Saturday, April 14, 2007

Bloated House Prices

Australians Have Less to Spend due to Bloated House Prices

According to the Sydney Morning Herald a survey in the Fujitsu/JP Morgan Mortgage Industry Report indicated that one-quarter of households has had to reduce spending to pay home mortgages in the bloated property markets of Australia.

The Demographia International Housing Affordability Survey reported earlier this year that housing prices relative to incomes (the Median Multiple) had escalated to more than double the historic norm in all major Australian markets.

The net effect is house price escalation so severe that in Perth, it now takes 11 years of additional pre-tax household income to pay for the median priced house than would have been the case if housing had remained as affordable relative to incomes as 10 years ago. In Sydney, the additional income required is more than eight years, in Adelaide seven years and more than six years in Adelaide and Melbourne.

It should come as no surprise that consumer spending is taking a hit. A household with six to 11 years less income will buy fewer cars, fewer television sets, and less of just about everything. Households simply are not able to spend money that they do not have (or cannot borrow). Taking years of income away to pay for overheated house prices can only hurt the ability can only hobble the economy in the long run, leading to less job creation and less home ownership. Given the wealth creating effects of home ownership, inordinately high housing prices are likely to expand poverty, not to mention the escalating rental prices that must inevitably follow out-of-control land prices.

The housing bubble that has developed in Australia is not to be found everywhere. In a number of US and Canadian markets housing remains affordable, with Median Multiples near or below the historic norm of 3.0. Today, housing prices relative to incomes are little different than a decade ago in these markets. This includes markets such as Atlanta, Dallas-Fort Worth, Houston and Austin, which have stronger demand than any major Australian market, demonstrating that the universally available low interest rates and exotic mortgage products are not the explanation.

The difference, of course, is land use policies. Virtually all of the overheated Australian markets (as well as the overheated markets in other surveyed nations) have development restrictions, in law or practice, which severely ration the amount of land available for new housing. The law of supply and demand makes it clear that rationing supply drives up the price of any desired good or service. And, state land rationing in Australia has driven the price of land up with a vengeance --- at a rate that exceeds any element of the Consumer Price Index. Not even Typhoon Larry could drive the price of fruit up as much as urban consolidation policies have driven up the price of land. Few if any government policies in history have inflicted such horrendous losses on future generations in so short a period of time.

The loss of housing affordability in is about much more than academic discussions of home ownership rates. Rather, it is about the future of the economy and the quality of life in Australia.

Wendell Cox. March 27, 2007

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