The Supply Side Argument

The supply side argument insists that house prices are so high in Australia because there simply aren't enough new houses being built for the increasing population size.

It's a line carried by most media commentators and accepted pretty much as fact. Politicians will quote 'supply and demand' and then rest by saying that there simply aren't enough houses. They will then mention the population growth, stocking the fires of poorly disguised racists Sustainable Population Australia.

It's easy to find corroborating evidence for the supply side theory - just listen to people's complaints. You may note that the complaint is never 'there aren't enough investment properties' from people who don't intend to live in the housing that is naffordable. It is always assumed that the people for whom affordability is an issue are the ones that need to live in the home.

There's a reason for the popularity of this argument and its underlying assumption - and it isn't because it is necessarily true. It's because housing affordability is a lose-lose issue for the government. Something that is hard to verify from political and to a lesser extent economic commentators because they can't mention the role of the unsympathetic property 'investors'.

What I mean by lose-lose is that once you accept that property is the most popular investment class for the Australian people (above active share ownership) then if house prices go down (ie. become more affordable) the government loses because Australian's have taken a hit on their investment's 'Capital Appreciation'. If house prices go up, they are less affordable and those trying to buy in to the housing market for investment or otherwise complain.

Thus if prices go up, people are upset about housing affordability (whilst the majority are quietly pleased their investments do well). Then if prices go down almost nobody will be pleased that housing has actually become more affordable and will in fact be outraged at the RBA or Governments economic policy that has caused the fall in housing prices.

What is the whole supply side argument then? Compare it to 'Microsoft Affordability' if Microsoft shares appreciated in price to the point that the average person couldn't buy in to the market, then it is easy to increase the supply and make the share more affordable. So in it's heyday imagine that Microsoft stocks got to $6,000 a share. Microsoft could undertake a 1:6 stock split, then each share would be worth $1,000 but there would be 6 times the supply of shares. So presumably everybody is happy. People can buy into the company, those already in it have 6 times as many chips but totalling the same value.

Thus the supply side argument is an attempt to do the same thing for housing, but you can't 'split' houses into 6 pieces. People want their own home. So the government strategy, real estate industry endorsed is to attempt to expand the housing supply in line with the demand (price) increases. This way existing houses would sit up on a permanently high platue that won't come down ever, plus people who want to live in actual houses get to buy their little plot in palooka-ville.

Thus I actually agree with 'The Age' article today's headling 'No ceiling to housing prices in sight' I agree, house prices are irrational, the future ceiling of house prices is opaque. No matter what interest rates do, the house prices can head up seemingly on their own upward momentum. Why? I don't know why, and that's precisely why it can continue. If people were rational or had any basis for paying what they have paid for housing already then we might be able to predict what would happen.

But the prices are already irrational (in a broad sense) so who knows when that will change, or why...

But I was struck by this particularly amusing statement in the article

In Victoria, the ratio is 1.5 dwelling approvals for every 2.3 person increase in population.

This is possibly the dumbest statement I've ever read in a newspaper, that wasn't a quote of some dumb celebrity but an attempt at serious journalism.

Never mind that the average dwelling occupancy for Victoria (going by 2006 census data) is 2.6 people per 1 home. This means that new dwellings should exceed actual demand (to live in) by almost 50% based on the above statement.

The supply side argument is dangerous because nobody seems to consult actual occupancy, because that would mean they would have to confront the gross ineffeciency of the housing market and the gross inequality of the housing market.

If they did consult actual occupancy and acknowledge that many people buying into the property market aren't even utilising the properties by renting them to people (thus artificially restricting supply, which produces the appearance of an apparant housing shortage), and with this acknowledgement, we would start to predict that as house prices increase so too would the number of unoccupied dwellings.

With a government trying to boost the supply of houses to let steam out of the market, the total glut of housing is increased. Meaning that if prices actually give and 'investors' flee the market, the damage will go from catastrophic to apocalyptic.

Here, we can thank a degree of cognitive dissonance, as the exact same thing happened in Ground Zero of the GFC/US Subprime Mortgage crisis - In 2006 California had a severe housing shortage, by 2007 this housing shortage was widely acknowledged to be an incredible housing glut. As bubblepedia put it so eloquently, it isn't a shortage of houses we are experiencing at a moment (not for the purpose of actually accomodating people) but a shortage of gambling chips given the amount of gamblers.

Contemplate for a moment, the number of people that have bought the book 'From 0 to 100+ properties in 3 years'. If it was actually viable for everyone to succeed at building this property portfolio from reading the book, we would need new dwelling approvals to be 33 properties for every 1 new person each year.

HIA implicitly predict that by 2050 for example, the housing shortage will be equal to the number of people actually in Australia (once you extrapolate out their figures for a much shorter forecast), Bubblepedia actually break down the numbers to reveal the one gaping flaw of the supply side argument -

As 'house' prices increase, so too do vacancy rates. Why? because as Capital Gains ecclipses rental income in the mind of a naive speculator (ie. mum and dad) then rent becomes irrelevant, high house prices make housing affordable (specifically if you anticipate growth then what's it matter what price you buy at because you can sell it for more in the future if worst comes to worst).

Check out the stats: Bubblepedia

It will be interesting to see the 2010 census data come out.