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.
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?