The Issue of Housing Affordability

Housing affordability has long been a major political issue. This is increasingly the case in Australia and New Zealand, where speculative local and international investment has driven prices extremely high. The latest Demographia International Housing Affordability Survey (PDF here) has just been released and includes UK, Ireland, Canada, USA, NZ, and Australia. Based on 2007 Q3 data the report unsurprisingly shows extremely low levels of affordability for NZ and Australia.

This is undeniable, but what should be questioned more is a fairly insideous argument - dangerous even, propounded by many, including none other than former Governor of the NZ Reserve Bank Dr. Donald Brash who, in his introduction to the study, states (Brashly, of course) that "Once again, the Demographia survey leads inevitably to one clear conclusion: the affordability of housing is overwhelmingly a function of just one thing, the extent to which governments place artificial restrictions on the supply of residential land.."

This is not surprising coming from an economist but it is a load of codswallop. Not because it isn't true, but because in life the easiest solution is not always the best. In fact it is often the worst. Let's think about this for a moment. What is the easiest way for the governments of a country like Australia and NZ to improve housing affordability? Well, the answer has to be by releasing more "vacant" land for development. Mr. Brash and many others are clamouring for this in Australia and NZ today. Why? Because it works - yea, it works all right. It works like getting a loan from a loan shark will help you pay of your gambling debt so that you can keep gaming without worrying about bothersome things like rehabilitation. No - banish the thought. I apologise for suggesting such a dreary boring do-goody thing. Much more fun to borrow from the loan shark and have a bit more fun. Much more fun to release a bit more land, keep the economy buzzing along with all the new residential housing and road building and beautifully mind-numbingly endless suburban sprawl it generates.

Hell, yea. Who wants to talk about cost? Who wants to think about those irksome things that responsible economists call "externalities".

Ok. Enough cynicism. What really happens when the government releases land? In a word, "sprawl". What happens when you have sprawl? Well, lots of things, and most of them are not good, except for the fact that the economy probably grows because prices come down, more people buy into the suburban dream, builders get busy and everyone is hunky dory... for a while... But the stark, inconvenient reality that everyone is trying so hard to pretend not to notice is that we are building growth at the expense of future generations. This is most strikingly shown by the US experience. The United States government is finding that it is having to spend an every greater proportion of the budget on the maintenance and upkeep of all the roads and sprawling infrastructure that it has build. Personal debt is at record levels because essentially that is what is funding the growth from individual consumption. In other words, once the benefits to growth from the stimulus have long withered away and been spent on flat screen TV's, all you have is the government liabilities of roads maintenance and upkeep, increased costs of maintaining the police forces to patrol these expanded urban areas, the electricity production to keep all those air conditioners pumping, the cost of all the extra sewage, drainage, road cleaning, ambulance services, not to mention the collateral damage from increased health burden from more injuries and environmental issues from low density cities. This whole argument reminds me very much of Dr. Robert Lustig's obesity interview I wrote of recently, in which he described the negative feedback loop effect that sugar and fructose has on the body. We have a similar negative feedback loop going on here.

Never let a financial economist convince you that growth is a good thing for its own sake. Look at what that the growth is comprised of and what that is going to cost you - now and into the future. A financial economist is more like a banker - they don't really give a damn who takes the money and what they do with it - only whether or not they can pay, and how much. And if the economy is growing, there is more chance that people will repay - so hell, ANY growth must be good, right...? (wrong!)

And don't think that China is doing it right either. They are going down exactly the same path - only it isn't a path any more -it is a 12 lane highway, and they are going down it at breakneck speed.

So let's think of a few advantages of keeping house prices UP. There are a few. You may be surprised. One is that it discourages Australians from buying McMansions. I find it fascinating that the same Australians who winge about the price of housing, are the ones who have made the average Australian new home THE LARGEST IN THE WORLD. No sympathy from me.

Another advantage is that foreign buyers are less likely to buy into Australian residential housing markets. This is an interesting one here. Australians tend to spend a little too much on consumption. In return they need to sell something to the foreigners. But Australians don't make much that foreigners want, so they sell shares in mining businesses and yes, residential real estate. Australia has one of the most liquid real estate markets in the world. Surely international speculation in these markets is something that keeps prices very high. I suspect, however, that more important is international investment in DEBT (RMBS). Investors buy the loans that banks make to homebuyers. Australians, addicted to their McMansions, buy ever bigger homes at inflated prices, promising to pay this borrowed money back. In other words, the real speculator here is the HOMEBUYER. For now, with China and the price of commodities booming, we have managed to pull this illusion off. But it cannot last - unless of course we force the government to release some more land so that we can party on a bit more!

But really. C'mon. We can do better than that. Are we citizens or consumers? What are you?