The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Wednesday, October 5, 2011

RBA just released the best Australian housing research since 2003

A terrific, must-read paper on the Australian housing market was just released by the RBA's Tony Richards et al (RP Data-Rismark supplied some of the key data for this analysis). You can download the RBA paper here. One critical point, which was first made empirically, and at some length, in my 2003 report to Prime Minister, which the authors kindly reference (a first for this specific paper from within the austere halls of the RBA), is that in Australia supply-side factors do matter:

"It is noteworthy that while prices have risen significantly over an extended period and population growth has been quite strong, there has been no pick-up in the supply of new housing...Indeed, the growth rate of the nationwide housing stock has been falling gradually over the past several decades, and in 2009 and 2010 was lower than at any time in at least the last 50 years...

While demand-side factors, especially changes in the cost and availability of finance, have clearly been very important in explaining developments in the Australian housing market over the past two decades, our results lend support to other work pointing to the role of structural factors in influencing housing market outcomes. There is a growing body of international evidence on the role of supply-side constraints in limiting construction and driving up prices..."

This Richards et al (2011) study contains many important theoretical and empirical findings, which emphatically reaffirm those that were first discussed in our 2003 paper (see also charts below):

"The model highlights the importance of transport infrastructure. While we do not model the financing of such infrastructure, the model points to the potentially significant effects of transport systems on households. In particular, in cities with better transport infrastructure it is more feasible to live further from the city, where land and housing prices are lower and dwelling sizes can be larger. It is noteworthy that reports on the development process for Australian cities have pointed to transport problems being a major issue for development at the city fringe (e.g. Applied Economics (2010)).

The analysis also highlights the effect of land usage policies on housing density and prices. We show that zoning limits on the amount of housing built close to the CBD imply that more of the population lives in middle and outer rings,increasing the overall footprint of the city and resulting in higher housing prices. These effects can be expected to become more pronounced as the population of cities increase. In particular, as population grows and land prices increase, the expected response would be for cities to become denser and for land to be used more intensively. However, any fixed set of zoning restrictions will slow this adjustment...

The model shows that policies associated with the development process that act as a friction on the supply of new housing result in higher housing prices for consumers and a reduction in the supply of housing. In the model, which assumes a fixed number of people per household, this is reflected in smaller dwelling sizes, but one can also think of these policies as resulting in an increase in the average number of people living in dwellings of any given size."