Housing affordability

Big issue in Australia, especially in large cities is the lack of housing affordability, and rents which are increasing rapidly.
Tonight the SBS insight program skimmed over the issue.

All interested parties are lobbying hard for the Government to step in and "make a difference".
The new PM ol' mate Kev says that is it the number one problem (amongst other number one problems) affecting working families.

By now you should known that I think getting the Government involved is a sure way to make it worse. We even have a classic recent example.
The First Home Owners Grant (FHOG) introduced, had the opposite effect. Damn law of unintended consequences...
Instead of improving the ability for first homeowners all it did was put a fire under the existing demand, $1 Billion per year, leveraged by the banks to 95% (with mortgage insurance) of course and you have $20 Billion dollars looking for a home in property.

But wait, in an unconstrained market, tonnes of entrepreneurs (and investors) would jump in and provide supply for all that extra demand... right?
Like MySpace and Facebook caused a huge increase in the number of social networking sites on the internet.

Housing has some characteristics (not an exhaustive list)

1. It is a long term durable asset.
2. Supply is illiquid due to a couple of reasons (see below)
3. It is reasonably expensive to build new or replace existing with higher density.
   

Why is supply illiquid?

1. Zoning laws and associated regulations. Mostly local government related.
2. It takes time to build houses and units.
3. New land releases are slow and in outlying areas.
   
4. Noone wants to live 2-4 hours commute from their job.

You must ask yourself who benefits from the existing setup. Cui Bono? Who benefits?

1. Existing homeowners: They are the ones wanting heritage listing, facade orders, height and density regulations. Anything which reduces supply when demand is the same or strong will increase the value of their primary asset (their house).
2. State Labor Parties: Political donations from big property developers help ease the pain of working in State politics versus the glory of Federal.
3. State Governments: Increasing house and land prices equals more stamp duty and more land tax!!
   
4. Local Councils: Increased house and land prices equals more rates. I am sure the power of controlling development goes to the head of some people as well.

No you scream, if you allowed every stinking property developer, never mind the couple with some kids who want to extend their house, a free for all on development we would have skyscrapers overlooking peoples pools, no park land, destruction of old (heritage) housing.

What should and eventually will happen in Sydney and Melbourne is what has already happened overseas. New York is a good example. Everyone wants to live close to work, densities increase and we have apartment blocks and skyscrapers where people demand to live!

At the moment we have everyone wanting to live with a enjoyable traveling distance of their place of work. Most work is concentrated in CBDs, so you can draw a radiating circles around it in terms of travel times and map reasonably accurately where free standing houses are a waste of space and need to be replaced by higher density housing.

You can join the mortgage treadmill or make your asset work for you and get the normal tax deductions of an income producing asset. Living elsewhere for the first 7-10 years of the mortgage is the best thing you can do. Mortgage interest is dead money as well.

The most interesting tidbit I got from the Insight problem was the Federal minister mentioning reviewing fair rental rates. This sounds like rent controls in disguise (similar to the NRMA and ACCC petrol price witch hunt).
Ask New Yorkers what rent controls have done to parts of New York City!

Guess what happens to supply if you limit or legislate the return on investment?

Have Fun

Paul