Sunday, November 02, 2008

Housing price pain a tale of many cities

Saturday morning is a prime time for Melbourne house auctions.  Over the past few weeks fewer hands have responded to the auctioneers' calls.

House price inflation and subsequent price falls have been key ingredients in the current world economic maelstrom.

The US and Britain have been at the centre.  On average in the US, home prices are down 17 per cent over the past year.  This dramatic fall has come on top of already depressed prices.

But the adverse effect of the downturn on individual home owners is only fully revealed by examining different cities.  Phoenix, Miami and the Californian cities have seen price falls of more than 25 per cent.  By contrast, prices in Texas and most southern states saw little or no reduction in house prices over the past year.

Those experiencing the biggest falls were locations where restrictions on land use for new housing had previously brought very high prices.  Those relatively untouched were where land restrictions are less stringent.

Australia has seen much less diversity of house price bubbles than the US.  This is because in Australia all capital cities have seen mushrooming house prices stoked by easy money combined with a government-created land scarcity.

On the city edge this shortage has been due to the government adopting the elitist views of those urban planners who oppose "urban sprawl".

Victoria has suffered less than other states from the efforts of this plague of planners.  But only 0.3 per cent of the state's land is in urban usage and it is farcical to think we need to prevent low-cost new developments.

In Victoria and elsewhere, land shortages deliberately created on the city edge have been worsened by other government regulations.  In the inner areas a dense thicket of heritage, environment and other laws add to the costs of housing and further squeeze supply.

The Commonwealth Government, as part of its doomed-to-failure recession busting measures, is providing new subsidies for first home buyers.  But these offer far less compensation to the first home buyer than the inflated costs caused by state government restrictions on land usage.

In most respects, Victoria has been the least-worst state in its planning and land usage policies.  As a result, prices here are dropping less than elsewhere.  Even so, according to the Real Estate Industry of Victoria, average house prices dropped 5 per cent in the past quarter.  REIV also notes that sales are down by a fifth, which heralds further price softening.

The last major housing downturn in Victoria was in the early 1990s when prices in real terms fell 20 per cent and stayed subdued for years.

The state faces a different set of circumstances now.

In the years prior to the 1990s downturn, Victoria was economically crushed by years of incompetent government under Cain and Kirner.  The present impending downturn owes more to national and international forces.  The outcome will be different both in the nature of price falls and where they will be most savagely felt.

On average, house prices may not fall as much as in the 1990s.  But then again they may fall even more.


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