One of the myths in the housing debate is that Australia’s housing experience is unique. It is not. The Canadian housing market – recently described as “completely insane” and without the excuse of negative gearing – is a case in point. Toronto prices are reportedly up 33% on a year ago (beat that, Sydney), after a 16% rise the previous year. Even the US market is starting to raise concerns. A common factor in all these markets is very low interest rates, foreign demand, improving economies and the resultant demand meeting inelastic supply.
Hitting foreign demand has been the favourite tool (they don’t vote), with Vancouver imposing a hefty 15% tax (verdict on this still out) in mid-2016. Toronto has now copied, and given the sheer magnitude of the past 12 month’s rise, if foreign demand is a factor it should have a material effect. These events are being watched in Australia.
Relative to history, price levels in Sydney, Toronto and San Francisco are expensive. But while the US market contains a significant numbers of cities (e.g. its west coast coastal cities) where housing is expensive – those cities sharing common characteristics with Australian and Canadian cities – it also contains cities which are not expensive.
A recent interview by Joe Gyourko, one of the US’s leading urban economists, discusses the contrast between expensive and inexpensive US cities. In short, the expensive markets are characterised by inelastic supply (supply takes a lot longer to respond to changes in price). Or, more precisely, by planning systems which make the market for land uncompetitive and the process of bring new supply to the market an expensive one. Another feature of inelastic markets is that they are more volatile, both on the upside and (NOTE) downside.
Certainly Toronto and Vancouver fit into that inelastic market category which is almost certainly a factor in the current period of rising prices in those two markets.
A Sydney vs Melbourne Comparison of Interest
In Australia, all capital cities are characterised by rigid planning systems but the Productivity Commission (2011) in its report into complexity of the regulatory planning process clearly indicated that Melbourne’s system was more efficient than the Sydney system. The benefits of that more efficient system can be seen in a comparison of urban fringe land and house prices in the two markets.
Whereas fringe land prices in the Sydney and Melbourne markets were at similar levels in the 1980s, since then a significant gap has emerged. In the early 1990s, the average price of housing lots (in today’s dollars) in SW Sydney was $130,000 per lot and were about 70% higher than those in W-NW Melbourne. (Chart 1) The deeper recession in the Melbourne economy/market in the early 1990s would explain a gap emerging in this period compared with the 1980s. Then in the 1996-2004 boom, prices in SW Sydney trebled to a 2004 peak of about $400,000 per lot (in today’s dollars) to then be 140% higher than those in W-NW Melbourne. The end of that boom saw land prices decline by 30% from its 2004 level, emphasising the point about volatility. After a period of steady prices, the 2012-16 boom has seen prices “recover” by close to 50% back to $420,000 per lot.
In the period from the early 1990s to 2004, the price of land (in real terms) in W-NW Melbourne (its fringe) rose from $75,000 to $220,000 in 2011. However, since then and during the latest boom it has essentially been steady at $220,000. That is, the price of land in W-NW Melbourne has risen significantly in the period before 2004, which suggests it falls well short of being efficient in its own right. But prices have risen much less than has been the case in SW Sydney and during this latest boom period, when population growth in Melbourne has surged more strongly than Sydney (2.1% vs. 1.4%), the steady level in land prices stands in stark contrast to the experience in SW Sydney.
Not unexpectantly, that difference in land prices is fully reflected in house prices (Chart 2). These are important markets for first home buyers, so on a number of scores Victoria is doing better than NSW. Turning things around is not easy but, if the NSW Government sticks to its commitment to focus on supply, things have the potential to improve.
 Canadian Business Apr 11, 2017. http://www.canadianbusiness.com/economy/how-canadas-real-estate-market-went-completely-insane/
 Business Insider 22 April 2017 http://www.businessinsider.com/ontario-is-trying-to-burst-torontos-housing-price-bubble-2017-4?IR=T
 Understanding Housing Supply: Views from Joseph Gyourko,Global Housing Watch Newsletter: April 2017
About the author:
Dr Nigel Stapledon
Nigel has a PhD in Economics from UNSW and a Bachelor of Economics with Honours from the University of Adelaide. He started his career in Canberra, where he worked in the Commonwealth Treasury, following this he worked at Westpac where he was Chief Economist. Nigel has been at UNSW Business School since 2003 where he completed a PhD on the long-run history of house prices in Australia. Nigel is a regular commentator in the media on macro-economics and housing., contact Nigel on 02 9221 5211 or firstname.lastname@example.org