< Improving housing affordability ultimately depends on building more and cheaper houses, not on suppressing or diverting the demand for housing. >

What an extraordinarily WRONG conclusion!

Improving housing affordability depends primarily on demand and supply. So if the demand is lowered while the supply is kept well up, housing prices will fall.

By far the easiest thing to do is to significantly lower the demand, by lowering our enormously high immigration rate.

It would be enormously difficult to significantly boost the rate of house-building to the point where it would significantly lower costs, for as long as the current demand continues. Just think of all the new suburbs, loss of bushland, loss of agricultural land, and all the associated roads and other infrastructure that would be needed, all of which the existing taxpayers pays through the nose for.

Again, BY FAR the easiest thing to do to lower house prices would be to significantly reduce the huge ongoing demand for new houses.

This would also reduce the demand for all the associated infrastructure, and services, and resource consumption, and impact on the environment…. and it would lower the rate of overburdening on existing infrastructure and services.

Heavens, it might actually mean that we could start to improve the quality of I & S, rather than be eternally struggling to maintain the same quality for ever-more people.

When you look at it in a somewhat broader manner than what Stephen Kirtchner has done, the answer is crystal clear – we need to greatly reduce population growth. and the biggest and easiest factor therein is a large reduction in immigration!

Australia has been living in an artificial economy for too long: too much government meddling, too much corporate welfare (listening to developers barking for higher immigration to keep them rich, tax breaks, negative gearing, foolishly low interest rates); and, of course, the absurd idea of just GIVING taxpayers’ money to first home buyers.

We are supposed to be a market economy and a democracy. We are neither, including under the new Abbott government, which is supposed to stand for such things. Both Coalition and Labor are high immigration junkies cheered on by the builders. All taxpayer aid to business is wrong, and fewer people coming here is going to bring prices down. As it is, housing is being built for FOREIGNERS to let out; they pay more, and the local population suffers. Property salespeople are so excited about the big money coming in from the Chinese that they don’t even bother to hide their big, greedy grins any longer.

We most certainly don’t need to boost supply to further help the most mendicant industry in Australia. We do not need to give tax breaks on mortgages. We do not need to “reward” people for saving. We do not, and should not, need to allow foreigners to own real estate in our country.

What we should be doing is reducing immigration to only those we need so that demand is reduced (we have no obligation to keep builders in business for ever), then let the market look after the cost of houses. And, remember, there is a right for people to have shelter here, but there is no right for them to necessarily own that shelter.

A good article that identifies a significant problem - the increase in costs caused by taxes, charges and regulations.

Reducing immigration and banning foreigners from owning property are not just bad ideas, they will do nothing to address the fundamental problem of unnecessarily high costs.

Nonsense, Rhian

This excerpt from an IMF working paper shows historical house prices in Europe since 1985

http://books.google.com.au/books?id=8uzLSwrQMMwC&pg=PA12&lpg=PA12&dq=house+prices+Europe+historical&source=bl&ots=NOXcombPRy&sig=U7dcur1GVrh0L2O5LYRaezNteTA&hl=en&sa=X&ei=3h7iUvzJIsnFkwXm0YGgDQ&redir_esc=y#v=onepage&q=house%20prices%20Europe%20historical&f=false

If you look at the table and graphs, you will see that prices have not gone up much in most countries and have actually fallen in some in real terms. The countries where they have gone up the most tend to be the ones with higher than average population growth. To compare with Australia, see this two part series by Philip Soos

http://www.propertyobserver.com.au/trends/a-history-of-australian-property-values-in-charts-philip-soos/2013051361302

The land component has gone from about 30% of the price of an average house in the early 1970s to 70%, even though the average block has been getting smaller.

Do you seriously think that house prices would be so high if we had a stable population?

As well as boosting demand, of course, through mass migration, our politicians have been restricting supply by concentrating nearly all the development in a few big cities and holding back on land releases. The taxes and charges you complain about are to pay for the costs of extending infrastructure and public services to more and more people. Supplying a new suburb with roads, sewers, water mains, electric power lines, schools, hospitals, libraries, etc. doesn't come free. An average new migrant family needs all of this right away, but will take years to contribute enough to pay for their share.

http://ideas.repec.org/p/pra/mprapa/6869.html

If the home buyers weren't paying for a lot of it, we would all be facing much higher taxes and charges, even though most of us will see no significant economic benefits from mass migration -- the Productivity Commission's opinion, not mine.

Divergence
The book in your first link finds positive but weak and inconsistent correlation between population growth and house price growth for part of the period studied. It says “for the whole period, total population growth appears to exhibit a limited correlation with house price movements”. Hardly a ringing endorsement of the theory that cutting migration will make housing affordable. It also found that in the countries studied, housing costs had gone down. So if Stephen’s article is right, and tax and regulatory costs in Australia have risen, then the study is not especially relevant.

Your second link ascribes the increase in prices to “debt-financed speculation and the relative non-taxation of land rent”, and describes the land prince increase as a “bubble” that is likely to burst. No mention of population as a significant factor.

Your third link does conclude that migrants are a net burden on the community because of their demand for both private and public infrastructure. Many other studies do not. However, it explicitly excludes housing from this mix, because it admits this is paid for by the migrants themselves. So it has nothing to contribute to the matter under discussion.

You ask, “Do you seriously think that house prices would be so high if we had a stable population?”. Yes, I do. Australia enjoyed decades of population growth well above the average for the industrialised world, and also relatively affordable housing. As you rightly say, prices are a function of both supply and demand. This article, and a lot of other evidence, points to supply as the key driver of recent price rises in Australia.

I’m not sure politicians have been encouraging migrants to settle in cities; I think policies aim to do the opposite, e.g.

http://www.immi.gov.au/Visas/Pages/119-857.aspx

I agree that constrained land releases are part of the problem, though.

Ludwig,
Cheers for that, couldn't agree more.

Price is the driver of all economies, not supply. To deny this fact is Keynesian claptrap.

The Centre for Independent Studies is privately financed by ....wait for it....the business class. The business class are only interested in growth as this feeds their bottom lime. It is a matter of profound indifference to the business class what social problems high immigration causes to the society they live in. I would say that Steven is a spokesman for Hervey Norman, the Real Estate Institute, and every used car salesmen in every city in Australia.

I find it amusing that Steven Kirchner whines about high taxes on new developments when it is primarily the taxpayers who pay for the new services to homes for tens of thousands of unemployable people. One reason why so many Australians are moving away from inner city areas is to distance themselves from our new arrivals who behaviour leaves a lot to be desired. How many more car washers from third world countries can Australia take? And how many more prisons do we need to build before the penny drops that some ethnicities make much better citizens than others?

I think that the Federal government is terrified of putting the stops on immigration because manufacturing houses is about the only thing left that Australians manufacture. We have become a cargo cult economy where we think that endlessly building houses, town houses, and huge block of flats will somehow cause the Gods of prosperity to smile on us

The over reaching problem is debt. We sold off 4 Govt State banks and the Commonwealth. Now all our new money is created as debt by private banks both here and overseas. When you add inflation of 3% to growth of 3% the debt can never be repaid unless we sell off lots of resources for a song. Remember when we used to afford expressways toll free and education free of debt? There was a Govt institution called the Commonwealth bank that kept our taxes a lot lower.

Govts have to tax us to pay off an ever increasing debt. Our Govts are now controlled by the international banking system. He who pays the piper calls the tune. We have been Globalised and shafted.

Very good comments, LEGO.

An oversupply of housing can not bring the price of housing down, without causing a huge flood of bankruptcies.

I live 22 kilometers from the southern Brisbane suburbs, & probably 32 from industrial areas of high employment. It was always a horse area, with mostly above 5 acre blocks, but recently the council has allowed one & a quarter acre blocks, & a lot of them.

While attractive to people from the areas of 450 Sq. Meter lot sizes, these are a bad size for owners. Too small to support more than a cat, they require a huge effort to maintain nicely, & even more water to have a garden. I guess they do at least have enough space for off street parking.

We see hundreds run out of the city to the peaceful/beautiful country, only to find the workload, & the time commuting just too onerous. In an often quite short time, they want out, but find themselves trapped. They have very little chance of getting back what they have spent, & often, not what they owe on the mortgage.

In a district of 800 houses, many on those larger acreages & not on the market, we have over a quarter, for sale. This does not bring the price down, as few owners can afford to meet the market, they are stuck.

Not that far away we have Yarrabilba, a huge development to total 50,000 population, in the middle of nowhere on those 450 sq. meter blocks. Buyers are paying more for these postage stamp lots than our buyers were paying for their 5000 sq. meter lots around here were just 5 years ago. This proves how bad the shortage of housing land really is.

Already dozens of homes have been jammed in there. I wonder when the for sale signs will start to appear?

I just want to add another dimension that has yet not been raised in relation to Chinese investment. The Chinese have a tradition of what has been termed 'petty capitalism' which is a phrase coined by a book I read whose name escapes me. Basically the Chinese are good at exploiting business opportunities engaging in activities designed to get around legal restrictions and which are not counted in measures of general economic output.

In relation to the domestic residential property market what is happening is some Chinese who move to Australia and obtain either PR or Australian citizenship are utilising this status to operate a little business whereby they assist Chinese nationals in the mainland to transfer their wealth out of the country through the purchase of Australian residential property(s). Often this person may be a relative (often a younger relative) but they may also be a business associate or a trusted friend. The business operates on a commission basis whereby the person with Aust PR or citizenship buys properties on behalf of someone else.

These kinds of arrangements are very informal and therefore hard to prove but I have seen them operate first hand. There is a phrase in Chinese - 'bu yi zhi cai' that translates to ill-gotten gains and means that some people in China have made money through illegitimate means and they then attempt to transfer those gains into tangible assets and it is really very easy these days for them to buy property in Australia. They don't even have to leave China.

What Dr Kirchner and government regulators are displaying is an ignorance of Chinese business practices and how this is impacting on the Australian property prices. One consequence is that Australian citizens (esp first home buyers) are being priced out of the market by foreign nationals.

To those who oppose negative gearing, and would like to see it phased out, I say to you all, be careful what you wish for, especially if you are renting as apart from tax offsets, there are very few carrots to lure investors these days, especially given the hands tied approach landlords are often faced with.

One problem with housing affordability is that when a scheme is introduced, take first home buyers grant for an example, up goes the price of housing.

I am afraid the only answer to housing affordabillity for this just outside the market, is to go without other things, something most won't do.

Rhian,

In a number of European countries with much lower population growth than ours, house prices have grown much more slowly since 1985 than ours have, or not at all. The Soos articles were to show just how much house prices have gone up here. Of course there are other factors involved, and you can always just point to them if you don't want to be accused of racism or hating people, but if you try to claim that demand is irrelevant to prices, I don't think that many people will believe you.

The article by the economist Ralph Musgrave did say that the migrants pay for their own houses. True enough, but they don't pay up front for all the infrastructure that goes with them. Although here are arguments about the infrastructure cost per additional person, Jane O'Sullivan has estimated $200,000, of which she has said $100,000 to $120,000 is government spending on infrastructure. (Nevertheless, if your electricity, say, is supplied by the private sector, the company will still need to raise charges to pay for more power plants and expansion of the network.) Ralph Musgrave estimated 30,000 pounds per person as of 2008 for non-housing infrastructure in the UK. If the migrants and other new residents in a community aren't paying up front, who is? As Musgrave writes, "Immigrants do eventually pay this back – after about a generation. But by that time interest on the debt (which is not paid back) resembles the debt itself."

In the past, when Australia was at or below its optimum population, cities were much smaller. They had a lot of cheap land around them within easy commuting distance. As cities have grown, we are running into diseconomies of scale, so that further growth is really cutting into people's quality of life in a way that it didn't in the past. Likewise, it is good that your bones were growing when you were 8 years old, but if they are still growing in the same way when you are 40, then you have a very serious problem.

(Cont'd)

From Musgrave paper (pp. 12-13):

"Having said that immigrants essentially fund their own houses, this is not to say that the extra housing is totally cost free for the host community. Immigrants have certainly helped raise house prices in the UK to the point where thousands [of] first time buyers cannot afford to buy. The additional demand for mortgages also raises interest rates, which is not cost free (repossessions, etc.). Moreover, people often go to extreme lengths to prevent houses being built on countryside they overlook or on playing fields their children use. These people clearly regard additional housing and other development associated with an expanding population as a severe cost."

Not just residential, Farquar. I have a friend in Goulbourn NSW who is a real estate agent. She told me that "busloads" of Chinese are turning up in her town and buying up every farm they can, apparently with no intention of farming the land. The places are either left empty or they are rented out for low rent with the tenants expected to keep the farm in god condition.

Lego,

I spent some time in China and I even worked at a immigration firm for a while helping applicants with their English and I saw first hand the enormous amount of interest for immigration places. I also saw how corrupt the industry was and I know the Chinese are very industrious and good at setting up businesses designed to get around existing laws.

When Bob Hawke made that knee-jerk reaction to allow Chinese students studying in Australia to stay after the crack down in Tiananmen in 1989 some of those students went on to set up shame marriage businesses, in effect they were utilizing their PR status to make money.

A similar kind of thing is happening now with land acquisition in Australia. Chinese who have obtained PR status or citizenship are exploiting that status to make money by allowing Chinese foreign nationals to purchase land indirectly, and since China has such a large population they quickly overwhelm the market.

Dr Kirchner is so far behind the eight ball on this issue, he has no idea how Chinese operate. He still thinks the Australian property market is a regulated industry but it is clear to me that the Chinese have been able to get around any regulations such that now the industry is effectively operating in an unregulated fashion.

I would be looking closely at how Canada & the US regulate Chinese investment because they would be experiencing similar issues. This is an issue that should have attracted more attention during the election.

especially if you are renting as apart from tax offsets
rehctub,
Wouldn't tax offsets go out the window with negative gearing ?

Divergence
Your link to a google book did not show all pages. If you look at the full article, you will see it concludes:
"Demographic factors are perversely signed or statistically insignificant" -

http://www.imf.org/external/pubs/ft/wp/2008/wp08211.pdf

ClaireC,

This is from the conclusion of your article:

"House prices are, as expected, inversely related to user costs and directly linked to output. Demographic factors were not found to be robustly related to house price developments over the 20-year sample period, although since the beginning of this decade the correlation seems to have strengthened."

As I wrote in my previous post, there are other factors involved in house prices apart from population. Since none of us is immortal, though, with a stable population, houses would come onto the market at the same rate as people appear who want to buy or rent them, assuming that some areas aren't growing at the expense of others. More people wanting to buy into a limited supply of housing will raise prices. It is much like when Cyclone Larry wiped out most of the Queensland banana crop and bananas went to $13 a kilo. User costs will also go up with a growing population because of the need to supply infrastructure to new residents in advance, as explained by Ralph Musgrave. This isn't rocket science.