Why Australia is a world champion at home price rises

Why Australia is a world champion at home price rises, by Alan Kohler.

Australian house prices, relative to income, have increased almost two and a half times over the past four decades while in the rest of the world, on average, houses have become cheaper.

Houses getting more and more expensive all the time — the stone that Australians have dragged behind them these past 40 years — is not what usually happens.

There are a lot of very different experiences inside the global average. Japan, for example, has had a horrible time since 1990 and dragged down the average. Spain, Ireland and Italy have had huge busts as well.

The other English-speaking countries – UK, Canada, New Zealand and the United States – have seen large house price increases relative to incomes, and the difference between Australia and those “Anglo” countries is much smaller. But we are the world champions.

Why us?

First, governments used to build or finance tens of thousands of houses each year from the 1950s to 1980s, but then they stopped. It was partly due to other demands on the budgets, but also due to economic rationalism in the 80s that decreed “private sector good, public sector bad” and led to wholesale privatisations, including of public housing.

Also local councils changed the way infrastructure for new estates was financed. Instead of debt repaid with rates, they moved to upfront charges on developers, which made house and land packages much more difficult to finance.

And finally, inner suburban councils tightened planning laws to prevent higher density, as existing homeowners sought to keep their neighbourhoods the way they were. …

Other government policy mistakes include negative gearing and first home buyer schemes, both of which encourage demand and subsidise price.

The main factor in rising house prices is availability of credit, or the bubble in money manufacture than runs roughly parallel:

David Evans, money supply

When a house is sold, money is exchanged for a house. Therefore the supply and demand for money is just as much a factor as the supply and demand for houses. We tend to overlook the money supply because it is not an issue for smaller items like say avocados, but for houses it is.

But the bubble in money manufacture is a global phenomenon — and Kohler is focusing here on the Australia-specific factors.