Sunday, November 21, 2010

A double whammy from The Australian

Just a day after its revelation that there is dissent within the Australian Treasury about the government and RBA's view that Australia does not have a property bubble, we have an article today claiming that the Reserve Bank "deliberately intervened in the political debate over the property boom to stop governments releasing more land."
The bank feared the release of land would cause traffic gridlock, environmental problems and potentially a US-style housing slump. The move, detailed by a senior RBA official in documents obtained under Freedom of Information laws, is a rare example of how Australia's independent central bank is prepared to act to protect its monetary policy decisions.
Now, there are several interesting revelations in this article, but I was perhaps most struck by this passage:
Even if Australia had lifted supply-side restrictions, she said, and "became Phoenix or Las Vegas", there would still be significant price cycles... Ms Ellis, who, like Mr Stevens and Wayne Swan, has pointed to the more recent contribution of supply-side issues to higher prices, believes government restraint on housing supply helped avoid a US-style slump.
I find this interesting because it is, to put it mildly, totally at variance with the facts. There is very strong evidence that the US states that had the most "government restraint on housing supply" -- such as California and Florida -- had the biggest price rises when the market was booming, and are now suffering from the biggest crashes. It's hard to believe the RBA is not aware of this evidence. See the chart below.

Source: Carpe Diem

Important to note is that Texas, the second largest US state, has managed to almost entirely escape the housing crash. This article has a nice summary of the arguments. 
Throughout the past decade, Texas has experienced far smaller house price increases than in California, Florida and many other states. During the bubble, California house prices increased at a rate 16 times those of Texas, while Florida house prices increased 7 times those of Texas. As a result, after the bubble burst, subsequent house price declines were far less severe or even non-existent in Texas... Unlike Texas, all of the markets with steep house price escalation had more restrictive land use regulations. 
So back in the real world, the evidence suggests that supply side restrictions do nothing but intensify the boom-bust cycle and worsen the fallout when the music stops. Am I the only one disturbed that even the RBA is utterly unable to face up to reality?

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