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Hugh Pavletich Comment - Housings High Water Mark

NZ HERALD ARTICLE – “HOUSINGS HIGH WATER MARK” – BRIAN FALLOW
HUGH PAVLETICH COMMENT

Hello Brian,

Thank you for your excellent article Brian Fallow: Housing's high-water mark - 15 Nov 2007 - NZ Herald: New Zealand Business and Personal Finance News .

My reading of the latest “household debt to disposable household income” from the RBA and RBNZ is that both Australia and NZ are sitting around the 160% mark now. I note you state that the household debt is sitting at the 140% in Australia within your article.

I am not sure that Australia’s housing overall is as low as 5.7 times the average gross household income. That seems a little light to me. You will be aware that the Annual Demographia Survey uses the median multiples (medians being more reliable than averages) covering the 159 major metros of the 6 countries surveyed – and on that basis the 2007 Survey (data Sept qtr 06) found Australia overall 6.6, NZ 6.0, Ire 5.7, UK 5.5, the US 3.7 and Can 3.2. Not surprisingly – you will find that Canada – with housing half the cost of ours in Median Multiple terms, has household debt to disposable household income of around the 125% mark. Using Canada as a guide - my guess is that if our urban markets were operating within the internationally acceptable affordability range of 2.5 to 3.0 MM – our household debt to disposable income would be in the order of 120% - not the 160% it is today. Regrettably – we appear unable to get this US States data. I would like to compare Texas and California for example.

I suspect that with housing inflation running at around the 12 to 15% mark over the past 12 months within the Australasian metros – that in the 2008 Dem Survey (release around 20 January) that we may find the Australian and New Zealand metros up to around 7.1 and 6.6 Median Multiples respectively. Going forward – the Australian housing inflation will likely keep pumping due to what I see as the irresponsible demand stimulations by both major political party’s in the current election campaign. The article in this mornings Melbourne The Age by Prof Steve Keen of the University of Western Sydney A lose-lose election for home buyers outlines rather well why housing inflation will keep pumping there.

It needs to be borne in mind that Australia’s annual population growth at around the 1.5% is currently substantially more than ours here in NZ at 0.97% - and this really shows up with the current chronic undersupply of rental stock in Australia hovering around the 1% (other than Wellington – there is not the same pressure here on the rental front – partially because of the number of Kiwis leaving for Australia I suspect).

Compare this with the situation in Texas as Steve Brown of the Dallas Morning News explained well in a recent article Dallas-Fort Worth apartment market is profiting from housing crunch | Dallas Morning News | News for Dallas, Texas | Business – where all it has taken there is a 2% lift in annual rentals and rental vacancy rates to fall below about 6%,, to trigger a massive construction response in new apartments in the Dallas Fort Worth and Houston urban markets. If you check through the latest US National Association of Homebuilders (NAHB) numbers – you will find that the “supply response” in Houston was quicker than Dallas Fort Worth because the former does not have zoning. Obviously the developers couldn’t buy the local politicians and public officials off fast enough in Dallas Fort Worth to overcome the zoning impediment – but they have been trying as this article Fed Up: Texas Monthly November 2007 illustrates. It goes on pretty much everywhere of course – but only illustrates how zoning tends to assist in inflating prices and stalling supply responses.

Its about time we starter to learn from the affordable growing North American markets – and stopped playing games with this serious issue.

This “switch” to apartments within the affordable markets of Dallas Fort Worth and Houston has to some extent been created by the drying up of liquidity at the bottom end of the housing market (creating a need for more rental stock) – due to the sub prime fiasco. Partly due I might add to the whole issue being “wound up” in the media. With the US residential stock being in the order of $33T, household mortgages of $10.5T and of that the Alt A being around $2T and sub prime about $1.3T – its hardly a big deal if the losses may be in the order of $150billion to $400 billion (a very high estimate) – particularly when a significant proportion of the inevitable losses will be incurred outside the United States. It’s more the uncertainty and lack of knowledge – that are the real problems with this particular issue.

You may like to read the Sydney & Dallas Fort Worth New Starter Home Comparative Study by Demographia to get some idea of the inability of these highly restricted inflated markets to respond to demand (check out the appalling New South Wales build rates as well). Australia’s current annual residential build is only about 145,000 units (6.9 per 1000 population) and New Zealand’s at about 25,000 units (5.95 per 1000). In both countries they are currently falling. If you want to see where Australia is heading – I suggest you check out the California housing market. California’s build rate per 1000 population is at or below 4 and could be 3 this year. If Australia persists in strangling land supply and not ensuring it supplies affordable lots / sections and drives its residential construction down to California levels – that would mean less than 84,000 annual residential builds. In my view Australia needs to be putting in place in excess of 200,000 new builds annually – New Zealand in excess of 35,000. And affordable ones at that.

If you are keen to learn how bad – bad can be – Britain in the “textbook case” where over the past few years – build rates per 1000 population have been an appalling 2.5 – last year 3.0 – and in the usual convoluted and inept way of trying to deal with these political issues – the British Government is (vainly in my view) attempting to lift the build rate to 3.5. They just learnt recently that their population growth rate (due to grossly underestimated immigration projections) is now up to 0.7%. So the undersupply situation there is now particularly serious.

You will be aware that new starter housing build costs per square metre are - Dallas Fort Worth $US550 per sq metre, Australia $Aust650 to $Aust800 and NZ $NZ900 to $NZ1,200. Because of the degradation to our production house building industry over many decades now due to land supply strangulation (remember the waves of builders who left here for Australia through the 80’s and 90’s) – New Zealand is at a serious disadvantage. Add to this our fringe lot / section pricing as well.

In conclusion – it is my view that whilst there may be a pause on the housing inflation fronts in both Australia and New Zealand (refer graphs from the 2006 Demographia Survey) – inflation will resume before long – simply because we don’t have the capacity in both countries to get affordable new housing stock in to place. The “interest rate” issue is of no real consequence. If it was – (as an example) all the US urban markets would be in the same pricing / affordability position – as they clearly are not - as illustrated within the Demographia Surveys. It is important to focus on the “structural” aspects of this issue.

With best regards,
Hugh

Hugh Pavletich
Co author – Annual Demographia International Housing Affordability Survey
www.demographia.com
Christchurch

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