Leading Australian economist Leith van Onselen provides the 121st Annual Henry George Commemorative dinner presentation. The wide ranging discussion covers land and housing prices, bank lending, demographics and investment behaviour plus the commodity boom's influence on incomes and thus land prices.

1. Macro Housing Conditions
The long-term outlook for the
Australian housing market

2. Overview of Australian housing market
• House prices in
Australia
experienced a
decade of strong
growth that was
not matched by
growth in
underlying
fundamentals.

3. Overview of Australian housing market
• Australian
housing has
become
increasingly
expensive
relative to
household
incomes.

4. Overview of Australian housing market
• Mortgage burden
has risen despite
the sharp
reduction in
mortgage rates.
• Aggregate
mortgage
payments ~50%
higher today
than in 1989,
when mortgage
rates = 17%.

5. Overview of Australian housing market
• In 2011, a typical
household with a
mortgages spent
34% of its
income on
mortgage
payments, up
from 26% in
2001, an increase
of 32%.

6. Overview of Australian housing market
• Rental burden
has also risen,
particularly in
the five years to
2011.

7. Overview of Australian housing market
• But mortgage
payments rose
by more than
rents in the
decade to 2011.

8. International comparisons
• Australian
housing is
relatively
expensive
internationally.

9. International comparisons
• Australian
housing is
relatively
expensive
internationally.

10. It’s all in the land
• Virtually all of
the growth in
housing values
has come from
land price
appreciation,
with land prices
roughly doubling
relative to GDP
since the late-
1980s.

11. It’s all in the land
• Land price appreciation has occurred across all markets, with
Victorian values the most expensive at 2.8 times GSP as at June 2011.

12. It’s all in the land
• Australian vacant residential land has become prohibitively
expensive, with all markets experiencing rapid price appreciation.

13. How did we get here?
• The ratio of
Australian
mortgage debt
to GDP rose
four-fold since
1990,
following
deregulation
of the financial
sector.

14. How did we get here?
• Reflecting the
boom in mortgage
credit, annual
housing finance
commitments rose
from around 5% of
GDP in mid-1980s
to a peak of 22%
in 2003. They have
since fallen back
to 13% of GDP.

15. How did we get here?
• The share of loans channelled into housing has increased from 24% of total loans in
1990 to 59% currently.
• The rapid expansion of mortgage debt and housing values has been funded, to a
large extent, by heavy offshore borrowings by Australia’s banks and is represented
by a massive expansion in bank assets (mainly mortgages) relative to GDP.

16. How did we get here?
• The Finance & Insurance industries have grown more than twice as fast as
the rest of the economy since the mid-1980s, when financial markets were
deregulated.
• Finance & Insurance’s share of GDP has more than doubled to nearly 10%.

17. How did we get here?
• Strongly rising commodity prices have played a major role in increasing
housing values since-2004, via their positive impact on incomes. The
commodity price boom came along just as mortgage growth began to
decline, enabling house prices to remain “stronger for longer”.

18. How did we get here?
• The Australian Treasury estimates that 50% of Australia’s income
growth over the 2000s came from the one-off terms-of-trade
(commodity price) boom, whereas McKinsey estimates that 90% of
Australian income growth since 2005 came from the mining boom.

19. How did we get here?
• The number of property investors has surged, from 696,000 in 1990 to 1.75
million in 2010. Nearly 60% of investors are baby boomers.
• Two-thirds of investors were negatively geared in 2010, losing on average
$2,750 per year, or a total of -$4.8 billion. Three quarters of negatively
geared investors earned less than $80,000.

20. How did we get here?
• Australia’s rigid urban planning system has ensured that the
increased demand has manifested in rising prices rather than
increased dwelling construction.

21. Risks to the outlook
• Australia’s terms-of-trade (commodity prices), peaked in 2011 and are now
falling, which will drag on incomes and employment going forward.
• Australia’s population is also ageing, with the working age population set to
shrink in relative terms from now on, reducing the economy’s potential
growth rate and demand for housing.

22. Risks to the outlook
• Prices of iron ore – Australia’s biggest export – have collapsed on lower steel
demand from China.
• Spot iron ore prices are down over -50% since peak and by more than-30% since
the beginning of July. Australia’s terms-of-trade will be hit hard, subtracting from
personal incomes. Further mining investments are also likely to be cancelled.

23. Risks to the outlook
• The outlook for Australia’s terms-of-trade and mining investment is not good.
• China’s massive stimulus in the wake of the GFC has built-up too much excess
capacity.
• China is, therefore, unlikely to embark on another fixed asset construction boom,
meaning that demand for Australia iron ore will remain tepid.

24. Risks to the outlook
• How low can iron ore prices go? The recent boom in iron ore prices was
extreme and saw prices rise nearly ten-fold in real terms over the past
decade.
• There appears to still be significant potential downside as slowing demand
from China meets rising global supplies.

25. Risks to the outlook
• Population aged
65+ is projected to
explode over the
next two decades.
• Baby Boomers will
need to sell-down
their property
holdings to fund
their retirements.
• The need to sell
will be greatest for
those whom are
negatively-geared.

26. Risks to the outlook
• In 2010, the BIS forecast that the ageing of Australia’s population
would reduce real house prices by around 30% over the next 40
years, compared with what would occur under ‘neutral’
demographics (i.e. a steady age structure).

27. Risks to the outlook
• Housing credit growth is falling, hitting fresh 35-year lows in July on
both a quarterly and annual basis.
• The number of owner-occupied housing finance commitments also
remains weak, tracking -11% below the five-year moving average.

28. How could it have been prevented?
• Macro-prudential controls on lending would have
muted the credit cycle, for example:
• Maximum limits on loan-to-value ratios (e.g. maximum
85% LVR).
• Tighter mortgage serviceability requirements, such as:
• Loan repayments cannot consume more than 40% of after-tax
household income; or
• Loan repayments cannot exceed 130% of market rent on
property.

29. How could it have been prevented?
• Free-up supply-side bottlenecks:
• Implement more permissive urban planning:
• Create a presumption in favour of sustainable development
• Speed-up development approval times
• Eliminate artificial barriers to development, e.g. UGBs,
restrictive zoning, etc
• Reduce up-front development/infrastructure charges in
favour of long-term bond financing, recovered from property
owners over decades
• Fund infrastructure properly via infrastructure bonds

30. How could it have been prevented?
• Empirical evidence from the US and elsewhere shows that markets
with responsive land-use regulations have more affordable
housing markets and experience less price volatility, as changes in
demand manifest more in new construction rather than prices.

31. How could it have been prevented?
• Abolish negative gearing or restrict it to new builds
only. It costs taxpayers in excess of $4 billion per year,
inflates demand and does not add to housing supply.

32. How could it have been prevented?
• Abolish transaction taxes – stamp duties and CGT – in favour of a
broad-based land values tax (LVT).
• Benefits of LVT include:
• Discourages speculation – prevents land-banking and increases
competition in the land market.
• Encourages more efficient land use – increases density in order to avoid
paying tax. Governments are also more likely to be pro-development in
order to increase taxpayer base.
• Governments are more likely to support infrastructure provision as cost
can be recovered via higher land values.
• Difficult tax to avoid and administratively simple – land ownership is
well documented.
• Fairer – those with largest land holdings pay most tax.