Tips courtesy of Cameron K. Murray's March 2024 title The Great Housing Hijack.
1. What Determines Housing Prices
A house is a type of financial product. Property asset pricing across the market as a whole is predominantly affected by financial features, like interest rates and market expectations, rather than physical features.
The price at which houses trade is the point where a seller thinks they are better off swapping the property asset for cash to invest their money elsewhere, and a buyer thinks the reverse. Housing booms always end because the market runs out of buyers with both the expectation of further gains and the money to spend on housing. The shift back into other assets after a property boom means that, over the long term, the rates of return of different asset classes, like commercial property and corporate shares, are almost identical.
Australian residential property was worth about $10 trillion in 2023, of which only about $3 trillion reflected the construction cost to replace all the existing homes.
Commercial property was worth $1.3 trillion, with about half the value being the cost of the buildings, and rural land was worth about $0.5 trillion. By comparison, listed company shareholdings were worth about $3 trillion. Australian wealth is mostly the value of the property monopoly, and most of it is used for housing.
2. Incomes determine rents
The popular idea is that increasing welfare payments to low-income households gets ‘eaten up’ by higher rents. In fact, rents rise consistently with incomes. In Australia, the average rent-to-disposable-income ratio for renter households in the private market in 1993 was 20%. In 2023, it was 20%. This would still happen if we built 10% more houses.
In the late 1940s, rents paid were a lower share of household income because of rent controls. But housing was small and overcrowded then. Now houses are bigger and better, with the fewest people per dwelling ever in history.
3. All locations are substitutes at the right price
Households sort into different locations according to how much they value each location. This is why property markets create clusters of high-income and low-income suburbs.
In Melbourne in Covid, 80,000 people left the suburbs. Rents fell in the cities and grew rapidly in smaller towns, especially on the coast. By 2023 rents were up 10%, rising at the fastest rate in history.
4. Density
The Housing Cheer Squad claims a lack of density causes high rents and prices, and that regulations inhibit the creation of denser (taller) housing, which property owners desperately want to build.
In fact, per-dwelling construction costs and risks rise as density increases. This is why high-value areas have tall buildings and low-value areas don’t. It is why very tall buildings are almost always built during the peak of a property asset price boom, when extremely high sales prices can justify the extra costs of building taller.
5. Rate of new housing development
Property owners will not flood the market with new homes just because the rules allow it. To develop new housing gradually is normal for the property monopoly. Out of the queue of feasible sites across all locations, the absorption rate is how quickly those sites are picked off for development so as to maximise total economic returns. Even when it is profitable to build, it can be more profitable not to build.
Undeveloped property feasible for housing development rises in value over time, and oversupplying housing means selling at a discount, so most feasible development opportunities are left undeveloped. This is a built-in speed limit on the rate of new housing supply.
[The above is an edited extract from The Great Housing Hijack by Dr Cameron Murray.]
*Housing Cheer Squad refers to property owners, politicians, the media, and housing researchers that discuss the property market.
The Great Housing Hijack
By Cameron K. Murray
The Great Housing Hijack reveals how vested interests pull the strings on the property market in Australia, and offers a solution for genuinely affordable housing for those who need it.
Comments