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In her excellent and challenging book Happiness for All, Carol Graham uses the analogy of being stuck in traffic, with the lane next to you moving and yours not.
" Are property values… at the point where many are starting to feel they will be forever stuck in the wrong lane?"
Richard Yetsenga, Chief economist at ANZInitially movement close by gives you hope but pretty soon if you don't start to move, frustration and anger build and the risk of antisocial behaviour escalates.
The question is: are property values in Australia's east-coast capitals, if not elsewhere, at the point where many would-be buyers are starting to feel they will be forever stuck in the wrong lane?
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FORCES
The forces which have driven Australia's housing affordability issue for those out of the market are deep and varied.
The first is strong population growth, which is foundational, and at its most basic adds to existing demands on the available stock of land.
A recent study of advanced economies suggests land prices have been responsible for about 80 per cent of real house price growth in the post war period.
Second, the collapse in interest rates since the financial crisis has created a global asset class for property as capital has searched for long duration assets with yield.
Offshore perspective: What Australia can learn
Housing markets in New Zealand and Canada have also experienced similar price growth to Australia. In response, they have applied policies to curtail rapid price growth. Here’s what Australia can learn.
WHAT NOT TO DO
There is no single quick fix for rapid price growth. Canada has been battling with this issue for the best part of a decade and New Zealand has implemented a number of policies over the past four years but price growth remains elevated. This suggests that Australia is likely to require some time to correct the issue, given that our policy response commenced well after these other countries.
In isolation, changes such as requiring higher deposits, limiting lending to investors or high-LVR borrowers or implementing taxes on foreign buyers are likely to be insufficient.
We have seen numerous times across these countries that the impact of such policies tends to be either ineffective or short-lived at implementing meaningful change in the market. This suggests that such changes need to form part of a broad package of reforms. Further, we have seen that regional policies are largely ineffective.
LVR restrictions in Auckland and foreign buyer taxes in Vancouver may have had some impact in slowing price growth in those cities, but an unintentional side effect has been subsequently strong growth in other cities, including Wellington and Toronto respectively.
It appears investors are not afraid to look for opportunities both domestically and internationally, and restrictions in one city simply guide purchasers toward another.
COORDINATED
This means a coordinated response is likely the most beneficial approach. In Australia, this would involve the cooperation of APRA and Commonwealth and State Governments.
The vital issue across all of these countries is property remains an extremely attractive asset class, and thus far attempts to cool investor demand have been largely ineffective. But there remain plenty of options for regulators and policy-makers in Australia. APRA has the ability to further tighten investor borrowing restrictions, or implement LVR restrictions.
It is worth noting the experience across all three countries so far has not involved a substantial supply-side response. Structural issues around land release, urban planning and infrastructure provision are undoubtedly integral to any successful policy response, but their immense complexity and long-term nature make them much more difficult to implement and assess.
This does not provide an excuse not to do so, however, especially when supply-side measures are likely to be more effective over the longer-term in containing price growth in our view.
Overall, Australia’s housing affordability is certainly not a lost cause. We have seen tentative evidence across Canada and New Zealand that slowing price growth can be achieved, but it requires a broad package of policies, coordination across governments and regulators, as well as time.
Daniel Gradwell , Senior Economist, Daniel Wilson, Market Economist & David Plank, Head of Australian Economics at ANZ
China's capital-account adjustment, which has entailed potentially the largest single outflow of capital the world has ever seen, has exacerbated this shift.
Lastly, conventional monetary policy in a range of countries has been narrowly focused on CPI targeting, with financial stability often only considered in a supervisory or liquidity context.
The impact of these key influences is likely to have been exacerbated by a range of policy issues indigenous to Australia: issues around quality of city infrastructure, concessional tax treatment for a geared asset, episodic support for public housing, and rental conditions which seem to favour the landlord when compared with other countries.
Given the breadth of the issues involved, the far-reaching impact of getting it right – and hence the risks around getting it wrong – it is not surprising much creative effort seems to be going into finding policies which are perceived to affect few people. And cost little.
This approach risks covering symptoms rather than addressing causes and potentially even escalating imbalances.
SUPPLY
Consider supply, which must be a part of any sustainable solution. Adding supply to a market with some speculative involvement isn't certain to reduce prices in the short term.
Additional supply can simply feed the speculative forces which already exist and exacerbate the risk of a boom-bust cycle.
Similarly, policies which make it easier for people to 'get into the market' might bring some short term improvement but would seem to be ultimately counterproductive if prices are already too high relative to incomes.
For many inflation targeting regimes, financial stability considerations are viewed as largely separate to interest rate decisions.
With household debt having increased relatively consistently since the adoption of inflation targeting in the early 1990s there may need to be a more formal shift towards policy targets which recognise the financial risks which pure inflation targeting can create, even if this comes at a cost to top line GDP growth.
At the end of the day, easier monetary policy favours debtors over savers. First-home buyers are savers in a relatively pure sense of the concept.
With this range of deep and varied drivers, the policy response must be similarly broad.
POLICY
As well as a greater role for debt levels in monetary policy considerations, we advocate a range of policies.
These include stronger restrictions on non-resident buyers – rather than just tax surcharges which overseas experience suggests are very difficult to calibrate and which gear state government finances even more towards housing - including dwelling availability as a consideration for immigration policy.
It also induces tax reform to reduce the upfront cost of dwellings (which also inhibits turnover) and redresses the imbalance towards investors. There also needs to be a concrete effort to improve the efficiency of land usage.
A policy response which over-focuses on narrow financial levers and not sufficiently on the institutional or broader environmental drivers risks exacerbating rather than reducing stability concerns.
The right policies will help rebalance the housing market in a sustainable way, not just over an electoral or economic cycle - and in a way which addresses the emerging division between those are in the lane of home ownership and those who feel they will always be stuck elsewhere.
Richard Yetsenga is chief economist at ANZ
This story originally appeared as a Blue Lens piece from ANZ Research
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
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The not-so-simple housing story
2017-05-03
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