David Albouy is an associate professor of economics at the University of Illinois, with a research focus on housing demand, cost of living inequality and the affordability crisis. Albouy was a guest speaker for the Real Estate Initiative at the Centre for Applied Economic Research at UNSW Business School where he spoke to Julian Lorkin for BusinessThink.
An edited transcript of the conversation follows.
BusinessThink: Your research is of particular interest to people in Sydney and Melbourne, but also the whole of Australia at the moment. What can we say about the link between income and housing affordability?
David Albouy: I think one of the big issues that we're facing right now is that it looks like the price of housing, whether it be in rents or in actual buying costs, has risen relatively to the price of other goods. So we've become dramatically good at producing clothing at low prices, electronics, and even food has become relatively cheaper. But housing we haven't seen nearly as many gains in productivity and it looks like because of that the relative price of housing, whether it be in rent or housing prices, is going up.
And households are having a hard time responding to those price increases by decreasing their consumption – and because they can't decrease their consumption very much relative to higher prices they're basically forced to spend a lot on housing.
And there are other things that are playing a role. We also see that people are choosing to live in smaller household sizes so we have people sharing housing less. So there has been a demographic trend towards fewer people per household and fewer children. Perhaps that's partly a response to the higher rents but we think that might be going on independently as well.
BusinessThink: I notice you've looked at housing elasticity and whether in particular the supply is elastic. Is housing elastic?
Albouy: Not in areas where people really want to live. If you think about the market around Sydney or in Melbourne, there is some new housing supply but not nearly enough to satisfy the rising demand. So more and more Australians seem to want to live in what you might call the superstar cities of Australia – Melbourne and Sydney – and there's simply not enough new housing to keep up with the rising demand that's coming along with people's increased needs.
'A box becomes much more special when you put it in a special place and you don't let any new boxes get built' – david albouy
And so because of that we essentially have a bidding war in these cities and basically only those who can afford to spend the most on housing are the ones who get to move to those cities. Now, there are some people who have been there a long time and the lucky ones already own their house, or perhaps are in rent-controlled units. But the rest are facing this aggravating problem of seeing their rents being, in American terms, what we would say is too damn high.
BusinessThink: It certainly is. But many economists who've studied housing markets around the world have brought into play the concept of a housing bubble. That's where the supply is very small, where prices keep on rising because you've got a limited supply, until suddenly the bubble pops. It's like the tulip bubble in Amsterdam where suddenly prices collapsed in classic economic history. Are we near the level in Australia that, say, the US was in 2008-09 when the housing bubble popped there?
Albouy: I think there's a bit of confusion over rents versus housing prices. So what we've seen in a lot of coastal cities in the US [are] rents that have been edging up more and more and more and more, in tandem with the economy – when the local economy is booming, the rents have been inching up.
Now, housing prices are much more volatile. So when rents tend to edge up a little bit the housing prices tend to sometimes soar. We see these big swings in terms of housing prices and that's largely related to people's expectations and what they think is going to happen later on in the market.
What's been going on though is that we're actually seeing rental rates continue to rise. So in a sense the way I view it is that we're in a bit of a dilemma. Either we're in a housing bubble or housing is just becoming generally unaffordable. Neither prospect looks good.
But it looks more and more like we're not just in a bubble. Perhaps housing prices will drop a bit, but rents are going to continue to rise in these superstar cities because we're just not building enough. And so on top of it, the lack of new building contributes to the bubble factor because a house is no longer considered something like a piece of clothing where you simply buy what you need off the rack. It becomes more like a Van Gogh painting. It's something that's very limited in supply and only a few people get to really cherish it and so we enter into bidding wars. And then it becomes a lot more speculative, because ultimately a house or a residence is a box. So what's so special about a box? Well, a box becomes much more special when you put it in a special place and you don't let any new boxes get built. So then it becomes something much more worthy of speculating on.
BusinessThink: Of course we've seen that in London, for example, over the past couple of years or so where houses, big houses in central London, are left empty simply because they're used like a gold brick, being passed from one investor to another. I don't think we've quite got to that level in Sydney yet, but you've obviously been talking to Urban Taskforce Australia [which represents the property and development industry]. What were your discussions with them in terms of housing affordability and also new building in Sydney?
Albouy: Well, I do think that's a lot of press [coverage] about units being kept empty and kept purely for speculative purposes. And while that's surely happening, we would actually have very low vacancy rates in most of these cities – in Sydney and Melbourne, also in London, Vancouver, New York, etc.
So there's a little bit of concern but that's mainly just a lot of outrage. It's just sort of distracting people from the main issue. The Urban Taskforce has a lot of people who are experienced in urban issues and urban development. What they're experiencing is a frustration in providing new housing units because there are so many roadblocks along the way.
So they were actually quite gratified by my take on saying, "Well, look, if housing is indeed an issue, we are seeing the price of housing going up and that's hurting everyone, but it's hurting the poor especially, right?" And so a result of this kind of awkward political – shall we say – equilibrium, as we like to call it, is that in the attempt to try and help the poor by blocking new construction of luxury units, we're actually hurting the poor because we're not providing them with the housing that the rich are going to actually leave behind for them to use.
And that's actually how most housing markets work – the poor very rarely move into new housing. That's not how their housing market works. And generally it's a fairly effective system. We see this throughout the world. There's not a huge problem with living in older housing. It's something quite normal, it's something I like to do. I actually find older units are oftentimes charming – not always, but oftentimes.
'Density can't really be that bad, otherwise there wouldn't be so many people paying so much to be in dense areas' – david albouy
BusinessThink: But doesn't this come down to the problem of people treating houses now like cars. You have a nice new car, you feel great. You have a second-hand car that a few people have been in before and it's like ... it's really not very impressive at all and it's getting a bit tired around the edges. It's only when it comes around to the real classic, historical piece of housing again that it suddenly becomes like that gold brick, something that somebody wants to hang on to.
Albouy: I would disagree with that. Conspicuous consumption isn't for everyone. Some people have said – I've heard this in Canada – that there's no such thing as a cool car. So some people find that there's very little appeal to having a fancy new unit. But one thing I do think that as a society we do enjoy and we like to take pride in is our city and our neighbourhood. And so that I think is what people are putting more and more value on. It's actually not on market goods but on non-market goods. And I'm actually very interested in the quality of life that people enjoy.
And so I think in some regards, part of what we're seeing, part of this rental crisis, some of it has to do with jobs being located more and more in the superstar cities, but a little bit of it has to do with the fact that people are valuing quality of life more than they used to. They want to appreciate better weather, nicer coastlines, more culture, safety, and all sorts of other great amenities – restaurants and bars. And those are much nicer, or sort of much more available, in certain parts of the country than in others. And so they feel that it's more important that they live in a good location than they have a luxurious unit.
There are probably plenty of beautiful houses in the back country of Australia. There's a lot of gorgeous houses in Detroit that are currently not lived in. And they are actually within driving distance to quite a few jobs but the neighbourhoods don't have the appeal that people want. So that's the big issue. I do think it's not all a bad thing. It's actually kind of a sign of an improving society, of a society that's somewhat less materialistic that they value the location more than the actual unit. But at the same time we do want a certain degree of comfort, so people like having their own bathroom and their own bedroom. So there's only a willingness to downsize so much in order to live in a nice place.
BusinessThink: Is the solution that we should be encouraging people to live in Lithgow or Orange [in rural NSW] and encouraging companies to move out there as well so there are jobs?
Albouy: I think there's an argument to be made there. I do think that some small towns aren't so bad and many small cities are actually seeing a certain boom. I think that oftentimes you can go to a smaller city and will be surprised at the quality of the bars and restaurants that have come up. In the US we have a lot of college towns and those places tend to be considered quite attractive for those who like small-city living.
But at the same time there is a little bit of a privilege in saying that. So perhaps a long-time resident of Sydney can say, "Oh well, I've lived in Sydney all my life. What is someone doing coming and encroaching on my place? Why don't you go live elsewhere?" In San Francisco there are, for example, protests against new people coming to San Francisco. But oftentimes these [newcomers] are just young, industrious people. They bring life and vitality to the city. And so to try and exclude them can oftentimes lead to almost a – what's the word? – a gerontocracy.
So there are communities that were once considered lively artist towns on the coast of California, like Laguna Beach. I just visited there and I was surprised to find out that the typical age of a resident was 53. So we're getting these more income and age-segregated places and it's oftentimes the young who are being pushed out. The vibrant young who have all these ideas.
Now, they're going to do great things wherever they go, but at the same time it does seem a little bit privileged to say, "Oh, well, that's someone else's problem. Just go and live somewhere else." I do think we could encourage the creation of new centres and high-quality-of-life areas outside the principal centres. I think there's a lot to be said for that. But I don't know if it should all be driven on that.
There's probably something to be said for also just allowing cities to grow up. And honestly, I mean, I think you look at American cities, and maybe Australian cities as well, or so many Asian cities, and they're defined by their skyline. We actually appreciate from afar – maybe not too close – the high-densities and the gleaming new buildings and all the fancy things, and there's a certain spectacle and enjoyment in seeing a large, bustling city.
New York is not considered an undesirable place to live. It's the most dense and kind of crazy place, but people are paying a lot of money to enjoy it. If it was such a terrible place, why would people pay so much to live there? And therein lies the contradiction. Density can't really be that bad, otherwise there wouldn't be so many people paying so much to be in dense areas.