A SENIOR Treasury official has sounded the alarm over Australia's property market. He has warned that the prospect of a sudden and dramatic drop in prices is "the elephant in the room" and should not be ignored by the federal government. [Source: Treasury warning on home price bubble by Sean Parnell, FOI editor, The Australian, 20th November 2010] While the government and Reserve Bank insist Australia does not have a housing bubble - as some economists and the International Monetary Fund suggest - it remains such a worrying concept that Treasury has privately sought reassurance from its analysts that prices are not artificially high and that Australia does not face the kind of house price collapse that has hit Britain and the US. Documents obtained by The Weekend Australian under Freedom of Information laws show the Treasury officials preparing the so-called Red Book of briefs for the incoming government were as divided as private sector economists about the strength of the property market. Phil Garton, the manager of Treasury's Macro Financial Linkages Unit, sent colleagues a draft paper on the rise in household debt, prospects for further growth in the debt-to-income ratio and the potential implications of slower household debt growth. His email prompted an exchange with Steve Morling, currently the general manager of the Domestic Economy Division, who argued the paper should "make a bit more about the risks". "The elephant in the room is house prices or more specifically the risk of a precipitous drop in them, perhaps from an external shock or perhaps from their own internal dynamics when affordability constraints or capacity debt levels see prices and expectations of house prices start to move in the opposite direction," Mr Morling wrote on June 15. "(I) know there are very supportive fundamentals, but prices rose by 50-60 per cent in three to four years in the early part of this decade, with largely unchanged fundamentals, so they can have a life of their own. "And given what's happened elsewhere I'm far less sanguine about this - and the interplay with debt - than in the past." Mr Garton agreed that there would be risks if the fundamentals of low interest rates, unemployment, and financial deregulation "reversed significantly". But he maintained the price growth in the early 2000s was based on a "lagged response" to improvements in the fundamentals, and questioned how Australia could have maintained a bubble for more than six years.
housing price spiral
This article is based on highlights from a lecture by George Soros, at the London School of Economics to launch his new book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means (PublicAffairs, May 2008). Early in this lecture, Soros situated the beginning of current problems down to deregulation as practised by Thatcher and Reagan from 1980. He gave four reasons why he believed the US economy (and the world economy as it is impacted) will go into recession: 1. The decline in housing prices is still accelerating and is going to overshoot on the downside the same way as it overshot on the upside. We are not yet half way in the decline in housing prices. We will have at least 12 more months of increasing foreclosures and so on. 2. The consumers who have been relying on the double digit rise in housing prices for their ‘piggy-bank’ have withdrawn equity from their mortgages at a rate in excess of the current account deficit. This peaked at around between 8-900 billion USD in 2006. Now the outlook has changed and they are facing declining housing prices where at least 15% of regular mortgage-holders will be 'underwater' in their mortgages. Savings will therefore have to increase. The American consumer will cease to be the motor of the world economy which they were for the last 25 years. 3. The banking system is severely impacted, despite its 'quite impressive ability to raise capital'. The willingness of banks to lend to finance business is also going to impact capital and spending etc. 4. The situation now carries simultaneously the threat of inflation and recession. This is partly because the dollar has ceased to be the unquestioned accepted reserve currency, which up until recently allowed the American consumer to become the economic motor of the world and permitted the US to consume over 6% more than it produced. When asked if 'we' [the world] are heading for recession, Soros said, “Yes”. Asked about Europe, it was obvious that Soros saw the European economy as different from that of the US. He anticipated, for instance, problems for Spain, but not for Germany, because Spain has had a housing bubble but Germany has not. He expressed the opinion that these kinds of different outcomes will give rise to 'serious tensions' in the EU, because up until now the EU has been characterised by convergence rather than divergence'. Now there will be divergence. Also, the ECB (European Central Bank) has an 'asymmetric directive'. Its job is 'to prevent inflation, not to maintain growth'. As a result it is keeping interest rates steady rather than reducing them. That and, most importantly, the exchange rate, because lowering interest rates quite radically has led to a decline in the value of the dollar and that 'decline in the dollar has effectively exported the recession to Europe'. But 'the UK and the US will probably be more affected'. On the possibility that hope of continued growth might lie in the developing world "decoupling" from developed world: Might it be true to say that if the US consumer stops dragging the world along, the world will still be dragged along by China and India whose growth will mitigate the recession?. “There is a very substantial difference between the developing and the developed world which has positive and negative aspects. It may lead to avoiding a world wide recession but on the other hand it could be responsible for inflationary pressures which can make problems bigger for the developing world. There is a difference but there is no decoupling. We are Siamese twins tied together." Soros said that there is a "Need to improve the quality of regulation. It is not enough to regulate the money supply; you also have to regulate credit. This is because credit conditions do not always correspond to the money supply. Markets tend towards extremes of optimism and panic. Therefore you have to have minimum reserve requirements and optimum reserve requirements. They need to be made variable. That is the way to prevent asset bubbles from developing. Greenspan is right to say it is difficult to identify a bubble and to know when to interfere. It may be difficult but you cannot escape the duty. Keeping the economy on an even keel is an art, not a science. Regulators have to accept this additional duty … It is not enough to bail the system out when it collapses." Markets can behave faster and regulators are slower and more bureaucratic; you need both. Soros stated that he thinks that "market fundamentalism is a very convenient belief for the 'haves' because it justifies their having it. In other words, they prosper (that includes me, [he added] by the way, among the haves but I don't share this view on market fundamentalism). It's a wonderful excuse for pursuing your self-interest to the detriment of the common interest because there is a theory which says says that the common interest is best served by everyone pursuing their own interests. So its a very convenient belief and that is why it has such great currency and that's why you find that it is generally people with lots of money who are supporting and propagating this belief. There is a connection. The impact of the price of oil at $130 on US inflation... "I have given this a lot of thought because it is really quite disturbing, the price of oil. And I would say that there are four factors involved. One, the increasing difficulty and cost of finding and extracting oil. People talk about "Peak Oil, but that is a misnomer for increasingly expensive oil. So that is number one. "Secondly because of the decline of the dollar you now have a backward- sloping supply curve, that is to say, the more the price goes up the less incentive the oil-rich countries have to convert their oil reserves underground, which appreciate in value, into dollar reserves above ground, which depreciate in value so you have a backwards sloping supply curve. There are also other factors involved, namely that many of the oil reserve countries are in the hands of desperates who mismanage the economy ... Iran or Venezuela and so on... You know it's easy to be a Bolivarian revolutionary when you have oil at over $100. That's the second factor. "Thirdly the main areas of demand growth are in China and in the oil producing regions of the Gulf and Russia. And in those countries the price of oil is subsidised and therefore the rising prices don't have an effect on demand. In the US, yes. But in those countries and that's where the real growth is... the price does not influence demand. "And fourthly there is a trend following speculation and it is now having a major effect on the price of oil and you see that in the rise of far out delivery ... the real big move has not been in the cash price of oil but in the futures price several years out. And that does affect the cash price as well ... so there is now a bubble aspect also. So those four factors are responsible for the rise in oil. Again there is this sort of Greek tragedy aspect of it. Yes, if you have a serious recession in the developed world, it means that demand does go down and the the price will be affected, but first you have to have the recession for that to happen, and the rise in the price of oil actually hastens the outset of the recession and that is part of my argument why this crisis is different from the previous ones." You can download the entire lecture from the London School of Economics site at www.lse.ac.uk/resources/podcasts/publicLecturesAndEvents.htm.
In yet another bizarre twist in the property development lobby's constant pushing for high immigration, one of its strongest advocates over the past decade, Ron Silberberg, Managing Director of the Housing Industry Association (HIA) appears to have come out blaming immigration for the housing crisis which his own organisation's advocacy for higher immigration helped to create. "There has been an uncontrolled expansion of the immigration program," Dr Silberberg told a Senate committee in Canberra, according to an AAP sourced article, "Immigration blamed for housing crisis," in The Sydney Morning Herald, Tuesday April 1, 07:01PM. Analysts of Australia's rampant population-growth-lobbying movement were today scratching their heads and sending round emails asking if this was an April Fools joke. Mr Ilan Goldman, housing analyst, wrote to housing sociologist, Sheila Newman, late Tuesday night: "Is it an April Fools joke, or is it for real? If it is real, I need you to analyse it " Goldman felt that the article was probably real news, since the same news had appeared at the following addresses: http://news.smh.com.au/immigration-blamed-for-housing-crisis/20080401-22... at Yahoo News: http://au.news.yahoo.com/060622/2/zhm9.html, and at NineMSN; http://news.ninemsn.com.au/article.aspx?id=59380 The Sydney Morning Herald went on to report that "Housing Industry Association (HIA) managing director Ron Silberberg blamed the shortage of private rental accommodation on net immigration he estimated at 250,000 people a year." Silberberg had also described Australia's immigration program expansion as "uncontrolled", and as having increased at a massive pace, blaming pressure on private rental housing for these huge, uncontrolled increases. Most surprisingly, Silberberg admitted that the federal government could use the immigration program as a way to diminish the housing crisis problem. He said that immigration was substantially impacting on the housing crisis. "It's a very significant influence on the demand for housing and accommodation." Silberberg was critical of the Immigration Department, which he thought did not have a "proper understanding of labour market forecasting." He complained of a shortage of building trade workers in Australia, claiming that only around 800 immigrants in a rough total of 250,000 per annum, were suitably skilled in housing construction. There was apparently some discussion about 'releasing' more land (a term which means clearing bushland or rezoning agricultural land, entailing heavy carbon emissions). The Planning Institute of Australia advanced the opinion that releasing more land needed to be balanced by a construction sector able to meet the demand. In a more familiar pitch, Planning Institute National President, Neil Savery said, "Addressing undersupply is a critical issue if we are to ensure that we are able to adequately and affordably house our communities as Australia continues to develop." Population growth lobby analysts see this kind of remark as an indication that the property lobby is about to ask for an increase in immigration numbers of building tradesmen. They say that the term 'undersupply' (referring to land) could just as well be replaced with the term 'oversupply' (referring to population). This is a property developer construct which glosses over the real problem, which is that Australia has reached its comfortable limits to growth. "We're not saying that addressing supply is the panacea to the problem and certainly that the equation in relation to supply isn't simply: `Let's release as much land as we can possibly can on the urban fringe of the city'," Mr Savery was reported to have said. "It is unlikely that Dr Silberberg or Mr Savery are on the road to Damascus. Leopards rarely change their spots," concluded housing sociologist, Sheila Newman, after a quick review of these remarks.
It's uncanny. Two cities on two continents, but Growthists in Vancouver and Melbourne seem to be reading from the same playbook. Lance Berelowitz, an urban planner who chaired Vancouver's planning commission, praised the Mayor's so-called "Eco-Density" initiative as the answer to the city's ever-increasing house prices. Given that between 800,000 to one million new residents are expected to come to Greater Vancouver in the next 25 years, it can be assumed that developmental pressures on the city's limited land base will steeply drive up land costs. It follows then, that "housing prices in Vancouver will keep going up, unless we substantially increase the housing supply to match the aging demand." For Berelowitz it is unconscionable that Vancouver, currently representing about 27% of the metro area's 2.2 million citizens, continues to throw up a kind of cordon sanitaire around its perimeter and not "shoulder its load" by accepting its share of growth. To do this he offers several European solutions to shove more innovative housing units into the area. But what is interesting about his plan is that he failed to mention Vancouver's housing surplus. Between 1991 and 2006 Vancouver grew by 126,000 people who required 15,000 new dwellings to house them. But developers built 69,000 units. According to activist Randy Chatterton, judging from BC Hydro statistics, 18,000 units are unoccupied, andMLS listings are up 26% while sales are down 10%. Now there are seven unoccupied apartments for every homeless person in Vancouver. "Accepting our share of growth" is a standard line of urban planners and politicians. What they never reveal is their role in not only accommodating growth but promoting it. Developers build houses on spec. They are built on the expectation that compliant governments will continue to provide international clientele (migrants) and the monetary and tax policy necessary to lubricate investment in real estate. It is a case study of Say's Law---supply creates its own demand. Berelowitz never once thought to question the necessity for Vancouver to grow by 45% in the next quarter century. He never thought to consult Dr. Michael Healey's landmark 1997 study of the Fraser Basin ecosystem that recommended a halt to immigration and a Population Plan defend the region and others like it from runaway population growth. That's because the ideology of urban planning is not growth-control but "growth management". Former real estate developer and media mouthpiece Bob Ransford recently "despaired" of those in Vancouver with, are you ready for this old chestnut, a "drawbridge mentality", that is, "who think we can resist the global flow of population and somehow sustain our lifestyle." One wonders what kind of lifestyle Ransford imagines for the Vancouverites forced to live like sardines in a sardine can just so more migrants can move in and buy the bachelor suite closets that his developer friends would obligingly sell them. It seems logical that the law of physics would place a limit on the process of densification that Berelowitz, Ransford and the Mayor would set in motion, but so far they have shown no apprehension of it. And the law of "livability" would surely fall well short of that physical limit. One wonders how Ransford would behave if he were the last of ten passengers on an elevator that safety regulations set at ten. Would he hold open the door for more people in the lobby who wanted in because he feared being accused of "Nimbyism" or having a "drawbridge mentality"?. Would he suffer an urban planner who insisted that the elevator could hold 12 or 15 people, or a real estate developer who sold tickets to more people than could safely ride on the contraption? Would he listen to a human rights advocate who said that every person of colour from another country had a right to jam on board regardless of the elevator's carrying capacity because it was a matter of social justice? If it was a matter of profit, one suspects he would. Growthists can't grasp the concept that existing passengers, existing residents, be they of a city, or a nation, have a moral right to set limits. Ransford ices his argument with more tired clichés. Cliché Number One: "Our kids will not be able to afford to live in a city where no new housing is built." Trouble is "our kids" aren't buying that new housing. In Greater Vancouver 85% of new housing is occupied by immigrants, while 70% of new housing in other Canadian urban centres is occupied by "New" Canadians. Cliché Number Two: "If we halted growth we will have a real labour shortage with our rapidly aging population." Fact: the C.D. Howe Institute demonstrated that it would take an unsustainable immigration rate 28 times higher than its present rate for the next 50 years for Canada to maintain its present age structure. Postponed retirements and higher productivity will greatly lessen the impact of this over-hyped bogeyman. Lastly, Ransford recruited the words of retired planner Peter Oberlander who said that compact settlement patterns were an inevitable feature of urban growth especially where we were committed to preserving agricultural land. "The city is humanity's supreme achievement", he maintained, in dismissing fears about continued growth. Apparently Oberlander never heard of the failure of "smart growth" in America or the compromise of British Greenbelts by developers or he might be less confident in his "compact settlement patterns."And when it is recalled that a Greek polis was ideally imagined to consist of 5,000 citizens, one shutters to think that today a city of five million is considered a "supreme achievement". In a speech that could have been ghost-written by any of the aforementioned Canadian growth-a-holics, Premier John Brumby of Victoria spoke of his Government's plan to "manage growth", because you see, growth is inevitable, and growth projections must be treated as, if anything, "pessimistic", ie. conservative. Thus Melbourne is going to grow at least 44% by 2030, with 6.2 million people by 2020. "Demographer Bernhard Salt has projected we will regain our title (sic) as Australia's largest city within 20 years." Note that the Premier treats a population growth plateau like a sports trophy to be raised aloft in triumph. Melbourne will regain its "title" like Muhammed Ali regained his title against George Foreman. Similarly when Victoria was "losing" people in the 1990s, presumably the state of Victoria was a "loser". But now "the exodus has been turned around and people are now voting with their feet in favour of Victoria." It is as if Premier Brumby is fighting an election campaign and people moving to Victoria are casting a vote for him. A commonplace illusion among Premiers, Governors and Prime Ministers. But he does acknowledge the strain that in-migration places on infrastructure and states that a million extra residents will require 380,000 new houses or apartments. Given Melbourne's growth rate, he projects only a 17 year supply of land, and housing affordability, planning and supply issues demand full attention. He confesses that "the faster we grow the greater the demand on land supply." Yet the one option that Brumby will not consider of course is to lobby the federal government for a severe cutback on immigration. Out comes a variant of Canadian Cliché Number Two: "we are facing a skills gap of 123,000 jobs over the next decade, which could curb our ability to benefit from the climate change economy." Victoria attracts 27% of Australia's skilled migrants, and Melbourne 25% of migrants of all categories. It is curious that the Premier would think that the importation of workers would be key to fighting climate change, when research clearly indicates that the best climate change fighting strategy is reducing population growth. Certainly the Vancouver experience leads one to question the party line of housing lobby groups that releasing more land is requisite to housing affordability. Australian Property Monitors operations director Michael McNamara argues that "demand for housing is extremely flat and developers haven't been able to sell the projects that they've got, let alone launch new projects—so we totally dismiss the argument that releasing more land on our cities outskirts is going to affect affordability." ANZ Bank senior economist Paul Braddick says "there is no strong evidence to suggest that a lack of land supply has been driving up prices." The proof of that is house prices have gone up across the board—indicating it is not just land availability that is the culprit here." Macquarie Bank analyst Rory Robertson attributes the fact that city house prices have grown 75% faster than wages over the past 20 years to a halving of interest rates, the halving of capital gains taxes in 1999 and massive immigration which chose to settle in the eight capital cities. Of relevance here is a study done by Bob Birrell and Ernest Healy of Monash University in 2003 entitled "Migration and the Housing Affordability Crisis". While the authors acknowledge that Melbourne's housing price spiral "cannot be attributed to recent migration levels," they qualify their statement with significant findings. "The impact of migration varies sharply by metropolis. For Sydney the share of household growth attributable to net migration in 2001-2002 is 47.8% Migration makes the next biggest impact in Perth where it is projected to contribute 33.5% of household growth, then Melbourne where it constitutes 28.6% of growth in 2001-2002." By 2021, however, migration will account for 63% of Melbourne's household growth. "Developers and builders are already heavily dependent on immigration to sustain their activities in Sydney. Within a decade those operating in Melbourne and Perth will be dependant on immigration for nearly half the underlying household growth. This will apply to Australia as a whole by 2021 when 48.4% of household growth will derive from overseas migration." It is in this context that the idea advanced by population sociologist Sheila Newman that property developers are key lobbyists for the country's ecologically suicidal policy of high immigration becomes very plausible. As Birrell and Healy state, "It is no wonder that the housing and property industries in Australia are so keen for high migration." That immigration has a crucial impact on housing affordability is not immediately apprehended in any correlation of housing price increases in six major Australian cities with a given volume of migrant settlers. From 1989 to 2002 Sydney increased 30.7%, Melbourne 20.5%, Brisbane 45.8%, Perth23.5% Adelaide 28.1% and Canberra 34.8%. What must be understood, however, is while certainly investors and speculators played a major role in the housing price spiral, immigration boosted their confidence, and without that the spiral would never have taken off. That is why, Birrell and Healy explain, Sydney's housing bubble remained the strongest, for even if immigrants demanded mainly rental accommodations, "this is still vital to investors if they are to fill their properties with tenants." "In the case of Sydney, the intuition of residents and some politicians that immigration is a factor in the housing affordability crisis, is correct. The absence of the immigration component of household growth in Sydney would significantly reduce the underlying gap between demand and supply. There is little doubt that a reduction in the national immigration intake would improve affordability in Sydney." "The authors conclude by saying that "Immigration is an important underlying factor shaping growth in demand for housing prices because of its role in household formation ... By 2021, according to our projections, the migration component of household formation in Sydney will be around 75%, in Melbourne and Adelaide 60% and in Perth 54%". As a rule of thumb, according to Albert Saiz of the University of Pennsylvania, "an immigrant inflow of 1% of a city's population is associated with increases in average rent and housing prices of about 1% ." (Journal of Economics, Volume 6, Issue 2) By that token then, immigration has added 18% to the price of Vancouver real estate, or to put it another way, it has reduced the supply of housing stock available to resident buyers and the price mechanism has adjusted accordingly. The logic of Growthism calls for an increase in supply, for more housing units through more density and/or the release or development of more land. The logic of common sense, however, calls for a decrease in demand, that is, a decrease in tax incentives for real estate investors and speculators and a reduction in migrants. Whether it be Vancouver or Melbourne, throughout the Anglophone world, the issues are the same, cloaked in the same euphemistic code language of Growthism. The choices are ours to make. Tim Murray, Quadra Island, BC Canada March 15/08 Personal Disclaimer See also Should Brisbane aim to be like Vancouver? - the naked truth about a world class city.