There are few arguments more heated than those based around the future direction for house prices. i am about to make some statements that many people will find disturbing so please, if you have a weak stomach for discussion on house prices, change channels now…
A hundred billion dollar error
One of the great difficulties that exists with most housing benchmarks is the difficulty in obtaining up-to-date, objective data. Auction clearance rates are just one example. The Eastern States have more auction sales than Western Australia does, so most West Australians are not aware of the gaping differences between proposed auctions and action clearance rates but this is an area that highlights the difficulty of obtaining reliable data in the real estate market.
It’s a bit like the current furore over LIBOR rates, which is likely to be the world’s largest financial fraud yet uncovered. A system based on subjective processes and the honesty of the underlying participants has two primary weakness – the integrity of the underlying processes, and the honesty of the underlying participants. The housing market is a highly localised affair – making any comprehensive data analysis liable to error based on the reliability of any one or more of the multitude of local data collection points.
However, housing wears a golden crown in Australian society. This allows people to blithely make nonsensical statements, and put forward strong opinions that are quite often completely incorrect. Here’s a bit of detail on just one example…
The Australian Bureau of Statistics (“ABS”) has come out with an update from the 2011 Census that confirms there are 7.8 million households in the Lucky Country. The businessspectator.com.au website points to a number of interesting outcomes of this new data. This figure of 7.8m households is 900,000 more than National Housing Supply Council (“NHSC”) were estimating when they suggested that Australia was facing a 228,000 undersupply of housing. Morgan Stanley have calculated that this means there is actually a 341,000 oversupply.
If we put an average house price (and i’m going to make up an average house price, just to be part of the team of mis-estimators that seem to be operating the global finances at the moment) of $400,000 on a home then this translates from a $91,200,000,000 shortfall to a $136,000,000,000 oversupply in the housing market*.
The differences in value between the stated undersupply of housing and the suggested oversupply is quite difficult to wrap one’s head around. Let’s try. $136 billion is the total market capitalisation of Fortescue Metals Group, QBE Insurance Group, Newcrest Mining, CSL Limited, Westfield Group, Rio Tinto Limited and Woodside Petroleum. Can you imagine the furore if a measure of the sharemarket completely failed to take all of these companies into account?
Looked at another way, $136 billion is close to 70% of Australia’s federal debt – and look at the amount of comment that accompanies any change in that particular indicator.
Now that is more than a little difference, and you’d think that this would cause more than a short pause in the overall approach to housing and government support for housing in Australia. But you’d be wrong.
The Australian Financial Review (“AFR” p39 “Housing stimulus call” Wednesday 25th July 2012) reports that…
“A group of 40 building industry leaders has pressed the federal government for measures to stimulate the ailing building industry, citing the findings of a report which pointed to huge flow-on effects for the broader economy.”
When i was reading economics 101 textbooks, this was referred to as an “inefficient allocation of scarce resources”. In other words, why would the government spend taxpayer money on building houses in a market that is oversupplied with housing? If it is to receive those “flow-on effects to the broader economy” then that’s a rather inefficient way of stimulating an economy. It’s like spending money solely for the benefit of a tax deduction – which makes no sense at all. It’s also pretty much a guarantee for reducing house prices into the future in an “all other inputs remaining the same” scenario.
Here in Western Australia, the WA Today website carries an article confirming that the WA government has spent $1,600,000,000 assisting new home buyers in the last 11 years. The article points out that “In that period of time the average house price has risen from $125,000 to $425,000”. There are a host of other reasons for the average house price to rise in that time period but clearly a $1.6 billion boost is at least a contributing factor.
As a financial planner, i find it fascinating that the myths surrounding housing in Australia should have sufficient pull to enable commentators, analysts and government academics at the highest level to completely disregard data when making economic decisions. An error of one hundred and thirty six thousand million dollars in measuring the market most people have the most money in, seems so over-the-top that it beggars belief. Someone, somewhere should be very angry about this issue.
As a taxpayer, perhaps you should too. If you are a parent with children looking to buy into the property market then i expect you’d prefer that your taxes aren’t used to increase the amount of money that your children have to come up with to buy their first home?
These are the kinds of distortions that occur when policy is guided by vested interest and urban mythology instead of hard physical evidence. If that level of misinformation was revealed in any other market, there would be fisticuffs on the footsteps of parliament but in the property market it passes by with barely a whimper.
* For those who don’t like my $400,000 average house price, the end results for a $300,000 house price is a $68.4 billion dollar shortfall becoming a $102.3 billion dollar oversupply. I also understand that i am escalating the issue by assuming every house built is at the average price, whereas the building cost is usually only around half of the total house/land cost. However, once built the total sum is the figure that reflects in the market. Here’s a quick matrix of possible dollars that these little miscalculations result in at different average house prices. i’m going to assume the ~$400,000 average is roughly correct, owing to the estimations of the total housing market size in Australia usually being quoted as around $3 trillion.
|Putting a bit of scale into the housing equation|
|Average house price||$200,000||$250,000||$300,000||$350,000||$400,000|
|Total No of households||7,800,000||1,560||1,950||2,340||2,730||3,120|
There are clearly many more issues at play in house prices than a bunch of figures and estimates. Demographics (which is the issue here) is just one, in amongst credit supply, labour costs, materials cost, availability of land, dwelling size and format preferences and investment yield. There is also the issue of excess housing supply in some areas and undersupply in other localities – many financial commentators see the lack of labour mobility and lack of regional infrastructure as being major impediments to Australia’s productivity, so directing energy and capital towards these outcomes may be far more efficient than simply promoting the building of more homes carte blanche.
My little rant here isn’t about the full complexity of the housing market situation – it’s the total ignorance with which this particular market is handled that galls me the most. Obviously, nobody is infallible, and mistakes can always be made – but one of this magnitude and importance to Australia’s government and industry planning should not be allowed to pass unnoticed.
- The “London interbank offered rate (“Libor”) scandal – Wikipedia’s overview
- Housing – builders call for greater government support of the industry – Australian Financial Review
- Housing undersupply to oversupply in one fell swoop – BRW story