In relation to COAG, all I can say is, good intent, but it's been done before in 2003 and 2004. And so it sounds like a monumental waste of time. As I have written many times before, the policy solutions are well known. Once again applying the hand-brake and allowing the policy wheels to spin will achieve nothing.
The 2003 report was by far the best, if, as a co-author, I can say so, and argued for the first time that the high cost of Australian housing could be partly explained by supply-side rigidities (zoning, approval processes, conflicts of interest between local councillors and the next generation of owners, slow land release programs, high development levies, insufficient infrastructure spend, the environmental movement, etc).
Prior to this report house price rises had been assessed almost exclusively through a 'demand-side' lens: eg, the huge decline in nominal mortgage rates since their 17 per cent peak in 1990; the secular fall in unemployment to below the previously-accepted NAIRU level of circa 7 per cent; the advent of two-income households; and the emergence of securitisation and the competitive pressures this new funding medium exerted on the major banks (think Aussie, RAMs and Wizard), which helped to improve the flexibility, availability and cost of housing finance.
In our 2003 report we argued that while the demand-side was clearly important, and equally ripe for reform through, for example, reducing household leverage, the many largely government-imposed inelasticities that constrained the ability of builders and developers to produce new supply, which were politically-convenient State and local government concerns, were artificially driving up the extrinsic cost of land in our major conurbations (to levels well above the intrinsic worth of the ‘turf’ plus building costs in the absence of government interference).
These problems have, of course, only continued to grow with greater vigour in the seven years after the last boom ended in 2003 leading to a striking decline in (until recently) housing starts and housing starts per capita to the lowest levels seen since the 1950s and 60s.
While our thesis was accepted by many, it was oddly rejected, for a time, by the RBA in its submission to the 2004 Productivity Commission Inquiry, which was formally established to further investigate our report’s supply-side findings. The Treasurer’s terms of reference explicitly asked the PC to concentrate on the supply-side, which the government at the time thought would be a useful way to shift the burden of housing affordability blame back to the Labor-held States.
I believe that the RBA’s position, which is best characterised by the following quote, led the PC to materially understate Australia’s supply-side challenges, which have become more significant as the demand-side pressures (eg, population growth) have built up over time:
“At the macro level there is not much evidence to suggest that the growth in house prices has been due to a persistent shortage of supply of houses relative to underlying demand for new housing.”
A better idea would probably be to simply give Treasury a maximum of three months to deliver a report of no more than 30 pages containing all realistic (ie, practically achievable) policy solutions. No long-winded background, or any new analysis is needed: just hard solutions.
On this note, perhaps the best publicly-available housing analysis that I have seen for a long time comes from ANZ Bank’s team of economists, led by Paul Braddick. This was released yesterday. Paul has kindly has allowed me to reproduce some of their slides below, which are well worth reading.
