November 28, 2003 | Graham

Sydney’s house prices help the huddled masses

It takes a lot of guts to sit around and wait for markets to go about their self-regulating business, especially when there is a moral panic around. Today’s moral panic is housing affordability and the latest sign of hysteria is the HIA Commonwealth Bank Housing Affordability index which has reached new lows.
Apparently it now takes 45 percent of average income in Sydney to service the typical first mortgage on the average first home. No wonder as it costs $488,000. In the rest of the country it is only 28.4 percent. This is good news for all of us.
Think about it this way – why do we all envy Sydney? Because it’s an exciting, beautiful, cosmopolitan city where people earn a lot more money than they do in the rest of the country and where more big businesses have their head offices than anywhere else, so there are more jobs. So we’d all like to get a share of Sydney, but we can’t afford to move there.
Well, very few people can, which means one thing – Sydney is going to have to move to us. A lot of businesses now situated in Sydney are going to have to think about shifting out to areas where living costs are lower and there are more workers at reasonable wages. High house prices, particularly in Sydney, are the best regional development policies the country could adopt.
They’re also good for the population problem that Premier Bob Carr keeps complaining about. Sydney is the city of first choice for migrants. More of them land there than anywhere else in the country. Migrants are all first home buyers, at least so far as Australia is concerned. So with housing affordability figures like this, it won’t take long before migrants start thinking of Melbourne, Brisbane, Adelaide, Perth and Hobart (possibly in that order) as alternate destinations.
HIA economist Simon Tennent is quoted as saying that “in the longer term, interest rate rises will help cool house prices”. Yes, but they’ll only do that by making housing even less affordable in the short-term, and if they are successful in regulating house prices they won’t make them dramatically lower for quite some time. What we need is a policy that makes housing more affordable and reduces its cost simultaneously.
That policy requires the Reserve Bank to do nothing. By allowing prices to stay naturally high and keeping interest rates where they are it will encourage developers to bring more supply onto the market. In fact, if we are really lucky, they will do that so enthusiastically that there will be such a flood of new stock on the market that it will reduce prices quite dramatically. Then all the Reserve needs to do is to ensure that there is enough liquidity in the system to allow new borrowers to enter the market at bargain basement prices and mop up the oversupply.
In the meantime there will be a net transfer of wealth from highly leveraged developers and some banks to the rest of us, so you effectively get redistribution of wealth from some of the capitalists we all love to hate without having to get interventionist about it.
Iif you own a home or if you rent; if you own a business or would like to own a business; if you are employed, or would like to be employed, send an email to Ian MacFarlane urging him to spend more time with the cellar at the Reserve Bank and less time fiddling with the monetary levers. It should keep him out of harm’s way and help him with the requisite amount of liquidity and tightness.

Posted by Graham at 6:00 am | Comments (1) |
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1 Comment

  1. I reckon that to me as an agrarian socialist type you make a compelling case for market forces. I never underestimate self interest though acting in the most banal way. I can’t imagine a CEO or a board of directors accepting that they need to go bush or at least somewhere outside the harbour city to make a company thrive. Better to go offshore (trips to various world cups etc) However if a visionary comes along who would promote this view and reconcile the conservation aspects then you may have something.

    Comment by archie ambulancechaser — November 28, 2003 @ 1:29 pm

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