Trouble at home

In their ‘theses on the crisis’, which I posted a month ago, Panitch and Gindin present the ascension of bank nationalisation onto the political agenda as an opportunity for some revolutionary leverage: it “provides an opening for advancing broader strategies that begin to take up the need for systemic alternatives to capitalism”.

This doesn’t have much resonance in Australia, because the banks here are not in big trouble; in fact they’ve been strengthened by the collapsing fortunes of their finance company rivals. Bank nationalisation is not on the agenda.

I wonder if housing isn’t a better focal point here. Australia hasn’t seen a housing bust to the extent the US and UK have, and it doesn’t seem likely to, except in the top end of the market. The reason is that housing demand has been outstripping supply, due mainly to population growth. According to Treasury, the increase in demand for dwellings started taking off above the supply of new dwellings in 2005.


New housing construction has fluctuated around a fairly constant mean since at least the early 1990s. The construction slump of the mid-1990s reflected a housing stock that had grown faster than the demand for it. But demand caught up, and for most of the next decade, supply and demand circled one another. So far, so good, the economist might say, supply and demand correcting each other and tending towards balance.

But the market adjustment story has some problems. Between 2000 and 2006, the median first-home price doubled. Why, when underlying supply and demand for dwellings were reasonably matched? The answer lies in the investment demand for houses and the easy availability of finance for it.


Meanwhile the supply of new dwellings moved up and down around its long-run average. Why didn’t the rather deafening price signal motivate an equivalent expansion of supply? Presumably because the construction industry has limited capacity, and faced workforce and materials constraints on its growth.

Now, given projected population figures, a decent case can be mounted that housing demand is going to outstrip supply for the foreseeable future, which is bad news for people who don’t own houses. The real estate industry can argue that there was no bubble in Australian real estate, that investment buyers were correctly forecasting the future. But if this is true, the price mechanism has epically failed to increase the capacity of the construction industry to provide for society’s housing needs.

If Treasury’s population projections are accurate, the construction industry needs to be much bigger, in absolute terms and as a proportion of the workforce, if these needs are to be met. There are those who see that as Australia’s way out of the recession – a movement of workers out of manufacturing and mining and into construction… But that requires a (financed) boost to construction demand from somewhere, which so far exists only in government and industry prayers.

The alternative is demand-side adjustment, which is what’s taking place now. This means the burden falls predominantly on renters – a pool of renters swelled by frustrated would-be homebuyers (although house purchase affordability has increased to some extent with the fall in interest rates and the increased first-homebuyers’ grant). Renter adjustment means some combination of more crowded households and an acceptance of higher rents. Higher rents are a flexible pressure valve because rental demand is pretty inelastic since everyone has to live somewhere, so it will crowd out other items in the household budget before households exit the market (to live with relatives, in caravan parks, etc. – which, incidentally, are already trends too).

Finally, demand side adjustment could come from reduced immigration. This is the reactionary solution. While I don’t doubt that this is going to a chronic pressure point in Australia, it’s not a nice way to go. (Disclosure: author is an immigrant and renter.) It also just shunts pressure elsewhere in the system, into the pensioner quagmire, since increased immigration is Treasury’s solution to an ageing population.

It’s obvious all over the world that housing is a fragile point in post-2000s capitalism. Housing is both a human need, and a financial vehicle for savings and speculation. House prices in Australian politics are what Americans call a ‘third rail’, i.e. what governments stay clear of for fear of instant electrocution. The Labor government’s strategy on housing focuses entirely on that small subset of policies that can be portrayed as simultaneously supporting house prices and making them more affordable. Unfortunately, ‘more affordable’ means ‘cheaper’, which, you will note, is synonymous with ‘lower prices’.

For a large proportion of the populace, including much of the working class, the house is almost as important as a financial asset as it is a place to live, given the uncertainty of living standards after retirement. Therein lies a deep contradiction, which only a radical socio-political shift can resolve.

The URI to TrackBack this entry is:

RSS feed for comments on this post.

10 CommentsLeave a comment

  1. Hey Mike. Interesting post; does this mean that the housing bubble was not so inflated in Australia? Also, what do the wage rates look like down there? Part of my gut tells me that housing prices should be more or less within a certain range relative to the average wage rate–at least, if it as an asset is supposed to be valued in a ‘sustainable’ way–and that the reason housing value needs to greatly decline in the States is because the great credit era has ended.

    Which leads me to wonder if anyone has done any research on the ranges of housing prices relative to wages paid. It’d be an interesting area to look at. Also, it might be useful in modeling or coming up with different legal frameworks to get people access to places to live, etc, that are not bound to a market framework.

  2. I am fairly astonished by this piece Mike, particularly because it seems to take supply and demand as the fundamental forces that determine price.

    The most glaring thing you don’t account for is the ability of people to pay. I expect a property price collapse similar to that in the US or UK, if perhaps not as deep, because unemployment is going to rise, wages are going to fall, and prices were fall for everything, particularly property. The reason we’re only seeing high-end falls at present is that the first shock to the economy has been to the high-end through the hit share prices have taken, but this will filter down.

    Immigration is already being curtailed by the government, but this isn’t really important, because the economy – even if not the banks – is going to collapse and this will mean that the desire to immigrate is going to decrease by itself. I have speculated before that many recent immigrants might actually leave, but I think on balance what will happen is that population growth will steady. Of course, this doesn’t matter since, as you say, demand for housing has already outstripped supply.

    The reason that demand has outstripped supply is manifold, but the effect in the construction industry, certainly in Sydney, is misrepresented by you here: it’s not a failure of construction to keep pace
    One thing, certainly in Sydney, is a lack of land – or at any rate a lack of land anywhere where anyone would actually want to live, which is a lack of land where construction can reap profits. Another is increased cost of construction. Primarily though, it’s been the collapse of a real estate speculation bubble. Until a few years ago, anything you built would get sold, to be bought up by speculators. Now, everyone is expecting the prices of property to fall further, including speculators and builders, thus there’s actually little demand for new housing. The government has been falling over itself to artificially stimulate demand with big cash handouts, even though interest rates are already through the floor. This, as I’ve argued, amounts to a bailout for speculators saddled with otherwise unsaleable property.

  3. Sorry, bits of that comment are somewhat garbled – where I said that the construction industry has not just failed to keep pace, I meant to go on to say that it has fallen off completely.

  4. First up – yes, like just about any economist I take supply and demand as useful concepts for organising thinking about price determination. Marx’s point about the asininity of saying supply and demand determine price was only that it says nothing about what determine supply and demand. But even neoclassical economics implicitly recognises that, in its insistence of talking about supply and demand _schedules_, each of which are determined by other relations.

    The point you both raise about capacity to pay: Housing is an absolute necessity, we all have to live somewhere. We would expect that because there aren’t many alternative options available to renters, they will wear general rent increases, with rent growing as a proportion of the wage basket. The main countertendency would be larger households, with kids staying longer with parents and more share-houses. Migration to cheaper places also, though this is a more drastic step and faces the difficulty that the places with cheaper rents are generally harder to find work in, and have lower wages, which is why we see the general capitalist tendency of net migration to large cities despite the cost of living.

    As we would expect, then, housing costs have in fact historically varied as a proportion of income. The Australian stats don’t go back very far, but show a rising trend of rents relative to incomes in the 1980s, relative stability in the 1990s, and a further rise in the 2000s. Note that the 1980s rise has never (yet?) been reversed.

    Elsewhere, longer-run stats show that the proportion of household income devoted to housing has risen substantially over the long term. This book shows (Housing in Britain by Short: 226) a steady rise from 8.8 per cent in the early 1950s to 14.8 per cent in the late 1970s; presumably it’s significantly higher today.

    This is housing costs as a proportion of income; since real incomes have also risen in the long run, this means housing tends even more strongly to become more expensive relative to other goods and services. (One big reason why despite the huge increases in productivity over time it’s still so hard for people to get out of the rat race, contra the anti-consumerist people.)

  5. Land is certainly an issue, but not as important as some people make out. Infill development (i.e. already-urban land redeveloped for higher density) already makes up a third of new housing development land. In terms of the number of dwellings, infill redevelopment now contributes more than greenfield urban edge sites. That’s in Australia as a whole, I imagine in Sydney and Melbourne its even higher, and of course that’s where the future is. (Data:

    As for the real estate bubble and credit crunch more generally, I agree with you that until finance gets its shit together and confidence increases, construction’s not going to be expanding. Maybe I wasn’t clear enough in the post, but my point was how little the house price boom of the 2000s did not flow into a construction boom. Just as it didn’t fuel a boom, neither has the tail-off in price rises led to a bust. Take a look at the latest ABS stats and you’ll see that residential construction has been more-or-less steady since 2002, while non-residential construction has continued an _upward_ trend. (

    My point is that while supply has remained fairly steady, demand, in the broadest sense of demand for a place to live, is still high. You’re probably right that investment demand for houses has fallen, but overall demand for house purchases has held up. Rents continue to rise at a rapid pace – see the latest Housing NSW’s Rent and Sales Report (

    On the question of whether the economy’s “going to collapse” I’m just not as apocalyptic as you. A recession, even a deep and long one, is not a collapse, and I’m talking about long term trends.

  6. […] on house prices Reserve Bank of Australia Deputy Governor Ric Battellino has waded into the Scandalum Magnatum controversy, laying out (again) the central bank case on Australian housing in a speech today. No mention of […]

  7. “Housing is an absolute necessity, we all have to live somewhere.”

    The first part of this is surely not true. Though we all have to have a spatial location, this doesn’t mean we have to rent or own land. This demand, like all others beyond basic nutrition, is culturally and politically relative. In India large numbers of people live without what would be deemed housing in Australia, raise families in such conditions, etc. Of course, in Australia such mass homelessness has been eliminated through public policy as well as by cultural choice. On the one hand, anyone actually homeless can obtain emergency housing through government agencies and NGOs. On the other, Australians in insecure housing situations are less likely to get married, have children, etc., whereas in India people prioritise family over housing.

    Regarding supply and demand, I wasn’t denying that they had any determining effect in the economy, just that they are the fundamental factors in determining price, which I felt was a position implicit in your argument. You seem to admit now that the determinants of supply and demand are more fundamental than these factors, yet in the above-adduced quote you seem to be claiming that certain demands are absolute, i.e. based on nothing but themselves.

    I meant ‘collapse’ in relative terms, i.e. in the same sense one might talk about prices collapsing, not in the sense of the economy literally falling apart so it doesn’t work any more. Perhaps this is still more apocalyptic a vision than you’d countenance, but I just wanted to clarify that.

    You still seem to ignore the unsustainability of the housing bubble, i.e. the growth of consumer indebtedness that has been required to reach the current price levels for housing, and which has been possible because of low levels of unemployment and low interest rates, which will have to snap back sharply as unemployment rises and interest rates increase.

    Your point about making a long-term argument seems to me to be a variant of the popular belief that this recession is a temporary anomaly that will soon give way to the trends of the previous decade. I tend to think it’s the trends of the last decade that were anomalous, the products of a unique combination of privatisations and the wealth effect, that could only ever be temporary, and that thus we could be in for a return to a high-unemployment, low-house=price economy in the longer term.

  8. On supply and demand: You seem to see them as two individual factors among others, which I don’t understand. I see them, rather, as categories of factors, one relating quantities to prices at which producers/owners are willing and able to sell, and the other relating quantities to prices at which buyers are willing and able to buy. I don’t think the original post is inconsistent with that.

    The factors you mention relating to living in larger households are there in the post too. I didn’t deny it as a countertendency. The question is then the relative strengths of the tendencies, which we can only settle empirically. I linked to some stats suggesting that so far rents have continued rising rapidly and house prices have on average failed to collapse. We are now _more than five years_ since the top of the housing boom in Australia.

    Same with the question of indebtedness. I don’t deny it’s a counter-tendency, and nobody doubts that households are going to be paying down debt for a while. But while that will cut into consumption, it’s not clear it’s going to have a big impact on house prices. Aggregate debt figures can be misleading, because it’s very unevenly distributed. According to the RBA, “In Australia, the lending boom was concentrated on existing home owners who traded up to bigger and better houses and bought investment properties. Many of these were people in their 40s and 50s who previously had low levels of debt.” (

    While the proportion of non-performing loans have skyrocketed in the US, there has been barely any growth so far here, and the non-performing rate is below that of the mid-1990s. (ibid) Remember that most mortgage interest rates in Australia are adjustable linked to the cash rate, which has meant a large decline in the ratio of debt repayments to income since a couple of years ago. While in the US, mortgage rates are predominantly fixed and connected to the rate on seven-year Treasury bonds, which are much further from the Fed’s control. (

    No doubt when unemployment rises, there will be an uptick in mortgage stress. But how big? It depends on who is likely to be unemployed, and the extent to which these are the people with large debts. Again, an empirical question which we should have evidence for before jumping to conclusions.

    The last five years were definitely above average for Australian household incomes, the best since the turn of the 1970s, and I agree that the wealth effect was a big part of that. A lot of the wealth was an illusion. I don’t think house prices are going to boom again any time soon, I just don’t think prices are necessarily going to collapse. There’s still a real question about what happens as baby boomers and their children try to cash in the assets with which they’ve ‘saved’. But this is a longer-run question involving other unknowns like immigration, the character of the next global recovery and Australia’s place within it. At the moment housing affordability, and especially rental affordability, is a bigger problem.

  9. In the United Kingdom, it is clear that the demand for luxury homes is facing recession. On the other hand, the demand for the economy homes, however, appears active. Perhaps due to some of the reasons include: the immigrants and a large number of foreign students to the United Kingdom.

  10. I think untill we get the credit mess fixed we are in for along road

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: