News for you. Current prices are not the new normal, they are what existing buyers are willing to purchase them for. As we continue to see economic chaos in Europe, the US and as China blows it's bubble, people will find it increasingly hard to service existing debt, and also to take on new high levels of debt just to put a roof over their heads. Global energy supplies are peaking (particularly oil). Without cheap energy you cannot have growth, period. Housing prices in Australia, like the rest of the world will continue to decline as the Industrial age comes to an end. Who cares about differing points of view in relation to interest rates, time frames etc. We are seeing a new paradigm shift, post petroleum age, welcome to a new age and a new economy. Get used to it.

I suspect you may not have actually read the article before taking up your metaphorical pen, Geoff of Perth. If you had, you would have begun the discussion by first finding fault with - or even wiggle-room in - one or the other of Mr Joye's arguments.

Of course the cost of houses is "what existing buyers are willing to purchase them for". That is a truism. It is one that is often forgotten, incidentally, when folk go waffling on about the "unaffordability" of houses. When houses actually become unaffordable, prices fall. According to The Economist, this hasn't yet happened.

But your riff on what people might be likely to do in the event of "economic chaos in Europe, the US and as China blows it's bubble" is only one possible scenario. The way I see it, rather than find themselves out of the housing market when times become uncertain, I suspect that more than a few will choose to go without another 3D TV, or skip a generation of iPad, or defer the purchase of a new car, rather than give up their home and take their chances in the rental market.

The first signs of serious hardship amongst the populace is far more likely to be when Harvey Norman goes to the wall, rather than a serious dip in property prices.

The Economist, this hasn't yet happened.
Pericles,
This economist is talking nonsense. Housing has been unaffordable for a long time in Australia. The economist just can't tell that there is a difference between working class families who simply can't afford a home & those who drive up prices by speculation purchases. It's the latter who are the cause of the discriminatory buying of property thus effectively denying many others the opportunity of getting a home.
I just hope there are some economists who can see reality.

Your response puzzles me a little, individual.

>>This economist is talking nonsense. Housing has been unaffordable for a long time in Australia.<<

I was referring to "The Economist", which is a weekly publication, 50% owned by the UK's Financial Times. According to the article, they maintain that the property market is overvalued.

This has nothing to do with the concept of "affordability", which is not mentioned in the article. I introduced the idea to support the article's contention that The Economist's assessment is flawed.

Housing only becomes "unaffordable" when it is too expensive for people to buy. The fact that people are still buying houses, by definition, indicates their affordability. If they become unaffordable, no-one will buy, and prices will fall until they are able to be sold.

You have introduced the concept of a segment of the population, "working class families who simply can't afford a home". While there may be a significant number of people who fall into this category, it is a problem of income distribution, and not housing affordability.

You also identify another group, "those who drive up prices by speculation purchases." In order to fund their purchase, these people expect to make the properties available to rent. If they are unable to do this at an affordable (to the tenant) level, a level that relates to the price they paid, rents will come down, and bring with them a lowering of the property price.

I hope that makes it a little clearer.

The state in the biggest danger of collapse is WA; There is no manufacture, the state is far to reliant on mining. Any downturn in China and WA will submerge in it,s own excrement.

Many economists’ reputations have been destroyed on the shoals of house price projections.

House price increases reflect two sorts of forces.

First there is the intrinsic scarcity of some locations. These are scenic areas or close to the fashion shopping etc. With consumers’ rising income levels, competition for them lifts the prices they can command.

Secondly, there is new housing on the urban periphery on land that is plentiful, and therefore less vulnerable to changes in interest rates and so on.

Demographia adjusts house prices for household income levels. On this basis, Australian house prices have increased relative to incomes by between 60 and 100 per cent over recent years. Mr Joye argues that house prices have not kept pace with disposable household income growth.

If houses were an absolutely inelastic good one would expect the price to rise in line with income levels depending on their responsiveness to income changes. However houses are not in fixed supply and like IPODS they need not keep pace with inflation. With open access to the house construction market, new house prices should be dictated by building costs. And existing houses should reflect those costs.

There are three elements in the costs of housing

• preparing a block, which depending on terrain and size is between $40,000 and $80,000. This involves putting in local roads, leveling putting in water, gas, electricity and so on.

• Finished houses with three bedrooms, two bathrooms and a double garage are available from many builders across Australia at $130,000.

• Land itself in its dominant use, farming, is worth around $1,000 per housing block. A regulatory induced shortage of land raises this to between $100,000 and $190,000 on the fringes of major Australian cities.

If the regulatory arrangements change and land becomes priced at its worth, we would see prices fall by $100-190k.

Falls may occur without such changes in regulatory arrangements if incomes fall. If the regulatory vice is maintained on new land availability and incomes rise, notwithstanding the fundamental overpriced nature of Australian housing, prices could rise further.

affordable (to the tenant) level, a level that relates to the price they paid, rents will come down, and bring with them a lowering of the property price.
Pericles,
Sorry,
I misread about the economist. However, where I live the Qld Government sold all Departmental housing & is now renting it back at insane cost. Local people have to leave the area because they can't possibly afford to buy & pay rates. Due to the Govt policy of paying whatever the landlords ask the rates have gone through the roof. The property prices are past insane.

As a supplier to the domestic construction industry, I can say unequivocally that in Brisbane at least housing construction has been effectively at a standstill for at least 12 months.

At the same time, I have noticed a big increase in expensive signage being used to advertise rental houses, even including one quite ordinary 4 bedroom house I saw with photos on the sign, which must have cost a heap. This sort of thing used to be reserved for homes on sale, not merely for rent, so what's driving it?

Given that construction is at a standstill, if there is difficulty renting houses it can only mean that people are being accommodated in other ways, so I suspect the glut of flats and townhouses that Brisbane was experiencing for a while is now being addressed on the demand side. In Brisbane this effect is being exaggerated a very little by the people who have been renting short-term whilst their flood-affected property is made habitable.

I do think we're heading for an extended contraction in the detached-dwelling market that probably won't end for years. An average home is simply too expensive for average young families and so they have to vote with their wallet for cheaper alternatives. This is not optional. If and/or when prices fall to a level at which a storeman married to a checkout operator can afford to buy, as used to be the case, then demand will increase again. I can't see the speculators allowing that.

I can't see the speculators allowing that.
Antseptic,
What I don't understand is why Government doesn't put a lid on this evil practice of speculation ? They do it on everything else ?
Speculation is not investment. Speculation is denying others & stifling society building. We now have the evidence that speculation is merely a short-term profit maker for a few who don't pay adequate tax.

It might be instructive if you were to define "speculator" for us, Antiseptic and/or individual.

>>I can't see the speculators allowing that.<<

>>What I don't understand is why Government doesn't put a lid on this evil practice of speculation ?<<

I think you might mean "investors" and "investing".

Buying land in the hope that you can find gold is speculation.

http://www.nullarbornet.com.au/towns/kalgoorlie.html

"1897 saw the Kalgoorlie Boulder gold fields riding the crest of an investment wave largely financed by British speculators. The stage was set for the creation of a highly capitalised modern gold mining industry. Literally hundreds of companies were floated, fortunes were won and lost..."

Pericles, I call it speculation because it has been driven by an expectation that prices would continue to increase, rather than based on market fundamentals. If ordinary families have been priced out of the market for ordinary houses in ordinary suburbs, then there is something wrong with the fundamentals, since the reason those houses exist is for ordinary families to live in them.

The fact that Governments artifially support house prices by witholding land releases only adds to the case. I'm sure you'll tell me this is all OK, because otherwise there would be no investment, or some such thing, but it's hardly free-market stuff, is it?

Antseptic,
Ditto. There's an explanation for you Pericles.

I understand "affordability" as the ease with which something is bought. Hence silver is more affordable than gold, which is more affordable than platinum. To suggest that "unaffordability" means that nobody can buy something seems ludicrous. "unaffordability" could be defined as being expensive and thus a purchase option. Hence cars, computers and televisions are now more affordable, whereas housing is now more unaffordable.

Interesting definition, Antiseptic.

>>Pericles, I call it speculation because it has been driven by an expectation that prices would continue to increase<<

That doesn't define speculation. It defines investment. And I'll prove it to you, with one simple question.

What would you call the act of putting your money into a venture that was based on the expectation that prices would continue to decrease?

>>If ordinary families have been priced out of the market for ordinary houses in ordinary suburbs, then there is something wrong with the fundamentals<<

Have they been? Is there any factual basis to this assumption?

>>The fact that Governments artifially support house prices by witholding land releases only adds to the case.<<

What has that to do with speculation, or speculators? It is simply a facet of the market conditions that are taken into account when making an investment decision. Would the situation change, in your view, if governments simply released all the land that developers asked for? Would you have any view on, for example, their responsibility to provide infrastructure?

This is the purest nonsense, Fester.

>>I understand "affordability" as the ease with which something is bought. Hence silver is more affordable than gold, which is more affordable than platinum.<<

Silver is no more "affordable" than gold or platinum. You are simply referring to the amount of each commodity that you can buy.

It is equally true that a bigger house costs more than a smaller one, but what does that prove?

>>To suggest that "unaffordability" means that nobody can buy something seems ludicrous.<<

It may seem ludicrous to you. But it is literally true.

>>"unaffordability" could be defined as being expensive and thus a purchase option.<<

No. That's why we have the word "expensive", and the concept "purchase option". The dependency is on the money in your pocket, not the commodity itself.

>>Hence cars, computers and televisions are now more affordable, whereas housing is now more unaffordable.<<

By this logic, a Maybach Landaulet is "more affordable", but a house in Mildura, at a fifth of the price, is "more unaffordable"?

In whose universe?

Pericles,
I define it as unaffordability when a community where many families do not get an opportunity to buy land & build a home because Council sells to the highest bidder rather than to individual families. The other description I'd use is immoral.

By your logic, "affordable" applies to all things, so becomes a meaningless epithet. "more affordable" and "more unaffordable" are simply relative measures of cost.

Applied to precious metals, "more affordable" refers to the relative amount of a precious metal you can buy for your money. Thus,for a given amount of money, you can buy more silver than gold, and more gold than platinum.

Applied to housing, "affordable" refers to the proportion of the population able to buy a house. Thus "more affordable" implies that a higher proportion of the population are potential buyers, and "more unaffordable" implies that a smaller proportion of the population are potential buyers.

In each case you are making a comparison of cost. For the precious metal example, you are comparing the quantities purchased for a given amount of money. So "more", refers to the weight of metal. For housing, you are comparing the proportion of the population able to buy a house at different times. So "more" refers to the proportion of the population.

<By this logic, a Maybach Landaulet is "more affordable", but a house in Mildura, at a fifth of the price, is "more unaffordable"?>

For starters, you are comparing different commodities. What you could observe is that a Maybach Landaulet is more unaffordable than a Hyundai, as fewer people are potential buyers. For a house at Mildura, you might conclude that the house is more unaffordable, because compared with some time in the past a greater proportion of the population were potential buyers.

No violation of a definition at all, and a seemingly trite thing to understand.

Pericles, housing investment has traditionally been based on the prospect of having a long-term interest that will effectively self-fund. The capital gain is expected to be made over a long period and the main reason for buying your "six pack" or duplex is to have the rental income, especially as a retirement income stream. This is the model that ordinary "mum and dad" invetors have followed and it is a pretty good one. Successive Governments have encouraged the practise with tax breaks.

Speculative investment, on the other hand, is based on the idea of making a quick buck. It may be that one has found the "hidden gem" in the local housing stock or, as in this case, that one anticipates a rapid period of generalised price inflation due to regulatory and social factors, as well as the effect of speculative investment itself. "Bubbles" are features of investments that have an excess of speculative cash being pumped at them.

IT is the rapid price inflation driven by cashed-up "investors" that is the problem here, I think. House price to household income ratios have risen dramatically, pricing a great many people who do not already own a property out of any prospect of purchasing one without committing so much of their income that it is unsustainable, even if they can obtain a loan of the requisite size in the first place.

In any case, it seems to me that you're getting your knickers in a twist over semantics. 'twere ever thus...

Fester, the difference between cars and houses is that houses are persistent investments that tend to appreciate in value, whereas most cars are rather less durable and tend to depreciate. Most people buy several cars in their lifetime, as a temporary investment in utility.They don't have speculators driving prices up on the latest model commodore.

Antiseptic

The difference between housing and cars is that the car market is a free market. So if the demand for cars increases, manufacturers can make more cars to satisfy this demand. With housing, the supply side is heavily regulated and restricted, so with increased demand via high immigration, supply shortages are a consequence. With less restriction, there would be much more supply to meet demand.

Individual; I don,t know where you got your opinion of speculating. In my day speculating was something you done while you never had a job, to go on with. You built a spec house, and sold it as a means of creating an income.

Wrong conclusion, Fester.

>>By your logic, "affordable" applies to all things, so becomes a meaningless epithet. "more affordable" and "more unaffordable" are simply relative measures of cost.<<

Why should the fact that a word applies to all things turn it into a "meaningless epithet?"

It means precisely what it says. Only by applying it to housing (or anything else) without regard to the varying abilities of people to pay, does it become meaningless. A property that is affordable to John Symonds might be - indeed, most probably is - unaffordable to me. The property itself is still affordable, by definition, if John buys it.

Changing the concept to "more affordable" and "less affordable" doesn't help, since you are just dealing with different levels of the same commodity. One ounce of gold is by definition more affordable than two, independent of who might be buying. In the same way, a large house in Vaucluse is less affordable than a 3-bedroom brick-veneer on the outskirts of Mt Isa.

>>For starters, you are comparing different commodities.<<

Well, duh. That's because I was responding to your own assertion that "cars, computers and televisions are now more affordable, whereas housing is now more unaffordable.<<

>>Applied to housing, "affordable" refers to the proportion of the population able to buy a house.<<

If you say so. But the absolute same logic applies, in terms of whether the price goes up or down. If more houses become "unaffordable", fewer people will be able to buy. And in order to be sold, prices need to come down. So "unaffordability", even in your tainted definition, will result in falling prices.

So, surely, unaffordability is to be welcomed, is it not?

The reason it doesn't happen is because a sufficiently large proportion of the population is able to buy.

Semantics, antiseptic?

>>In any case, it seems to me that you're getting your knickers in a twist over semantics. 'twere ever thus...<<

Not at all. Just applying straightforward logic, as opposed to blind emotion.

Pericles:"If more houses become "unaffordable", fewer people will be able to buy. And in order to be sold, prices need to come down. So "unaffordability", even in your tainted definition, will result in falling prices."

This is assuming that there is one house per person/family, but as we know there are many speculators (investors for the semantically prissy) who own many homes and who may well be able to maintain the price of housing stock at levels above what your idealistic view would tend to predict. Therefore, the "affordability" of a house may be reduced for an ordinary person wishing to live in it, because it is still "affordable" at the higher price for someone with spare resources .

A confounding factor, it seems to me is the move away from one form of housing to another. Thus houses may be less attractive to the likely tenants due to price, so they choose to live in a flat or townhouse instead. At the moment, I suspect with little hard data that this is a big factor, in Brisbane anyway.

Not at all, Antiseptic.

>>This is assuming that there is one house per person/family<<

The laws of supply and demand are operate perfectly here, as they have identified the disparity in the distribution of commodity and purchaser. When there are fewer houses than people who want to buy, then naturally the price will tend to go up. But that has nothing to do with speculation, and everything to do with the availability of housing stock.

>>...as we know there are many speculators (investors for the semantically prissy) who own many homes and who may well be able to maintain the price of housing stock at levels above what your idealistic view would tend to predict.<<

I don't have an "idealistic view". In fact, yours might more easily fit that description, I suspect. Nor do I make predictions.

But you seem to be suggesting that these "speculators" have deliberately removed properties from the housing stock in order to drive up prices. Are these properties empty, do you think. Or are they available to rent?

I suspect the latter - it would be unusual for a "speculator" to hope that the house price rises faster than the amount to be earned in rent. In which case, that rental price is also subject to the laws of supply and demand. And along with it, the underlying price of the property.

Unless of course you believe that every single one of these "speculators" is in deep collusion, deciding between them to lift the prices. But that's conspiracy theory territory, is it not.

Dear me, Pericles, no need to invoke conspiracy theories, no matter how smelly a red herring they may be. Yes, housing stock is available for rental, at higher rates because the house price is higher. This acts to keep low-income earners out of the mortgage market, because higher rents impinge on their capacity to amass capital. The accommodation is still needed, because the people exist, so it still attracts rental tenants who put up with the quarterly inspections by the letting agent and the barely-supportable cost because they have to, but home ownership becomes less of a reasonable aspiration for ordinary people.

You're right, I do see that in terms that are less than completely dispassionate. I think it is highly desirable for people to own the roof over their head, for all sorts of reasons that are not economically-based in the first instance. I think it is part of the basic functioning of a decent society to make possible home ownership for ordinary people without forcing them into penury to achieve it. The regulatory environment that has grown up to "protect" investment in housing is only making it more difficult to achieve for ordinary people and I regard that as a great shame.

It's also a bugger for my business, so I'm not entirely disinterested.

It's encouraging that you reject the hypothesis, Antiseptic.

>>Dear me, Pericles, no need to invoke conspiracy theories, no matter how smelly a red herring they may be.<<

So you agree with me, that landlords are in competition with each other in the property rental business, and do not collude on pricing. This means that the rental market is also "affordable", in that the vacancy rate in most capital cities is quite low, therefore the occupancy rate quite high, therefore there are people willing and able to pay the asked amount.

It all comes back to the same thing: disposable income. Property prices keep pace with increasing earnings, being quite simply the result of where people allocate their spending priorities.

>>...home ownership becomes less of a reasonable aspiration for ordinary people... I think it is part of the basic functioning of a decent society to make possible home ownership for ordinary people without forcing them into penury to achieve it. <<

According to the ABS, as well as most market observers, "Home ownership rates have been fairly stable at around 70% for many decades".

At the same time, Australians have become more affluent, and less prone to "penury", so it would seem that our society is in fact functioning quite decently, wouldn't you think?

Pericles:"Australians have become more affluent, and less prone to "penury","

Largely due to handouts from government in recent years, which have been indiscriminate and broad-ranging. They do nothing to address the housing opportunity issue.

Pericles, you might be interested in this story from News Limited, which tends to support my view.

http://www.news.com.au/money/property/first-home-buyers-cool-their-heels/story-e6frfmd0-1226095049138

"Research published by RateCity reveals the number of first-home buyers across Australia tumbled nearly 40 per cent in the year to May, down from almost 150,000 to about 90,000."

and

"Meanwhile, the Housing Industry Association released figures with RP Data showing land sales have collapsed.

The number of sales fell 6 per cent in the three months to March, down 43 per cent compared with the same quarter last year.

In contrast to housing, the cost of residential land had increased by 4.4 per cent for capital cities and 3.8 per cent in regional areas in the year to March. The weighted median land value was $198,980.

The HIA said excessive government regulation and costs were among reasons pushing land prices higher.

HIA research director Tim Lawless said the undersupply of land meant no real improvement could be expected in the construction industry."

As I said...

Antiseptic, you might be interested in this story, not from News Limited, which tends to support my view.

http://www.propertyobserver.com.au/news/aussie-house-prices-set-for-big-slide-leading-academic/2011071450806

"Australian house prices have started a substantial decline, a senior academic economist at the Australian School of Business says"

And the reason they suggest is that the amount of "new" money sloshing around the system courtesy of the stimulus package, is dwindling.

"It is likely that this is the beginning of a substantial housing correction, because the stimulus effects are continuing to fade"

It would appear that "affordability" of property is a personal issue, having to do with the amount of disposable income people are prepared to allocate to the task. Given that for every seller there must necessarily be a buyer, the variable is the "spot" price. Which will tend to fall, if the prices are perceived to be too high at any point in time.

“The economic rationale behind long-run house prices not staying above a multiple of four for long periods is that households simply cannot afford this through all phases of the business cycle. Currently in Australia the multiple is over six and therefore they are very likely to fall considerably in value,” Dr Reeves said.

As I said...

Yes, you did, Pericles, but I think we're arguing at cross-purposes. We appear to agree that they're too high - however you see this as perfectly fine and dandy and due for a correction, however I think you're missing the confounding effects that I've mentioned earlier. Young families cannot afford to buy homes in the areas in which young families might be expected to afford to do so, so when a transaction takes place at that "spot" price, it must be with some other type of buyer. By buying in at these inflated prices, such buyers artificially maintain pricing levels and by limiting land releases, Governments assist them to do so.

This will have the effect of making even larger parts of our dormitory suburbs rental dominated, with all of the problems associated with a low attachment to a community and with very little money spent on renovation or improvement.

Something that hasn't even been mentioned yet is the disposable cash that's becoming available to superannuees. I suspect that more than a few have gone out and bought "investment" properties at inflated rates and will continue to do so if other factors don't intervene, , with an eye to the rental income and continued capital growth.

Besides, the deputy governor of the Bank of England agrees with me, according to that article:

"He noted the deputy governor of the Bank of England, Charlie Bean, said at a conference in Australia yesterday that there may be little option for policy makers other than to clamp down on house price growth, even though it would be politically difficult and economically costly."