What base case are our boffins using? 40 more years of boom.
So I’m putting the final touches on my masterpiece, my magnum opiate – “Why the boom has ten years to run”, and some boffin in Sydney comes out and calls 40 years.
C’arn mate. Let's not get into a willy measuring contest about it.
Ok, so I’m talking about a professor of Economics at the University of Sydney, Prof Judith Yates. She’s probably never heard of me. I’ve never heard of her until someone forwarded me this report.
(Don’t bother opening it unless you’re super keen. It’s over 100 pages long.)
Anyway, it’s the Centre for Economic Development (CEDA)’s Housing Report. It’s huge. It’s mammoth. It makes my magnum opiate look like something scrawled in crayon you’d stick to the fridge.
But the good news (if you’re me) is that these boffins are pretty much bearing out all the things I’ve been talking about here in this blog.
But not only that, Prof Yates has upped the stakes and saying that the outlook for the next 40 years is pointing to further surges in property prices.
That’s not really Yates’ angle. She’s thinking about ‘affordability’, but they’re both sides of the same coin.
Anyway, what jumped out at me was this:
Looking forward, there can be little sense of optimism about future housing affordability outcomes:
• Demand pressures are likely to continue over the next 40 years. Economic growth per capita is (still) predicted to continue, although at a somewhat lower rate than experienced over the past 40 years.
• Australia’s population also is projected to continue to grow at only a slightly lower annual growth rate than over the past 40 years, with this growth being concentrated in Sydney and Melbourne.
Ok, I’d agree with this. I’m not sure that the picture is completely without optimism. But it does require a rethink of the way people enter the property market. But that’s a story for another day.
And demand pressures continuing over the next 40 years? Well, I think you’re mad if you’re going to forecast anything over a 40-year time horizon (but then, who’s going to hold you to it?) But I think what she’s saying is that if you look at all the projections and forecasts we’ve got, none of them have demand pressures easing.
The base-case scenario is for the economy to keep growing and for wages to keep rising with it. The base-case is also for population growth to continue at strong levels.
If that eventuates, and you’d have to think it is the most likely outcome, then property demand will grow. Unless something happens to supply, that means prices will keep rising.
So does she say anything about supply?
Actually, yes, she does.
Supply constraints are likely to remain. Urbanisation trends are expected to continue, with the proportion of people living in Australia’s capital cities projected to rise from a current 66 per cent to almost 74 per cent. Jobs in the future are projected to grow in service and knowledge based industries with skilled labour being favoured over unskilled.
This will reinforce the steady growth in earnings inequality that Australia has experienced since the mid-1970s.
So supply is going to struggle to keep pace. It’s failed for pretty much the past twenty years and it looks like it will keep failing (again, based on pretty much all the projections out there).
But she hits the nail on the head when she points to urbanisation trends. It’s not exactly true to say that we have a supply problem. There’s a whole lot of cheap houses out the back of Cloncurry.
The problem is that we don’t have supply where we need it (mostly in Sydney and Melbourne.)
And that reflects how concentrated the Australian population is in our major centres. But get this. It’s going to get worse. Two-thirds of us live in the big cities now. Soon that will be three-quarters.
So the price pressures that come from poorly located supply are going to get worse before they get better.
And when you add in the tendency for new economy jobs (services) to be overly weighted to the big cities, the picture only gets worse.
So this is the base case scenario. Not just for property bulls like me, but everybody. These are the projections that everyone in academia and government are using.
Demand keeps going up. Supply keeps struggling.
But then you can add in some structural features as well. As Yates says:
Increasing population, increasing economic growth and increasing concentration of well-paid employment opportunities, therefore, are likely to continue to put pressures on well-located land in our metropolitan regions. Such pressure will be reinforced by:
• Increasing income and wealth inequality;
• A tax-transfer system that encourages established households to hold on to the growing equity in their owner-occupied housing and to increase their housing wealth by borrowing to invest in residential property; and
• A housing finance system that remains biased towards those most able to pay.Pressures on the private rental market will continue as low and middle-income households are excluded from home ownership and higher income households choose to rent rather than own.
I don’t need to go into all of these but you get the idea. Demand and supply will remain unbalanced. On top of that, all relevant policy settings will remain tilted to favouring property owners, increasing the desirability of property, and pushing prices up.
And that folks is all your ducks in a row.
The result. 40 more years of house price gains.
A lot could happen a long the way, but on the whole, she’s right.
I’m certainly not betting against it.
What do you reckon? 40 more years?
Simon says
Hope that sheila has a degree in astrology, I’m expecting a financial crisis before then, and the govt. doing what it did with Uber, let the crisis overtake those with taxi licenses, like it’s not the govt.s responsibility, issuing licenses, then saying they are worthless.
hope that report wasn’t written on taxpayers time – 100 pages? does she bill by the page?
Dougal says
The massive financial crisis in early 2008 caused only a minor stumble to housing prices. I think they dropped 10% or so. I was expecting them to remain flat for years but lo and behold in late 2009? they started rising and have gone ballistic since then. The prices don’t make sense to me but I thought YouTube was a stupid idea when it first came out so what do I know.
Simon Andrew Richard Long says
Hong Kong has a genuine shortage of land, Australia has a fake shortage, councils not releasing land and favouring expensive development over budget terrace style housing which was good enuf 30 years ago.
The problem with housing being a wealth vehicle is that you have to pay workers $400 of their pay cheque just for housing, if housing cost 100 / week, then the car factories wouldn’t have to shut, our industries would still be competitive.
Bomber Charlton says
The govt only needs to do one thing to dramatically increase the level of supply and that is remove stamp duties (or drastically cut them). Stamp duties are the single biggest factor in reducing the supply of properties on the market. Why would someone move unless they absolutely have to when you have to factor in a $100K tax on most houses in suburbs with a median house price of $1mil (which is many suburbs in Melbourne and Sydney).
Eddie says
The thing govt needs to do is create work economic growth opportunities throughout more of australia rather than confining it to 3 major capital cities. Simple approach spread the demand over more area and the prices will stabilise. This will take some time though maybe a generation or more. But have to start de-centralising australia.
Alex Cook says
Lack of a reliable telecommunications system is one big factor that is preventing de-centralising Australia. The NBN, if they ever get it to work, will start to make this possible. There is no reason why large companies need to have large offices, with hundreds of people doing centralised purchasing, accounts and the like, in Sydney and Melbourne when, with a fast internet, they could move these centres to regional towns at a much lower cost. Unfortunately the NBN is 10 years over due in this country and has now been watered down to something that will be 10 years out of date by the time they get it finished….if that ever happens. I live in Metropolitan Sydney and have had to move my business twice due to lack of internet. It remains a huge cost and constraint on my businesses. There is still no competition and too much pork barreling going on to effect any real change My real estate investments / developments are all going well….Its good to have fingers in several pies!
James says
Wow… Long projections. It is interesting and pleasing to note that the small portfolio of property I have managed to accumulate in the past 15 years has a high probability of increased price growth (equity) and increased rental growth (income) so that I may in fact become a self funded retiree; as was always the plan. My hard work and calculated risk taking should then pay dividends. It is actually the short term global issues that are in play at the moment that are most peoples main concern. Cheers.
Eddie says
Will you be offering comment on the 4 Corners report about housing the other week?
Eddie says
Are you kidding! Economists have a worse track record trying to predict future economic trends a day out than the meteorlogist have predicting weather 7 days out.
Dave says
Good article thanks JG.
40 years is not that long – I came to Australia 50 years ago and remember the average wage was about $35 per week and we could have purchased a 3 bedroom Cheapie in Lakemba for $12,000, but unfortunately we couldn’t afford it. Instead we bought a block of land in Campbelltown for $1,300 which we paid off over time, but didn’t build there. About 5 years later we purchased a block of land in Milperra for $4,200 and spent $11,600 on building a new house. 10 years later we sold the house for $72,000. Fast track to today and that house, according to “On the House” is worth $987,000. That means over the last 35 to 40 years (or so) the price has double just about every 8 to 10 years.
Can it keep going?