Former Treasury Secretary, Dr Martin Parkinson, reckons he knows why Sydney housing is so expensive.
Speaking at a Queensland University of Technology business leaders’ forum yesterday, Dr Parkinson offered the following when asked whether he agreed with current Treasury Secretary, John Fraser, that Sydney housing was a bubble. From The AFR:
“Is there an issue of house prices in Sydney? Yes there is”…
“Do we have a bubble? I think that is the wrong question to be asking. We should be asking why house prices are so high and there are two reasons: first Sydney is becoming an international city and there has been an inability of state governments to take a sufficient forward view of what is needed to be done for land release”…
“I don’t see that there is a role for national level politicians trying to talk down house prices rather the role for politicians should be to put in place structural reforms that lead to an increase in housing supply”…
“If you don’t do anything to increase housing supply and you simply talk down prices what’s the point? You won’t get anywhere”.
“The only way you will get house prices to grow more slowly or to fall is by expanding supply. Supply is the problem.”
I can only presume that by “Sydney becoming an international city”, Dr Parkinson is referring to the high numbers of migrants and foreign investment flowing into the city, which is clearly pushing up demand for housing. If this is the case, he has a point, and the same argument equally applies to Melbourne.
Dr Parkinson also makes a valid point when he talks about a lack of supply. As shown below, the rate of dwelling construction in New South Wales (read Sydney) did indeed plummet last decade just as population growth (read immigration) surged:
Moreover, of the homes built, an increasing proportion have been units and apartments, which are necessarily smaller than detached homes and cannot accommodate as many people:
Certainly, if housing supply was far more responsive to demand in Sydney, then home prices would likely be more affordable than they currently are.
That said, to pin Sydney’s housing problems solely on supply-side bottlenecks is wrong. Sydney house prices first surged in the early-2000s – before supply plummeted:
And the driver on this occasion, as well as more recently, has been an unprecedented surge of demand from investors, egged on by Australia’s generous negative gearing and capital gains tax concessions:
Sure, there is the argument that if Sydney’s housing supply was highly responsive (elastic), like it is in places like Houston and Atlanta, then this extra demand would have manifested mostly in increased construction rather than higher prices. But how realistic is it to expect Sydney’s housing market to become hyper responsive when the city is: 1) hilly; 2) surrounded by ocean to the east; 3) hemmed-in by the Blue Mountains to the West; and 4) constrained by some state/national parks to the north and south?
Blind Freddy can see that Sydney’s housing woes are caused by a combination of factors affecting both the supply AND demand sides of the market.
Thus the solution requires both measures to free-up supply-side bottlenecks, as well as efforts to remove speculative demand induced by spurious tax incentives, along with tighter surveillance/enforcement of foreign investment in established homes.
None of this is rocket science.
