Thursday, November 27, 2008

Regulating the housing market

It should not take a sociology major to determine that adequate, affordable housing is a social imperative. Which makes the proposition of the home as an investment, wealth generation vehicle a dubious development. The resulting housing stress as the ‘free market’ approach to property trading implodes must surely flow on and reduce overall productivity.

Historically, while home owners might have aspired to upgrades, actually clinging to the family home was a clear priority. Even when the home became a commodity, and for much of the 20th century, there was no real change in house prices, measured against the broader economy – at least in western economies.

It was only around 1995 that house prices began to outpace inflation, the greed and speculation coming out of the 1980s finally infected the housing market. The security of the family home is now under threat, subject to increased outside forces and an increasing willingness to risk the house on the promise

At the same time pressure is increasing on rental markets, which had remained more competitive than the purchase sector until recent times. In Australia “vacancy rates in all capital cities have fallen well below the three per cent level which is widely used as a benchmark of fully-utilised supply.” With a consequent creep in rent levels.

The global credit squeeze will no doubt slow down housing speculation. In the long term slowing this trend is not good enough, housing is too important to simply leave to the mercies of market forces. If we want relatively stable economies homes cannot be used as gambling chips.

Perhaps more than any sector of the economy housing needs to be regulated. Certainly there must be an end to no-doc or sub-prime loans; home equity lending needs to be looked at and controlled carefully, as do many of the financial ploys in the market. There might be a sucker born every minute, but the housing market is not the place to test the concept.


lindsaylobe said...

As the current global financial crisis deepens, if anything, it has tended to make Rudd more popular as folk rally around the Leader. But I sense as the full effects start to bite it will be increasingly difficult to maintain that momentum. Even so it has been a remarkably smooth first 12 months period in office.

On the other hand the housing market in Australia is one in which control has largely been at the behest of State governments, who have been very tardy at both releasing sufficient land and in the provision of affordable infrastructure.

States revenues have further become very dependant upon ever increasing stamp duty receipts on house sales.

It’s unsustainable.

Hence the price of land has been kept artificially high which has been popular with the electorate who like the idea of seeing their wealth appreciation in the form of rising house prices in excess of the rate of inflation.

But it’s easily fixed if you were to release large packets of land with supporting infrastructure. In fact now is the time for such an initiative to be funded as part of a Federal Government Stimulus Package for the economy, both to support affordable and housing and the rental market.

Best wishes

Cart said...

“the housing market in Australia is one in which control has largely been at the behest of State governments…”
That is probably true of the US and Canada, and to a lesser degree Britain, but it should not preclude change. Australia has the advantage of the well established COAG initiative which has effected reform across the various governments involved, including NZ.
As I understand it consistent consumer law has been mooted for the COAG agenda, and so it should be. At least some of the housing boom and bust could be modified under nationally applied consumer credit laws.
I’m not sure about property supply as a control. Best I could see there is to simply flood the market to reduce the supply/demand pressure. Far better would be a long term effort to distribute the population away from high cost city infrastructures. That is a joint state\federal initiative, surely.

lindsaylobe said...

The cost of basic building materials has remained the same in real terms over the past 30-years.

However land has skyrocketed to double in real terms even for the very generous geographically friendly Melbourne; whilst pockets of Sydney and elsewhere have reached double digit proportions. The malady also applies to rural land whose unrealistically high land values encourage continued pockets of unsustainable farming. Australia was undoubtedly lulled into a false sense of security by an unusually wet period from the 1950’s to 1970’s and successive drought relief underpins unrealistic high rural values which make insufficient allowance for regular seasonal drought.

Certainly I agree that the Federal Governments high levels of immigration made virtually no provision for new infrastructure and hence our over crowded cities are captives to skyrocketing land prices. The state based limited land releases programmes have not been matched by a strong public transport and infrastructure vision.

Hence I think The highest level of dissatisfaction however must be reserved for the country, for all of the reasons I have mentioned. There has been very little thought given to assist and encourage a high proportion of incoming migrants to settle in the country away from overcrowded cites (except for pockets like Albury,/Wadonga in Vic and Bathurst in NSW) by ensuring there was sufficient provision for sensible infrastructure and incentives for planned land development and business regionalization. I am not against regulation so long as it addresses the supply issue and helps remove self imposed supply restraints leading to land price escalation. Conservatism has prevented us from implementing bold new initiatives which would immediately make land more affordable by addressing the supply issue. Subsidies for first home buyers simply increase demand, without improving supply in the absence of suitable infrastructure iniatives.
Like anything else, if you restrict anything so it underlying supply can never meet underlying demand real prices must escalate as a consequence of the price mechanism.

Best wishes

Cart said...

I’m no fan of first home subsidies, and they certainly have no great benefit just now. As to land values, they might well moderate purely in response to tighter credit conditions. If the real demand drops because of reduced buying power then property owners need to either sit tight or reduce. That effect, of course, depends heavily on the length of the credit squeeze and willingness to learn the lessons of the crisis. Not an encouraging thought.

D.K. Raed said...

The home rental market is a real catch-22 for the property owner. In many locations, the prevailing home rental rates do not come close to covering all the owner's costs. In the past, this generated some short-term tax losses but long-term capital gains as equity increases outstripped the losses (always welcome for the investor). With home prices in a downward cycle, I wonder if we'll ever that situation again.

In Calif, the larger bldrs were required to produce a certain number of "affordable houses". Sounded like a good concept. Of course the bldrs put those houses on their worst land (next to freeways, etc). And the state mandated that those homes could only be sold to verified low-income buyers. That also applied to resales, so when those low-income buyers went to sell their homes, they could only sell them to other low-income buyers for far below what the market would indicate. Not a win-win, in my opinion.

Cart said...

I don't dispute either of you while housing remains a speculative venture. I guess I start to sound a little 'Fidel Castro' suggesting heavy regulation.
But in reality basic productivity is endangered if there is a widespread loss of housing stability. I would have thought housing stability was a basic requirement of capitalism.

D.K. Raed said...

I guess I just don't see how housing price stability could be maintained unless we are dealing with a stagnant economy. Worker's wages rise each year, so do their benefits, and some of these workers build houses, so ...

I think one underlying problem, one that people don't talk about much, is the idea that everyone should OWN a house. There is much thought lately that maybe homeownership is NOT all it's cracked up to be.

Cart said...

DK, I’m not suggesting I know the answer, but I cannot see it exists in the current paradigm. My basic argument is that safe secure habitation is fairly essential to ensure a stable and productive workforce. Even the constant pressure of meeting rent or mortgage must reduce a workers value to an employee.