November 25, 2017

Yet Another Hole In That Sacred Claim

A weekend topic starting with this piece by Ben Phillips, a Principal Research Fellow at the Centre for Social Research and Methods at ANU. “One of the great mysteries in Australia is how and why did Sydney house prices get so high? A common explanation is that Sydney housing supply is just not keeping up with demand as strong population growth and a lack of land release combine to drive up house prices. We decided to test this hypothesis by comparing the underlying demand for housing in each region in Australia from the perspective of population growth and demographic change. We found that, contrary to popular belief, Australia as a whole has built more than enough houses to accommodate this growth.”

“In fact, about 164,000 dwellings more than was required since 2001. Much of this surplus of housing was found in our capital cities, particularly inner city areas and much of this surplus contained unoccupied dwellings. Sydney’s most over-supplied region is Inner Sydney with a surplus of around 6000 dwellings or 5 per cent of stock. The driver of over-supply is the new unit developments. A significant number of these dwellings are vacant. They may be for sale, a vacant rental, or left intentionally vacant by investors.”

“It may surprise that the current house price inflation in Sydney is not unprecedented. An equally strong period of house price growth was between 1999 and 2004, a time when population growth was about half current levels. During this period house prices nearly doubled in Sydney. Over the last five years house prices grew by 81 per cent.”

“If it’s true that our current record home-building levels are not balanced by a large housing shortage, then there is the risk that these current building levels and the associated economic activity will reduce in the near future. Policy makers will also need to place greater emphasis on other potential drivers of house price growth and housing affordability, such as a range of demand influences such as interest rates and housing taxation arrangements.”

From the Conversation in Australia. “As everyone supposedly knows, fixing housing unaffordability is simply a matter of boosting housing supply. But wait! With their just-published report on house-building and population growth, ANU academics Ben Phillips and Cukkoo Joseph have blown yet another hole in that sacred claim. By comparing housing demand and supply at a sub-regional level, their analysis highlights evidence that in many parts of Australia – not least inner Sydney, Melbourne and Brisbane – house-building has been running well ahead of local household growth for the past few years. Yet these are hardly areas where prices have dived.”

“Previous commentaries have highlighted the recently strong positive correlation between rapidly expanding housing supply and property inflation. But these correctives to the popular wisdom have failed to gain traction. This is partly because of the continuing seductive appeal of the common sense claim that rising prices reflect gross shortage. So, it’s reasoned, expanding house building will moderate the market.”

“As my Sydney University colleague Peter Phibbs recently observed, this ’supply mantra’ works for politicians seeking to connect with voters because ‘everyone is an economist now and more supply will bring down prices.’ More importantly, though, governments use their unqualified faith in equitable housing market solutions to get off the hook. It absolves them of the responsibility for playing an active role in managing and shaping these markets to deliver housing that meets everyone’s need for shelter. Instead, they facilitate development for speculation.”

From CTV Vancouver in Canada. “Politicians and developers have long pointed the finger at a shortage in supply as a root cause of Metro Vancouver’s skyrocketing home prices. A local academic, however, is now challenging what he calls the myth that simply adding more units will help solve the problem. John Rose, a geographer at Kwantlen Polytechnic University, studied the housing supplies in Canada’s 33 largest municipalities between 2001 and 2016. ‘The prices (in Metro Vancouver) escalated dramatically over that 15-year period. You might expect that supply might have shrunk during that period of time. In fact, the opposite is true,’ he told CTV News.”

“Rose uses figures from Statistics Canada census reports in his analysis. His number crunching found that for every 100 individuals or families who moved to the region since 2001, 119 housing units were also added to the market. According to those numbers, the professor said, the Vancouver area had the fifth largest housing supply of the 33 cities he studied.”

“‘The market has provided a lot of units, yet at the same time, we’ve seen affordability get degraded,’ Rose said. ‘We look back at this and we say, ‘If you’re trying to figure out what the cause of the housing crisis is, it doesn’t seem to be the product of adding enough units to the market.’”

“Instead, Rose contends that ’speculative investment’ has resulted in tens of thousands of empty homes and led to the region’s sky-high prices. He says as of 2016, the Metro Vancouver region had more than 60,000 vacant units. ‘We’ve got all this available supply that’s just sitting there unoccupied,’ Rose said.”

“Another study recently conducted by real estate marketing website Point2 Homes found that Vancouver is ‘in a league of its own’ as the most unaffordable housing market in North America, surpassing major U.S. cities such as New York and San Francisco. According to those findings, the average annual family income is $81,608, while the median home sale price in the City of Vancouver is more than 17 times greater at around $1.4 million.”

The Richmond News in Canada. “Kwantlen Polytechnic University human geographer Dr. John Rose has lived in Richmond for the past 20 years. It’s where the Vancouver-raised professor chose to start and raise his family. In that time, he’s seen the supply of housing soar, in the form of dozens of City Centre apartment buildings and hundreds of townhouse developments. And yet, in the past 10 years, housing prices have more than doubled. ‘It certainly seems the market has not been undersupplied,’ said Rose.”

“But, he thought, it has long been argued by the development community and politicians (most often financially backed by developers) that more housing begets lower prices. His new study pours very cold water on that supply/demand paradigm. And, at this point, further solutions to curb speculative demand, including a ban on foreign ownership of homes, should be ‘on the table.’”

“‘It doesn’t hold water the idea we have an expensive housing market because we don’t have enough supply,’ said Rose, who found that since 2001, according to census housing data, Metro Vancouver has seen 241,336 new (net) housing units built to accommodate 202,184 new households.”

“But if it’s the case we are transforming our city in such a drastic way to provide empty units for speculative investors, such costs must be questioned. ‘Supply hasn’t worked in past. Why are we assuming the continued approach will work in the future? More of the same,’ that’s what we’re being prescribed by the doctor,’ said Rose.”

“‘I think a lot of people are now coming to the realization that this (supply-oriented housing policy) isn’t working. It’s been so many years, we’ve built so many houses and yet housing costs just keep going up,’ said Justin Fung, founding member of activist group Housing Action for Local Taxpayers.”

“He refers, tongue-in-cheek, to a ‘Vancouver Real Estate Cartel,’ which ‘promotes a narrative’ that supply is the solution, at all cost. ‘The cartel is this group, the realtors, the property developers, the people who have vested interest in pushing this narrative that supply will solve everything; we just need to build more, build more. They’ve been profiting significantly from this; they’ve been profiting from land banking; they’ve been profiting from selling these units offshore to speculative investors,’ said Fung.”

“Rose said since his findings were published by media last week, he’s seen local university economists criticize it. ‘Now I’m hearing we need to accommodate investment. It’s basically accepting the idea speculation is going to happen. And that’s pretty problematic. I’ve literally heard the argument we need to pump up the supply so much that it creates a glut so that it drives down the prices,’ said Rose.”

“Rose is also concerned about a drastic market correction considering how dependent B.C.’s economy is on construction and real estate finance (housing as a commodity). ‘My concern is the situation has developed for 15 years and now we have a whole economy, or whole economic ecosystem, organized around this particular model. If there are dramatic measures taken, there would be a shock. I don’t envy policy makers to get us out of this mess.’”