That bloody housing shortage

It seems that the RBA's Anthony Richards may have been reading my blog. His comment today from a national housing market forum includes the following

I said in a talk earlier this year that most calculations available then put underlying demand at something like 180,000 to 200,000 dwellings per year. However, I noted that such figuring was based on simply extrapolating earlier trends in household size and ignored the likely impact of prices on the demand for housing. At some point, the overall demand for housing will be affected by the higher cost of housing. For example, with housing – both owner-occupied and renter – more expensive than in
the past, we might expect to see some young adults choosing to live with their parents for longer. We might expect some households to look for an extra flatmate rather than leaving a bedroom vacant. Some owners of holiday homes or second homes might have become more inclined to sell them, with those houses then occupied full-time.

Hence the ‘undersupply’ of housing might not be as large as sometimes thought. But this is not necessarily something that should reassure us – it may be because the higher cost of housing – partly reflecting supply side problems – has choked off some of the demand that might otherwise have existed.

However, by the end of his statement, fingers are squarely pointed at the pet issue for housing analysts, supply side constraints.  That bloody housing shortage gets a good run in his statement as well. 

I also wonder how we are meant to know the counterfactual demand that might otherwise have existed.  Isn't he just saying that demand for housing follows the law of demand?
 
His remarks are reported as evidence that the housing market is ready to 'take off'. But only time will tell whether the inverse correlation between change in housing shortage and change in price proves reliable in the longer term, or whether the RBA really can forecast market behaviour.

----------UPDATE----------

It looks like I'm not the only one who has interepreted the housing market exactly the opposite way to the RBA and other property bulls.

Roads for nobody

Friday's local rag suggests that the State government here in Queensland is keeping their employees busy by investigating a possible new tunnel from Toowong to Everton Park.  This is to alleviate traffic congestion (of course).

Let me make some predictions.
1. This tunnel will not start construction within a decade.
2.  If 1 comes true, expect the tunnel never to be built.

The reasons are equally as obvious as the predictions.
1. The State government has no money for ridiculous projects like this.
2. The Federal government will tighten its belt before they are asked to fund this project.
3. The private sector will not fund it - they wouldn't fund a little $250million bridge because of good alternative routes, why would they fund this. 

If you want to head north on the Bruce highway from Toowong, wouldn't you take the other tunnel they plan to build to the Inner City Bypass, then get on the other new tunnel to the airport, then get on the Gateway motorway heading north?  I would.

It appears that the transport planning community has looked to cities around the world that have similar traffic problems to Brisbane (Los Angeles, Sydney etc), and adopted similar approaches to alleviating traffic congestion.  One wonders why transport planners don't instead look to cities that actually don't have severe traffic problems, and instead adopt some of the approaches used in these cities.  It is a lot like asking a chronic alcoholic which intervention worked best for him when he still drinks like a fish. 

I await a more diversified transport plan for South East Queensland.

Child care subsidies and maternity Leave: New incentives and unintended consequences

The maternity leave debate was raised yesterday with an angle I had not thought about before, but being an economist, really should have. It suggests that maternity leave has the unintended consequence of encouraging women with young children to work rather than stay home with their children. Rather than bringing families together, it actually tears them apart. Let us examine this claim.

The article claims that more than 80% of children under 5 years of age attend formal day care in Sweden, where 12 months maternity leave is the norm. This figure must surely be closer to 100% of children aged 1-5, given that mothers (or fathers) are paid to stay home for the first year of their child’s life. In Australia, the number of children under 5 in formal day care is currently less than 40%, and much of that I would imagine is part time.

Both the pro and anti maternity leave debaters need to get straight the purpose of their policy. That way we can examine whether there are possible unintended consequences which can undermine the suggested outcomes.

For example, the pro-maternity side appear to want to reduce the cost of child rearing to working mothers. Fair enough. But the unintended outcome of a maternity leave is to decrease the costs of child rearing for working mothers, but not stay-at-home mums. The new incentive structure encourages mothers to choose work over staying home with youngsters.

Complementing maternity leave is the current child care benefit scheme. I have mentioned before how cheap child care can be after all the subsidies are considered – about $15/day/child. This policy increases the net benefits of working for mums, as the cost of working, in the form child care, is reduced. These subsidies provide incentives for mothers to return to work quickly after the birth of their children.

Sweden is the classic case study of the pro-maternity leave lobbyists, but I wonder if they have really examined the outcomes of Swedish policies in detail.

Consider this comment (all quotes from here): 

Policies such as childcare and parental leave have meant that the majority of Swedish women are employed in the labour market and remain there throughout their lives, with only minor interruptions after the birth of a child.

And: 

from 1990-1998 the percentage of women engaged in part-time work fluctuated between 43 and 47 percent, while since then it has decreased to between 33 and 36 percent.

It appears more kids in full time, rather than part time, child care is what you get.

The following graph is of the period following the introduction of 180 days parental leave, at 90% of previous salary, in 1974 in Sweden. This was extended to 9 months in 1978.

During the 1970s and 1980s, the state and the municipalities both covered approximately 45 per cent of the fees, leaving the remaining 10 per cent to be covered by parental fees.

Again, subsidising child care works, in that it increases the uptake of child care. Not subsidising it works too. Cost of childcare exploded in the 1990s, and

…by 1998, 17 per cent of the costs of childcare were being covered by parental fees

The graph above clearly shows this impact. But what of the 2000s boom? We have another policy change to explain that one.

In July 2001 the Swedish government expanded childcare to include children of parents who are unemployed and in January 2002 to include children of parents who are on parental leave looking after a sibling (Swedish National Agency for Education, 2003). In addition, in January 2003 all children aged 4-5 became entitled to 525 hours of free attendance in childcare per year.

It is time for the pro-maternity leave lobby to ask whether having almost all of our children aged 1-5 in full time child care is a desirable social outcome.

My gut instinct is no, but I have no reason for this position. My son is in family day care two days a week, and he started this at 18months of age. He enjoys it, and he learns to socialise with other kids. Since putting kids in child care is a voluntary action of parents, my inner economist says that it must be the best outcome in the circumstances. Of course, the circumstances are the direct result of government policy tweaking the incentive structure.

In the end, it appears maternity leave policies do not bring families closer together, but create a generation where parents and children become strangers.

A comment on Fixing the Floor in the ETS

Dr Richard Denniss recently published a research paper for The Australia Institute. Despite its promising title, there is no solution for fixing the ‘floor’ in the ETS to be found in this document. In fact, it takes tentative steps towards teasing out the mechanisms through which the economy and environment interact, but in the face of reality, jumps back on the feel good, greenwash, drive a hybrid, hold hands and be nice to each other bandwagon.

Let me explain.

The story woven by Denniss is that energy and emissions conservation efforts by households will be rendered ineffective due to the proposed emissions trading scheme (ETS). For example, if households reduce their electricity demand through efforts to conserve, the electricity producer now needs to produce less electricity, and can then sell some of their emissions permits to other polluters. Hence the ETS provides a floor on emissions that cannot be passed, as permits can always be traded to other potential polluters.

However, the fundamental assumption in the paper is that households can reduce their greenhouse gas emissions by simply changing their purchasing behaviour and embracing energy efficiency. If you have read my previous blogs you would know that this is an ineffective strategy.

While the paper provides an interesting insight for many, the major flaw is that Denniss acknowledges the flow-on effects from the ‘after ETS’ scenario, without any reference to flow-on effects in the ‘before ETS’ scenario. As an Associate Professor in economics, Denniss should know that these type of flow-on effects would appear without the ETS due the price mechanism. Taking the above example in the 'before ETS' scenario, a reduction in electricity demand should reduce the price of electricity, and subsequently increase electricity demand by others (because of the Law of Demand - lower the price, the more we buy). Therefore, the actions that are supposed to be rendered ineffective by the ETS are already ineffective.

Blake Alcott has a very interesting paper that debunks conservation as an effective way to reduce energy consumption and subsequent greenhouse gas emissions.

In short, as I have mentioned many times in this blog, to truly reduce resource consumption you must restrict the supply. In the case of greenhouse gas emissions, the ETS does exactly that. Individuals actions mentioned in the paper are presently ineffective, and will remain so under the ETS. However, there will now be the opportunity to buy emissions permits, restricting their supply to polluters if you wish to invest in behaviour that reduces emissions.

If the only pressure on emissions production is upwards, then the existence of a floor is clearly not an issue, as long as it also acts as a ceiling. If you think about is, most restrictive regulations that provide limits also act as floors with little criticism. Safety standards, town planning restrictions, and many other regulations provide no incentive to ‘outperform’. That is not their purpose.

It is time to stop the feel good ramblings and the government blame game and accept reality for a change.

Fluoride: Medication for the masses?

The Queensland government is currently phasing in fluoride to the reticulated water supply in many parts of the State. Yet there is by no means a scientific consensus that adding fluoride to drinking water provides net health benefits to the community. While there is debate regarding the ability for fluoridated water to improve the condition of teeth, there are more broad and significant implications of the decision to fluoridate water. I aim to add some further economic dimensions to the fluoride debate.

When considering a policy decision, an economist will seek to implement only those policies whose welfare benefits outweigh the costs. Regarding fluoridation, the benefits are the potential for reduced tooth decay and any health and psychological benefits that this may encompass, as well as reduced dentist bills. The costs include the provision of fluoride to the water supply, the cost to people who suffer allergies or long term side effects of which little in known, and the costs imposed on people who wish to drink water that contains no fluoride. Some estimates put the benefit to cost ratio at 56:1.

But an economist would take one step further, and would judge this policy decision against other alternatives. What about spending the money on education? If the benefit to cost ratio is higher than 56:1, then education spending should get priority.

The question the few people seem to raise is that if fluoridation is about medication of the masses, surely there are less obscure medicines that would provide greater benefits. What about adding vitamins to the water? Maybe anti-depressants? Viagra? To an objective observer, each of these options should be open to assessment as a potential policy if the social benefits outweigh the costs.

When I have the fluoride discussion with friends, this line of reasoning, about assessing alternative medications for the water supply, is generally the enough for them to actually think deeper about the fluoride issue. It raises questions like:

• How can you medicate anyone without any prior knowledge of his or her medical history?
• Why would you spend so much on putting medication in the water when most water from the reticulated supply is not consumed by people? Only about 1-2% of water in the home is used for drinking. Do we really need to fluoridate the laundry, the toilet, and the garden?

Asking the first question should really be enough to stop water fluoridation. The second question pricks the ears of an economist. If 98% of the fluoride is wasted, surely a more cost effective alternative would be to subsidise fluoride tablets, which would ensure the 100% of the fluoride gets to the people. A misallocation of 98% of a medication alerts even the serious fluoride believer.

Even for those who believe in the potential health benefits of fluoride, using the water supply for medication delivery is wasteful, and inappropriate.

Population - the forbidden debate

A newspaper article this morning got me thinking about the untouchable issue of population growth. It is available here. Basically, the article publicised the not so surprising fact that SE Queensland’s rate of population growth is slowing. But what it did mention was the causal relationship between the supply of housing and population growth.

If we are to believe this article then increasing the supply of housing causes population growth – it must be true if the opposite is true. We have probably heard the phrase ‘build it and they will come’. Such a saying did not gain popularity because it is irrelevant. It gained popularity because is very close to the truth. If you would like an rather academic discussion of Say’s law – the theoretical argument that supply constitutes demand, have a read here.

The main point I want to raise today is that population growth is not something we respond to, as the state government so often puts it. It is something that comes about in response to economic conditions. When there is a boom – high growth. When there is a bust – low growth. Just today I sat in a seminar on the impact of war on reproductive rates of women. And yes, the supply of men also has an impact on reproductive rates and population. Imagine how well we could plan cities, towns, and infrastructure, as well as putting away areas for conservation, if we knew which factors highly influenced peoples reproductive decisions. We could plan, knowing in advance, the flow on effects from our policies. I wonder how much discussion was had before the introduction of the baby bonus? Or even discussion of the need for such direct stimulation, if indirect means can be equally effective.

So why would I raise population growth as an issue. Because for an economist environmentalist, labour supply is an important component in determining the net environmental impact of society. The more people we have, the more man/woman hours can be put to work producing goods and consuming natural resources.

The question we need to ask ourselves is what population we would like? It seems pretty radical to think about this. It brings images of China, oppression, and a violation of peoples right to reproduce. But this need not be so. While the Chinese have targeted population growth directly, if we believe that external factors influence population growth, then all we need to do is manipulate these factors to give people incentive not to reproduce. If we want more growth – just build more houses.

Growth spurt draining the state dry

Cyclone Odette may have been the last chance to receive drenching rain to top up the parched dams of the southeast corner before the winter, and it passed by leaving just a few drops.

In the same week, the Federal Government announced it will fund the long-awaited $2.3 billion Goodna bypass, and yesterday I received a rebate from the State Government for installing a water tank.

The connection between these three events is water, and more specifically, the lack of this precious resource in the dams around southeast Queensland. As we enter our dry season under the imposition of level 5 water restrictions, residents are being expected to cut their domestic water use to a scarce minimum. To offer further incentive, the state and local governments are offering grants to install water tanks for residential buildings. But if the State Government and Brisbane City Council were truly serious about the issue, and serious about the long-term sustainability of the region, why are they now spending many billions on large infrastructure projects designed to encourage rapid development?

The connection between the water crisis and the rapid scale of development in Queensland is clear to many people. Not only do more people need more water, but the development of new homes, workplaces and infrastructure requires massive amounts of water before and during construction.

The water required in the production of goods is known as embodied water, and has been overlooked in the decision-making processes for development in the southeast corner. In construction projects, the volumes of embodied water are extremely high. Recent studies from Deakin University show that the embodied water of a three storey office building designed to high environmental standards is about 54,100 litres per square metre of space. This is the equivalent of 18 3000 litre domestic water tanks, six months' domestic consumption by one person, or enough drinking water for one person for 37 years.

In the Brisbane CBD alone there is an estimated 100,000sqm of office space expected to be constructed this year, which would use about 5.4 billion litres of our supply – almost equal to the domestic consumption of Bundaberg with a few million litres to spare.

To offer some ballpark figures on embodied water, the CSIRO has found there is about 140 litres of embodied water for every dollar's worth of steel, and 15 litres for every dollar's worth of concrete. Other less reliable evidence suggests there is in the order of 40 litres of embodied water per dollar spent on construction.

Based on these figures, one might wonder how much water is going to be required to build Campbell Newman's TransApex plan. The North-South Bypass Tunnel alone will use 280,000 cubic metres of concrete and cost in the order of $3 billion (or will it cost us 120 billion litres of water?)

And what about the other infrastructure projects which have been proposed, such as the Goodna Bypass, or those under construction?

Putting enormous pressure on residents to save every drop seems ludicrous among this wastefulness. Even if every person in Brisbane saved 10 litres per day this year, it would be the equivalent of about 4 percent of the embodied water of the NSBT.

If the State Government is serious about water, it must get serious about limiting the scale of development in southeast Queensland. When you find yourself in a hole, you stop digging. When you find that you have outgrown your natural resources, you stop growing.

First Home Owners Grant has driven the housing affordability crisis

There has been much publicity recently about Australia’s growing housing affordability crisis. And quite justifiably. The 3rd Annual Demographia International Housing Affordability Survey released earlier this year puts Sydney, Hobart, Perth and Melbourne in the 25 least affordable housing markets in a study of Australia, New Zealand, United Kingdom, Republic of Ireland, United States and Canada. Shocking research such as this study has put pressure on the Federal Government to relieve pressure through tax reforms and incentives. 

Young Liberal Micheal Janda, in an award winning essay, proposed that the First Home Owners Grant was a positive move to combat unaffordability, yet this has simply not been the case.

The FHOG was intended to assist first home buyers to offset the impact of the introduction of the goods and services tax (GST). Apart from the obvious indirect relationship that GST and home buying have (since residential dwellings are GST exempt) and that the GST had impacts on all people, not just potential first home buyers, there is startlingly clear evidence to suggest that the FHOG was the stimulus for a reduction in affordability since 2000.

From the 1st July 2000, home buyers who had not previously owned their own property were given $7,000 by the federal government. Immediately, the price of housing in all areas would rise by at least this amount, for a first home buyer could offer for example $5,000 more for a property and still be $2,000 better off than another buyer. 

 In an instant, prices all residential markets rose by $7,000. 

Not only were the buyers who were already in a position to buy now helped along, but those who could not have been in the market except for the grant had started buying. This lead to an increase in potential buyers in any given area, thus an increase in aggregate demand for residential property, and following basic economic principles, an increase in prices. So not only were prices increased by $7,000, but also the flow on effects of a larger pool of buyers lead to further rises. Of course, looking at other flow on effects, or transformational effects, it could be stated that this rise in prices stimulated even more speculative investment, thus leading to a positive feedback cycle where as prices are seen to rise, more investment is made, raising prices even further. In property terminology this would be labelled a boom.

Addressing housing affordability is not a simple task, and like many other crisis, there is no silver bullet. Solutions will need logical foundations and sufficient time to wind back the crisis without causing other new crises. The call from the property development lobby to rezone more land for development is another counter-productive suggestion. There is already surplus land with development potential. But developers must wait for prices to rise before they can develop it. Can you imagine a property developer moving in to an area and selling below current market prices to forse the market down? It will not happen.

One of the best suggestions to address this crisis is a gradual movement of tax subsidies away from investment property to owner occupied dwellings. Currently, all maintenance expenses, interest on loans, and depreciation are all tax deductible for investment property. For your own home, you get nothing except a tax break on capital gains tax if you sell.

For a home purchased for $400,000, the tax benefits to the investment buyer over the home owner could easily exceed $15,000 dollar per year. The comprises of tax deductible interest and depreciation of the building, as well as rates and insurance costs. It makes the FHOG look like a token gesture.

Let’s get serious about the issue, and get people into their own homes. The benefits of home ownership to communities around Australia should be acknowledged and acted upon today.