wonderful stuff, full of common sense.
"The emperor has no clothes."
Indeed.

Agreed! It's nice to see common sense in an article about the housing market and someone thinking about sustainability, productivity and by inference making a contribution to society rather than just taking what you can. The housing market is currently sustained by greed and fear, two of the worst bases for decision making!

Such a long article, yet no mention of why things are as they are. No mention of the severely restrictive, opaque, time consuming and expensive development approval process. No mention of the massively increased rate of immigration and introduction of foreign buyers into the market. In short, housing prices are a consequence of government restricting supply and increasing demand, not wanton speculation.

How much more supply would there be were development restrictions eased? How many inner city blocks would be subdivided were it not for the severe restrictions on landowners? The restrictions seem designed to deny them a commercial opportunity which is transferred to developers via secretive approval processes.

The only thing the author got right was the realisation that high house price inflation is economically damaging.

Great article Kris. The obsession with real estate has put Australia on a path to ruin.

The other thing that is happening Fester is an increase in household size. Most of the two-bedroom units around me used to have singles in them. Now there is someone else in the unit in that other bedroom. That makes it possible for rents to rise and justify higher prices because the occupants can now afford to pay twice the rent.

The biggest problems will be for people with young families where increasing household size is caused by economically unproductive units called children coming on the scene. No way to split the rent or mortgage with them!

And with no sign that the housing shortage is going to stop, prices probably have a way to go yet. But then, I've probably forecast 6 of the last two downturns in housing, so maybe my bullishness is a sign that the market is about to tank.

Interesting article. I will take up the challenge of answering your questions.

Firstly ‘the economy’ is just an abstract collective expression meaning all the exchanges between people. When people are productive, they do so not to ‘add something to the economy’, but because they hope to sell what they have produced, and then use the proceeds to buy goods or services to satisfy a particular want, or to remove a particular dissatisfaction. The point is, the motivation is subjective, even though the thing they produce may be objective.

In the early history of economic thought, it was thought that only primary production adds value to the economy. Manufacturing, it was thought, is not really productive, because it merely shuffles things around, it doesn’t produce anything. But as manufacturing got bigger than agriculture, eventually people came to understand that, no, manufacturing must actually add value to the economy – (which it does, because the stuff manufactured may be used to satisfy human wants). But still people denied that tertiary activity – services – is “really” productive, that it adds value to the economy. But when whole countries came to make high standards of living mainly from services, people realised that tertiary industry also is “really” productive and adds value to the economy. The value in issue is subjective; and you can’t pronounce finally on whether there has been an increase in value by considering only objective goods, because it is not the objective goods themselves that are decisive; it is when objective goods *are brought into connection with satisfying human wants* that value is created.

When someone makes a profit, the reason is, because the price of the completed product is greater than the price of the factors of production. The profit results from the fact that the entrepreneur has adjusted the factors of production so that they satisfy the more urgent wants of the consumers than they would have done in their original uncombined state, which is why the consumers are prepared to pay more for the finished product than they are for the factors of production.
(cont.)