Japan, housing crisis and deflation

NPR's Planet Money podcast has an episode on Japan's long term economic slump. The transcript can be found at: Japan had a vibrant economy. Then it fell into a slump for 30 years. The episode puts much of the blame down to the bursting of bubbles in stocks and real estates. People lost a lot of money or wealth, and so they stopped spending and Japan went into a recession. This then led to a banking crisis and sustained deflation.

The ABC's If You're Listening also has an episode on Japan:  How Japan opted out of a global housing crisis. This episode discusses the measures the Japanese government took to lower house prices after they became unavoidable.

I think the two are linked and there are potential lessons for other countries:

• Don't let your real estate prices get too high, keep them affordable. Focus especially on making it easy to increase urban density and reduce red tape around urban development.
  
• If prices do start getting too high, try to bring them under control. But, whatever you do, don't let them come down too much. You really need to avoid sustained deflation.
   

 

Don't restrict public housing to the most needy

In The public housing paradox: by helping only the neediest, we undermine the entire system Professor Jenny Stewart, visiting fellow in the school of business at UNSW Canberra, explains that restricting public housing to the most needy denies the revenue that public housing authorities need to maintain their services.

There's no doubt that Australian cities are changing fast. It's difficult enough for those with reasonably good jobs to buy their own home. Public housing could, and should, be an important factor in the mix. But to rejuvenate the sector, more flexibility is needed. If we want to use the state to help the disadvantaged, it is sometimes necessary to think beyond our own good intentions. In public policy, it is easy to do the wrong thing for the right reasons.

NIMBYism leading to increased inequality

In Inequality is growing in our own backyards Michael Pascoe looks at an article in The Economist by Matthew Rognlie who argues that a major cause of growing inequality is the growing cost of housing.

Pascoe posits that house owners, keen to "preserve its character", actively campaign against changes that would result in more efficient and higher density housing. This not only leads to a shortage of supply, but may also rob the owners of heritage listed buildings of dubious value the opportunity to reap the maximum returns from the value of their land.

In many of the trendier suburbs, you may well be a Green or Labor supporter who rails against inequality but also rabidly supports the imposition of heritage orders to freeze often dreary and inefficient architecture and, heaven forbid, limit or ban higher density housing for the masses.

But it's you who is creating the inequality gap.

He concludes:

But that's only part of the solution to the housing problem. If any government took that problem seriously and could ignore the rent seekers, medium density should be the default option for cities like Sydney. Anyone with a suitably sized block of land or any group of willing neighbours should be able to build a fashionable row of terraces instead of their isolated boxes, if they so wish.

Those who prefer their own quarter acre would, of course, be welcome to it, and the land tax that it would incur in a rational nation interested in sensible tax reform.

So put your hand up if you're genuinely interested in a fairer society, in preventing increasing inequality, in making housing more affordable for your children, in living in a more efficient, greener city with better infrastructure, and, effectively, freezing housing prices and restoring individual property rights?

I think I just lost the owner-occupier and NIMBY vote.

I think Pascoe has nailed one of the main reasons for the high cost of housing in Australia.

An argument for negative gearing

In Negative gearing is not so negative Michael Pascoe argues that negative gearing is not necessarily a bad thing. As he writes, and this is something I've thought for a long time, the issue with housing affordability isn't the presence of investors but the lack of supply. On the positive side, the additional investors attracted by negative gearing increase the supply of rental accommodation in the market, this lowering rental costs.

More fundamentally, the article homed in on the negative gearing scapegoat because it only addressed the housing affordability question from one side of the equation – demand – and did not mention the other side – supply. Fixing the supply problem is a better way of solving the housing affordability problem than trying to arbitrarily restrict broad taxation principles for one particular sub-set of an asset class.

...

Increasing supply, given our population growth, is a much better way of equitably dealing with housing affordability.

Australia's housing unaffordability caused by restrictive land use policies

In Unrealised fringe benefits in the housing market Leith van Onselen looks at the 10th Annual Demographia International Housing Affordability Survey which again "ranks Australia as having one of the most expensive housing markets out of the countries surveyed".

At the national level, Hong Kong has by far the most unaffordable housing, with a median multiple of 14.9. Australia and New Zealand are tied for second most unaffordable market out of the nations surveyed (both 5.5), followed by Singapore (5.1), United Kingdom (4.9), Japan (4.0), Canada (3.9), United States (3.4), and Ireland (2.8).

All of Australia's 39 markets captured in the survey are ranked as either "Seriously Unaffordable" (14) or "Severely Unaffordable" (25). Australia currently has no housing markets ranked as "Affordable" or "Moderately Unaffordable". The result represents a slight improvement on last year's survey, where 30 markets were ranked as "Severely Unaffordable".

Looking at the major metropolitan areas only - i.e., those with more than 1 million inhabitants - Australia ranks as third most expensive after Hong Kong and New Zealand (Auckland).

Overall, Australia has moved down the league tables, registering 5 out of the 20 most expensive housing markets identified in the Survey, versus eight in last year's survey.

So why are Australian house prices so expensive. The report puts it down to high land prices, which in turn is due to Australia's restrictive land use policies. It's no surprise that locations with more liberal land use regimes have lower prices:

By contrast, affordable housing markets, like Texas and Georgia in the United States, utilise open market-based land use structures whereby plentiful new housing supply is able to be built quickly and cheaply on the urban fringe, thereby preventing rapid house price escalation.

The report claims that less restrictive land use policies also have other benefits:

In addition to lower costly housing costs relative to incomes, lower population densities in liberal markets are associated with less intense traffic congestion and shorter average work trip journey times.

Leith van Onselen concludes with:

So under an open market-based model (provided there are not also substantial physical barriers to housing supply), increased demand, such as from reduced lending standards and easier availability of credit, quickly leads to the building of additional low priced housing on the urban fringe, which helps keep house prices in check and reduces the likelihood of speculative housing bubbles developing. Further, highly leveraged speculators are less likely to be encouraged into open land markets, since there is little prospect of achieving strong capital gains. Investing in open land markets is, instead, more about rental yield.

I will add that restrictive urban planning structures should not be viewed as a one-way bet for house prices, with unresponsive land supply also more likely to result in higher levels of house price volatility and boom/bust price cycles - a fact also acknowledged by Demographia. Why? Because strict land-use policies (planning) steepens the supply curve, which makes house prices more sensitive to changes in demand, increasing the likelihood of the housing market experiencing boom/bust price cycles as demand rises/falls.

Pick 2 out of 3: Cheap housing, low density housing, no urban sprawl

In When you buy a house, you shouldn't buy the neighbourhood with it Matt Cowgill looks at the rising cost of housing and makes the point:

I think we've tipped the scales too far in favour of those who want to restrict development. The consequence of this is that housing is more expensive than it otherwise would be. That's fine for people who already own their own home, but it hurts the young and the poor.

There's a trade-off at play here, one that can't be wished away or ignored. With a growing population, you can't restrict rising density in established suburbs, prevent sprawl on the urban fringes, and prevent housing from being unaffordable. Pick two out of the three. The urge to preserve historic neighbourhoods, the desire the conserve all the green bits around our cities, and the wish to maintain affordable housing are all noble impulses with which I sympathise. But, again, we can't have them all.

If you stop density from rising in the inner city, you push people further out to the fringes. If you try and stop this sprawl, prices will soar. People will spend longer living at home or in share houses than they’d like, and we'll suffer through more of those tiresome pieces in newspaper lifestyle supplements speculating about the deep cultural cause of this allegedly dysfunctional generation's protracted adolescence.

Should be abolish negative gearing?

I'm still not convinced, but in It’s time to abolish negative gearing Philip Soos argues that we should.

Housing affordability

Australian cities have a problem with housing affordability. Blame for this has been assigned to a number of causes including lack of supply, red tape, stamp duty, and the market distortions of negative gearing and first home buyers schemes. It all helps to tell us how we got here. However, what we really need is a way to fix the problem. Unfortunately, what many people won't admit is that house prices need to fall, at least in real terms, for housing to become more affordable. This can either be via a fall in prices or, and it would take much longer, growth in house prices below the rate of growth in median income.

The elephant in the room? Two thirds of households, those who own their home or those with mortgages, aren't going to like either option. Any moves that reduce housing costs to aid affordability are likely to upset a sizable portion of the voting population. It will take a very brave Government indeed to implement such measures.

Housing affordability

Jessica Irvine in Housing outlook remains grim for the forgotten people notes that buying their first home is still impossible for a third of households.

A lot has changed since the global financial crisis hit Australian shores in late 2008. For the third of households who own property outright, the news has been good - homes have largely retained their value. For the third of households paying off a home loan, the news has been similarly positive - mortgage interest payments have fallen dramatically.

But for the forgotten third - renters or those looking to buy - the outlook remains grim. Once the mortgage belt's demand for lower interest rates was satisfied, concern about high prices for first-time buyers evaporated. House prices may have plateaued, but a new generation of young peoplestill cannot, and may never, afford to buy their own home.

Tim Williams, the co-author of a report on housing affordability, released this week by the McKell Institute, says the proportion of those aged 35 or below who cannot access home ownership - they live at home or rent - now stands at 66 per cent, compared with about one-third for the population at large.

Jessica goes on to write:

From an outsider's perspective, Williams says the property market is fundamentally, and uniquely, distorted. ''I remember my head reeling when I discovered how generous negative gearing was. There's nothing like it in the known world in terms of its generosity and in terms of its middle-class welfare.''

By adding to demand for housing - people's ability and willingness to pay for housing - negative gearing had inflated house prices for decades.

''I just think it's an astonishing gift to the wealthy and it has perverse effects on the housing market. You are squeezing young people out of home ownership while some people have two, three or four units - the incentives are just wrong.''

All this distortion has resulted in an astonishing fact: 22 per cent of people now own 55 per cent of the homes.

Williams is similarly shocked by the breakdown in the supply of new housing in the big cities, and Sydney, in particular. A complete lack of trust in the planning system in NSW has forged an unholy alliance between environmentalists and wealthy homeowners who gain from higher house prices by restricting the supply of new housing, he says.

Taken together, governments have for decades stimulated demand for housing, while failing to increase supply; a simple equation that has driven home prices up as a multiple of household incomes.

The solution?

Tax breaks that encourage excessive investment in housing,such as negative gearing and capital gains tax exemptions on the family home, need to be curbed or phased out.

Transaction taxes on property, that is stamp duties, which discourage people moving to more suitable accommodation, need to be abolished. Higher density development along transport lines and a focus on developing multi-centric cities should be encouraged.

The cost of infrastructure that will benefit future generations should not be passed on to new home builders through developer levies.

Michael Pascoe on housing affordability

Michael Pascoe has some interesting things to say in Housing affordability: the summit we really need. I'm not sure I agree with everything he says, particularly in regards to negative gearing (disclaimer, I don't have an investment property or any negative gearing). I'm also not sure I support a land tax. Still he has a point.

Edit 12/10: Michael Janda discusses negative gearing and the tax summit in Let's talk about tax.

Edit 19/10: Jessica Irvine in The true cost of NIMBYism discusses modelling by economists from the Reserve Bank that looks at some of the causes of the housing shortage.

Through a combination of empirical research and new economic modelling, the authors Mariano Kulish, Anthony Richards and Christian Gillitzer highlight some factors that contribute to Australians living in more expensive, smaller and lower density housing than we would if the housing market was not constrained by a number of structural factors, including high transport costs, restrictions on density and costs imposed on new housing supply.

Edit 22:10: In Urban Densities: Keep it Real Bob Carr discusses Jessica Irvine's above piece and notes that although it's correct, it fails to address two recent developments that will lower housing density in NSW (with the implication that the increased sprawl will decrease affordability):

One, Barry O’Farrell in April this year gave control over density and zoning decisions to local government. As a result, this will see more high and medium density developments rejected.

and

Two, the Land and Environment Court has overruled attempts by the previous Labor government to have high density development along the North Shore rail link in Ku-ring-gai shire, boosting densities near the railway station and along a major transport artery. This decision means 10,000 more future dwellings will have to be delivered on Sydney’s urban fringe.

He concludes with:

Jessica finishes her piece saying “Interestingly, the … researchers found evidence that Sydney’s population density has increased in recent years.” Yes, it is interesting. It was also the product of 16 years of sound planning policy. Sydney has the highest population density of any Australian capital. Over the past decade only 21 percent of new homes were built in greenfield areas, compared to over 50 percent in other Australian capitals. Melbourne is going for growth on the fringe. Cities either grow up or out. Stop them growing up and they sure as hell will grow out.