As the aftermath of the GFC is still being felt around the world, the housing market continues to suffer and potential home owners are still feeling it.
The 2008 global financial crisis was widely expected to end the worldwide housing boom. Instead, it has produced a divergence. In the US and some European nations, house prices dropped off a cliff and are still down. But in Singapore, Hong Kong, Canada, New Zealand and Australia, prices have continued to rise – not only in the amount, but also when measured against both incomes and rents.
We ask three experts: what’s going on here?
University of Sydney
House prices rise faster than incomes because of pressures both from supply and from demand. In many developed countries, structural economic change has resulted in increasing urbanisation. In highly urbanised countries, such as Australia, that has made urban land scarce. As population grows, this scarcity increases. On top of that, our dependence on car travel has limited investment in the type of infrastructure that might have allowed expansion at the fringe of our larger cities to relieve price pressures on the supply of well-located land.
Our slowness to accept smaller, denser forms of development has had a similar effect.The unearned increases in land values that accrue to existing landowners because of urban expansion have transformed urban housing into a speculative asset. A rising standard of living has made it possible for most of us to put an increasing share of our rising incomes into housing. A tax system that permits us to retain some or all of the unearned increases in land values, and a financial system that encourages us to borrow against this increased value, has made many of us willing to allow housing to absorb an increasing share of our incomes.
"We face an important challenge to intelligently share the returns from urban land." Judith Yates
The importance of these factors will change over time and between countries. But we face an important challenge to intelligently share the returns from urban land – one of our scarcest finite resources – amongst current and future generations. If we do not address that question, then land ownership may become an even more powerful force behind growing income and wealth inequality.
I have been analysing house prices for decades, and one thing I have learned is that trying to get a handle on why they are where they are is easier said than done. But two things stick out. First, short-term cyclical movements are largely driven by economic swings and the related cycle in interest rates and credit. Second, longer term house price moves are explained by demographics and supply. For example, while low interest rates may spark an upswing in house prices, a surge in supply relative to demographic demand is usually relied upon to ensure house prices don’t go ballistic.
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What is common amongst all four territories mentioned has been relatively modest economic slumps during the global economic crisis, and easy monetary conditions in subsequent years and now, which have helped the resumption of strong demand. This has been exacerbated in Hong Kong which has effectively imported easy US monetary policy.
"The key is to make easier for the developers to bring homes to the market." Shane Oliver
However, this has all occurred against a background of supply constraints. These are perhaps most acute in Hong Kong and Singapore where the supply of land is limited. But they have also been severe in Australia – which allowed a shortfall of more than 200,000 dwellings since 2001 – and in major cities in Canada. While economic and credit cycles will come and go, if governments are serious about improving housing affordability the key is to make it easier for developers to bring homes to the market. This is harder in Singapore and Hong Kong but should be easy in Australia and Canada. At least in theory …
Digital Financial Analytics
What’s driving house prices ever higher? The recent Demographia study rated Canada, Singapore and Japan “seriously unaffordable”, and Australia, New Zealand and Hong Kong “severely unaffordable”.
It’s pure economics. Simply put, supply and demand are out of kilter.
On the supply side, not enough property is being constructed to meet increasing demand from local and overseas purchasers. Either space is a problem, land releases have not kept pace, or builders cannot get funding.
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Demand is being stoked by demographic shifts, such as more single households, older independents and young families. Also, investment purchasers see property as a good hedge against wider uncertainty, so they are very active. Many can enjoy tax breaks. And Chinese investors have become a major force.
Thanks to the banks, purchasers can borrow more and this lifts prices. First, low interest rates are making larger mortgages more affordable. Second, they have been able to increase the supply of home lending credit, thanks to lower capital rules, especially for those using the most sophisticated capital management. Next, they see risks in property lending as much lower than commercial lending, so are happy to skew their portfolio. Finally, they have changed their lending criteria (although some regulators are pushing back), making larger loans possible for some.
"It's pure economics. Simply put, supply and demand are out of kilter." Marin North
As a result, rising property prices are artificially lifting bank and household balance sheets. History shows that prices won’t necessarily defy gravity forever. If they do correct, there could be significant consequences for households, banks and the community.
Dr Judith Yates is an honorary associate in the School of Economics at the University of Sydney. Her primary research has been in housing economics, finance and policy. She worked on the Australian Government’s National Housing Strategy and has served on numerous advisory committees and boards, including the board of the Commonwealth Bank of Australia.
Dr Shane Oliver joined AMP in 1984 and in 1994 became its chief economist. He now plays a major role in determining AMP Capital’s investment strategy and asset allocation and provides economic forecasts and analysis to the asset class portfolio managers. He is a long-time commentator on economic issues.
Martin North founded and now runs Digital Finance Analytics, a boutique research, analysis and consulting firm providing advisory services to clients in Australia and beyond. He was previously managing consulting director of Fujitsu Australia and, before that, a principal at Booz Allen Hamilton.
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