow, Urban Research Program, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/324552014-10-13T19:20:10Z2014-10-13T19:20:10ZZombie economics: the notion China is to blame for Australia’s property bubble refuses to die<figure><img src="https://images.theconversation.com/files/61471/original/z76wbzrn-1413109903.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The notion that Chinese buyers are pushing up house prices is a "zombie idea"</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>Despite valiant efforts by commentators such as <a href="http://www.crikey.com.au/2014/03/10/chinese-real-estate-invasion-not-according-to-the-data-fellas/">Bernard Keane</a> and <a href="http://www.smh.com.au/business/comment-and-analysis/why-we-should-welcome-chinese-housing-investment-20140311-34j00.html">Michael Pascoe</a> to slay claims that Chinese buyers are making it harder for ordinary Australians to enter the housing market, the notion <a href="http://www.smh.com.au/comment/grey-money-from-china-helps-blow-our-property-bubble-20140928-10n7a8.html">refuses to die</a>. It is the <a href="http://press.princeton.edu/titles/9702.html">“zombie idea”</a> afflicting the Australia-China economic relationship. </p>
<p>And there is a danger the zombies will multiply. Last week the <a href="http://www.afr.com/p/business/property/more_chinese_investment_likely_as_hgTpJvcLwJaFVV5MpsX5EL">Australian Financial Review</a> reported that China recently eased restrictions on outbound investment. The implication being “a fresh wave of capital [is] expected to make its way into the Australian property market”. </p>
<p>The <a href="http://www.smh.com.au/business/chinese-investors-are-pushing-into-melbourne-and-sydney-20141010-113q7x.html">Sydney Morning Herald</a> continued with the same theme listing several recent examples of Chinese-funded projects with values reaching into the billions. </p>
<p>But all these reports lack one critical factor: context. </p>
<h2>Even if Chinese investment is rising, it is still a small proportion of the market</h2>
<p>All foreign investment in Australian real estate requires approval from the Foreign Investment Review Board (FIRB). </p>
<p>According to <a href="http://www.firb.gov.au/content/publications.asp">FIRB</a>, over the period 2009-10 to 2012-13, approvals for Chinese investment in Australian real estate totalled $16.6 billion. </p>
<p>At first blush this seems an impressively large figure. But it is actually less than 10% of the total value of foreign investment approvals in the sector. </p>
<p>Approvals to Chinese investors have lagged behind those from the United States. They have also not been much more than those from the United Kingdom, which has an economy around one quarter the size of China’s and less than 5% of the population.</p>
<p>The scale of Chinese investment seems again smaller when viewed against the size of the market. In a report earlier this year, the <a href="http://www.rba.gov.au/publications/bulletin/2014/jun/bu-0614-2a.html">Reserve Bank of Australia</a> (RBA) observed that total foreign investment approvals in residential real estate have historically only been around 5-10% of the value of home sales. Chinese approvals are just a proportion of this percentage.</p>
<p>It is also important to keep in mind we are talking about approvals here, not purchases. This means FIRB data overstate the true value of foreign investment. </p>
<p>For example, a property developer in Australia can apply to the FIRB for approval to sell all new dwellings in a large scale real estate project to foreign buyers. In their <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/House_of_Representatives_Committees?url=economics/foreigninvestment/index.htm">submission</a> to the Inquiry into Foreign Investment in Residential Real Estate, the Commonwealth Treasury noted that based on past experience only around 35%, on average, of such dwellings end up in the hands of foreigners. </p>
<p>Also don’t forget that FIRB data is gross, not net. In any given year some foreign investors will seek FIRB approval for new purchases. Meanwhile others will sell down their existing portfolios. As a result, simply adding the value of FIRB approvals from year to year exaggerates the size of the stock of Australian real estate assets held by foreigners. </p>
<p>What all this means is that Chinese investment can grow strongly and still not come close to flooding the market. Citing preliminary FIRB data from the first three quarters of 2013-2014, the Commonwealth Treasury noted a sharp jump in foreign investment approvals over the previous year, particularly from China. But as the RBA shows, this still only takes the value of total foreign investment approvals to around 12-13% of total sales.</p>
<h2>Chinese investment actually increases housing supply</h2>
<p>Issues of scale aside, Chinese investment has the effect of increasing housing supply. This acts to restrain price growth. </p>
<p>Regulations also limit Chinese investors to buying new properties. Exceptions are few. For example, a Chinese student may purchase an established property to live in while studying in Australia. But it must be sold once they return home.<br>
Building new housing requires a lot of capital. A report earlier this year by the <a href="http://www.ahuri.edu.au/publications/projects/p81009">Australian Housing and Urban Research Institute</a> found a leading cause of the undersupply of housing in Australia is the availability of finance. Banks are the first port of call for most developers. Yet banks generally demand pre-sales, or sales of dwellings before their construction even begins, of between 50-100% of the value of the loan being sort.</p>
<p><a href="http://www.smh.com.au/business/comment-and-analysis/why-we-should-welcome-chinese-housing-investment-20140311-34j00.html">Michael Pascoe</a> put it like this, “Without the stimulus of investors to get the country building now, we’ll face demand-induced price pressure all of our own soon enough”. </p>
<p>With a small population and a limited domestic savings pool, Australia has a long tradition of accepting and benefiting from foreign investment in capital-intensive sectors of the economy. The real estate sector is no different: a dollar of Australian savings tied up in housing is a dollar that cannot be productively invested elsewhere. </p>
<p>Other benefits of Chinese investment include the very real jobs created in Australia’s construction industry and associated sectors such as housing appliances. </p>
<h2>Are foreign investors breaking the rules?</h2>
<p>Recent allegations that some foreign investors have skirted FIRB rules to purchase established housing have attracted much <a href="http://www.smh.com.au/business/punish-foreign-property-cheats-says-coalition-mp-kelly-odwyer-20140916-10hp2r.html">media attention</a>. This claim does nothing to undercut the benefits brought by foreign investment. Rather, it is a complaint about existing rules not being enforced. </p>
<p>The intensity of enforcement is entirely at the discretion of Australian authorities. The FIRB reviews around <a href="http://www.afr.com/p/national/firb_we_don_have_staff_to_veto_foreign_u7VxVO2Hr9zdQsjkc8NwyK">2.5% of housing transactions</a> to verify compliance. Simple economics says that scrutinising every one of the 600,000 housing transactions each year would not be an efficient use of resources. The FIRB employs the same risk management approach that Australian Customs uses when screening imports for contraband and counterfeit products. </p>
<p>Another factor that troubles commentators about Chinese investment is that some of this money finds its way to Australia via the <a href="http://www.smh.com.au/comment/grey-money-from-china-helps-blow-our-property-bubble-20140928-10n7a8.html">“grey economy”</a> or the <a href="http://www.theaustralian.com.au/business/banks-admit-to-limited-control-over-foreign-funds-for-housing/story-e6frg8zx-1227021005452">“shadow banking system”</a>. </p>
<p>But there is nothing sinister about it. China has a prominent informal financial system because its formal banking sector functions so poorly. It regularly offers savers negative real returns and supplies a dearth of credit to dynamic private sector firms. </p>
<p>Without an informal financial system to overcome these deficiencies, China’s growth would have been much slower than it has been and Australia would be worse off as a result. Similarly, the flow of Chinese capital to Australia would have been reduced and so too would the benefits received – there would be less housing supply and fewer construction jobs. </p>
<p>Knee-jerk arguments blaming Chinese investors for high Aussie house prices may be refuted with hard evidence. Unfortunately zombie ideas in economics have a habit of rising again.</p><img src="https://counter.theconversation.com/content/32455/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>James Laurenceson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Despite valiant efforts by commentators such as Bernard Keane and Michael Pascoe to slay claims that Chinese buyers are making it harder for ordinary Australians to enter the housing market, the notion…James Laurenceson, Deputy Director and Professor, Australia-China Relations Institute (ACRI), University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/323662014-10-02T20:15:10Z2014-10-02T20:15:10ZRational talk on housing prices lost in a bubble<figure><img src="https://images.theconversation.com/files/60618/original/9g3rygkx-1412222124.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Is our thinking on house prices blurred by irrationality?</span> <span class="attribution"><span class="source">Kesu/Shutterstock</span></span></figcaption></figure><p>The <a href="http://www.rpdata.com/images/stories/content/pressreleases/2014-10-01--rpdata-rismark-home-value-index.pdf">latest house price index</a> figures released by RP Data earlier this week show a year-on-year increase in property values in Sydney of 14.3%. This has sparked the current hot debate on property prices and <a href="http://www.news.com.au/finance/economy/is-there-a-housing-bubble-thats-about-to-burst-in-australia/story-e6frflo9-1227062516640">speculation</a> of a price bubble. Though, it seems many people have forgotten what house price indices represent.</p>
<p>The All Ordinaries, the index of broad Australian equities market movements, increased by around 9% in the 12 months to the start of September. As investors understand, this doesn’t equate to all stocks on the market increasing in price by 9% over that period. </p>
<p>For example, shareholders in BHP, one of the largest ASX companies by market capitalisation, have suffered a modest loss over that period, even after dividend payments are considered. And as the All Ordinaries Index value has fallen 6% over the past month, there have been some stocks that have fallen more (Myer shares tumbled nearly 20% in the month) and others that have gone against the trend (insurer QBE was up 1.2% in September).</p>
<p>Similarly, a house price index gives a measure of the broad property market movement. In the case of the RP Data-Rismark Index, the change in the index value reflects the average increase or decrease in property prices.</p>
<p>Prices in Australian capital cities, the typical benchmark measure of the Australian residential real estate market, increased by 9.3% in the year to September.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/60563/original/fx9nb9ry-1412182860.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/60563/original/fx9nb9ry-1412182860.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/60563/original/fx9nb9ry-1412182860.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=395&fit=crop&dpr=1 600w, https://images.theconversation.com/files/60563/original/fx9nb9ry-1412182860.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=395&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/60563/original/fx9nb9ry-1412182860.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=395&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/60563/original/fx9nb9ry-1412182860.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=496&fit=crop&dpr=1 754w, https://images.theconversation.com/files/60563/original/fx9nb9ry-1412182860.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=496&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/60563/original/fx9nb9ry-1412182860.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=496&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Source: RP Data.</span>
</figcaption>
</figure>
<p>In Canberra and Perth, however, the reported growth in real estate prices was significantly lower at 3.2% and 1.7% respectively. Outside of capital cities property price growth was also a modest 3.3%. </p>
<p>Even in Sydney, which has experienced the strongest price growth of any capital city, there are marked differences in the rate of price appreciation between different suburbs. Western Sydney clearly captures this with residents in <a href="http://www.dailytelegraph.com.au/realestate/buying/price-hikes-for-homes-in-popular-western-sydney-suburbs-eclipse-annual-income-of-most-residents/story-fni0cate-1227049569685">South Granville</a> enjoying an increase in median property price of around 17.5%, while reported median prices have shown virtually no annual change in <a href="http://www.realestateview.com.au/propertydata/median-prices/nsw/fairfield/">Auburn</a>. </p>
<h2>Blunt policy tools are not the answer</h2>
<p>It wasn’t so long ago that the average price of Perth’s houses surpassed Sydney’s on the back of a mining industry-led boom in the West. At the national level, these differences in property price growth are the result of shifting labour and economic factors, and to a lesser extent state-specific regulation.</p>
<p>Within a city, local amenities and employment, as well as the preferences of the potential home buyers are reflected in price growth variation.</p>
<p>This is a key point that needs to be remembered when blunt policy tools are debated. Measures to tighten home loan lending, increase borrowing costs or remove negative gearing affect the market as a whole, whether in Sydney, Perth, or a regional centre. </p>
<p>For policy to be effective it needs to firstly identify what it aims to achieve. Housing policy is a double-edged sword. Rapidly rising house prices can put home ownership beyond the reach of younger and lower-income Australians. But policy designed to lower house prices can put existing homeowners at risk of falling “underwater” - holding negative equity in their property. Again, it is typically lower-income households that are most at risk in this scenario.</p>
<h2>Cooling the bubble talk</h2>
<p>The growing pressure for a policy response to rising house prices is in part due to fears of a price bubble. The last time the Australian or Sydney house price index increased at more than 10% in a year was 2009. Unsurprisingly, there were calls then too that increased regulation was required to prevent a property bubble burst and housing crisis. </p>
<p>Since 1996, Sydney real estate prices have grown at an average annual rate of 7.26% though, with considerable variation in that time. A growth rate in a single year of 10% in any other asset market with these dynamics would not be cause for alarm. Yet housing has this perception of being low risk, pervading our cultural psyche. Something idiomatically described as “safe as houses” is viewed as guaranteed or risk-free. </p>
<p>When faced with the reality that property prices go up and down, sometimes fast and sometimes slow, we seek ways to explain the conflict with these cultural expectations. Assigning the label or “price bubble” shifts the responsibility for our own irrationalities back on the market.</p><img src="https://counter.theconversation.com/content/32366/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Danika Wright is affiliated with Sirca, as a member of the Sirca-RP Data Advisory Board</span></em></p>The latest house price index figures released by RP Data earlier this week show a year-on-year increase in property values in Sydney of 14.3%. This has sparked the current hot debate on property prices…Danika Wright, Lecturer in Finance, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/320142014-09-25T20:08:36Z2014-09-25T20:08:36ZHousing bubble or not, negative gearing should stay<figure><img src="https://images.theconversation.com/files/59964/original/ztt77fd2-1411608428.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Should housing policy and tax reform be driven by pricey Sydney housing?</span> <span class="attribution"><span class="source">Aaron Jacobs/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>The perennial debate about negative gearing of residential property investments has been reignited yet again, by two reports in the past week. </p>
<p>The International Monetary Fund has <a href="http://www.theaustralian.com.au/national-affairs/imf-calls-for-exemptions-to-be-stripped-from-the-gst/story-fn59niix-1227066994700">nominated taxes</a> on housing as ripe for reform in order to improve the efficiency of the tax system. And the Reserve Bank of Australia has <a href="http://www.rba.gov.au/publications/fsr/2014/sep/pdf/bus-house-fin.pdf">argued</a> that housing credit to investors has become excessive and is driving up house prices.</p>
<p>Although neither report specifically recommends changes to negative gearing rules, the mere suggestion that we look at housing taxation or lending for housing investment is enough to awaken the anti-negative gearing lobby.</p>
<p>Before we go on, a definition: negative gearing arises where the interest on money borrowed for investment in an income-earning asset is greater than the income earned from that asset. The asset is said to be negatively geared. </p>
<p>Investors are prepared to bear this income loss if they think the price of the asset will rise sufficiently to more than offset the income loss. What <a href="https://theconversation.com/explainer-why-negative-gearing-is-bad-policy-21882">upsets some people</a> is that the excess of interest over income is allowed to be deducted against income from other sources, such as wages or business income, for the purpose of calculating taxable income. </p>
<p><a href="https://theconversation.com/its-time-to-abolish-negative-gearing-9879">Critics</a> see negative gearing as the source of all kinds of evils: it inflates house prices making housing unaffordable for first home buyers and inflates a house price bubble that will eventually burst causing wider economic problems; it is an unfair tax handout to the rich; and it bleeds the government’s budget which is all the worse in these times of stubborn budget deficits. And according to some critics there is no upside – negative gearing serves no useful purpose.</p>
<h2>House price rises have other causes</h2>
<p>Let’s take a look at these claims. House prices have risen by an average of about 10% per year in Sydney and somewhat less in Melbourne in the five years since the global financial crisis. But in the rest of Australia house price growth has not even kept pace with inflation at 2 to 3% annually. </p>
<p>Part of the growth in Sydney and Melbourne is due to investor demand since, as the RBA notes, housing credit growth is running at twice the rate for investors (about 10%) than for owner-occupiers. But even if we think house price growth in Sydney is a problem caused by excessive investment demand, negative gearing is not the prime culprit. </p>
<p>The rules around negative gearing have not changed significantly in Australia for at least 25 years, so it can’t explain house price growth over the past five years. Persistent record low interest rates over the past few years is the main driver, which the RBA <a href="http://www.rba.gov.au/publications/fsr/">acknowledges</a> has meant that loans remain affordable. In fact the ratio of interest payments to household income has actually fallen since 2009.</p>
<p>Sure, if we restricted the tax advantages of negative gearing we would dampen investor demand for housing which would slow house price growth in Sydney and everywhere else. But at what cost? It would be tougher to rent a property, hurting low income households. </p>
<p>Rental vacancy rates are already low in Sydney and Melbourne and in fact have fallen in the last couple of years. Critics <a href="http://www.macrobusiness.com.au/2014/09/hia-continues-negative-gearing-subterfuge/">refute</a> this argument. They say that the vast majority of investment demand is for existing properties rather than investments in new housing stock, which simply drives up house prices. True, but higher house prices make new housing construction profitable, which boosts the rental housing stock. So restricting negative gearing is a very inefficient way of tackling a perceived house price bubble – which in any case is restricted to Sydney and, as I’ve <a href="https://theconversation.com/memo-to-the-imf-there-is-no-housing-bubble-27925">argued</a> before, is not about to burst.</p>
<p>What about the fairness argument? The RBA <a href="http://www.rba.gov.au/publications/fsr/2014/sep/pdf/bus-house-fin.pdf">report</a> shows that negative gearing is by no means restricted to the rich. About half of all housing property investors have household incomes under A$100,000. Half of all household property investors are young – 30% are under age 40 and 60% are under age 50. Also, if we want to be fair we have to be consistent. This would mean tackling negative gearing on other income-earning assets such as company shares and business ownership. And we would have to explain why we would want to tax the interest income received by the lender but not allow the borrower to deduct the interest paid, which would amount to double taxation. </p>
<h2>Consider the many alternatives</h2>
<p>If we want to tackle fairness in the tax system, there are lower hanging fruit. For example we could bring the family home into the pension assets test, address tax avoidance through artificial structures such as discretionary trusts, and tax superannuation contributions at marginal tax rates (as long as we keep withdrawals tax-free).</p>
<p>The budget saving argument is also overstated. According to the <a href="https://www.ato.gov.au/uploadedFiles/Content/CR/Research_and_statistics/In_detail/Downloads/cor00345977_2011TAXSTATS.pdf">Australian Taxation Office</a>, the total losses on rental property in 2011/12 were A$6.8 billion. Applying an average marginal tax rate of, say, 35%, this amounts to A$2.4 billion in tax revenue forgone, or 0.6% of total tax revenue in 2012. However we would save much less than this if we were to abolish entirely negative gearing for rental property because investors would switch to other investments and other ways of minimising tax.</p>
<p>We need to be clear about what problem we are trying to fix and consider whether there are better ways of doing it.</p><img src="https://counter.theconversation.com/content/32014/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ross Guest does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The perennial debate about negative gearing of residential property investments has been reignited yet again, by two reports in the past week. The International Monetary Fund has nominated taxes on housing…Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/318912014-09-25T00:50:59Z2014-09-25T00:50:59ZHome loan limits and buffers won’t stop a housing bubble<figure><img src="https://images.theconversation.com/files/59956/original/5gw856tr-1411601002.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Dealing with housing bubbles can get messy for central banks.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Australia’s central bank has formally flagged the use of macroprudential tools to address what it called “unbalanced” lending in its most recent <a href="http://www.rba.gov.au/publications/fsr/">Financial Stability Review.</a></p>
<p>Loan-to-valuation ratio (LVR) limits are the latest tool doing the rounds of central banks as they seek to cool overheated housing markets, with investors spurred on by low interest rates. </p>
<p>Introduced by the Reserve Bank of New Zealand in October 2013, LVR limits are now being considered by the Reserve Bank of Australia.</p>
<p>LVR limits restrict the proportion of new lending that can be done at high LVRs. In New Zealand, the RBNZ requires that banks limit residential mortgage lending at LVRs greater than 80% to no more than 10% of the dollar value of their new housing lending flows. The intention is to reduce demand for housing, and therefore demand-side pressure on house prices.</p>
<p>However, evidence from the New Zealand housing market suggests the effect has been minimal. </p>
<p>The median house price in New Zealand rose by NZ$30,000 (7.7%) in the 12 months to August 2014, according to the <a href="https://www.reinz.co.nz/shadomx/apps/fms/fmsdownload.cfm?file_uuid=4C1A0207-E98C-4098-BDFA-21269FB11D32&siteName=reinz">REINZ</a>. In the hottest housing markets in New Zealand, the increase has been <a href="https://www.reinz.co.nz/shadomx/apps/fms/fmsdownload.cfm?file_uuid=7737F5CD-ED11-4662-A4AD-C5B54D00FB6A&siteName=reinz">greater</a>: NZ$59,493 (10.3%) in metropolitan Auckland and NZ$56,500 (12.7%) in Christchurch.</p>
<h2>Unintended consequences</h2>
<p>The impact is expected to be greatest for first home buyers, who are likely to be trying to buy a house with the smallest contribution possible in order to make a purchase at the earliest opportunity. Therefore, there was some expectation the impact would be greater at the lower end of the housing market. However, this has forced home buyers into cheaper homes, where their contribution represents a greater proportion of the house price. As a result, demand at the lower-price end of the market has increased and pushed prices up.</p>
<p>The greatest impact tends to be disproportionately on first home buyers, who are already experiencing difficulties getting into the housing market. LVR limits add to their difficulties. It increases the quantum of savings they need to make that first purchase. </p>
<p>At the national median price of NZ$420,000 in August 2014, increasing the borrowers’ minimum contribution from 10% to 20% requires additional savings of NZ$42,000. </p>
<p>With house prices continuing to rise, the increase between August 2013 and August 2014 would have required an additional contribution of NZ$6000. In metropolitan Auckland, this is worsened with the higher minimum contribution requiring an additional contribution of NZ$63,500. In addition, the increase in house prices for the 12 months to August 2014 requires a further NZ$11,890.</p>
<p>At the same time, any change to LVR limits will not affect potential borrowers with a sufficient contribution. This is the largest part of the market. In August 2013, high LVR lending in New Zealand represented just 25.4% of new residential mortgage lending, according to <a href="http://rbnz.govt.nz/statistics/tables/c30/">RBNZ data</a>. This means nearly 75% of lending was not affected by the LVR regulations.</p>
<h2>Loopholes</h2>
<p>As with any new regulation, those affected will seek ways to (legally) get around the rules. The LVR limits are no exception. </p>
<p>RBNZ attempted to limit this by requiring banks to adhere to the spirit of the new regulations, as well as the specific regulatory requirements. While banks provide the majority of housing finance in New Zealand, other lenders are not bound by the LVR limits, so some high-LVR lending is still being undertaken. But the funding available to these lenders is more limited, which imposes natural curbs on the quantity of high-LVR lending available. </p>
<p>In addition, it appears parents are providing assistance to their children by becoming joint borrowers, providing guarantees or simply providing funds, possibly seen as an early inheritance.</p>
<p>All of this activity is reflected in RBNZ data. By August 2014, high-LVR lending (before exemptions) had decreased to 7.7% of new residential mortgage lending, but the decrease in new residential mortgage lending was only 10% in dollar value. Over that same time interest rates in New Zealand have increased. </p>
<p>It is unclear to what extent the reduction in new borrowing is driven by the increased cost of that borrowing rather than the introduction of the LVR limits.</p>
<p>LVR limits may be useful as a regulatory tool to manage lenders’ risk profiles, as high-LVR lending is inherently more risky. But the effect on the housing market is limited, as the New Zealand experience demonstrates. </p>
<p>In New Zealand, the key reason for the limited impact is that the growth in house prices is driven more by supply-side factors. This is particularly true in the most overheated markets of Auckland and Christchurch, where there is simply a shortage of housing.</p>
<h2>Other options to reduce risk</h2>
<p>Other macroprudential tools are available to the RBA. The first of these is the counter-cyclical capital buffer requiring banks to hold additional capital when the economy is booming. This would provide banks with higher levels of capital to cover losses when the bust occurs. </p>
<p>The second option is a sectoral capital overlay requiring banks to hold additional capital for particular sectors, such as housing or the rural sector. </p>
<p>The third is the core funding ratio (the RBA’s Net Stable Funding Ratio), which could be increased if a risk is identified. This would provide banks with a higher ratio of stable funding, including retail deposits, that is more likely to remain in the system in a downturn.</p>
<p>It is important to remember macroprudential tools are actually designed to build resilience into the financial system to enable financial institutions to cope when the economic boom turns to economic bust. A housing bubble does have the potential to lead to an economic bust, but macroprudential tools are not designed to prevent that and should not be used in that way.</p>
<p>Housing bubbles are a real concern for the RBA, and other central banks, but misusing a macroprudential tool like LVR limits is not an appropriate response. Unfortunately, there is no easy answer.</p><img src="https://counter.theconversation.com/content/31891/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Claire Matthews has received funding from Finsia. She is affiliated with the Fin-Ed Centre, NZCU Baywide and the New Zealand Association of Credit Unions. </span></em></p>Australia’s central bank has formally flagged the use of macroprudential tools to address what it called “unbalanced” lending in its most recent Financial Stability Review. Loan-to-valuation ratio (LVR…Claire Matthews, Director of Academic Programmes, Massey UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/300822014-08-04T05:05:44Z2014-08-04T05:05:44ZEnd of low rates in sight as case for interest rate hike strengthens<p><em>The CAMA RBA Shadow Board is a project by the Centre for Applied Macroeconomic Analysis, based at the ANU, which asks industry and academic economists what interest rate the Reserve Bank of Australia should set.</em></p>
<hr>
<p>New inflation and growth data suggest that the RBA’s low interest rate setting ought to come to an end soon. Inflation is close to the upper target band, consumer confidence has bounced back from the temporary drop in May and GDP growth remains solid. Though some weakness in the labour market remains, the majority of Shadow Board members is arguing for an interest rate increase in the foreseeable future. </p>
<p>That said, the CAMA RBA Shadow Board’s conviction that the cash rate ought to remain at 2.5% in August remains strong; it attaches a 71% probability that this is the appropriate setting. The confidence attached to a required rate cut has fallen one percentage point to 5%, while the confidence in a required rate hike has risen to 24%.</p>
<p>Headline inflation in Australia rose to 3% (year-on-year) in the second quarter of 2014, hitting the top of the RBA’s inflation target band of 2-3%. Core inflation in the same period has also edged up to 2.81%, suggesting that the increase in prices is broad-based. With domestic growth looking solid and other economic indicators (e.g. consumer confidence, business confidence, inventory stocks, private sector credit) pointing to a continuation of the economic expansion, the case for an increase in the benchmark policy rate is increasing. </p>
<p>Furthermore, among the Board members, concern about inflated asset prices, resulting from low interest rates, is rising. The biggest factor holding interest rates in check appears to be the unemployment rate which currently stands at 6% and is unlikely to improve significantly.</p>
<p>The Australian dollar remains relatively strong, hovering around 93 US cents. Some uncertainty remains about the federal government’s budget, with the Senate unlikely to pass significant sections of the budget announced in May.</p>
<p>The global economy appears to be improving. US second quarter GDP roared back to 4% (annualized), after an unusually weak first quarter. This is supported by a further reduction in the US unemployment rate. The Federal Reserve is continuing with its phase-out of quantitative easing, and financial markets are beginning to price in an interest rate rise in the medium term. China’s economy is steadying; the European economies are still languishing, but not worsening. </p>
<p>Some global risks remain, in particular geopolitical conflicts (such as Syria, <a href="https://theconversation.com/explainer-how-will-sanctions-against-russia-work-29920">Ukraine</a>, and the <a href="https://theconversation.com/here-we-go-again-israel-and-hamas-resume-their-war-29379">Israeli/Gaza conflict</a>) but also economic and financial problems including the economic slowdown of BRICS countries and <a href="https://theconversation.com/for-argentina-debt-default-is-a-solution-not-a-problem-30010">Argentina’s second debt default</a>.</p>
<hr>
<h2>What the CAMA Shadow Board believes</h2>
<p>The consensus to keep the cash rate at its current level of 2.5% has fallen 5 percentage points to 71%. The probability attached to a required rate cut is up a percentage point to 5% while the probability of a required rate hike has risen to 24% (20% in July).</p>
<p>Six months out, the probability that the cash rate should remain at 2.5% is unchanged at 47%. The estimated need for an interest rate increase equals 45% (41% in July), while the need for a decrease equals 8%. A year out, the Shadow Board members’ confidence in a required cash rate increase has risen further to 65% (61% in July), the need for a decrease fell to 9% (11% in July), while the probability for a rate hold slipped two percentage points to 26% (28% in July).</p>
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<span class="caption">Aggregate August.</span>
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<hr>
<h2>Comments from Shadow Reserve bank members</h2>
<p><strong>“Prevent a housing bubble from inflating.”</strong></p>
<p>Paul Bloxham, Chief Economist (Australia and New Zealand), HSBC Bank Australia Ltd:</p>
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<blockquote>
<p>Timely indicators of economic conditions have generally improved in the past month. Consumer sentiment has bounced back, after having fallen sharply in response to the May Federal budget. Activity in the housing market has picked up, after having slowed around May. Business sentiment remains positive and a recent lift in business credit growth provides an early sign that corporate sector investment may be starting to lift. China’s growth has also lifted, which is providing some support for iron ore prices in the past month, following significant falls earlier in the year. </p>
<p>The labour market remained broadly steady, with the unemployment rate around the same level as at the beginning of the year. At the same time, the Q2 CPI print showed that underlying inflation remains solidly in the upper half of the 2-3% target band. Very accommodative monetary policy appears to be working and inflation is in the upper half of the target band, which provides little scope or necessity for the board to consider cutting rates further. </p>
<p>Indeed, in my view, the risk that low rates may start to drive excessive risk taking in the housing market is building, which could eventually threaten financial stability. I recommend the cash rate is left unchanged this month, but expect that the cash rate may need to be lifted in the next 6-12 months partly to prevent a housing bubble from inflating. </p>
</blockquote>
<hr>
<p>Mark Crosby, Associate Professor, Melbourne Business School:</p>
<p><strong>“Hopes for US and Europe to edge closer to normalising monetary policy.”</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55603/original/tgw6d5y6-1407118581.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55603/original/tgw6d5y6-1407118581.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55603/original/tgw6d5y6-1407118581.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55603/original/tgw6d5y6-1407118581.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55603/original/tgw6d5y6-1407118581.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55603/original/tgw6d5y6-1407118581.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55603/original/tgw6d5y6-1407118581.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55603/original/tgw6d5y6-1407118581.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<a href="https://images.theconversation.com/files/55605/original/6x2f6f2v-1407118580.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55605/original/6x2f6f2v-1407118580.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55605/original/6x2f6f2v-1407118580.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55605/original/6x2f6f2v-1407118580.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55605/original/6x2f6f2v-1407118580.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55605/original/6x2f6f2v-1407118580.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55605/original/6x2f6f2v-1407118580.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55605/original/6x2f6f2v-1407118580.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<a href="https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55604/original/s3bdwjfj-1407118580.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<blockquote>
<p>There is little in the current environment to suggest anything other than sitting on one’s hands for the moment. In the six to 12 month horizon we can hope that the US and Europe continue to edge closer to normalising monetary policy, freeing up the RBA to also move rates closer to a more usual neutral rate.</p>
</blockquote>
<hr>
<p>Guay Lim, Professorial Research Fellow and Deputy Director, at the Melbourne Institute of Applied Economic and Social Research, Melbourne University:</p>
<p><strong>“Inflation is edging up, but the case for an immediate hike is not strong.”</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55611/original/xhs7s5r8-1407118927.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55610/original/7m7n8tst-1407118928.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<a href="https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=491&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=491&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55609/original/wfbhmmbx-1407118928.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=491&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<blockquote>
<p>The case for tighter monetary policy has strengthened as inflation is edging up along with a pick-up in the growth of credit. However, the case for an immediate hike in the cash rate is not strong as growth in activity and employment remain tentative.</p>
</blockquote>
<hr>
<p>Warwick McKibbin, Professor, Australian National University, CAMA:</p>
<p><strong>“The blocking of policy reform by the Australian Senate is making a bad situation worse.”</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55614/original/vsgns6ty-1407119338.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<a href="https://images.theconversation.com/files/55616/original/8p4z3k6c-1407119339.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55616/original/8p4z3k6c-1407119339.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55616/original/8p4z3k6c-1407119339.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55616/original/8p4z3k6c-1407119339.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55616/original/8p4z3k6c-1407119339.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55616/original/8p4z3k6c-1407119339.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55616/original/8p4z3k6c-1407119339.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55616/original/8p4z3k6c-1407119339.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<a href="https://images.theconversation.com/files/55615/original/9jjxksxh-1407119339.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55615/original/9jjxksxh-1407119339.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55615/original/9jjxksxh-1407119339.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55615/original/9jjxksxh-1407119339.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55615/original/9jjxksxh-1407119339.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55615/original/9jjxksxh-1407119339.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=468&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55615/original/9jjxksxh-1407119339.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=468&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55615/original/9jjxksxh-1407119339.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=468&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<blockquote>
<p>With domestic goods price inflation rising to the top of the RBA’s inflation target band and asset price inflation clearly rising to uncomfortable levels the current policy interest rate in Australia is too low. Monetary policy is too expansionary. The dilemma for the RBA is how to get back to a more neutral interest rate given global policy settings. The strong Australian dollar will continue while foreign investors search for yield and the international adjustment of monetary policies continue to drive global currencies. Clearly the policy answer lies outside the domain of monetary policy. </p>
<p>The current problem in Australia is in the settings of fiscal policy and the lack of appropriate structural adjustment policies. In a world of significant geo-political risks and economic uncertainty the blocking of policy reform by the Australian Senate is making a bad situation worse by hurting consumer confidence. There is little that monetary policy can do to negate the near term and more serious long term economic damage caused by the current political standoff.</p>
</blockquote>
<hr>
<p>James Morley, Professor, University of New South Wales, CAMA:</p>
<p><strong>“Ongoing weakness in the labour market may see the RBA hold steady.”</strong></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55623/original/b6h4wb9g-1407120319.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<a href="https://images.theconversation.com/files/55624/original/xfnrptdn-1407120320.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/55624/original/xfnrptdn-1407120320.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55624/original/xfnrptdn-1407120320.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=373&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55624/original/xfnrptdn-1407120320.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=373&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55624/original/xfnrptdn-1407120320.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=373&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55624/original/xfnrptdn-1407120320.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=469&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55624/original/xfnrptdn-1407120320.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=469&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55624/original/xfnrptdn-1407120320.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=469&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>Inflation is running at the high end of the RBA’s target range of 2-3%, with year-on-year headline inflation in June of 3.0% and underlying inflation (excluding volatile items) of 2.8%. Given these inflation numbers, the RBA needs to consider raising the policy rate in the medium term. However, unless inflation looks to actually fall outside the target range, ongoing weakness in the labour market suggests that the RBA can hold the policy rate steady in the immediate future.</p>
</blockquote>
<hr>
<p>Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:</p>
<p><strong>“The pressure to raise interest rates sometime next year continues to increase.”</strong></p>
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<blockquote>
<p>The pressure to raise interest rates sometime next year continues to increase given Australia’s inflation rate in the second quarter reached the upper limit of the RBA’s target band of 3%, that hours worked increased 0.9% despite the unemployment rate rising to 6% in June, and that output growth in the first quarter was a little above normal at 3.8%. </p>
<p>This future recommendation is supported by the fact that the US economy growth has recovered significantly in quarter 2 to 4% following its temporary weather-related drop in the previous quarter. However, as a counter-weight, the IMF has lowered its prediction a little for China ‘s growth in 2015.</p>
</blockquote>
<hr>
<p><strong><em>Click <a href="https://cama.crawford.anu.edu.au/rba-shadow-board">here</a> to view the full charts of all CAMA board members. Saul Eslake has resigned from the CAMA RBA Shadow Board and did not vote in this round.</em></strong></p>
<p><em>VERDICT FOR AUGUST: cash rate ought to remain at 2.5%.</em></p><img src="https://counter.theconversation.com/content/30082/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timo Henckel receives funding from the Centre for International Finance and Regulation.</span></em></p>The CAMA RBA Shadow Board is a project by the Centre for Applied Macroeconomic Analysis, based at the ANU, which asks industry and academic economists what interest rate the Reserve Bank of Australia should…Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/279252014-06-13T00:52:15Z2014-06-13T00:52:15ZMemo to the IMF: there is no housing bubble<figure><img src="https://images.theconversation.com/files/50994/original/p7fd7mq2-1402617160.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The IMF is wasting its time trying to convince central banks of a housing bubble.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Australia’s house prices are grossly overinflated – if you believe the International Monetary Fund’s recent <a href="http://www.imf.org/external/research/housing/index.htm">analysis</a>. It says radical <a href="http://www.imf.org/external/np/speeches/2014/060514.htm">policies</a> are required to deflate this emerging housing bubble, such as a stamp duty on house purchases by foreign residents and government imposed controls on bank lending for housing. </p>
<p>The IMF’s analysis of global house prices – especially with respect to countries like Australia - is misleading. It has focused on two measures of housing affordability: the ratio of house prices to household incomes and the ratio of house prices to rents. On both measures Australia’s house prices are one of the highest in the developed world – higher than the US and almost all of Europe. </p>
<p>In Australia the house price to income ratio is 30% above its historical average, behind only Canada and Belgium among the 22 advanced countries chosen by the IMF. Similarly, the current growth in house prices of 7% in Australia is the 7th highest among the 22 chosen countries.</p>
<p>But the IMF has ignored the <a href="http://www.ahuri.edu.au/themes/housing_affordability">preferred measure</a> of housing affordability, at least in Australia, which is the proportion of income spent on housing costs. For home buyers (not renters) this is best measured by repayments on hew housing loans as a percentage of household disposable income. This measure is now around the average of the last 30 years for Australia at a little over 20%, and falling due to low and stable interest rates. </p>
<p>The typical standard variable housing rate has been at 5.95% since August 2013, which is the lowest rate on record except for a brief period at the depths of the global financial crisis (GFC) in 2009. </p>
<p>Also households are not piling up debt to buy houses like they were before the GFC. Household debt has been flat as a proportion of income since 2007. And household saving is at the highest level for 25 years.</p>
<h2>What’s wrong with this picture?</h2>
<p>This is not a picture of unsustainable house price growth in Australia. The same generally applies globally given that interest rates are typically even lower than they are in Australia. </p>
<p>It is true that house prices are going up globally, having slumped after the GFC. But even on the IMF’s figures global house prices are still 5% to 10% below their peak in 2007 – and even lower relative to other prices which have gone up over that time.</p>
<p>The IMF is wasting its time asking central banks to worry about house price growth. Central banks in the US, Europe and now Japan are deliberately pumping new money into the economy, and have cut their official interest rates to virtually zero in the hope of stimulating spending and jobs growth in the face of anaemic economic growth. Australia’s Reserve Bank has not had to resort to this, but for others, cheap money and plenty of it is the only policy they have left, given that government debt has reached unsafe levels in most countries preventing them from spending their way to stronger growth. Average government debt in OECD countries is now 110% of national economic output of goods and services. </p>
<p>However, as the famous analogy goes, cheap money is like pushing on a string. It won’t make households spend or businesses invest if they don’t have confidence in their economic prospects. Instead the money goes into assets like housing and the stock market, pumping up those asset prices. Central banks are relaxed about this. Indeed it is deliberate in the hope that rising wealth (on paper at least) will encourage consumption and investment spending. The risk of a housing or stock market bubble is seen as the lesser of two evils – the price that must be paid to try to stimulate spending on goods and services and to create jobs.</p>
<h2>Foreign investors are not to blame</h2>
<p>One of the IMF’s suggestions – a stamp duty on foreign purchases of investment properties – may have populist appeal to Australians who are worried about Chinese buyers inflating house prices here. It may appeal to the Australian government for this reason as well as being a revenue raising measure – and it is something they could do independently of any Reserve Bank action. But such a policy has dubious merit on balance. </p>
<p>Foreign investment, whether it is in domestic real estate or manufacturing or mining, tends to increase national wealth. If a foreign resident is willing to pay an Australian owner more for their asset than any Australian resident, why shouldn’t the owner sell? The owner’s, and Australia’s, wealth rises. The Australian dollar also rises which transfers income to all Australians since they can now buy goods and travel overseas more cheaply. </p>
<p>Of course not everybody wins. Potential buyers of Australian assets – in this case houses – find that they are more expensive than they otherwise would be. In simple dollar terms, the gains to the winners outweigh the losses to the losers – so in principle the losers can be compensated through the tax and subsidy system.</p>
<p>In short, Australia doesn’t have a house price bubble. Nor probably does the rest of the world at the present time. However even if it did, central banks would not likely do anything about it until their economies start to grow more strongly.</p><img src="https://counter.theconversation.com/content/27925/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ross Guest does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Australia’s house prices are grossly overinflated – if you believe the International Monetary Fund’s recent analysis. It says radical policies are required to deflate this emerging housing bubble, such…Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/277212014-06-11T17:40:17Z2014-06-11T17:40:17ZExplosive London housing bubble will spread to the rest of the UK<figure><img src="https://images.theconversation.com/files/50854/original/5psz2jy3-1402499155.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Coming soon to a city near you.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/nate2009/12705287074">Nate Edwards</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>It is easy to see why people are talking about the possibility of another UK housing bubble, just six years after the last crash. House prices in London, for instance, have <a href="http://www.ons.gov.uk/ons/rel/hpi/house-price-index/march-2014/stb-march-2014.html">gone up 17%</a> in the past year alone. </p>
<p>Many feel rising prices are the normal results of increased incomes, a shortage of housing supply, or other perfectly logical factors. However, our research at Lancaster University suggests this may not be the case. The findings indicate that a housing bubble is developing in London, with the risk of spreading to the property markets in the rest of the UK. </p>
<p>A bubble is defined as a prolonged departure of house prices from reasonable causes, typically due to expectations and speculation on a market where prices are going to keep on rising. Critically a bubble involves prices growing fast, showing “explosive” behaviour.</p>
<p>Bubbles are more dangerous than simple price rises as they have the potential for a sudden crash, leaving homebuyers with large mortgages and negative equity.</p>
<p>We have <a href="http://www.dallasfed.org/assets/documents/institute/wpapers/2013/0165.pdf">gathered data</a> on house prices across the UK since start of the housing boom under Margaret Thatcher in the 1980s. We then analysed the data using a statistical method <a href="http://cowles.econ.yale.edu/P/cd/d18a/d1843.pdf">recently developed</a> by Yale economist Peter Phillips to identify bubbles, known as the Backward Supremum Augmented Dickey-Fuller, or BSADF. Using the BSADF were we able to identify periods during which the housing market experienced explosive price increases which may not be explained by the normal factors that determine house prices. </p>
<p>The following graphs show there is indeed evidence consistent with a house price bubble in London, and that it is likely to spread nationally.</p>
<p>The first graph below shows the estimated BSADF figure for the London and UK house markets since 1983. The blue line is the “critical value” – the point above which we can be sure price rises are no longer linked to normal factors such as increased incomes. Periods when the BSADF crosses above the blue line are indicative of explosive behaviour.</p>
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<a href="https://images.theconversation.com/files/50729/original/6wqcbxnd-1402423157.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/50729/original/6wqcbxnd-1402423157.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/50729/original/6wqcbxnd-1402423157.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=351&fit=crop&dpr=1 600w, https://images.theconversation.com/files/50729/original/6wqcbxnd-1402423157.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=351&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/50729/original/6wqcbxnd-1402423157.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=351&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/50729/original/6wqcbxnd-1402423157.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=441&fit=crop&dpr=1 754w, https://images.theconversation.com/files/50729/original/6wqcbxnd-1402423157.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=441&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/50729/original/6wqcbxnd-1402423157.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=441&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">BSADF statistic over time for UK housing market.</span>
<span class="attribution"><span class="source">Paya et al</span></span>
</figcaption>
</figure>
<p>As the graph shows, London was in “bubble territory” from late 1985 until early 1990 and again from late 1999 until the third quarter of 2008, when the financial crisis hit. </p>
<p>London’s line has just gone back above the blue line, in the first quarter of 2014, so the capital’s house prices just turned explosive.</p>
<p>The next graph shows when the price rises were above the bubble threshold line for each region in the UK since 1982. Importantly there’s strong evidence of a precedent for London and its metropolitan area leading all other regions, and the likelihood of the same kind of ripple effect in the rest of the UK. </p>
<p><strong>Explosive house price rises by UK region</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/50730/original/8dshx9nj-1402423761.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/50730/original/8dshx9nj-1402423761.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/50730/original/8dshx9nj-1402423761.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=353&fit=crop&dpr=1 600w, https://images.theconversation.com/files/50730/original/8dshx9nj-1402423761.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=353&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/50730/original/8dshx9nj-1402423761.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=353&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/50730/original/8dshx9nj-1402423761.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=444&fit=crop&dpr=1 754w, https://images.theconversation.com/files/50730/original/8dshx9nj-1402423761.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=444&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/50730/original/8dshx9nj-1402423761.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=444&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Both previous housing booms began in London and spread from there.</span>
<span class="attribution"><span class="source">Paya et al</span></span>
</figcaption>
</figure>
<p>The ripple effect is simply the result of buyers looking for more affordable property elsewhere. Armed with positive equity, money pours into regions around London, and then further afield, increasing demand and prices. </p>
<p>Intuitively, price rises in London cause price rises in the surrounding areas, as people who cannot afford to buy a house in the capital settle for their second-best choice. And buyers bid up prices to profit from the price gap between London and surrounding regions.</p>
<p>The data is consistent with Mark Carney’s view that the housing market is the <a href="http://www.theguardian.com/business/2014/may/18/mark-carney-house-prices-risk-economy-bank-of-england">biggest issue</a> for the economy. It is easy to see why housing will be a central feature of the banking sector’s next “stress test” carried out by the Bank of England – rapid price rises are no longer something the rest of the country can dismiss as a London quirk.</p><img src="https://counter.theconversation.com/content/27721/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It is easy to see why people are talking about the possibility of another UK housing bubble, just six years after the last crash. House prices in London, for instance, have gone up 17% in the past year…Ivan Paya, Professor of Economics, Lancaster UniversityAlisa Yusupova, Doctoral Researcher, Lancaster UniversityDavid Peel, Professor of Economics, Lancaster UniversityEfthymios Pavlidis, Lecturer in Economics, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/227452014-02-05T06:45:18Z2014-02-05T06:45:18ZAussie rules for overseas buyers won’t solve London’s housing bubble<figure><img src="https://images.theconversation.com/files/40681/original/d9k7h4bh-1391551463.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">House prices in Australia are still sky high.</span> <span class="attribution"><span class="source">markehr</span></span></figcaption></figure><p>London-based think tank Civitas has called for <a href="http://www.bbc.co.uk/news/business-26006214">restrictions on foreign buyers</a> as a solution to escalating house prices in the UK capital. They suggest the UK adopts a similar approach to that used in Australia.</p>
<p>No one would dispute the fact that something needs to be done, as London’s housing problem is increasingly obvious. In the past year, house values in the city went <a href="http://www.bbc.co.uk/news/business-25575964">up by 14.9%</a>, and it is harder than ever for Londoners to get on the property ladder. This is underpinned by rapid population increases not being met by supply.</p>
<p>Civitas points to international investment in the London housing market as a source of the price increase. It indicates that <a href="http://www.civitas.org.uk/pdf/FindingShelter.pdf">10 to 15% of new build purchases</a> in Greater London are made by foreigners, and that ratio is far greater in the city centre and among high end properties. With foreign investors exempt from capital gains tax, the concern is that London housing is being used as an investment rather than a place to live. This only fuels the price escalation. </p>
<p>The think tank’s remedy is to impose controls on foreign investment in residential real estate, following the Australian model.</p>
<p>However it is not clear that this approach would help house prices or availability in London. It is not clear that it even does that in Australia, nor that it was meant for that purpose.</p>
<h2>Adding to the stock</h2>
<p>Foreigners <a href="http://www.firb.gov.au/content/guidance/gn3.asp">cannot buy established residential real estate</a> in Australia. They can invest in new real estate “only if it adds to the housing stock”. This includes new dwellings, off-the-plan properties under construction, or vacant land for development. </p>
<p>All applications by foreigners must go to the <a href="http://www.firb.gov.au/content/default.asp">Foreign Investment Review Board</a> (FIRB), a body within the Australian Treasury. Applications are subject to an open-ended national interest test which typically includes national security, competition, impact on other government policies (including tax), impact on the economy and community, and the character of the investor. Where the proposal involves a foreign government, the Board can consider whether this would facilitate control by a foreign government. </p>
<p>FIRB approved 9768 applications for residential real estate in 2011/12, the most recent year for which data is available. But just 13 of all real estate purchases were rejected, <a href="http://www.firb.gov.au/content/Publications/AnnualReports/2011-2012/_downloads/FIRB-Annual-Report-2011-12_v4.pdf">0.1% of applications</a> – and that last figure includes commercial properties too. With overseas buyers having a 99.9% chance of approval, the system would appear to be having only a weak effect. That said, its role as a deterrent on foreign investment is unknown. </p>
<p>But what of the argument that foreign investors are more likely to have deep pockets which drive speculation, pushing up prices without increasing supply? Well, this is still possible under the existing system in Australia.</p>
<h2>Priced out</h2>
<p>The relative influence of foreign investment on house prices in Australia compared with local buyers is unknown, even if established real estate is not available. However, we do know that foreign investors make up <a href="http://business.nab.com.au/wp-content/uploads/2013/10/residential-property-survey-09-2013.pdf">about 12.5%</a> of “new property demand” in Australia, a figure comparable to London’s. </p>
<p>The available data on housing purchases is not broken down by investor’s country of origin. However, for total real estate purchases including commercial properties, the <a href="http://www.firb.gov.au/content/Publications/AnnualReports/2011-2012/index.asp">biggest four in value</a> by far are the USA, Singapore, China and the UK. Again, there is a similarity here: Singapore and China make up <a href="http://www.knightfrank.com/news/international-investors-spent-%C2%A32.2-billion-on-central-london-new-build-property-in-2012-01526.aspx">two of the top three nationalities</a> of overseas buyers of central London property (the other is Hong Kong). </p>
<p>Australia’s foreign ownership rules have failed to stop prices rising way above inflation in the big cities. Sydney, with nearly five million residents, saw <a href="http://www.abs.gov.au/ausstats/abs@.nsf/cat/6416.0">prices rise 11% last year</a> for established homes and 5% for new homes which tend to be further from the city centre. This also appears surprisingly comparable to London, although the spread of prices may be less, and the market is smaller.</p>
<p>Land is easier to come by in Sydney than in London, and <a href="https://theconversation.com/home-truths-are-planners-really-to-blame-for-our-housing-shortage-12723">planning thresholds are lower too</a>. But other factors are at work, such as the “<a href="http://lexicon.ft.com/term?term=dutch-disease">Dutch disease</a>” of high prices transmitted from the Australian mining boom, and the ongoing unique system of “negative gearing” which gives property tax advantages over other forms of investment.</p>
<p>So, foreign investment restrictions have not stopped house price increases in Sydney, but nor are the increases likely to be significantly due to foreign demand. In fact insofar as the foreign investment rules act as a deterrent, they also apply to foreign investment in residential construction and might just as well limit housing supply. This could also be the case if they were applied in the UK.</p>
<p>The Australian system does not explicitly include high prices in its criteria, although of course they could be considered. Although FIRB deliberations do not have to be released, it seems unlikely that rejection of a proposal has occurred on the basis that the offer is too high. </p>
<p>It is odd that the solution proposed in the UK is one that is toothless or even potentially restricts housing supply in Australia. New policy is certainly called for to address the London housing crisis, but there is nothing to suggest that the Australian approach as it stands is the solution. </p>
<hr>
<p><em>This is the third piece in our Housing 2020 series, exploring the major policy issues facing housing over the next five years. Click on the links below to read the other pieces.</em></p>
<p><a href="https://theconversation.com/your-home-as-an-atm-home-equity-a-risky-welfare-tool-22000">Your home as an ‘ATM’: home equity a risky welfare tool</a></p>
<p><a href="https://theconversation.com/explainer-why-negative-gearing-is-bad-policy-21882">Explainer: why negative gearing is bad policy</a></p><img src="https://counter.theconversation.com/content/22745/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Margaret McKenzie does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>London-based think tank Civitas has called for restrictions on foreign buyers as a solution to escalating house prices in the UK capital. They suggest the UK adopts a similar approach to that used in Australia…Margaret McKenzie, Lecturer, School of Accounting, Economics and Finance, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/195662013-10-25T13:39:19Z2013-10-25T13:39:19ZGrowth based on consumption is only short-term relief<figure><img src="https://images.theconversation.com/files/33815/original/73v3vvv6-1382708038.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Green shoots don't become tall trees without long-term nurture.</span> <span class="attribution"><span class="source">Skotkin</span></span></figcaption></figure><p><a href="http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q3-2013/stb-gdp-preliminary-estimate--q3-2013.html">The Office for National Statistics</a> has issued the welcome news that UK GDP rose 0.8% from July to September this year. This is the fastest rate of increase in the past three years and is the third consecutive quarter of growth.</p>
<p>But before we heave a sigh of relief and conclude that the UK is on the mend for the long term, we should look at what this growth is actually based on. We have to remember that GDP is still about 2.5% below its pre-crisis peak. So we’re still producing and consuming less as a nation than we did five years ago. </p>
<p>There is also a big question about how balanced and sustainable this growth is. Long-term growth can only be sustained if it is underpinned by investment and export growth. While today’s figures appear to indicate recovery, there is little evidence that the economy is being rebalanced towards these areas.</p>
<p>When the figures are broken down by sector, they show that there was a 2.3% growth in construction - reflecting a buoyant housing market - compared with a much smaller, 0.5% increase in production, which includes manufacturing, showing that the supply side of the economy remains weak and the GDP figures are largely driven by increases in household demand.</p>
<p>The most obvious conclusion to be drawn from the headline GDP figure, therefore, is that growth is again being driven by household demand for goods and services - consumption, underpinned by an increasingly buoyant housing market and easier access to credit. This sounds some of the same alarm bells that were last heard just before the global financial crisis.</p>
<p>The government’s <a href="https://www.gov.uk/affordable-home-ownership-schemes/help-to-buy-equity-loans">Help to Buy</a> and <a href="https://www.gov.uk/government/policies/making-it-easier-to-set-up-and-grow-a-business--6/supporting-pages/getting-banks-lending">Funding for Lending</a> schemes are both aimed at kick-starting the economy by helping first time buyers get on the property ladder and making it easier for businesses to access finance but after the initial benefit, they could lead to difficulties. Help to Buy for example can only be further inflating house prices as demand for housing goes up and increases in housing supply remain limited, especially in the short run. </p>
<p>There is therefore a real risk that this GDP growth will rapidly lead to inflation, especially if worker productivity (the amount produced per worker) does not improve. On the other hand, if productivity does improve this will jeopardise the creation of more jobs. Again, long-term growth underpinned by investment and exports would be the only way to guarantee a sustainable reduction in unemployment as we create jobs by expanding the productive capacity of the economy and selling our output abroad.</p>
<p>The headline GDP figures for the UK as a whole are also somewhat misleading if we look at how growth is spread around the country. <a href="http://www.wbs.ac.uk/news/uk-productivity-gap-is-at-its-biggest-in-the-north-east/">Figures produced at Warwick Business School</a> show that there is considerable regional disparity in economic recovery. Just as we as can be seen with house prices, London and the South East are recovering more rapidly than the struggling North East and Yorkshire, for example, with growth in output in the East and West Midlands somewhere in between.</p>
<p>So while our third quarter of growth is good news in some respects, we would be wise to think about the long-term implications of our reliance on consumption, our neglect of the regions as participants in recovery and the high-profile government schemes that offer short-term demand stimulus rather than long-term supply side growth.</p><img src="https://counter.theconversation.com/content/19566/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Taylor has received funding via the UK research councils.</span></em></p>The Office for National Statistics has issued the welcome news that UK GDP rose 0.8% from July to September this year. This is the fastest rate of increase in the past three years and is the third consecutive…Mark Taylor, Dean of Warwick Business School and Professor of Finance, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.